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 ‘Mental biases during disaster times’, ‘Risk to the “India Premium”’ and ‘how Netflix is shaping our movie choices’.Here are the ten most interesting pieces that we read this week, ended September 08, 2017.
1) Mental bias leaves us unprepared for disaster
[Source: Financial Times
A decade after the global financial crisis, the British economist Tim Harford asks, even if we had clearly seen the crisis coming, would it have made a difference? Perhaps not. He cites the example of New Orleans in 2004. With a terrible hurricane bearing down on the city, officials realised that the situation was grim. The levees were in disrepair and a storm surge could flood the low-lying city. A hundred thousand residents would be unable to evacuate without help, and not enough help was available. A plan was hatched to evacuate families to the Superdome, a sports stadium, but managers there warned that it simply could not house so many. The storm of 2004 was Hurricane Ivan, which, after lashing the Caribbean, weakened and turned aside from New Orleans. The city had been given almost a full year’s warning of the gaps in its defences. The near miss led to much discussion but little action. When Hurricane Katrina hit the city in 2005, evacuation proved as impractical and the Superdome as inadequate as had been expected. The levees broke in more than 50 places, and about 1,500 people died. New Orleans was gutted. It was an awful failure but surely not a failure of forecasting.
Robert Meyer and Howard Kunreuther in “The Ostrich Paradox” argue that it is common for institutions and ordinary citizens to make poor decisions in the face of foreseeable natural disasters. There are many reasons for this, including corruption, perverse incentives or political expediency. The authors though focus on psychological aspects and identify cognitive rules of thumb that normally work well but serve us poorly in preparing for extreme events. One such mental shortcut is what the authors term the “amnesia bias”, a tendency to focus on recent experience. We remember more distant catastrophes but we do not feel them viscerally. For example, many people bought flood insurance after watching the tragedy of Hurricane Katrina unfold, but within three years demand for flood insurance had fallen back to pre-Katrina levels. We cut the same cognitive corners in finance. There are many historical examples of manias and panics but, while most of us know something about the great crash of 1929, or the tulip mania of 1637, those events have no emotional heft. Even the dotcom bubble of 1999-2001, which should at least have reminded everyone that financial markets do not always give sensible price signals, failed to make much impact on how regulators and market participants behaved. Six years was long enough for the lesson to lose its sting.
Another rule of thumb is “optimism bias”. We are often too optimistic, at least about our personal situation, even in the midst of a more generalised pessimism. In 1980, the psychologist Neil Weinstein published a study showing that people did not dwell on risks, such as cancer or divorce. Yes, these things happen but to other people. The same tendency was on display as Hurricane Sandy closed in on New Jersey in 2012. Robert Meyer found that residents of Atlantic City reckoned that the chance of being hit was more than 80%. That was too gloomy: the National Hurricane Center put it at 32%. Yet few people had plans to evacuate, and even those who had storm shutters often had no intention of installing them. Surely, even an optimist should have taken the precautions of installing the storm shutters? Why buy storm shutters if you do not erect them when a storm is coming? Messrs Meyer and Kunreuther point to “single action bias”: confronted with a worrying situation, taking one or two positive steps often feels enough. If you have already bought extra groceries and refuelled the family car, putting up cumbersome storm shutters seems rather unnecessary. 2) In India, big firms face new competition
India’s GDP is the world’s seventh largest and its stock market the ninth biggest, but the country is like no other major economy. The informal sector accounts for about 50% of output, 80-90% of jobs and at least 90% of firms. Red tape and bad roads mean the country comes 130th in the World Bank’s ease-of-doing-business rankings. However, firms that overcome these challenges are exceptionally profitable. Since 2001, the return on equity (RoE) of listed Indian firms has averaged 19%, eight percentage points above the figure for companies in rich markets and five percentage points above those in emerging ones.
Interestingly, India is both a terrible and brilliant place to do business. Just as investors talk about a “Korea discount”, to describe chaebols’ lousy profits, so there is an “India premium”. The leading private lender, HDFC Bank, has an 18% RoE, ranking tenth among the top 100 global lenders. Hindustan Unilever, a consumer goods firm, has a 77% RoE, over twice that of its parent, Unilever. Even in basic industries, such as cement, returns have been relatively high. This record reflects good management: most firms know how to allocate capital well, unlike their profligate Chinese peers. But India’s informality and bad infrastructure also create obstacles for new entrants. Inputs, such as capital, land and energy can be nightmarishly hard to secure. It takes 10-20 years to build dense national supply chains and distribution networks. For example, Maruti Suzuki, the biggest car firm (with a 22% RoE), has over three times more dealerships than its nearest competitor.
