90% Tax on bonus: Are we being fair?

AIG bonuses has been the top issue in the news for more than a week now. Almost everyone including media, politicians, public are emotionally charged up. There is so much bad blood and negativity out there. Is all this hype & knee jerk reactions justified? I don't think so. We all seem to be carried away by this hype created/fueled by media & politicians and are failing to look at this in a bipartisan and level headed manner.

I agree that careless decisions by some of the senior banking executives led us to this current situation. In reality most of these execs who were responsible for this crisis have already left or have been forced to leave the financial institutions. They have made their money and have got away scot-free. The folks that are remaining are the folks that were working in profitable units of the banks(not involved with crisis), or those that have been hired/charged with fixing this crisis and getting things back in control, or relatively junior folks that merely followed orders. These are the folks that are working hard today to keep the system running, These are the folks that are trying their best to help us recover from this crisis. Is it fair on our part to penalize them?

One of the things that is happening today is generalization, rather than picking out and punishing the folks that caused this crisis, we seem to be indicting the complete banking community and focusing our ire & hatred on them. The politicians that are pushing for the 90% tax on bonuses today are the same folks that legalized & encouraged complex risky instruments like CDS etc in the name of liberalization. Don't they have an equal or higher responsibility for this bubble? Implementing the 90% taxation of bonuses for all bankers is a gross violation of individual rights(failing to pay for the work done/wrongly appropriating the money) and discrimination of banking community. This is no different than racial or ethnic discrimination, in this case discrimination is based on industry. This is also gross misuse of powers by the politicians. I can understand this happening in a Tanzania or North Korea but not in the US. The majority of folks impacted by this law are innocents. I'm surprised that there isn't any level headed person in our political system, that can rise above these silly politics and come up with a bi-partisan, honest and just solution.

Lastly, we seem to be looking at just one side of the coin. Here's a letter by an AIG executive to the CEO highlighting other side of the coin. I hope some of the media personalities and politicians that are fueling this hatred get to read this and realize their mistake.

Pls let me know your thoughts on this issue.

Photo Credits: fintag, hanneorla

High Altitude Wind Energy

Came across this interesting TED video on high-altitude wind energy. Its amazing that we are just scraping the surface of alternate energy. We are just getting started with wind power as an energy source and currently less than 1.5% of world's energy comes from wind. This is one of the most rapidly growing alternate energy source. Along with solar, wind represents the only renewable source of energy that is substantially larger than the world's current energy needs(72TW capacity vs 15TW global consumption today).Most of the wind energy we are harnessing today is in the lower atmosphere (ground level) where the efficiency is low. This video talks about harnessing wind power at higher altitudes. This is a green field technology with high potential.

High-altitude wind energy has the largest energy per square foot of all of the renewable energy technologies (wind, solar, tidal, hydroelectric, biomass, geothermal) and a very low cost. Capturing a small fraction of the global high-altitude wind energy flux could be sufficient to supply the current energy needs of the globe. This is achieved through the use of high altitude kites & Air-borne wind turbines. Technologies exist today to harvest this in a large scale and this has potential to change the energy landscape.

About this talk

In this brief talk, Saul Griffith unveils the invention his new company Makani Power has been working on: giant kite turbines that create surprising amounts of clean, renewable energy.

About Saul Griffith

Inventor Saul Griffith looks for elegant ways to make real things, from low-cost eyeglasses to a kite that tows boats. His latest projects include open-source inventions and elegant new ways…

Photo Credits: Ronnie44052

Auto Meltdown - End of an era (Part III - Final Part)

In my earlier blogs in this series I had covered about the current state of auto industry and how the US auto industry got into this mess. In this post I be focusing on my thoughts around the future of the auto Industry.

Auto Industry is in a serious need for disruptive innovation. The internal combustion engine technology was invented in 1870's in Germany. It is the same technology that has been running our cars for well over 130+ yrs!! While there has been improvements, optimizations etc the base technology is still the same. Compare this with other fields - Energy/Power, Medicine, Telecom, IT, Aviation or any other field for that matter, we've had multiple disruptive innovations and technology has evolved leaps and bounds during the last century. Due to cheap availability of oil, the auto industry was complacent and failed to innovate. The auto industry in the current state is not sustainable. The technology running our autos need a complete refresh and be environment friendly for the industry to recover and maintain its growth. Since the beginning of this decade awareness of this issue has increased amongst auto companies. Huge amounts of money is being pumped into research in alternate technology cars. I expect this to spawn off a wave of disruptive innovations in the next 1-2 decades. We are currently at the beginning of this cycle.

