Author Archives: Kevin L

Energy companies of the future

When I started more than 10 years ago in the infrastructure sector focusing on environmental solutions, I saw a lot of new energy startups. A lot of them were facing difficulty on the capital front because all the wealth of the energy sector is tied up in Oil & Gas or the traditional utilities. The startups needed to access regulated infrastructure, regulated markets as well as capital in order to scale but it was difficult. The incumbents were gate-keeping.

So I came to this conclusion that nurturing startups in the energy space wasn’t so much about forming the next unicorn or tech-giant equivalents. It was about strengthening the incumbents; and that these startups are ultimately finding a match in terms of strategic investors in the incumbents in order to exit or to find their innovations adopted through the value chain.

Even for the commercial & industrial, behind-the-meter type solutions, I had in mind that the traditional incumbents would still win out because of their brands and stability.

Turns out that these became areas where they tend to beat a strategic retreat. Because it was too difficult. The big guys had a couple of things they wanted to sell; and they sure could provide some service in order to sell those electrons or molecules. They would even invest in some hardware on your site such as a metering system, or some tanks and nozzles, etc.

But once things got complex, where they have to manage some operations (even virtual ones), and liability at the customers’ sites, it became too difficult. They also think it’s too small, so they left it to whom they believe would be the small guys.

Now it took a long time but these were still difficult projects for the small guys! The EPC players, system integrators, tech solution providers had to come together, get into the complexities of energy service contracting and setting up new operation protocol to get projects up. Slowly they came up; sometimes with investments from the cashflow of these contracting firms, sometimes from family offices and rich borrowers. Financial innovation sort of quickly caught up to support this.

The resulting model, as it turns out, is more of a fund structure where capital is raised in a vehicle that will deploy capital into those energy-as-a-service projects. There is basically an increasing specialisation in the capital-heavy versus labour/technical-heavy segments of the industry. The market is still struggling to understand whether these C&I type energy assets (be it a new chiller/cooler, some kind of tech-enabled energy management systems, or just a set of solar panels with battery energy storage system) is considered infrastructure. Nevertheless, they see it as riskier than traditional state-granted concession type of infrastructure, but still safer than privatw equity where the money is put into operating companies without committed long-term revenues.

Now, I want to address the segment of the market that is also dealing in utility scale renewable power. The end of market moves and financial innovations seem to also point towards a fund structure. Whether it is Equis Energy (now Vena) or even Brookfield Infrastructure that started off in more traditional infrastructure, a whole lot of large scale renewable projects are eventually funded and operated by funds.

I would have imagined that funds would be taking over the more traditional parts of the sectors but instead, what we are really seeing is that funds have become the vehicle for transiting into a new energy system of the world. Is this just an interim solution or do we expect funds to become the energy companies of the future?

Advancement through dilemmas

As I ponder over the paradoxes of our society and nature, I begin to see more and more how our traditional linear paradigms about advancement and growth jars too much against reality.

There are many things that appears contradictory and yet continue to co-exist peacefully in the world without apparent conflict except in our minds. There are tyrants who are charismatic, loved and admired but also incompetent democratically elected leaders who could set a country back by decades. And there are both decentralised and centralised systems that appear to thrive, and also implode.

We ask ourselves if history proceeds through its course regardless of individual’s actions and it is just collective macro force created by the tiny actions of every individual that matters, or that it progresses through the agency of a few, put in the positions of power and influence? It’s not clear at all.

So when we think that progress in the system involves maturity of technology, of having regulation, standardisation, proper rules of engagement in place, we also recognise that these things stifles innovation and block new, emergent contenders from taking over incumbent structures.

Similarly, having contending standards or technology pathways look as though they are going to create a gridlock that prevents the industry from adopting a single unified approach.

The western, perhaps Anglo-Saxon, thought models make it difficult to hold those juxtaposing, contradictory ideas together because it supposes that there is just this one way that is the right way.

What if that is not reality at all?

Climate startups

Whether it’s climate tech or climate or sustainability startups, I’ve been encountering them recently. Of course, they are just startup companies, looking to find a product-market fit and then scale their business. There is a massive distraction in today’s market where you could grow a business out of making grant applications and putting together plans, where you try to get funding to take off.