Now, a quarter of a century after India first liberalised, the pace of formalisation is picking up. A breakthrough came in 2012, when the courts began to crack down on crony capitalists, especially firms that used graft to get access to natural resources and land. A new value-added tax, known as the GST, requires firms to reconcile their tax returns with those of their suppliers and customers, forcing millions of companies into the tax net. The GST is complex but replaces a patchwork of local taxes, helping to create a single national market. The Government’s decision to retire old bank notes at the end of 2016 has made it riskier to hoard illicit cash. E-commerce accounts for only 3% of retail sales but provides a new way to distribute products. New digital identities for all Indians mean that more can open bank accounts. In the past year there has been a 13% increase in formal savings, such as bank deposits, life insurance policies and mutual funds. Cash in circulation has fallen from 12% of GDP to 10%. The value of digital payments has risen by over 40% and the number of taxpayers has almost doubled. While not perfect, formalisation is indeed happening.
As a result, for tens of millions of informal firms—shoe factories, plywood manufacturers, drinks wholesalers supplying roadside stalls—tough times are ahead. If they stay in the shadows they will be cut out of formal firms’ supply chains. If they enter the formal economy, their tax costs will climb. Some will fail, causing unemployment to rise. Others will consolidate. For big companies, formalisation could boost profits in the short term. They may take business from smaller firms: at least 40% of India’s tea, 85% of its jewellery and 70% of its dairy products are sold in the grey economy. Tata Steel, a metals producer, has said it expects to gain market share from informal smelters. However, the risk is that the “India premium” eventually crumbles along with long-standing barriers to entry. The assault on crony capitalism, along with lower commodity prices, has already reduced the RoE of listed Indian firms from 26% in 2006 to 13% (this is still well above the 11% global average). At least half of this fall is due to a slump at firms with reputations for graft, which often operate in the basic materials, infrastructure, property and energy sectors—and the state-owned banks that financed them.
In most consumer-facing industries, returns remain high. But in the long run, big Indian firms may be hurt by better-functioning markets for capital, land and natural resources, as well as more efficient supply and distribution chains. The advantages that they have assembled over years could be eroded. To maintain high profits, they may have to spend more on innovation. Investors don’t seem to be thinking about this much. India’s stock market is valued at three times book value. That makes it the dearest big market in the world and implies, roughly, that long term RoE will be 17-20%. 3) An Engineer’s guide to the Artificial Intelligence Galaxy
[Source: Columbia University
Kai Fu Lee, Founder and CEO of Sinovation Ventures, an early stage VC fund with investments in China and the USA gave the commencement speech at the Engineering school of Columbia University on how AI is going to affect us. We give below some of the key excerpts from that speech.
“AI will be a revolution on the scale of the Industrial Revolution, probably larger, and definitely faster.” He says, AI has made image processing, loan approval and facial recognition a matter of seconds- something which will only expedite going forward. “In the next 10 years, all financial companies will be turned upside-down, with AI replacing traders, bankers, accountants, research analysts and insurance companies. In the next 10 years, AI will replace most factory workers, assistants, advisors and middlemen. But AI is not limited to simple jobs. AI will also replace many reporters, doctors and teachers. Your AI assistant will know better than you what you would like to eat tonight, where you should go on vacation, and whom you should date.” He says that because AI will make so much money for humanity, we will enter the Age of Plenty, making strides to eradicate poverty and hunger, and giving all of us more spare time and freedom to do what we love. But because AI will replace half of human jobs, we will enter the Age of Confusion, and many people will become depressed as they lose the jobs and the corresponding self-actualization. He gives three pieces of advice on how not to miss the Age of AI.
First, embrace AI, and align your career by betting on its inevitability. While the first AI tools in your industry may appear fragile, be assured they will get better with data. So whatever domain you choose, be the first to use AI tools. The symbiotic combination of humans and AI is all about 1+1=3. For example, when a doctor can correctly diagnose cancer, and save 70 lives out of 100, and an early AI tool can save 60 lives out of 100—together perhaps they can save 80 lives. Just like the reporter who first found word processing, the accountant who first used a spreadsheet, the first photographer who applied Photoshop, you will have an edge. In addition, AI will evolve faster and more broadly than these tools, and your edge will grow and become sustainable.
