Ten interesting things that we read this week

Some of the most interesting topics covered in this week's iteration are related to 'are we getting wrong kind of innovation?', 'subjective vs. objective measure of wealth' and 'tackling the fake food industry'

Published: Aug 12, 2017

mg_98723_reading_bg_280x210.jpgImage: Shutterstock (For illustrative purposes only)
At Ambit, we spend a lot of time reading articles that cover a wide gamut of topics, including investment analysis, psychology, science, technology, philosophy, etc. We have been sharing our favorite reads with clients under our weekly ‘Ten Interesting Things’ product. Some of the most interesting topics covered in this week’s iteration are related to ‘are we getting wrong kind of innovation?’, ‘subjective vs. objective measure of wealth’ and ‘tackling the fake food industry’.

Here are the ten most interesting pieces that we read this week, ended August 11, 2017.

1) The electric car revolution will leave many behind [Source: Financial Times]
When it comes to electric cars, there is no end to what the naysayers think is crazy: the high price tags, the lavish subsidies, the swelling mounds of used battery waste. Climate change sceptics however don’t spend so much time on one of the great economic and political risks posed by the rise of the electric car: its potential to be a jobs killer. The auto industry is fond of saying that if it were a country, it would be one of the world’s largest economies. Its figures show it supports around 7m jobs in the US alone and close to 13m in Europe. Robots have encroached on the assembly line already and the deceptive looking electric car which is more of a computer on wheels is likely to cause further disruption in the job market. Analysts have found that it is $4,600 cheaper to produce an electric car (Chevy Bolt costing $37k in this case) than expected and concluded that, with further cost falls likely, electric cars would probably disrupt the industry faster than widely understood. The Bolt has just 24 moving parts compared with 149 in a VW Golf, mainly because electric motors are so much simpler than combustion engines. That suggests the car industry of the future will need far fewer people to make not just vehicles, but the components that go into them. Further, jobs will also be impacted in the maintenance and repair market given that electric motors do not require anything like the same amount of maintenance as an internal combustion engine.

2) Are we getting too much of the wrong kind of innovation? [Source: aei.org]
MIT economist Daron Acemoglu broadly identifies the existence of “enabling technologies (ET)” and “replacing technologies (RT)” with each having a different economic impact. The former, he writes, “augment the capabilities of some workers and enable them to perform new functions, increasing their productivity.” And with higher productivity comes higher wages. Examples include computer-assisted design and spreadsheet programs. The latter, however, “explicitly replace labor in some tasks.” To put it another way, some technologies allow companies to substitute capital for labor, while other technologies enable “the creation of new complex tasks [that] allow firms to replace old tasks by new variants in which labor has a higher productivity.” And thus what you have is a neverending race between those technologies with the economic impact varying depending on the winner. Critically, this framework implies that when the creation of new complex tasks keeps up with (or is even faster than) the process of automation, employment and wages will increase even as some workers are being replaced by machinery and new technology. In contrast, when automation runs ahead of the process of creation of new, labor-intensive tasks, technological change will bring lower employment, lower share of labor in national income and also potentially lower wages. So then which is winning right now, RT or ET? One sign that it might be RT is the well documented polarization of the job market and higher percentage of national income going to capital. But Acemoglu also suggests a self-correction mechanism or countervailing force “that may restore, in the long run, the share of labor in national income and employment back to their initial levels.” These forces may “restore some of the lost ground for labor because labor becomes cheaper as a result of automation, making the creation of new labor-intensive tasks more profitable.”

3) Challenge is all too easily ducked by the modern worker [Source: Financial Times]
“The man whose whole life is spent in performing a few simple operations, of which the effects, too, are perhaps always the same . . . generally becomes as stupid and ignorant as it is possible for a human creature to become.” – these are words not of Karl Marx but economist and philosopher Adam Smith.  Smith knew that specialisation and the division of labour weren’t about to disappear, so he advocated publicly funded schools as a path to more fulfilling work and leisure. The emergence of mass production lines made Smith’s words seem prophetic; but many repetitive jobs have since been taken by machines. So, has his warning about stultifying work been rendered obsolete? His book ‘The Wealth of Nations’ is almost a quarter of a millennium old, and we should not expect every word to ring true today. But correctly read, Smith’s anxiety continues to resonate — and not just for people with repetitive jobs, but knowledge workers too.  The modern knowledge worker — a programmer, a lawyer, a newspaper columnist, might appear inoculated from Smith’s concern. While their work may not be exactly monotonous, all too easily, though, they can be pulled into the soothing cycle of what slot-machine designers call a “ludic loop”, repeating the same actions again and again. Check email. Check Facebook. Check Instagram. Check Twitter. Check email. Repeat. Smith was concerned about jobs that provided no mental challenge: if problems or surprises never arose, then a worker “has no occasion to exert his understanding, or to exercise his invention, in . . . removing difficulties which never occur.” For the modern knowledge worker, the problem is not that the work lacks challenge, but that the challenge is easily ducked.

