204 (18 March 2015)

Welcome to week 204!  The articles below caught my attention this week.  Please note that what are intended to be relatively objective “briefs” are preceded by dashes (——–), whereas additional material or relatively subjective comments are preceded by asterisks (********).  The links to articles preceded by [SR] require a subscription to be read in their entirety, although complete articles may frequently be found by a title search.

You can find a pdf of this issue, a cumulative pdf for issues 1-156, and a cumulative pdf for issues 157-present at: https://sites.google.com/site/brucedeanlarson/the-invisible-forces.

(12 March 2015): “China Prepares Mergers for Big State-Owned Enterprises” (http://www.wsj.com/articles/china-prepares-mergers-for-big-state-owned-enterprises-1426053543)

——–“China’s leadership is preparing to radically consolidate the country’s bloated state-owned sector, telling thousands of enterprises they need to rely less on state life support and get ready to list on public markets.  The economic slump has heightened the imperative to eke out better returns from the state firms that tower over China’s economy, from the giants that dominate oil, banking and other strategic sectors, to smaller ones that run hotels and make toothpaste.”  In the next few months leaders of the Communist Party “plan to release broad guidelines in the next months for restructuring the country’s more than 100,000 state-owned enterprises . . . Strategically important industries such as energy, resources and telecommunications are marked for consolidation . . . The merged entities would then be reorganized as asset-investment firms, with a mandate to make sure they run more like commercial operations than arms of the government.”  Chinese officials see “a combination of mergers, better supervision and the discipline of public listing as crucial to reducing waste and corruption.”

********It would be interesting to see the argument that underlies such proposals.  Are there economies of scale in these strategic sectors or is it thought that the reduction of subsidies currently paid to unconsolidated state-owned firms will reduce costs?

(12 March 2015): “China Hails, Then Bans a Documentary” (http://www.bloomberg.com/news/articles/2015-03-12/china-hails-then-bans-antipollution-film-under-the-dome)

——–“It was no surprise that the Chinese government banned the environmental documentary Under the Dome, by Chai Jing, a well-known former television reporter.  The surprise is that it took the authorities so long to do it.” Released on the Internet on February 28th, the film exposing “the tremendous damage China’s heavy industry has done to the environment” abruptly disappeared from the Chinese web on March 7th; at the time of its removal, the film already had 200 million views.  Chinese filmmaker Hao Wu “says the sudden shift from support to censorship reveals disagreement among factions of the government, perhaps between the environmental ministry and the powerful economic ministry.”

********At this moment, the sub-titled documentary—104-minutes long—can be viewed at: https://www.youtube.com/watch?v=T6X2uwlQGQM.  The Wall Street Journal also picked up the story this week.  You can see a two-minute video summary of the article at: http://www.wsj.com/video/pollution-film-exposes-xi-jinpings-dilemma/7B13F64D-EDF4-4B03-B06E-449F4F464C53.html.  The New York Times covered the story on March 6th at: http://www.nytimes.com/2015/03/07/world/asia/china-blocks-web-access-to-documentary-on-nations-air-pollution.html.

(12 March 2015): “African Farmers Put Hope in Beer” [SR](http://www.wsj.com/articles/african-farmers-put-hope-in-beer-1426120282)

——–“Brewing giants such as SABMiller and Diageo PLC have invested millions of dollars into African farms, providing a guaranteed market—and better returns—to smallholder farmers as they look for more locally sourced materials such as sorghum.  Food staples cassava and yams are also being supplied to brewers.  Farmers are also growing less food, preferring to cultivate sorghum varieties specifically developed for brewing. . . . The brewers’ investment in Africa farmland reflects a strategic shift in the pursuit of cost-conscious consumers who favor cheaper beer brands made from homegrown crops.  Beers from local ingredients usually cost around 40% less than brands brewed with imported barley.”  According to Deutsche Bank, “Sub-Saharan Africa will make up 40% of global profit growth—or about $5 billion—for beer companies over the next decade.”

********The article points to one of the clear challenges associated with growing a “money crop” like sorghum.  Given fixed acreage, more land devoted to sorghum means less land devoted to food crops.  As Okasai Opolot, the head of Uganda’s agricultural ministry, says: “There isn’t enough land to accommodate both kinds of crops . . . More families are exposed to food shortages.”