Second, uphold your responsibility as an engineer. During the Age of AI, engineers will be the ones with power and given that they will build products with an impact across industries, they will have an indirect impact on people’s possessions, health and even lives. The first airbags saved many lives, but they also accidentally killed some children, due to the lack of adequate design and instructions that adequately considered children’s smaller size. So an engineer not only has the responsibility to make products safe, thoughtful, and usable but also to foresee and prevent the potential risks of technology to users from getting out of hand.
Finally, he said be in touch with your heart. He cited his own experience of being diagnosed with 4th stage lymphoma and being reminded of his misplaced priorities - chasing technologies, products, investments, and career and ignoring family. Post his recovery he’s made a point to spend more time meaningfully connecting with more people. He said that his near-death experience not only changed his life and values, it gave him an enlightened view about what AI should mean for humanity. Elon Musk and Stephen Hawking have given us their view, a view where machines supersede humans completely. He says that while it’s near certain that AI will beat humans at analytical tasks, we need to maintain what makes us human. Our compassion. The moment when we see our newborn babies; the feeling of love at first sight; the warm feeling from friends who listen to us empathetically; the feeling of self-actualization when we help someone in need. These all demonstrate that we are far from understanding the human “heart”, let alone replicating it. But we do know that humans uniquely are able to love and be loved. It’s this love that differentiates us from AI.
He says that this is where the AI related unemployment problem can be solved. The displaced workers can take up careers spreading love and experiences- whether as a passionate tour guide, an attentive concierge, a funny bartender, an infectious sushi chef. With the new “experts of love” titles many new kind of service jobs will be created. And they don’t have to be “jobs”, they can be volunteers, at an orphanage or a retirement home. This will give people jobs that AI cannot take away. 4) Why LaCroix sparkling water is suddenly everywhere
For the first few decades that LaCroix sparkling water existed, the Midwestern moms who drank it had it all to themselves. Then sometime in 2015, LaCroix — lightly flavored, sugar-free carbonated water wrapped in a garish can — became an unlikely breakout hit. Who turned this humble Midwestern seltzer into a status symbol? It turns out LaCroix isn't everywhere because it was trendy. LaCroix became trendy because it was easy for it to be everywhere. Over the past decade, Americans have done something that would have once seemed downright un-American: They've given up soda. And when you’re craving a can of pop, LaCroix is a decent substitute. Unlike tap water, it has carbonation and a little flavour. Unlike a countertop SodaStream, it's cheap, readily available and portable. LaCroix is succeeding as methadone for the soda addict.
LaCroix isn’t the only brand to benefit from the sparkling water boom. But it’s the one that’s risen to the coveted status of lifestyle brand, not just generating loyalty but becoming part of how we define ourselves. The secret behind LaCroix’s rise is a mix of old-fashioned business strategy and cutting-edge social marketing. When Americans wanted carbonated water, LaCroix was positioned to give them fizzy water. Then, sometimes by accident, LaCroix developed fans among mommy bloggers and Los Angeles writers who together pushed LaCroix into the zeitgeist. About five years ago, LaCroix spotted an opportunity - the downfall of soda was creating a craving for sparkling water. While bottled water dominates the market, sparkling water is growing faster. The amount of domestically produced sparkling water Americans consume increased by 58% between 2010 and 2014, according to the International Bottled Water Association. Between 2013 and 2014 alone, it grew by 17%.
Dieters kicking soda and alcohol were among the first LaCroix devotees, happy to find something with a little more flavour. By 2015, LaCroix was on the approved list for the Whole 30 diet, a restrictive eating plan that requires participants to give-up sugar and alcohol. Meanwhile, LaCroix’s flavour choices, which numbered just six in 2004, started to balloon. First came coconut, followed by apricot, mango and tangerine. Next, the bottling plants churned out a new line of water called Cúrate, packed into taller cans festooned with bright illustrations of fruit and labeled with fruit blends. Offering 20 flavours gives LaCroix the ability to profit from ubiquity while keeping the cachet of scarcity. Most stores don’t carry every flavour, so stocking up on a favourite can require some persistence. The proliferating flavour list also keeps loyal LaCroix drinkers from getting bored.