Alternate energy/Clean tech cars are the buzz words these days. In terms of technology, Electric plug-ins leads the pack, Some of the other key alternate technologies that hold a lot of promise incude fuel cell, Solar etc. It will be few more years before these technologies mature. While all the auto majors(GM, Ford, Toyota, Honda etc) are researching in new technologies and are in various stages of development of alternate energy cars, there is a slew of VC funded startups that are working in parallel to come up with nextgen cars. Some of these start ups like Tesla, Aptera, Fisker etc are in advanced stages and plan to roll out their cars in the next 12-18 months. I expect some of these new startups to take off and go mainstream(if they dont get acquired!). This transition into alternate tech cars is going to shake up the industry in the next decade. Those players that are not in the forefront and capitalizing on this trend would get left behind and eventually perish. I also see the current gas-electric hybrid cars to be more of a stop gap till alternate energy cars mature . These will eventually get replaced. I expect this transition to clean tech to occur in the next couple of decades.

Next turning to key markets for car consumption US market is past its peak demand. As highlighted in my earlier post due to easy availability of credit & low fuel costs the demand had spiked during the last decade causing an auto bubble. The net new sales of 17-18M vehicles/yr is not sustainable. I see this number settling to between 12-15M vehicles/yr in the near to medium term(once we are out of this recession). US will be upstaged by China as the top car market in the world. Over the next decade I expect the car consumption in China, India and other developing countries to fuel the growth of car industry. This is the beginning of end of US domination of auto industry.

To sum up this series, we are currently in the midst of an unprecedented shake up in the auto industry. I expect this change to unravel over the next decade and will result in changing the complete landscape including technology, key players, key markets etc. It will be interesting to watch which players survive and which players will perish in this shake up. The time is here to clean up the auto industry and recreate it as a more sustainable and green industry!

Pls let me know your comments and thoughts on this series. Pls feel free to share your views on how you think the auto industry would evolve in the next 1-2 decades.

Photo credits: geeksg, cobra_x, Solaris_bot

Who should be blamed?

Here's an excellent post "Bankers aren't special.. But Banks are" by one of my friends from the banking industry. As part of this post she talks about the double standards where we praise banks/bankers when they generate great returns and slam them when things turn sour. Here's my detailed response to the same.

I agree with her view that bankers get paid more as banks are wealth creation engines. Here are couple of points I would like to add on why bankers are paid more - high level of complexity/highly intellectual nature of their work(similar to IT) and high level of risk they deal with as part of their jobs- higher the risk higher the returns! Rightly so that they get paid more.

Banking industry is all about trust and reputation. One of the reasons why people are upset today is because the trust that people had on the banking system & reputable financial institutions is now broken. Lot of people lost their lifetime savings, 401k's and big portion of their hard earned wealth due to unsustainable/risky investment practices of banks. As a layman a lot of these practices looks way too risky to me. I fail to understand how these smart bankers failed to see the inherent risks/defects in the model.

I feel that banks were focused more on short term profits than long term stability/sustainability. Otherwise how else will you justify the leverages(Investment banks have a leverage of 30-40 times their asset base) and risk taking ability in the system? These days its all about the number game. Most banks/banker's performance is judged by the short term returns they generate and in turn their bonuses are based on the same. This blinded their view on the risks and biased their thinking towards short term profits.

I dont think its a problem with the banks alone, this is an inherent problem with our system (Btw I'm not a socialist, I'm a hardcore advocate of open markets). Who should be blamed for this mess - The Banks? Bankers? Government? or we as individuals who perpetually crave for higher returns? To give you a small example when we are putting our money in a fund/bank most of us by default put our money where there is a higher return and in a normal scenario we hardly care about the risks. When we encourage banks to take higher risk, generate higher return and provide them with our money how do you expect the banks to take the blame?

While i still hold the banks/bankers accountable as it is their responsibility to take the right decisions to safeguard/grow our wealth, we as individuals are equally responsible. We need to wake up to the fact that with higher returns come higher risks and be cognizant of this when we push our bankers to generate higher returns. We as stock holders need to realize that companies/banks cannot keep growing forever and generate unreasonably high returns, we need to take a long term view. To conclude, we need to keep our greed in check and come to grips with reality. End of the day its your money that is lost and you are the one who is affected!