This sounds a lot more like research in academia than the economics of a free market. While government is hoping to drive the development of good climate solutions, they are still tapping on the market where it failed, doing so through what they believe are ways to keep things market-driven when they have actually replaced the market and allowed the grant application processes to pick winners.

The challenge is that the winners picked through a grant application process are not going to be the type who wins in the market. These are firms who would have scrutinized the fine print, delivered on arbitrary KPIs and proxies that some bureaucrat came up with in his or her office. And these schemes are just distracting time, money and resources away from the startups towards satisfying governance requirements. After all, ‘it is taxpayers’ money”

The work of growing a new industrial ecosystem isn’t easy and I’ve spent considerable part of my career thinking about ecosystems, value chains, bottlenecks in developing an industry. If the government can give some demand assurance perhaps for a specific project, or product that the customer would be able to use or satisfied with, then it could help. And very often, if politicians want to be able to make claims about having supported one particular development then things becomes more difficult, not easy. When economic support is driven by a desire for narratives rather than allowing the stories to emerge from a system that is created, you can get a poorly specified policy.

Singapore’s 60th

I sat down and listened to the National Day Rally speech with a break in between. In terms of delivery and finding the stories to tell, I’d say Lawrence Wong did well. He also positioned the 4G team well, and to a large extent, it almost feels like political campaigning. The election results this year have shown a good amount of trust in the PAP government and reduced tolerance for weak opposition candidates. So I’d expect that the ruling government would lead confidently and start working on rolling out a vision.

I think the elements of vision involve more of the old playbook, unfortunately: another committee to work on the economy, more new towns and spaces earmarked to be developed, and then programme funding or tweaks to support Singaporeans, in terms of reskilling or upskilling.

There’s this common thread that Lawrence Wong seem to have been emphasizing, but I’m not sure I observe much of it on the ground. He seems to be recognising that general sense that the government had been dominating decision-making, and so there are generally more attempts to involve the people, to gather feedback, or to listen in. If that was his diagnosis about the sentiments, it is correct. It is not something to be ‘fixed’ overnight however. And it will take time to create a culture where people contribute responsibly to policy-making, and to concern themselves with the needs of the wider society.

Over the years in Singapore, there had been more individualistic attitude – because the government’s approach to just about everything involves sticks or carrots, more often than not, there’s this general attitude of ‘what’s in it for me?’ From the NDR speech, I can see Lawrence Wong urging less of that individualistic attitude, more of the ‘we’, but I wonder what are some behaviours that the government or the civil service can lead with, in order to foster and encourage that.

Trust in Singapore

As our nation crosses the diamond jubilee at SG60, people were putting down their wishes of ‘I want to…’ during NDP. The messages played on the videos for NDP were really inspiring and had nice stories from ordinary Singaporeans of diverse background. I felt genuinely moved and encouraged that we can be more than just ourselves and what we bring because Singapore is just a society that has been on the move, that has been developing and growing and thriving. It all feels good.

The stuff that doesn’t feel that good – how do we approach it though? The fact that places and spaces have been sacrificed, people uprooted to make way for development (as the Tekong story suggested). Or that sporting feels more like a lone wolf endeavour more than a national one, particularly during the ‘invisible phase’ of training, working towards Olympic qualifications, etc (story of Lloyd Valberg; though one can’t say this through that story since Singapore wasn’t yet a nation in 1948). Or that the big corporations often push around small businesses because that is ‘normal’ in our culture (story of Yanee; ‘but are you ready for an order of this scale’).

There is a choice to be made on how we see things. And whilst we have been told repeatedly there would be trade-offs, we haven’t yet learnt the real principles and intentions behind the decisions on those trade-offs. Why do we choose one over another? To the ones in places of power, it might be obvious. How could the sacrifice be made worthwhile for those suffering from its consequences?

What principles do we use to uphold our values – whether they are peace, justice or equality? Or perhaps progress? What happens when they are trading off each other? What if we cannot accomplish all of them at the same time? Often, ‘progress’ as the value seems to take centre stage. And is the kind of progress broad or narrowly defined?

To move forward, we must also learn unravel more the principles worth learning about and keeping, which we can use to navigate the future. Our forefathers left them for us but if we don’t pick them up to use them, it would be squandering the success that they’ve worked so hard to build us.

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.