LaCroix was able to win over its followers in droves by getting the writers of prominent blogs and writers to become fans. TV writers drank LaCroix because they’d always liked sparkling water, long before the rest of America caught on. Then in 2012, National Beverage (its parent company) expanded its West Coast distribution and got onto the websites of office supply stores for easy ordering. That was a decisive moment. From then on, LaCroix quickly became the drink of choice for Los Angeles writers. And in March 2015, one of them gave LaCroix its highest-profile endorsement yet - Mary H.K. Choi wrote in the New York Times Magazine: "The first time I cracked one open and took a swig, I understood. LaCroix sparkling water is absolutely delicious."
LaCroix has populated its own Instagram with photos taken by its followers — a cascade of pretty, laughing people; stacks of pastel LaCroix cases; and gorgeous, minimalist still lifes with artfully placed seltzer cans. The marketing approach followed by LaCroix creates a sort of self-fulfilling prophecy. LaCroix highlights its fashionable users, who make it clear that it's popular to both drink LaCroix and talk about it. And so more fashionable people talk about and Instagram their cans of LaCroix, and more people find out about it, and the cycle continues. Of course, the love of trendsetters burns hot and fast. The small, self-involved circle of people — many of whom write for a living, or work at start-ups, or both — who tweet about snacks and then favourite each other’s jokes about the snacks, are fickle. All trends are, in a sense, bubbles. We collectively decide to bestow social value on something until we're tired of it and move on.5) How Netflix’s content strategy is reshaping movie culture
Legendary movies like The Usual Suspects, Old School, Zoolander and The Shawshank Redemption have one thing in common: none of them can be streamed on Netflix. The list of Netflix’s greatest missing films doesn’t just stop here. The Wizard of Oz, Citizen Kane, E.T., Psycho, and 12 Angry Men all share the dubious honour of not being offered on Netflix. Why so? Netflix — like many platforms — faces a strategic decision. Does it compete by having a wide selection of movies? This is how Blockbuster used to operate, at least when it came to mainstream domestic films. People have a movie in mind, search, and are usually satisfied when they find it. Or does it focus on exclusive content that you can find on Netflix but not elsewhere? In its early days Netflix used the former approach in its shipping service. But as the shipping service has become second fiddle to streaming, Netflix has gone all-in on exclusive content that is developed in-house; it carries only a fraction of the classic movies on its streaming service. Looking at IMDb’s highest-rated movies of all time, only 13 of the top 100 are on Netflix.
As Netflix and other streaming platforms continue to grow and emphasize exclusive content, we risk losing pieces of our cultural memory — forgetting about some of the classic films that define a generation. Of course, the set of classics is always shifting but what is different now is that platforms like Netflix will decide which older films we will and won’t have access to. This fact has two important bearings: a) a large literature on psychology has demonstrated that our choices depend not only on our preferences but also on which options we are most aware of at the moment. In other words, out of sight, out of mind. When Netflix continues to prime users to think about its exclusive offerings, a user who would opt for Breakfast at Tiffany’s over the fifth season of House of Cards may not even think to look for the former, despite their underlying preference for it.
Furthermore, our preferences for movies depend on what others are watching. A recent paper shows that if one person ends up at the movies by happenstance, a second person will decide to go later on. The paper shows that this phenomenon is mostly local to a city, and is true even if the movie isn’t rated highly. This is because network externalities in moviegoing lead us to value a movie more highly when others have seen it. When a friend tells us that they went to a movie, we want to go, too; in other words, movies are best as a shared experience.
These results have important implications. Netflix is not simply a passive observer of consumer preferences; it shapes preferences through the content it pushes. As long as Netflix is the market leader in streaming movies, whatever it pushes its subscribers toward will benefit from the buzz created around the watercooler by other Netflix subscribers, who can act as tastemakers. And Netflix also benefits from making the missing alternatives less salient. For instance, Netflix offers you alternatives while showing the movie you searched for in small print at the top of the page. Even though content may be available elsewhere, these network and salience effects strengthen a platform’s position to shape content, and the role it plays in determining the movies that will remain in or fade from public consciousness.6) The future of grocery stores
[Source: Washington Post
The author of this piece interviewed Mark Ordan, a turnaround specialist and an expert in food retail, to understand the changing face of grocery retailing and the rationale behind Amazon’s interest in Whole Foods. Ordan, 58, was the Founder and Chairman of Fresh Fields Markets, a Maryland-based natural foods grocer that merged with Whole Foods in 1996. At the time of the merger, Fresh Fields had 22 stores and more than $200 million in sales in four markets: Washington DC/Baltimore, Philadelphia, New York/New Jersey/Connecticut and Chicago. According to him, Whole Foods made a mistake by keeping prices much higher than competition and that’s a major reason why their competitive store growth went down. This, apart from the fact that Whole Foods was never as efficient an operator as some of these world-class retailers are as one of the main reasons Amazon bought it to turn it around. The key to being a great retailer and great merchant is being incredibly efficient in terms of logistics and inventory management. Walmart and Costco and every major supermarket chain have been working on their logistics because they had such low margins that they had to grind out every bit of efficiency that they could.