Pls let me know your views/comments on this post!

Photo Credits: Nick.Hider & ilovepiano

Auto Meltdown - End of an era (Part II)

In my previous post I covered details on the current state of auto industry and the reasons that led us into this bubble. In this post I will be focusing specifically on US auto industry and how it got into the current mess.

The top 3 American auto companies(GM, Ford, Chrysler) are teetering on the brink and are currently going through the worst crisis of their lifetime. They have been piling up huge losses, losing market share to Japanese, Korean and German auto majors, their shares have been battered and are trading at 50-70yr lows and are almost on the verge of collapse due to a steep drop in sales. Feb '09 was the one of their worst months in several decades and most of them saw a big drop in demand - GM's YoY sales reduced by 53%, Ford reduced by 48% and Chrysler by 44%. For Q4 2008 GM alone lost around $30 billion and Ford lost around $5.9 billion. All the top 3 companies are running low on cash reserves, their corporate rating has suffered making it both expensive and tough to borrow in the market. They are currently looking to the US government to bail them out.

The decline of the big 3 companies started couple of decades back in the 80's when Japanese cars started making headway into US market. Here are my thoughts on some of the reasons that led them to the current state:
  • Lower Product quality: Japanese cars are known for their quality and reliability. This was one of the key factors that helped them differentiate effectively against American cars and grab market share. The big 3 had ignored this for too long. By the time they started to improve their product quality, the flood gates had been breached and Japanese cars had established themselves in the US market. Though the gap has reduced over the last decade still Japanese cars are ahead of US manufactures in terms of quality and reliability.
  • Lack of Innovation: The big 3 got too comfortable and were slow to innovate. Japanese cars had better technology & fuel efficiency than the equivalent American cars, which lagged Japanese cars in terms of technology by few yrs. Classic example is hybrid vehicles. Toyota had a head start on competition in hybrids. US car manufacturers are also lagging in their research for alternate technology cars. The internal combustion technology has been around for over 100+ yrs around and cars today are still based of the same technology that ran cars beginning of 20th century. Compare that with technology change in computer industry! The fact that oil is finite is well known. Car manufacturers are just waking up to the fact and developing alternate technologies.
  • Slow to change to evolving market trends: American cars are traditionally known for their big, powerful and gas guzzling vehicles. Over the last few years due to steep increase in price of gasoline and increased awareness of environmental issues, consumers are starting to migrate to smaller more fuel efficient vehicles. American car manufacturers had failed to forecast this trend. They suffered heavily when oil prices shot up last summer due to their weak line up of small cars. In the small car market they are the underdogs today.
  • Higher Cost of ownership: Though the purchase cost of American cars tend to be a little lower than equivalent Japanese cars their operational cost is higher due to lower fuel efficiency and lower reliability(especially as they age). The expected lifetime of American cars is also lower than Japanese cars. These factors together result in higher cost of ownership for American cars.
  • Unsustainable Labor agreements: American car manufacturers had entered into unsustainable labor agreements with union back in the sixties when they were doing well and were flush with lot of cash. They are stuck with these contracts now and the cost of benefits/Pensions runs up to around 10% of car cost. This is unsustainable and is a big drag on American companies, forcing them to spend valuable cash into benefits than in R&D.
  • Spread too thin and wasted money in acquisitions: Over the last couple of decades American companies spent lot of their cash on buying up multiple brands. They were looking at acquisitions as a key strategy of growth (inorganic growth). If you look at their portfolio there will be multiple cars from different brands in the same segment with little differentiation. Each of their brands were also fighting against each other and grabbing market share. A lot of these acquisitions were also overpriced and were not managed well. Classic example is Ford acquisition of Jaguar and Land Rover. Ford sold them last year after losing billions of $'s. In comparison, Toyota & Honda were very focused on organic growth and invested in their improving their products. They invested in improving the technology, quality and reliability of their products and used it to effectively differentiate and grab market share.
All the above factors had led to a gradual decline of American car companies over the last couple of decades. The last straw to break the camel's back was the sudden increase in oil price last summer and subsequent credit crisis/depression leading to a steep fall in demand. At this moment of crisis they are stuck with a line up of big, powerful vehicles that are not in demand anymore, precariously low cash reserves, excess capacity etc. Though their very existence is in question now, I think they will survive this crisis. However they are past their peak and I doubt if they can ever get back to the original market position.

