Category Archives: competition

Sewing seeds of manufacturing growth

The NY Times has a fascinating article on the increasing demand for American made goods, particularly textiles, and the limited supply of labour with the relevant skills.

There is plenty more to the story than just manufacturing increasing in the US – it also includes an historical perspective on the sources of labour in the textile industry over the last two centuries.

The relevance for me and South Africa is – even with our 40% duties on imported textiles, why are we still shedding jobs? In the US, it’s been a desire for higher quality, more reliable quality, shorter turnaround times, cheaper transport costs and a growing discomfort with safety conditions in Asia.

The higher average incomes in the US also make price less of a overriding factor than in South Africa. The COSATU t shirts that were made in China at least once is a clear reminder of how cost impacts buying decisions above almost all else in big parts of our economy. I don’t know whether the quality of our production and the appreciation for buying locally made products is great enough locally yet. The NY Times article spend several paragraphs talking about the need for strong English and Maths skills. We’re still struggling with our legacy of broken education even while we fail current learners. None of this helps to take advantage of these trends.

Manufacturing growth in the US and other developed markets is also driven by increased automation. Higher real wage are less critical when automation in eras decreasing the amount of labour required. Possibly counterintuitively, this increases the demand for labour in developed countries even while decreasing global demand for labour.

Wages for cut-and-sew jobs, the core of the apparel industry’s remaining work force, have been rising fast — increasing 13.2 percent on an inflation-adjusted basis from 2007 to 2012

If you look at a graph of the share of US GDP that goes to labour compared to capital, it’s been a steady decrease for decades. I can only imagine the same is true in South Africa. The increased use of automation (including new robots that work more interactively with humans in auto plants) may drive this even further.

So is this a story that bodes well for South Africa? We should be a low (lower than the US and Europe anyway) wage producer so developed market manufacturing should hurt our export industry. Given that we import textiles from China, should we maintain hope – against all experience of the last two decades – of regaining a meaningful textile industry? Or do we need to recognize that Africa should be our biggest export area and we should leverage our proximity, both geographical and cultural, and focus on our competitive advantages over the Chinese? Where is our Industrial Policy in any of this?

Lexmark quits inkjets

Price competition with commodiised products is not a fun place to be.

Lexmark is throwing in the towell on inkjets and will focus on laser printers. This links to the story about HP and Dell struggling to make money on commodity PCs while Apple changes the market and the margins.

Michael Porter’s Five Forces are just as relevant today. If you have intense competition, with plenty of threats from substitute and many competitors you’re margins are on a one-way trip to negative.

The question for me is, should financial services be any different? How different can you really make the products, services and customer experience? Apple has done it where other computer manufacturers can’t see a way, so maybe it is possible in FS.

Should South Africa import Chinese TVs?

Should South Africa import Chinese television sets? Your answer to this question depends probably on your education.

If you were university educated in South Africa, you are likely to be in the market at various times in your life for a large LED backlit LCD panel with a high refresh rate and more HDMI inputs than you will ever need. You will also quite likely have a market-oriented, Anglo-Saxon view of government’s role in industrial policy and international trade. Thus you would probably say “yes, import cheap TVs from China so I can buy a cheap TV and not pay for inefficient local firms to manufacturer expensive, inferior TVs.”

If you are a TV snob, you will still want free imports of Chinese TVs to keep the prices down of competing, but fancier Sony and LG models from Japan and Korea.

If you are a little cynical, you might say South Africa could never have the manufacturing capability and scale to produce all the components and assemble them into a modern LCD TV. That’s not actually the debate I ant to pursue now, so in that case let’s say the alternative would be to locally assemble sets made with significant local components, even if the LCD panel itself were imported. Of course, the reason South Africa doesn’t have the scale to produce the panels themselves at the moment is a function of industrial policy decisions decades go. There is no absolute reason we couldn’t have that capability. But, that debate is related but separate post. Continue reading Should South Africa import Chinese TVs?

We can’t all be Germany

Some interesting thoughts on what drives Germany’s apparent success.

The article does understate the problem that Germany’s success is significantly export driven – not everyone can export for obvious reasons.

Also, the author notes that consumption has grown more slowly than economic growth without understanding that is exactly the source of an export-encouraged boom. Growth in consumption will also grow imports!

Medical Schemes, discrimination and the CPA

The Consumer Protection Act (CPA) protects consumers from abuse by enforcing fair practices, improved disclosure and added minimum warranties etc,

It’s a good piece of legislation, even if at times some aspects of it may result in greater costs than benefits.