Also, there are no patents in retail. If you admire what Whole Foods is doing, you can copy it. There are a lot of good companies out there. And if you are better at logistics when you copy them, you can be more profitable. This is what happened. Competitors got better and better. Costco and Walmart are more efficient in logistics and Amazon, the most efficient merchant of all time has now entered the picture. Going forward, Amazon has two strengths which it will use to turn around Whole Foods. Amazon knows what customers want and knows how to offer customers choices with very good descriptions and follow-up service. The shopping experience gets better. Also, Amazon is able to get what you want to your door so rapidly that they have it as convenient as most brick-and-mortar operations. People might say you go there and get it, but that’s only if you have it in stock. Too often, you go to brick-and-mortar retailers and what you are looking for isn’t in stock. You never have that problem at Amazon.
He believes the Amazon-Whole Foods combine can become enormous. Conventional grocery stores have operated on low margins for years. They have to squeeze out efficiencies and inventory management. Whole Foods was able to rest on its laurels because they always had much higher margins. They were never as efficient as these conventional supermarkets. Now you have a good merchant like Amazon, who is far and away the best at logistics, far more efficient than any supermarket chain and it has a hold of a supermarket that enjoys the wealthiest demographics of any company in retail. People shop there several times a week. Amazon has the know-how to make shopping a better experience. They will absolutely revolutionize the way Whole Foods manages its logistics and inventory.
This partnership in effect will make grocery stores revolutionize the way people buy items, the way they pay for them, the way they handle inventory, the way they distribute to stores - all to stay competitive versus Amazon. This will drive multiple innovations. Very soon, he says, you are not going to get your items, go to a cash register, stand in line and check out. Soon, you will pay as you put them in your basket and you will walk out the store fully paid.7) Obituary: Robert Loder, art collector, 1934-2017
[Source: Financial Times
In the early 1990s, a striking change took place in South Africa’s boardrooms. Into the basement went the old masters of Cape Dutch farm houses. In came more abstract, expressive works by modern day Boshoffs and Sterns. In many cases, township artists entered the halls of corporate power ahead of the black capitalist class. The transformation was in no small part down to Robert Loder, a persuasive British businessman turned patron and private collector. He created opportunities for thousands of emerging artists in Africa, India and across the developing world through his Triangle Network. An indefatigable globetrotter, he brought the likes of Chris Ofili, Subodh Gupta and David Koloane together to make art and often liberated them from the hold of a few curators and dealers. In doing so, Loder amassed an enormous collection of African art at a time when its value, present and future, was unrecognised.
In 1991, in an industrial corner of a divided Johannesburg, he helped create a permanent space for artists, black and white, at a time when access to art schools was restricted and organised creative space scant. The result was The Bag Factory, located in a disused warehouse in the city’s edgy downtown. As business headquarters fled north to the shiny and safer business district of Sandton, artists and traders from all over Africa moved in. Within a few years, the Bag Factory was a byword for post-apartheid creativity. It had equivalents in Cape Town’s Greatmore Studios, New Delhi’s Khoj Studios and London’s Gasworks, near the Oval cricket ground. Loder’s network of artists’ workshops today spans 41 countries and claims 4,500 artists.
Loder spent his early years in Australia, where his father, Lord Wakehurst, was the governor of New South Wales. His grooming was upper crust British: Eton, Cambridge and the Coldstream Guards. The attachment to Africa was formed in Johannesburg’s Sophiatown with the activist Anglican priest Trevor Huddleston, and an apprenticeship at Anglo American, the mining group, where he worked for a decade until 1966. In his spare time, he discovered African art. High-placed connections in finance led him to Esperanza, a Cyprus copper mine turned insurance, oil and marine services conglomerate. On returning to London, he became its managing director.
