Business Insight Zone

That’s the important question raised by this Foreign Affairs article written by Marc Levinson, an expert in container shipping and its economic impacts:

Freight Pain: The Rise and Fall of Globalization

The entire article is available only to Foreign Affairs subscribers, but here’s a key excerpt:

That [container-shipping-based] globalization process [which started in the 1960s] is now beginning to shift into reverse. Because international freight transport is becoming more expensive and less reliable, companies are reconsidering whether it makes sense to depend on products made half a world away. Global sourcing is losing much of its allure.

While one big driver of this change is the high price of oil, Levinson talks about other factors, including the logistics of loading and unloading ships in ports like Long Beach, as well as more stringent environmental requirements. Reviewing these factors, Levinson predicts various impacts for U.S. commerce, including:

• imported goods will probably get more expensive across the board;
• U.S. companies may do more of their manufacturing in North and Central America;
• top manufacturers like Dell and Toyota may have to adjust the timetables — and the costs — associated with their super-efficient just-in-time production methods.

More directly, I would note that the shifts Levinson talks about stand to impact big container-ship operators like Maersk, railroads like BNSF, and trucking outfits from YRC on down. And all of that is before we factor in the consequences of the current economic downturn.

Here are just two recent news headlines that emphasize the damage all of this is doing to container shipping business:

• Financial Times — NOL warns of severity of shipping downturn
• Lloyd’s List — Analysis: Box shipping battered from all sides

If Levinson’s analysis is on target, and especially if the trends he sees continue to be exacerbated by a long global recession, he may be right that the shipping-led product globalization we’ve seen across the past 40 years may be firmly in decline.

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You can find out much more about all of these transportation industries via our Hoover’s industry pages:

• Marine Shipping
• Trucking
• Railroads

(And, if you’re in the market for premium content, you can find out much more by contacting us about a Hoover’s subscription.)

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Photo by nix-pix, used under a CC-No Derivative Works license.

As I write this, oil is trading at an eye-popping $123.39 per barrel on the NYMEX futures board. Part of the high price of oil stems from the low value of the dollar relative to other currencies — especially the euro — so the other day I pulled together some figures to see how much cheaper oil would be if it were priced in euros instead of dollars.

Inputs:

• Price of oil in dollars, taken from the Energy Information Administration of the US Department of Energy.
• Exchange rate, dollars to euros, taken from Exchange-Rates.org.

Timeframe:

• 5 November 2007 through 29 April 2008 (i.e. Tuesday of last week).

Results (greenbacks in green, euros in blue):

My simple-Simon conclusions:

• The exchange-rate divergence has meant more and more over the past couple of months.
• Even when priced in euros, oil is still plenty expensive.

Other items potentially of interest in this vein:

• Statistics Matter: Oil, Dollars, Euros & Gold — This one includes a chart scanned from the Wall Street Journal earlier this year.
• Crude Oil Prices, Dollars vs. Euros: Is There a Difference? – I used this post’s sources in formulating my own chart.
• U.S. gas: So cheap it hurts: “Relatively low taxes have kept pump prices far below most other developed nations, which some say is precisely why the current runup is so painful.” — This article explains why “the U.S. is actually one of the cheaper places to fill up in the world” and digs into the effect of government policy on gasoline prices.

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If you care at all about relations between the United States and China — and in my book, you should — do yourself a favor and read anything James Fallows writes on the subject in The Atlantic Monthly. Fallows has been living in China for the past couple of years, filing story after story on the commercial, economic, and political realities at work in the world’s most populous country.

Particularly interesting is this article from the beginning of this year, in which he discusses the strange financial relationship that prevails between the two powers:

The $1.4 Trillion Question

The whole thing is worth a read, but here’s the nut graf:

Through the quarter-century in which China has been opening to world trade, Chinese leaders have deliberately held down living standards for their own people and propped them up in the United States. This is the real meaning of the vast trade surplus — $1.4 trillion and counting, going up by about $1 billion per day — that the Chinese government has mostly parked in U.S. Treasury notes. In effect, every person in the (rich) United States has over the past 10 years or so borrowed about $4,000 from someone in the (poor) People’s Republic of China. Like so many imbalances in economics, this one can’t go on indefinitely, and therefore won’t. But the way it ends — suddenly versus gradually, for predictable reasons versus during a panic — will make an enormous difference to the U.S. and Chinese economies over the next few years, to say nothing of bystanders in Europe and elsewhere.