(12 March 2015): “Avian Flu Found on Turkey Farms Supply Butterball” (http://www.wsj.com/articles/bird-flu-strain-found-in-arkansas-same-as-virus-in-missouri-1426094184)

——–“A strain of avian flu highly contagious among birds has infected Arkansas and Missouri turkey farms that supply [North Carolina-based] Butterball LLC, escalating a multistate outbreak and raising the prospect of wider international-trade restrictions on U.S. poultry products.”  Some countries have already imposed bans on poultry products imported from certain U.S. counties.  In consequence of these developments, “Shares of some major poultry companies fell sharply Wednesday.  Thyson shares declined 5.6%, Pilgrim’s Pride Corp. dropped 4.4% and Sanderson Farms Inc. declined 4.2%.”  The migration of wild birds heading north at the onset of spring is adding to concern about additional infection risk.

********On the subject of poultry, the living conditions for hens are also in the news.  With more consumers concerned about the quality of life of the hens that produce the eggs they eat and more states legislating growing conditions, cage-free facilities and larger cages are being used more frequently.  You can watch a three-minute video on the subject at: http://www.wsj.com/video/flap-on-egg-farms-whether-to-go-cage-free/A73CF309-07C1-4CEA-83BC-BA7FC3DC6F16.html.

(12 March 2015): “Retailers Can’t Shake the Circular Habit” [SR](http://www.wsj.com/articles/retailers-cant-shake-the-circular-habit-1426113760)

——–“The world may be going digital, but the brightly colored advertising inserts that spill out of newspapers every Sunday somehow missed the memo about the decline of print.”  Although circulars are being seen by fewer people and are costly to produce, they are still more effective than digital alternatives, which have “failed to lure as many customers into stores as the weekly deluge of paper coupons.”  The persistence of circulars “is at odds with broader trends in retail marketing” that are seeking to connect with younger shoppers.  According to Corey Elliot, research director for Borrell Associates, “Circulars are like crack . . . It’s hard for retailers to walk away from them, because they are ingrained in how people shop.”

********I suspect that for many customers, clipping coupons is still an important and tangible part of the shopping experience.

(13 March 2015): “Crude-Oil Price Collapse Takes Toll on Williston” [SR](http://www.wsj.com/articles/crude-oil-price-collapse-takes-toll-on-willston-1426184505)

——–Williston, North Dakota has been “the epicenter of the North American oil boom . . . But the collapse in crude prices means truck-choked Williston is no longer the land of opportunity it was less than a year ago.”  As a result, job seekers are no longer having the success they were just a short time ago and workers had been used to working 60-80 hours a week now find they are work 40-45 hours.  Along with this is the reality that “While demand for workers is falling, the exorbitant cost of living is not.  A basic apartment in Williston is the most expensive of its kind in the nation . . . At $2,394, the average rent here is 27% higher than in San Jose, Calif., the second-priciest U.S. city.”

(13 March 2015): “High Voltage” [SR](http://www.wsj.com/articles/book-review-the-powerhouse-by-steve-levine-1426203492)

——–[A review of Powerhouse: Inside the Invention of a Battery to Save the World, by Steve LeVine.  The reviewer is Liam Denning, co-editor of the Journal’s “Heard on the Street” column and frequent writer on energy matters.]  LeVine’s Powerhouse is a history of batteries and their development that bears comparison to Daniel Yergin’s book The Prize on the history of the oil industry.  “Both tell an important story with world-wide implications through the medium of personal struggles and triumphs.  And both, of course, center on global competition for the one constant that defines modern civilization: a reliable and economic source of energy.  One big difference is that Mr. LeVine’s book points toward a prize that could ultimately consign the one at the center of Mr. Yergin’s book to history.”

********Denning describes the book as not so much a laboratory textbook, but a thriller, something that seems appropriate for a business “that could transform the car industry, kill OPEC and launch another front in the world’s never-ending battle for geopolitical supremacy.”  You can learn more about The Powerhouse at: http://www.amazon.com/The-Powerhouse-Inside-Invention-Battery/dp/0670025844/.   One of the interesting firms working in the area of new battery technology is the start-up Sakti3, which recently received a $15 million investment from Dyson, a producer of vacuum cleaners and a line of cordless products.  You can learn more about that investment at: http://blogs.wsj.com/venturecapital/2015/03/16/the-daily-startup-battery-startup-sakti3-gets-investment-from-dyson/.  James Dyson, who founded the company that bears his name, thinks that his share of the Sakti3 “could someday be worth more than all of Dyson.”  That comment appears in the article “In Battery Revolution, a Clean Leap Forward” [SR](http://www.wsj.com/articles/in-battery-revolution-a-clean-leap-forward-1426461806).

