Industrial Internet and Cultural Resources

In May I spent two weeks traveling, one week in China and one week in Greece. I want to share some of my learnings from both countries.

China

In early May, I traveled to Shanghai and Suzhou. On this trip, I met with investors, bankers, companies in the textiles, heavy equipment and shipping industries as well as cab drivers, Didi drivers, friends, and family. Despite the widespread concern in the (mainly Western) press about the risks stemming from the US-China Trade War and putative economic slowdown, the Chinese business-people I met did not seem phased. Many businesses have already diversified their supply chains across Southeast Asia and away from China. Companies have expanded production outside of China primarily due to rising labor costs, and to hedge against the sorts of political risks appearing today.

Business-people across industries continue to explain their current and ongoing innovation programs excitedly. Under China's industrial policy, businesses across industries are adopting "industrial internet," or "manufacturing 4.0." The industrial internet is a collection of techniques that allow companies to take an empirical approach to production, quality control, innovation, and cost management.

One instructive use of industrial internet applications comes from a heavy construction equipment company, called Company A. Company A has 350,000 bulldozers and cranes in use across more than 10,000 customers. Each bulldozer has more than 1,000 sensors spread throughout the vehicle. Each vehicle is connected to the internet 24/7 and broadcasts all usage data (audio, visual, click-stream, etc.) back to Company A in real time. Company A can observe how each of their 10,000 customers is using their products. For example, they can see which parts of their bulldozers are undergoing the most stress or tend to break down fastest. Company A can then work with its suppliers and encourage quality improvement in the areas encountering the most problems. With information on each component quality, Company A can better evaluate its suppliers and quickly replace them if necessary. Company A can recommend purchasing other machines that it thinks would be complementary to its customers' lineup. Industrial internet applications like those I listed here are just the tip of the iceberg and potential for cost reduction and volume expansion are both sizable.

Moreover, many of the companies I met in China are happy to explain how they are reducing headcount by replacing low and middle-skill tasks with industrial robots. Many of the manufacturers I met have already reduced headcount by 50% or more over the last decade and increased use of industrial automation (robots). As companies further implement industrial internet to improve manufacturing, headcount will decline industry-wide. Also, it may be the case that many of the production comparative advantages resulting in trade secrets developed by incremental innovation techniques in countries like Germany and Japan may reverse engineered through industrial internet. Should these techniques prove successful, China may be able to move up various value chains even faster.

While industrial internet may seem like an obvious next step across the manufacturing sector, implementation can be challenging. To meet this challenge, leading city governments like the Shenzhen government, have developed an industrial policy to support the application of industrial internet techniques. Shenzhen recognized that it is difficult for small and medium-sized companies to implement industrial internet techniques due to high fixed costs. If small players in the value chain are unable to make necessary fixed costs investment quickly, it could slow the implantation or retard the efficacy of the industrial internet – both sub-optimal economic outcomes. Shenzhen is experimenting by providing small and medium-sized enterprises with resources (including capital and consulting) to make the necessary expenditures to contribute to the industrial internet in their supply chains. Should these policies succeed, we should expect to see similar programs in other cities emerge.

Greece

In first grade, I enjoyed learning about Ancient Greece. My parents bought me a book about the Trojan War. I was fascinated by many elements of the story, including the concept of a Trojan Horse strategy and that the most beautiful woman in the world at the time, Helen of Troy, was from Greece.

Later, in 11th grade, I began studying philosophy with Kristin Smith, and she encouraged my love for the subject by giving me many of her college textbooks. Two years later, in college, I decided to pursue a second major in philosophy. Rochester had a small but excellent philosophy department where I had the chance to study ethics and ancient philosophy with Robert Holmes and Deborah Modrak, respectively, both brilliant scholars who further encouraged my interest in visiting Greece. While reading the trial of Socrates, I could not help but wonder how unique Athens must be for Socrates to sacrifice his life to remain an Athenian?

Greece is a country with an abundance of cultural resources. Since the time of Socrates, people have traveled to Athens to study, pursue business ventures, and admire the Acropolis. Today, Greece receives nearly 30 million tourists per year (and growing). Tourists collectively contribute 20% of Greece's GDP. Few activities are more beneficial to a country than tourism. Tourists are happy to pay for a place to sleep, the chance to eat local food, and the opportunity to take photos of cultural resources and themselves. Providing tourist experiences tend to be high margin/high volume and in my opinion, tend to have a high reward to effort ratio. The reward to effort ratio is exceptionally high in Greece, given that their distant ancestors paid the costs to create Greek cultural resources. These ancient investments provide them Greeks with cornered resources that are non-rivalrous, excludable, and have benefited the Greek economy for thousands of years.

However, over the last decade, life has been challenging for many Greeks. Fiscal imprudence, a culture of tax avoidance and graft have taken their toll and resulted in a lost decade:

The local stock market declined more than -90%
Median incomes declined -30%
Residential real estate prices fell -40%
The employment to population ratio declined from an already low 47% to 43% as of last year (15 percentage points below the US)

Greece is attempting to stage an economic recovery in part by trying to attract more foreign tourists and property investors. While on tour across Athens, Naxos and Santorini, I saw numerous WeChat QR codes and scanned many of them. Products available include Santorini wedding services starting at €2,000 and apartments in Athens starting at €250,000. Buying an apartment secures you a residency permit and travel rights throughout the Schengen Zone. The Greek 10 year treasury bond has declined from 40% yield to less than 4% today. As interest rates fall, capital market participants are apparently more confident in Greece’s improving ability to pay its debts.

I expect the road to recovery might be slow for Greece. However, if you are looking for an outstanding vacation filled with world-class hiking, biking, food and wine, all at an affordable price, Greece is an excellent option.