Read more

That’s the takeaway message from the WSJ Energy Roundup item quoted below, which discusses Lafarge’s $12.9 billion deal to buy the cement operations of Orascom Construction Industries.

For a while I covered the Egyptian beat for Hoover’s, and became fascinated with the Sawiris family that controls Orascom. (Naguib Sawiris, who runs Orascom Telecom, is particularly interesting.) I’m also intrigued by any deal that merges environmental-green benefits with dollar-green ones. That appears to be the case with this deal, since Orascom’s cement ops run more efficiently than Lafarge’s European plants.

Green Cement in Egypt

. . . Why the rush to clean up? Cement makers aren’t any more altruistic than the next guy. But it takes a lot of energy to fire up kilns to 2,000 degrees Centigrade, and energy accounts for between one-quarter and one-third of the industry’s costs. To stay competitive, cement makers have to trim energy consumption and make their plants as clean as possible.

Precisely. Over the years, companies across many industries have become accustomed to the idea of a certain amount of waste in their operations as being inevitable. That works for a while, but only until a new wave of technology — or of new market entrants with different ideas — upsets the apple cart. Then you have to get leaner and make your operations (or your products) more efficient.

We’ve seen this in industry after industry, whether it’s cars (American makers responding to fuel-efficient imports) or lighting (consumers realize they can get much more cost-effective lighting using technologies besides Edison’s bulb) or mutual funds (Vanguard undercuts the rest by keeping such a low fee structure).

More and more we’ll be seeing this in heavy industry, as manufacturers come to embrace the mandate that has driven the semiconductor business for decades: eliminate more waste every year, or else get out of the business.

As they seek diversification, plenty of money managers are investing in “frontier markets” — i.e. stock exchanges in developing countries. Some of these markets, like those in Vietnam, are especially appealing because they aren’t heavily tied (or “geared”) to U.S. stock exchanges. In other words, they don’t go up or down in lockstep with the bigger bourses of the world.

For more, check out this interesting Marketplace interview (posted in both text and audio) with John Authers, investment editor of the Financial Times:

Prospecting in ‘frontier markets’

One of the things that has driven the emerging markets and which has helped countries like Brazil or Russia truly emerge, at least on some measures, is the huge booming commodity prices. If you’re a mineral-rich, or in other ways commodity-rich country in that band in southern Africa there are ways in which you could become a frontier market. Obviously you need to make some extremely careful decisions about the political system. There could be some very interesting bargains to be found there. You obviously have to do an awful lot of due diligence first.

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Om Malik has this short item about rolling out tech in the developing world to test and learn before rolling it out in the higher-stakes markets of the more-highly-industrialized world.

Emerging Markets As Cutting Edge Tech Test Beds

Worth reading, and worth contemplating how the phenomenon — which Malik addresses in business-technology terms — also applies to boosting environmental and social goods in the developing world, as discussed in this May 2007 post from WorldChanging:

Principle 8: Leapfrogging

Whatever angle you take on this — human development, green business, filthy lucre, whatever — it certainly seems worthwhile to test concepts in markets without an intrenched infrastructure that must be overcome. Doing so eliminates one of the major status-quo inputs to the market equation, which would seem to make experimentation easier.

This Newsweek piece* details Mark Bent’s creation and marketing of the solar-powered BoGo light. “BoGo” stands for “buy one, give one”; as the article explains, “Bent’s light, sold only via the Internet, comes with a special deal: buy one for $25, plus shipping, and Bent automatically gives one to the relief group of your choice or to U.S. troops in Iraq or Afghanistan.”

Citizens of the industrialized world take for granted the availability of bright lights at night. If you want to stay up reading in bed past midnight, no problem. If you want to run a third shift in your company’s production plant, no problem — just leave the lights on. But in many parts of the world, nightfall brings any reading or schooling to an end, and spells the close of productive work for the day.