4) How sport is becoming more accessible in urban India despite challenges  [Source: Livemint]
When 45-year-old Jatin Paranjape – a former cricketer wanted to enrol his 11-year-old twins for tennis coaching, he just could not get hold of the right people for the job. Even though Paranjape lived in central Mumbai, in close proximity to places such as Matunga Gymkhana and Shivaji Park Gymkhana, he just wasn’t satisfied with what he got. To address the issue, he started a business venture. His website, KheloMore, aggregates sporting requirements in urban centres and provides options for people looking for coaching and access to facilities in increasingly congested cities. Paranjape, who worked in the marketing division at sporting goods company Nike for several years, breaks down the usability of his business into three parts: discover sport (for ages 5-15), find and book venues, and rediscover sport (for adults looking to play recreationally). Paranjape’s venture is not an isolated one—several entrepreneurs are attempting to improve infrastructure and coaching options for children, and working on building quality playing turfs in neighbourhoods. They are all trying to create an ecosystem for sport even as cities continue to lose their open spaces and struggle to provide adequate guidance to young aspirants. The public open space available per person in Mumbai is approximately 1.24 sq. metres while for Delhi it is 4.5 sq. metres. This does not compare favourably with other major cities worldwide, like London, which has about 31.68 sq. metres of open space per person, and New York (26.4 sq. metres).

5) In fund management, churn is not necessarily burn [Source: Financial Times]
In a world fixated on costs, it is easy to make the leap and assume that funds with higher turnover generate worse outcomes for investors. Conventional wisdom is overpowering on this front, but it is also wrong. It is true that high turnover might indicate low conviction or short-termism, and trading too often does eat into the returns an active fund delivers for investors. However, it is unfair to suggest that all turnover is bad. If a fund manager sells a stock that subsequently underperforms and replaces it with another that outperforms then the impact on performance should be positive, even after allowing for transaction costs. Conversely, if they hold on to stocks that have been underperforming then this could be a sign of a portfolio based on stale views. The research highlighted in this piece found no evidence of a structural relationship between turnover and excess returns among active US equity funds over the 1991-2016 period. Sometimes low turnover funds outperform and sometimes high turnover funds, without exhibiting any real pattern. This conclusion holds over both one- and three-year investment horizons. What may be more surprising is that no evidence of any relationship was found across all other styles of US equity fund, even in small-caps where the costs of trading are noticeably higher. On average, high turnover US equity funds have been able to add at least enough value to offset the additional transaction costs they incur. The moral is that pursuing a reduction in transaction costs without considering the consequences is misguided. Consistency between investment process and turnover is more important than the level of turnover itself.

6) Why you feel richer or poorer than you really are [Source: nymag.com]
How wealthy one feels is often only moderately related to how wealthy one is. “People aren’t just randomly saying, ‘I’m super wealthy,’ and really they’re at the bottom 20 percent of the income distribution,” says psychologist Elizabeth Dunn. For the average person, the correlation between objective and subjective wealth is around 0.5 or 0.6. In other words, “people aren’t stupid,” said Joe Gladstone, a consumer-behavior scientist at University College London, but there’s room for improvement. Which makes you wonder: Why wouldn’t we just feel as rich or as poor as we actually are? For one thing, money can be an emotional topic, and our feelings about it are often synced to how we’re feeling more broadly. Anxious and pessimistic people may assess their financial situation too negatively, for example, while some people may be overly optimistic about their wealth due to fantasies of affluence.  How wealthy we feel also depends on what form of wealth we’re focused on. One particularly potent indicator is checking-account balance, which seems to sway subjective wealth more than any other type of asset. Perhaps most importantly, though, subjective wealth hinges on comparison. Neighbors, friends, and family are perhaps the most common reference points for wealth, which may help explain findings that four in ten American millionaires say they don’t feel wealthy, and that a majority of people worth more than $25 million still don’t consider themselves “financially secure.”

7) Beating China’s fake food scourge [Source: Bloomberg]
In demand by multinational retailers and food producers, Inscatech and its agents scour supply chains around the world hunting for evidence of food industry fraud and malpractice. In the eight years since he founded the New York-based firm, Mitchell Weinberg, 52, says China continues to be a key growth area for fraudsters as well as those developing technologies trying to counter them. “Statistically we’re uncovering fraud about 70 percent of the time, but in China it’s very close to 100 percent,” he said. “It’s pervasive, it’s across food groups, and it’s anything you can possibly imagine.” While adulteration has been a bugbear of consumers since prehistoric wine was first diluted with saltwater, scandals in China over the past decade — from melamine-laced baby formula, to rat-meat dressed as lamb — have seen the planet’s largest food-producing and consuming nation become a hotbed of corrupted, counterfeit, and contaminated food. Weinberg’s company is developing molecular markers and genetic fingerprints to help authenticate natural products and sort genuine foodstuffs from the fakes. Another approach companies are pursuing uses digital technology to track and record the provenance of food from farm to plate. Some of the biggest food companies are backing technology that grew out of the anarchic world of crypto-currencies- blockchain, a shared, cryptographically secure ledger of transactions. Wal-Mart Stores Inc., the world’s largest retailer, was one of the first to get on board, just completing a trial using blockchain technology to track pork in China, where it has more than 400 stores. The time taken to track the meat’s supply chain was cut from 26 hours to just seconds using blockchain. Alibaba Group Holding Ltd., too, sees the potential for the eight-year-old technology to provide greater product integrity across its platforms, which accounted for more then 75 percent of China’s online retail sales in 2015.