TimesLive has a story about the alleged noncompliance of medical schemes with the CPA.

Some of the issues may have merit, but this struck me as particularly troubling:

According to the act, it is unfair when a consumer is discriminated against on the grounds of age.

Our constitution explicitly allows discrimination on actuarially sound rating factors that have both a statistical and causal link. This is how insurance is South Africa still uses underwriting to select homogenous groups of risks and to limit anti-selection by policyholders. If widespread anti-selection were to occur, then life insurance would not be viable.

Medical Schemes in South Africa have only very limited underwriting options in order to provide as many citizens as possible with fair health coverage. “Late joiners” are charged a premium since they haven’t contributed to the societal risk pool since they were most healthy and therefore haven’t paid “their fair share”. This has to do with a specifically identified risk rather than general discrimination based on age. These restrictions are important to maintain the solvency and viability of medical schemes.

Some schemes prevent women who fall pregnant within nine months of joining the scheme from claiming for the pregnancy even though they pay full premiums

This point is more tricky, but it does again reflect a misunderstanding. “Full premiums” on an actuarial sound basis have probably not been paid, since the fair premium for a member who joins just to get pregnancy benefits and hasn’t contributed at other times would be much higher than the premium that is charged. This one is a little more grey and while I feel the rules are entirely fair, they may not be viewed that way by a particular judge on a particular day.

Some schemes require that members give three months’ notice when terminating their membership, whereas the act deems 20 business days to be reasonable

This might reflect the desire to not have members leave a scheme immediately after having utilized the maximum benefit available to them before joining another scheme. I don’t know how much of this behavior would ever happen, so this might also ultimately be changed.

Many schemes don’t enforce the allowed waiting periods for members joining. If some of these other changes were to be made, I would expect these provisions would be more regularly used. Of course, that is another of the problems cited with medical schemes arising from the CPA.

All in all, we may see some changes, but by and large these comments reflect a lack of appreciation for the actuarial realities of managing a health scheme with community rating.

eBooks are bad for authors?

I don’t know enough about book publishing and distribution to evaluate this properly, but it doesn’t seem right. Freakonomics reports that according to the US Authors’ Guild, authors will be worse off while publishers will be better off comparing ebooks to hard covers.

When I say “doesn’t seem right” I’m referring mostly to the fairness of it, but I’m also wondering how it can possibly be true.

Of course the analysis if by the Authors’ Guild, so they are naturally likely to be biased towards authors. Specifically, I don’t care how many examples they quote – I’d like to see the real data or at least a random sample of data.

They don’t talk about sales volumes, but although higher volumes might still make authors better off than the pure margin analysis shows, I expect it will have an even better impact for the publishers.

The comparison of ebooks against hardcovers is an interesting choice. I would imagine there are far more paperback books sold each year – a more thorough analysis would consider that as well.

I read another recent story about John Locke making a fortune by leveraging the low cost of ebooks and the price elasticity of books. By dropping the price of his books to 99c he is making more money than when he was selling them for ten times that.  I don’t see how that isn’t a boon to authors from ebooks.

Ultimately, it probably isn’t ebooks that are bad for authors as much as it is the pricing model of current ebooks (in this case basically Amazon but also Apple with their iBook Store).

As I said at the start – I don’t know enough about this. If anyone can shed some light, please comment away!

Jobs, skills and lawlessness

It seems the taxi industry is unhappy with the proposed AARTO rules where traffic law infringements will earn drivers demerit points and eventually possibly licence suspension.

One of the reasons given is:

Satawu previously warned that Aarto will result in job losses, as drivers will lose their licences once the maximum amount of demerit points are exhausted, and have a negative impact on the economy.

This demonstrates two of my favourite principles:

  1. Almost everything is partisan. So partisan and self-interested as to make it blind to anything and everything else.
  2. Economics is a mystery.

There isn’t a lack of taxi drivers. There isn’t a lack of a deep pool of resources of potential taxi drivers just waiting to take the place of a recently vacated driving job.

What really surprised me though is that the taxi industry seems to think they are subject to the law than the average joe driving on the roads today. Given the overloading, dangerous driving, smooth-tired aqua-planing, randomly stopping, unroadworthy taxis on the road, not much law enforcement seems to be happening as it is.

Unless AARTO means the bribes will have to go up since the consequences of not bribing are now more serious?