American entrepreneurs looking to enhance social goods while making their own fortunes from customers at “the bottom of the pyramid” face unusual challenges, as the article explains:

It’s a tough business, though. Mills says Bent isn’t the only one trying to figure out how to make the lights affordable for people in developing countries and how to ship them to regions with a low population density. Bent says he has distributed roughly 20,000 BoGo Lights so far from his Houston headquarters, including 7,500 that were bought by ExxonMobil for refugees at U.N. camps in Africa. [...]

Still, Bent says his company has yet to reach the break-even point, despite his having sunk $250,000 of his own savings into it. “No one has done this before,” he says of his business model. “If I had a pizza parlor and was screwing up, I could walk down the street and ask what’s wrong with the sauce. But here, I can’t get any guidance from other people.”

While I still think that appropriately targeted aid programs are vital to development efforts — especially new-look programs like those of the Gates Foundation — in the long run, successful entrepreneurship for (and among) the developing world will play a vital role in improving prosperity there.

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* Pointed out to me by my mother — thanks, Mom!

This item from Foreign Policy’s Passport blog describes how “Ecuador’s government is asking developed nations to pay $350 million for them NOT to drill for oil in a major field in the heart of the Amazon.”

I do take slight issue with FP’s comment that this qualifies as “a unique environmental scheme,” since it appears to be similar to the financial deals that Indonesia has been working out with Australia and other countries.

The general idea behind these moves is the same. The richest countries have something — money — that developing countries need (or want, depending on your viewpoint), and many developing countries have something — environmental goods — that the rich countries need (or want). Sounds like yet another context for supply and demand, of both money and environmental goods, to take over.

It will be interesting to see just how much Indonesia, Ecuador, and their rain-forest-possessing peers will push on this front in years to come, and how much the most developed nations will be willing to pay.

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More context from the FT (via MSNBC):

Forest nations press for carbon credits to help cut greenhouse gas

and (the Australian variety of) ABC:

Indonesia says more money needed to stop deforestation.

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Charles Fishman is subtler than that, but it’s not hard to come away from his big Fast Company article — Message In a Bottle — with that conclusion. I adverted to the article in a post last month, but I didn’t get a chance to re-read it thoroughly until last night.

Fishman’s piece is a real eye-opener. Especially if you drink much bottled water, please do yourself a favor and read the whole thing. Meanwhile, here’s a key chunk from the early going of the article to set the tone.

Bottled water is the food phenomenon of our times. We–a generation raised on tap water and water fountains–drink a billion bottles of water a week, and we’re raising a generation that views tap water with disdain and water fountains with suspicion. We’ve come to pay good money–two or three or four times the cost of gasoline–for a product we have always gotten, and can still get, for free, from taps in our homes.

When we buy a bottle of water, what we’re often buying is the bottle itself, as much as the water. We’re buying the convenience–a bottle at the 7-Eleven isn’t the same product as tap water, any more than a cup of coffee at Starbucks is the same as a cup of coffee from the Krups machine on your kitchen counter. And we’re buying the artful story the water companies tell us about the water: where it comes from, how healthy it is, what it says about us. Surely among the choices we can make, bottled water isn’t just good, it’s positively virtuous.

Except for this: Bottled water is often simply an indulgence, and despite the stories we tell ourselves, it is not a benign indulgence. We’re moving 1 billion bottles of water around a week in ships, trains, and trucks in the United States alone. That’s a weekly convoy equivalent to 37,800 18-wheelers delivering water. (Water weighs 81/3 pounds a gallon. It’s so heavy you can’t fill an 18-wheeler with bottled water–you have to leave empty space.)

Meanwhile, one out of six people in the world has no dependable, safe drinking water. The global economy has contrived to deny the most fundamental element of life to 1 billion people, while delivering to us an array of water “varieties” from around the globe, not one of which we actually need. That tension is only complicated by the fact that if we suddenly decided not to purchase the lake of Poland Spring water in Hollis, Maine, none of that water would find its way to people who really are thirsty.