********At the same time that some are working to advance the frontiers of battery research and use, others are “doubling down” on coal.  One such person is Robert Murray, whose company Murray Energy Corp. is set to pay $1.4 to obtain a controlling stake in Foresight Energy LP.  You can learn more about Murray and the deal in “Robert Murray: The Last Man Betting on U.S. Coal” [SR](http://www.wsj.com/articles/robert-murray-the-last-man-betting-on-u-s-coal-1426636891).

(14 March 2015): “Insurance: Risk and reward” (http://www.economist.com/news/finance-and-economics/21646260-data-and-technology-are-starting-up-end-insurance-business-risk-and-reward)

——–Insurers typically use blunt proxies “to assess risk—age, sec and marital status, for instance.  [But] Modern technology enables insurers to gauge individual risk much more precisely.  Monitoring devices provide a wealth of data, as do social media, credit-card histories and other digital records.”  Such devices, including the knowledge of what movies one watches, are increasingly being used in making underwriting decisions for insurance.  In some cases this information has resulted in different insurance prices for individuals and in other cases resulting in coaching to avoid or reduce risky behavior.  The use of this information is giving rise to smaller risk pools and raises concern that with “more precise individual underwriting and pricing . . . some risks may stand revealed as being so high that they become uninsurable.”

********What struck me as especially fascinating about this article was the notion that companies like Amazon and Google are especially well-positioned to use data to assess risk, because they “have intimate knowledge of their customers and have earned their trust.”  Insurers, on the other hand, “are in touch with most of their customers once a year.”  That seems like a very important point.  As notes the director of one large European insurer, “I’m far more concerned about the Silicon giants than about the AXAs and Generalis” of the insurance world.

(18 March 2015): “Why Auto Makers Are Building New Factories in Mexico, not the U.S.” [SR](http://www.wsj.com/articles/why-auto-makers-are-building-new-factories-in-mexico-not-the-u-s-1426645802)

——–For many years automakers regularly set-up new production facilities in the U.S. South but that is no longer the case; “it has been more than six years since an auto maker picked” the area for a “greenfield” plant.  Increasingly Mexico has been the destination of such production facilities.  It is estimated that labor costs there are about one-half those in the U.S., but also contributing to the attractiveness of Mexico have been “trade-related costs.”  Mexico “has 10 free-trade arrangements encompassing 45 countries . . . In contrast, the U.S. has free-trade agreements with 20 countries.”  The difference such trade deals can make is illustrated by BMW, which ships cars to Europe from Spartanburg, South Carolina.  Its sales to Europe are subject to a 10% tariff, costing $5,000 on a $50,000 car; autos shipped from Mexico would be subject to no tariff.  That is one of the factors leading Audi to build a new plant in southern Mexico requiring an outlay of $1.3 billion.

********The article is accompanied by a three-minute video which relates some of the content of article and featuring Martha Palacios Monzon, a logistics analyst training in Germany.

(18 March 2015): “Unbundling Pay-TV Brings New Questions” [SR](http://www.wsj.com/articles/unbundling-pay-tv-brings-new-questions-1426639589)

——–“The media industry is racing toward an Internet-TV future at a breathtaking pace.”  Characteristic of this change is a move toward unbundling of traditional cable offerings that have offered hundreds of channels, many of which were seldom or never viewed by subscribers, toward much more narrowly defined (and cheaper) offerings like those planned by Apple Inc., Dish Network Corp., and Sony Corp.  As consumers scale back, “Not every TV channel is assured a secure place in the emerging Web TV landscape . . . The small and midtier channel owners . . . will be jockeying to make sure their networks are in the online TV bundles being marketed to the audience of the future.”  Although the impact of the Internet on cable TV has long been expected, the pace of change has been much more rapid than anticipated.  As Steve Shannon, who is the general manager of content and services at Roku, notes, a critical mass in streaming has been reached so that “cord cutting,” i.e., cable abandonment, is now more attractive.

May you have a good week!

Bruce

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