By his late 40s, and now chairman of the Institute of Contemporary Art, Loder’s artistic interests began to overtake his business dealings. He invested in a management buyout of Curtis Brown, the literary agency that had made the reputations of John Steinbeck, William Faulkner and Norman Mailer, becoming its chairman. Simultaneously, he set up the Triangle Arts Trust with Sir Anthony Caro, the British abstract sculptor, in 1982. They conceived a workshop for mid-career artists in a disused dairy barn in upstate New York. Artists from the US, UK and Canada were invited to work alongside one another for two weeks, free from outside interruptions. According to Caro, it was “a very loose idea” to “stick the artists together and see what happened”. This one-off idea inspired far wider involvement. In an art world that was increasingly global yet still seen as western centric, Loder’s activism spread to Africa, India, China and Latin America; places where it was not always easy to make art, and where artists lacked wider exposure beyond their own sphere. 8) Vice’s Charlottesville documentary reinforces rising profile
[Source: Financial Times
From North Korea to Syria, Vice Media’s journalists have reported from some of the world’s most troubled hotspots. But none of the company’s news coverage has had as powerful an impact as its film from Charlottesville a fortnight ago, which captured in detail the anger, racism and hate, of marching neo-Nazis. The 22-minute documentary for Vice News Tonight, the nightly bulletin Vice produces for HBO, Time Warner’s premium channel, already has more than 35m views online and has been widely cited by rival news organisations. Vice’s footage of protesters screaming anti-Semitic slogans contrasted dramatically with Donald Trump’s claim that “very fine people” participated in the march. The film’s online success and its pick up by rival news channels comes amid increasing investor interest in Vice, which recently secured a $450m investment from TPG, the private equity group, in a deal that valued the youth-focused group at an eye-popping $5.7bn. Underpinning the rising valuation is Vice’s ability to connect with younger viewers at a time when many of them are migrating away from television.
The Charlottesville film took Vice viewers much closer to the demonstrating racists than most rival media reports. While US news channels reacted to the demonstration and its violent aftermath when an anti-fascist protester was murdered by an alleged domestic terrorist, Vice was ahead of the game. Unlike their peers, Vice knew who the protagonists were and have been following this issue and thinking about it for a while. They knew about these protests for months and knew it would be a big story. Elle Reeve, its correspondent who reported from Charlottesville, had spent time earning the trust of key figures in the hate groups that participated in the march.
Vice’s decision to get close to the Charlottesville protesters reflected the interests of its audience. There is so much going on in the world and successful news organisations know they can’t possibly own every story. Thus Vice decided it’s going to own the things that are very important to its audience. Vice’s spokespersons said, “If you’re CNN or the New York Times, they’ve done very well on their top [story] priorities. For us, because we lean towards the younger, the rise of those groups seem like it’s one we should own.” The media group’s value has risen amid growing doubts about the future of US commercial television, which has been hit by falling audiences and lower advertising revenues. Vice is valued at almost $2bn more than Tribune Media fetched when the owner of 42 US television stations was sold recently to Sinclair Broadcast. It is more than double the market value of the New York Times, four times what the Financial Times cost Nikkei when the Japanese company acquired it two years ago and more than 22 times what Jeff Bezos, the Amazon founder, paid for the Washington Post in 2013.
9) Germany’s transition from coal to renewables offers lessons for the world
[Source: Scientific American
Zollverein is a symbol of Germany’s transition away from fossil fuels toward renewable energy—a program called the Energiewende that aims to have 80% of the country’s energy generated from renewables by 2050. That program has transformed Germany into a global poster child for green energy. But what does the transition mean for residents of Essen and the rest of the Ruhr region—the former industrial coal belt—whose lives and livelihoods have been dramatically altered by the reduced demand for coal? The answer to that could hold some useful lessons for those undergoing similar transitions elsewhere.
The Ruhr Valley lies in the state of North-Rhine Westphalia, made up of 53 cities that came to depend on coal mining when it reached an industrial scale in the 1800s. At their height in the 1950s, the mines employed about 600,000 workers, entwining the region’s identity with coal. But in the 1970s, as cheaper coal imports from other countries began to outcompete German production and drive down the price of domestic coal, it became unsustainable for the government to keep subsidizing the mines. At the same time, an appetite for green energy began in the 1970s driving the phaseout of coal. Today, only two hard coal mines remain, and in 2018 they’ll both be shut down. The move away from hard coal has left a lingering legacy in some cities, where unemployment can exceed 10 percent. Still, overall it was a relatively smooth transition as union representatives and local politicians worked out a plan to compensate and requalify people who worked in the coal industry.
