Category Archives: Infrastructure

Yvon Chouinard, founder of Patagonia has just announced that he is giving the full stakes in the company to trust entities that are committed to addressing climate change challenges. The company is valued at about $3 billion according to New York Times but I imagine the value that it is going to have in terms of making a difference for the world will be way more than that.

Instead of “going public,” you could say we’re “going purpose.” Instead of extracting value from nature and transforming it into wealth for investors, we’ll use the wealth Patagonia creates to protect the source of all wealth.

Yvon Chouinard

Patagonia has always been leading the way in terms of its focus on sustainability and profit for a purpose. To a large extent we need to recognise that Earth and our existence on it is not just the source of all wealth but also all the income stream and values we can generate. It thus serve also as the greatest possible investment we can make in our lifetimes for both our own and our descendants’ future.

The continued fragmentation of the world, driven both by political interests, the self-interest driven nature of capitalism, and the sheer inability to coordinate climate action beyond lip service is frustrating. But Patagonia gives us a clear example of how meaningful drastic actions can be taken that flips the switch on our incentives.

And aligns us to the better angels of our nature.

Industrial organisation was a very important discipline of microeconomics for a period of time especially when it came to supporting or counteracting the trust-busters. And then even as economists were just beginning to peer a little more into industries and understand the workings of firms and the strategic thinking behind them, finance came into the picture and all sorts of crazy connections between business metrics and financial metrics became the science of understanding business, evaluating and valuing them.

Strategic value of firms remain relevant in terms of thinking about merger financial models but these perspectives of looking at incremental value and the ‘main case’ of business-as-usual sometimes misses the point of an acquisition or integration. Aside from financial assessment, the whole strategic decision to undertake a merger or acquisition requires not a business-as-usual view but one that involves a vision of the future. Not forecasting the future but taking active steps to create it.

During a time of massive decentralisation and increasing marketisation, with lots of competitors, we can expect that value can be created by spinning off individual business units but when there’s shortage of resources, intermediate goods and services, vertical integration is powerful. And across the sectors, there are bound to be some that is plagued with bottlenecks and resource problems that only vertical integration can solve – which is to say the strategic value cannot be ignored. In fact, that is very often the way to compete in these markets.

When thinking about firms and business dynamics, are we just focused on the financial metrics or do we want to develop a view on the evolution of competition?

At the recent presentation I gave on ammonia as the new low-carbon maritime fuel, I was asked about the ability to scale production over the next couple of years. I think the time horizon we should be looking at is over the next 8 years up to 2030 and then 10 years after that, how things are likely going to change. We as consultants are often asked to look into our crystal balls and envision the future. We try our best to do it using data, looking at trends, making assumptions and all.

For ammonia, the demand is expected to more than double over the next 28 years. That’s still a fair amount of time, and as long as it grows by a rate of about 4% per annum, the supply will be able to meet demand in 2050. Not inconceivable though from historical trends on the production figures, it seems far fetched. But that is because ammonia has traditionally been demanded only as an industrial feedstock and for production of fertilisers. The people concerned about the competition with the existing agriculture or food industries have misplaced concerns because those are the guys who have been using grey ammonia and perfectly happy to continue to do so. The new demand is likely going to require green hydrogen; which means we are going to start growing new supply of this ammonia from scratch; no legacy issues of waiting for existing facilities to ramp up.

Then there are people pointing out the challenge of getting green electricity which seem short in supply to begin with. That is true to a certain extent; Singapore is having to import electricity from neighbouring countries, using actual physical transmission lines. But most of the time, this is caused by the fact that renewable resources may be scarce where the power demand centers are. If there are far flung locations rich with renewable resources, we can still capture these sites to produce green hydrogen as well as green ammonia, then ship them out.

So I’m actually pretty optimistic about trying to hit those demand and supply numbers over the long time frame that we are talking about. It might well surpass those numbers when the market really takes off. But the key is ensuring there’s clear price signals; and if there’s proper legitimate demand for green hydrogen, then someone will have to certify it and audit the production.

Is work about needs, or wants? When there are needs to be met through employment income, and yet there seems to be no job vacancies or employment available, what exactly is happening? Can the system actually cover the needs of these unemployed whilst they reskill, upskill and eventually find a place for their labour?