Please let me know your thoughts on the above. If I've left out any more key factors feel free to add to the above.

In my final post of this series I will be covering my thoughts on the future of auto industry.

Photo credits : dsheubert

Sylvia Earle: Here's how to protect the blue heart of the planet

Check out this excellent presentation by Legendary ocean researcher Sylvia Earle. As part of this session she shares astonishing images of the ocean and shocking stats about its rapid decline -- as she makes her TED Prize wish: that we will join her in protecting the vital blue heart of the planet.

As she rightly points out, environment destruction is visible at land and people are beginning to take note of it and start acting on it. In the oceans the destruction is not visible to the eye however the impact is equally bad if not worse. Protecting oceans is very critical for survival of earth and to prevent mass extinctions and climatic changes. She calls for creation of protected marine areas across the globe to help sustain and protect the ocean life. Excellent one!

Auto Meltdown - End of an era (Part 1)

This is the first of a 3 part series on Auto Industry meltdown. As part of this post I will be covering the current state of auto industry and my reasoning on what led to this bubble.

Current State

February 2009 has been the worst month for US auto industry in decades. The overall auto industry demand has fallen to 4 decade lows of 9.1M vehicles in 2009. The top 3 US companies sees their demand halved from last year's base. GM was the worst with 53.1% decline, Ford 48% decline and Chrysler 44% decline. The Japanese car companies fared slightly better than US companies however still took a significant hit. Toyota saw 40% decline in sales, Honda saw 38% decline and Nissan 27% decline. There is a virtual blood shed happening in auto market both US and globally.

US has been the top auto market in the world for years peaking at 17M+ vehicle sales in 2007. China was a distant second coming in at around 7M+ vehicles in 2008. For the first time in history Chinese car sales exceeded US car sales in Jan 2009. Is this going to be trend in future?

Auto Bubble - How did this happen?

Over the last couple of decades US has been experiencing an 'Auto Bubble' similar to the housing bubble or the dot com bubble. The demand in US auto industry is unsustainable. Overall there are around 251M vehicles in US and 199M licensed drivers this translates to around 1.3 vehicles/driver. I think this would most likely be the peak vehicle ownership ratio. It will start going down from here and eventually settle down between 1-1.1 vehicles/individual. Here are some of the key factors that led to this bubble:

  • Low interest rates and easy availability of credit in the last couple of decades fueled an increase in consumption(similar to housing) leading up to a bubble. It will be interesting to check out the foreclosure(or equivalent) rate for auto industry.
  • Low cost of Fuel - Low gasoline cost in US meant low operating costs for owning a car. This spurred people to travel more and buy more cars and less fuel efficient vehicles. In fact the average miles/gallon in US is 17.1 which is very low by global standards. People really didn't mind this low fuel efficiency till recently due to low fuel cost in US(one of the lowest in western hemisphere).
  • Reducing ownership cost -Technology improvements, innovation and automation has made cars more affordable and cheaper to operate at the same time offering more features and comforts. Opening up of US economy to Japanese and Korean cars also contributed to this trend.
  • Increase in disposable income - Over a 30 yr window between mid 70s to mid 2000's the average car price of american cars increased by 15% in constant currency terms. The average per capita income increased by more than 270%.
All the above factors led to building up of a bubble over the last couple of decades leading to peaking of demand in 2007. When the economy took a turn for the worse last year due to credit crisis things really started falling apart and auto companies started taking big hits with a drastic reduction in demand culminating in halving of their sales this Feb.

Please let me know your thoughts on the above. If I've left out any more key factors feel free to add to the above.

In my next post I will be covering my analysis of how Detroit got into this mess

Microsoft Office Labs vision 2019

Check out this excellent video & presentation on future of technology in 2019. Microsoft’s Business Division president Stephen Elop unveiled the latest production from Microsoft Office Labs called "Office Labs 2019" at the Wharton Business Technology Conference, starring stock photo men, women and children playing with the next-generation of communication, collaboration and production technologies.

Microsoft office labs vision 2019 - Video

Source: www.Microsoft.com

A Glimpse Ahead - Presentation by Steven Elop

Source: www.Microsoft.com

Pls click here to see the transcript of this session.

The technologies showcased above looks exciting and revolutionary. Excellent vision of future tech by Microsoft. It will be interesting to see how well they deliver to this vision!

For more details check out the below links
Started Something blog
Microsoft Business Division Virtual Presskit
Steve Clayton's Blog - Geek in disguise
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