At Zollverein, the viewing platform offers a 360-degree view of the physical change the transformation has brought about. The Ruhr’s low-built cities intermingle with lush forests and parks. Amid smokestacks stand the spires of wind turbines. People 30 years ago would have scoffed at the thought of holidaying here but now the number of hotels has increased. The mines themselves have even become a cultural stage. A museum and gallery at Zollverein attracts over 250,000 visitors a year, and several other mines host music concerts, food and cultural festivals. The Ruhr also has become attractive for businesses to invest and artists, jewelry designers, choreographers, design firms and tourism companies are just a sampling of those who have made the trendy industrial space their home. Still, the legacies of coal haven’t disappeared completely. Riddled with tunnels from centuries of mining, the geography has become so brittle that the region regularly battles with sinkholes.
With the move toward renewables, how much the Ruhr will benefit—having sacrificed so much toward this clean energy goal—has become a primary focus. Some 330,000 people work in the renewable sector in Germany; 45,000 of those are in North-Rhine Westphalia—and that is expected to grow as the government plans to roll out a structured plan towards using renewables to improve the Ruhr’s fate.10) The English are bad at playing football but brilliant at selling it
In the 25 years since it was first contested, the English Premier League, which kicked off a new season last month, has become the most lucrative product in the world’s most popular sport. Its clubs earned £4.5bn ($5.8bn) in the 2015-16 season, almost twice as much as any other football league. The puzzle is that the game’s most renowned domestic competition is not very good. ClubElo.com, which rates teams according to the opponents they beat, calculates that eight years ago four of the world’s five top sides were English. Today none is. An English club last reached the final of the Champions League, Europe’s most prestigious knockout competition, in 2012. A Premier League star last made the top five in the Ballon d’Or, an award for the world’s best player, in 2011. Spain, Germany, Italy and France, the other members of Europe’s “big five”, now dominate. England’s lower-ranked teams are worse than their equivalents in Spain and Germany, too. Yet as the standard of English football has dived, it has only become richer. Why are such a mediocre bunch so popular?
The English language makes the chatter between managers, pundits and players more accessible than in Germany or Italy, say. And being in a European time-zone means that early risers in the Americas and night owls in Asia can tune in to matches—something that England makes easier with its afternoon kickoffs, which are handier for Asian fans than Spain’s evening fixtures. Add to this the higher ticket prices and influx of money from a television deal with BSkyB, a satellite broadcaster, more than trebled the fee that the previous broadcaster, ITV, had paid. The biggest change, however, has been in the Premier League’s openness to foreign managers, players and owners. The expanding circus of international stars has broadened the league’s appeal. South Koreans tune in to watch Tottenham Hotspur’s Heung-Min Son; Senegalese to follow Liverpool’s Sadio Mané. Such players have been acquired partly thanks to injections of foreign capital. Led by Roman Abramovich, a Russian magnate who bought Chelsea in 2003, the Premier League has become a playground for foreign tycoons. They now have controlling stakes in 12 clubs, including smaller ones, such as West Bromwich Albion and Swansea City.
English teams have also been quicker than others to market themselves abroad. Manchester United began making regular pre-season trips to Asia in 1995, whereas Real Madrid did so only in 2003. This summer English teams entertained crowds everywhere from Houston to Hong Kong. And they are expanding with business ventures in new corners of the globe. Manchester City owns clubs in New York, Melbourne, Yokohama and Montevideo. With its three African sponsors, Arsenal has as many as continental Europe’s five richest teams put together.
The Premier League has some features which have the effect of lowering its standard but making it more exciting to watch. Its teams bargain collectively for television deals and share the booty more equally than other leagues, which have made for a more competitive division. And whereas continental teams sensibly pour resources into developing talented youngsters, English teams splurge on ageing stars, who draw in crowds but do less to win matches. Six of the Real Madrid side that won this year’s Champions League final joined as teenagers. By contrast in recent years a number of English sides have spent club-record sums on older players who are at the peak of their fame but have ended up spending half their time on the bench. Manchester United’s signing of Ángel Di María, a £59.7m flop, is one recent example. The constant hiring and firing of title-winning managers in England similarly makes for great drama, though bad results.- Saurabh Mukherjea is CEO (Institutional Equities) and Prashant Mittal is Analyst (Strategy and Derivatives) at Ambit Capital Pvt Ltd. Views expressed are personal.