Or what about the future where leisure reigns over work and because production is mostly a result of capital being put to work without labour, the society can afford to just adopt a universal basic income system to sustain everyone and free them to discover what kind of work or contribution they can make to the world that would be worthwhile?

Our market economy has transformed the lives of mankind because it has freed humans to focus on a narrower scope of labour in order to provide for oneself, rather than suffer inefficiencies in having to produce, food, drinks, clothes and other material comforts or amusement, the market helps us all collaborate and provide for one another.

But in the course of trying to provide for one another, distribution of the valuable resources or output can be rather skewed without any malice or ill intent, even if allocation is efficient. So the day when capital is responsible for the bulk of meeting most needs, labour needs to identify needs to serve in the market. If there isn’t, if we as humans collectively declare our contentment then we can start looking at just helping one another contribute to the future we want to build.

I buy electricity on the open market in Singapore. So when the bill came for the month of August, it looked pretty crazy. I have never seen my averaged cost of electricity actually exceeding the retail package pricing.

Of course I’ve allowed myself to be subject to the volatility but I wonder how often people really bother to understand or check their cost of electricity. For most part they might be using the overall cost as a proxy for consumption since they usually assume the electricity tariffs to be fixed. Well, that’s if you’re on a retail package. And even then it is fixed only for a certain time period.

I begin to wonder if there were any events and outages in the power system in August that resulted in some of those crazy rates. And with gas shortages in the world, things might be changing in the market quite a bit. People were even warned of the rising prices on the papers.

And this makes understanding the energy transition even more crucial for ordinary people like you and I. Getting a clearer view of the options for energy security for Singapore, greater transparency of the plans by the government, how far the market will be playing a role in determining the energy mix vis-a-vis policies to ensure a low carbon energy future.

Besides how much our electricity cost us, we should be also wondering how much it is costing our future and the earth.

I wrote about how we tend to overestimate mental strength and underestimate physical strength. The story is a bit similar with growth; we tend to overestimate our ability to grow and change in the short run. We would think that we can achieve some crazy target or try to force ourselves to get from Grade E to grade B in a few months. They are probably not impossible, but it will take a lot of effort and even if we plan well, things might not work out so well.

On the other hand, if we allow those short term lack of performance to cause us to be disappointed and discouraged from trying on and on, then it would be a pity. Because we tend to severely underestimate the potential for change and growth in the longer term. Even if things don’t seem to go as planned in short term, interestingly, once a direction is well-set, the longer term situation tends to be more optimistic even though more time tends to cause people to think more things can go wrong.

But more good things can happen because of that too. We severely undervalue and underestimate what we can accomplish over longer period of times and tend to think whatever happened in the short term will simply stay the same. If you’re unhappy enough about your situation, you’d tend to change it.

Our minds seem to struggle with nonlinearity more than we should. Given how much of reality is actually nonlinear, it’s a wonder why we are still stuck with wanting things to be linear, and panicking when the progress bar is not moving as time moves forward. It is important to anticipate when further actions needs to be taken as things are not progressing well so it is important to track progress but being unable to appreciate non-linearity means we can misallocate attention and resources.

There were many occasions when I used to organise events and we review sign-up rates or “ticket sales” weekly as we approach the events. Of course things will always be slow at the start but then it tends to pick up, and even so, in a very uneven manner where it accelerates crazily a few days before the event. People tend to put off securing their places at events until closer to the date thinking they don’t want to commit their calendar so early on in time. But the management will be unduly worried about poor turnout at the events and activate disproportionately more resources to drive the numbers.

Being able to look at past figures and the growth curve from past experience helps but not perfectly because we tend to insert those ‘boost’ right before the late stages just before the sign-ups pick up wildly. So we can even think that those ‘boost’ actions (like placing more ads) actually works. Sometimes, they create so much awareness even after the event sell out that we have to turn people away. And appreciation for nonlinearity is important for any leader and one who is developing a vision for the future.

Because the journey there would not be linear and the assurance that ‘we will get there’ is not going to come from data, or your people, but from your commitment to your vision.