8) An industrial age solution to email overload [Source: fastcompany.com]
In the early 20th century, the Pullman Company, manufacturer of the eponymous sleeper train cars, was in trouble. John Runnells, the situation “During [our] long years of growth wasteful ways had been fostered, losses, inaccuracies, and confusing unrelated systems had been spontaneously developed.” At a century’s distance, these problems mirror some of the issues knowledge workers grapple with today—top among them the deluge of communication that threatens to drown many of us at work. “In former days, approximately seven men [managed] the brass department and its 350 workmen,” Runnells explains. “In many places throughout the plant, [however,] one man or another was devoting a part of his time to assist the active seven. All the planning was being done somewhere. And every man contributing by that much, demoralized his own particular work by the interruption.” This is what Runnells called “slipshod” methods: work procedures were informal, if you needed something, you had to figure out how to get it, and if someone needed something from you, they’d bug you until they got it. The constant interruptions made it hard to keep track of details, and all that divided attention reduced productivity. Plenty of modern organizations suffer similar problems. In a workplace where everyone’s instantly accessible, whether by messaging apps like Slack or through a fixed email address feeding into a single inbox, John Runnells solved this problem at the Pullman Company and his first step was probably the last thing you’d expect at a company whose profits were dwindling: He oversaw “a vast increase in overhead.” In the brass department alone, Runnells expanded the number of managers from seven to 47. Next, in a shift that might puzzle open-office and constant-connectivity advocates, he made it harder for people to communicate, going so far as to actually lock the doors and screen the windows of the brass department, forcing outsiders to instead submit requests through official “channels” that were to be monitored and optimized by the new manager corps. In turning around the Pullman Company, John Runnells intuited a simple but powerful idea: Work processes fail when they divide workers’ attention and lead to mediocre results. Runnells would argue that to reclaim the attention of skilled knowledge workers, our current email-overloaded work habits need to go.

9) "Leave the crown in the garage": What I've learned from a decade of being PepsiCo's CEO [Source: Linkedin]
PepsiCo CEO Indra Nooyi talks about her journey to and as the head of one of world’s oldest F&B company.  She highlights seven critical lessons for running a Fortune 50 company in the 21st century. Notably these lessons apply not just to budding CEOs but each one of us.

10) Kolkata, unsurprisingly, houses the bulk of shell companies named by Sebi [Source: Livemint]
Every evening, hundreds of traders would gather around the Lyons Range edifice that houses the Calcutta Stock Exchange (CSE) to privately trade in shares after market hours. They would communicate among themselves in Lyons Range-speak, in which stocks went by fancy names—State Bank of India would be referred to as Bank, Hindustan Motors Ltd as Motor, and Tata Tea as Chai. In that market, a trader would cover naked shorting on the official platform with a partner who had the shares to deliver. Similarly, a trader short of cash would find someone to take over his liability—all for a fee. The “kerbside” market survived open outcry trading on the floor of CSE. It died only when the bourse itself ran aground following the March 2001 payment crisis. What kept it alive was synchronized trading—popularly known as 1-2-3. The transactions concluded in the kerbside market would be formalized on the official platform the morning after. Two brokers would connect on phone and match order placement on the official platform with a countdown: 1-2-3. Synchronized trading is illegal under securities market regulations, but it was impossible to legally establish collusion. For years, until trading on CSE was suspended in April 2013 for want of regulatory clearances, the bourse became the hub for synchronized trading, albeit with a different purpose—“tax avoidance”. Traders would transact in shares of illiquid “shell” companies in the same manner to manage tax liabilities on capital gains. “Short-term capital gains, for instance, can only be set off against short-term losses. To minimize tax liabilities on short-term speculative gains, traders would buy losses,” said a former CSE official from the surveillance department, adding that the final settlement would always be in cash outside the official platform, and that the “accommodating partner” would charge a fee. It’s not a surprise then that around 145 of the 331 companies declared shell by the securities market regulator on Monday are registered in Kolkata.

- Saurabh Mukherjea is CEO (Institutional Equities) and Prashant Mittal is Analyst (Strategy and Derivatives) at Ambit Capital Pvt Ltd. Views expressed are personal.

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