A chilled plastic bottle of water in the convenience-store cooler is the perfect symbol of this moment in American commerce and culture. It acknowledges our demand for instant gratification, our vanity, our token concern for health. Its packaging and transport depend entirely on cheap fossil fuel. Yes, it’s just a bottle of water–modest compared with the indulgence of driving a Hummer. But when a whole industry grows up around supplying us with something we don’t need–when a whole industry is built on the packaging and the presentation–it’s worth asking how that happened, and what the impact is. And if you do ask, if you trace both the water and the business back to where they came from, you find a story more complicated, more bemusing, and ultimately more sobering than the bottles we tote everywhere suggest.

Especially when you consider the success of products like Fiji Water, the issues surrounding bottled water are myriad and far from simplistic, as Fishman goes on to explain. But if you have a concern for the environment, it’s hard not to conclude that the prevalence of bottled water is more than just a negative trend — it’s a big negative, and one that’s eminently avoidable.

And yet it’s also a $16 billion business, and a staple for giant companies like PepsiCo, Coca-Cola, and above all Nestlé, so it’s not going away anytime soon.

Here’s more from Fishman:

Once you understand the resources mustered to deliver the bottle of water, it’s reasonable to ask as you reach for the next bottle, not just “Does the value to me equal the 99 cents I’m about to spend?” but “Does the value equal the impact I’m about to leave behind?”

Simply asking the question takes the carelessness out of the transaction. And once you understand where the water comes from, and how it got here, it’s hard to look at that bottle in the same way again.

I agree. In fact, I’ve decided not to buy bottled water whenever I can avoid it. I don’t think Big Water will come to supplant Big Oil as a target for environmentalists’ ire, but it’s surely coming into the crosshairs.

It’s hard for me to say anything detached about Zimbabwe, which has been so disastrously run in recent years by its President/autocrat Robert Mugabe. While the country’s massive fertility, hard-working populace, and common border with economically powerful South Africa should make it a breadbasket and a natural site for foreign investment, Mugabe’s blinkered economic policies and suppression of civil rights have made it into a locus of misery.

Citing economic instability — and driven by a new law that nationalizes foreign business holdings — H. J. Heinz has withdrawn from its operations in the country.

• From Reuters: H.J. Heinz says sold Zimbabwe oil maker over crisis
• From Voice of America news: Heinz Exits Zimbabwe After Writing Down US$111 Million Investment
• From the BBC: Food giant sells out of Zimbabwe

In her blog at The Atlantic, Megan McArdle discusses the economics of Mugabe’s “reforms” at more length.

Cry, the beloved country

After citing some of the statistics that quantify the disaster of the recent years of Mugabe’s reign, McArdle writes:

If Robert Mugabe had set out with the deliberate goal of trashing his country’s economy, he could hardly have been more effective. You might say he’s pioneered his own field: undevelopment economics. Starting with a disastrous land reform that placed land into the hands of political cronies, rather than those who knew anything about farming, or needed sustenance, he has turned a huge net food exporter into a net importer . . . when they can get the hard currency to import. [...] He has brought on hyperinflation, decimated the country’s financial system and industrial base, crippled its agricultural output, mired the government in unrepayable debt, and reduced virtually all of his citizens to appalling poverty.

Opinions differ on this, of course, and on what to do about it. Many Africans defend Mugabe from his Western detractors, citing the long, deplorable history of Western depredations in Africa — and especially against powerful black African leaders — as reason to suspect the motives of Western-dominated institutions like the UN and the EU. (They have a point: too often in years past, Western leaders and businesses viewed African assets as ripe fruit to be picked at their leisure.) African institutions such as the African Union have declined to censure Mugabe, in general taking his side, or at least taking the position that outsiders are in no position to talk about his rule or Zimbabwe’s laws. McArdle predicts that no solution will come until the country collapses completely; I’m prone to think she’s right.

Losing H. J. Heinz’s presence in the cooking-oil business probably won’t hasten that day for Zimbabwe. But the reasons for Heinz’s departure probably will. Which makes me far from detached in my sorrow for the suffering of Zimbabwe’s citizens.