business Archives - Kevin Low

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?

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.

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.

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.

Culture & Consulting

Having worked in consulting across cultures, I have begun to recognise some cultural behaviours when buying consulting across different countries and the attitudes towards consultants. Having advisors is nothing new; the monarchs of ancient times have had advisors to support them for as long as they existed. These advisors offered more than just advice, insights or knowledge that leaders did not possess (or did not think they possessed).

They offered assurances when it was scarce. Soothsaying, contrary to what people might think, actually means telling the truth; with ‘sooth’ being an old English term that meant truth, as opposed to ‘soothe’, which means to calm. And the advisors also provided perspectives that during times of wiser monarchs, could contradict the conventional wisdom or call out the folly of the leaders.

So if we distil it down to the value that consultants provide today:

Knowledge of what may not be known to the client: this is when consultants are selling their expertise, and familiarity with a topic area that clients are not familiar with
Assurance of a particular course of action, decision, or information: this is when the client needs something verified, checked, validated and confirmed. The confidence and conviction of the advisor matter here as well, compared to those who hide behind jargon and ‘expert lingo’.
Sparing partner or challenger to ideas: consultants can be valued in bringing new perspectives, especially an outside-in view of things thereby co-creating more valuable solutions or decisions with the client.

I begin to recognise that Asian firms especially with rather paternalistic leadership tend not to use consultants the way the West use them. So for example, when it comes to knowledge, the Western clients may appreciate specific subject matter expertise that comes through years of experience and in-depth research. In contrast, Eastern clients may value knowledge of implicit/unwritten local rules and norms rather than expertise in a more technical subject. The more institutionalisable the knowledge set is, the less likely an Eastern client would appreciate it as worth paying for.

Western clients see assurances from consultants as important while Eastern clients prefer to take the risks of not having check through things by themselves. This might have something to do with the way trust is formed. In Asian societies where getting things verified can be read as a sign of mistrust, it is challenging to value such independent checks and perspectives. The very deed of using independent validation can almost be an insult.

Finally, when it comes to having a sparing partner, the typical harmony-loving, and conflict-avoidant Asian culture would really struggle with the idea of paying someone to challenge you. In fact, leaders might instead assert the power of their wealth/influence over people so that they would not be questioned.

In this sense, Asian cultures tend towards getting advisors who can provide knowledge that is undocumented and unavailable in the public domain, and are often independent individuals with the specific gifts of being able to reveal ‘truth’ to the client. They also prefer that the knowledge advisors gain about the client cannot be easily disseminated. And as far as possible, they only care about knowledge that cannot be institutionalised.

This means that it is incredibly challenging for most professional, western-chain consultants to survive solely from serving a pool of Asian clients. If anything, they usually have to ‘survive’ off the big multi-nationals who are growing into new, and perhaps opaque markets, or needing more capacity support. In other words, consulting has grown out of an increasingly international market, yet not overly uncertain because surely some stability is necessary for consultants to be deemed to have accumulated enough lessons and experience to share.

Random musings as I continue to build up my knowledge and capability of managing a consulting practice.

Problem-solving or answer-finding

I am a Singaporean. And one aspect about Singapore highlighted by many stories of its growth and early leaders is the notion of pragmatism. Yet I feel that this notion probably has been overplayed.

Pragmatism is used to suggest that the ends justify the means. Now within the context of school, it could mean that you can get your grades by rote memorisation as opposed to genuine learning. Or that you could simply find the right answer to copy than to solve a problem yourself on an assignment.

Same goes for the worker at work – just find the answer, don’t bother solving the problem. This may mean finding out how it was done before; or to figure out what others who had the same problem was doing. One could argue those are problem-solving heuristics. Maybe. But I call those “answer-finding”.

As a consultant, I cannot help but recall clients who are asking, “but have you done this same thing before with another client or somewhere else?” This is answer-finding, not problem-solving.

The Singapore today needs trail-blazers and problem-solvers; as it always had. But decades of overemphasizing pragmatism means we prefer to pay for answers than purchase problem-solving capacity. We desperately need to shift this culture and move towards real problem-solving than answer-finding.