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A Pragmatic Approach to Sustainability for Smaller Manufacturers

 

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… Chuck Harrington

Getting to Drawdown

Drawdown

Book CoverDrawdown, [1] a new book edited by Paul Hawken, presents about 80 proven action areas for reduction of global greenhouse gas emissions. The book and its action areas take a notably comprehensive view by including greenhouse gases other than carbon dioxide, and by not limiting carbon dioxide emissions to those related to energy production. Each of the action areas is well researched, with quantitative projections for future greenhouse gas emissions reductions. About 20 “coming attractions” – emerging technologies – are also presented, but, appropriately, are not considered in a quantitative sense.

Since Climate Change is a set of anticipated negative effects from Global Warming, which is attributed to increased concentrations of greenhouse gases in the Earth’s atmosphere, it follows that reducing future emissions of greenhouse gases can delay those negative effects. Further, there are natural processes that remove greenhouse gases from the atmosphere (notably, but not exclusively, photosynthesis). If annual global emissions of greenhouse gases can be reduced sufficiently, then atmospheric concentrations of those gases can reach a point where natural removal processes, perhaps augmented with new technologies, can begin to be reduced — drawn down — year over year.

The book does not present a plan for systematically implementing the several action areas on a global scale, never mind the book’s subtitle. Realistically, creating such a plan, with an objective of achieving drawdown, is certainly not a simple matter. Effectively executing that plan is likely much tougher.

Challenges

There are a number of serious and fundamental challenges that creating and effectively executing a globally sufficient plan that should be expected. Here are two of them:

>> U.S. and the World: Over the coming decades, the U.S., along with other economically developed nations, faces a vastly different set of demographics than do less developed nations. Developed nations can expect slow population growth rates, aging populations and rather static economies. Less developed nations face more rapid population growth, along with rapidly rising expectations for economic growth. [2] This chart projects greenhouse gas emissions over the next several decades: [3]

IEO 2016 - Carbon Dioxide

As you can see, greenhouse gas emissions are projected to roughly correlate with population growth and economic growth, such that the U.S. cannot directly control reduction in global emissions sufficiently to achieve drawdown. Even if the U.S. were able to eliminate all of its emissions, global emissions would continue to rise. Direct control over sufficient emissions reductions to achieve drawdown lies among the many developing nations, each with its own interests and priorities. There, the U.S. can only indirectly influence emissions to some degree or another.

This does not mean that American emissions don’t matter or should not be reduced. It does mean that the U.S. alone cannot achieve global drawdown.

>> Urgent vs Important: Dr. Covey [4] taught many of us that the urgent almost always gets priority over the important. At the most zoomed out level, Climate Change competes for active attention with other potential global threats, such as global war, financial system collapse, terrorism or epidemic. Zooming in, Climate Change competes with the panoply of routine business issues – supply chains, customers, production, technology, industry issues, ad nausium — for the active awareness of business people.

Drawdown provides a ready collection of proven techniques and a rational objective: achieving drawdown. An executable plan for achieving that objective within a few decades is still needed.

Thoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.


[1] Paul Hawken, editor, Drawdown The Most Comprehensive Plan Ever Proposed to Reverse Global Warming, Penguin Books (2017)

[2] For more on this, see: Carbon, America and the World, this blog, http://jerasustainabledevelopment.com/2017/04/01/carbon-america-and-the-world/

[3] This chart is from the 2016 International Energy Outlook, published by the U.S. Energy Information Agency. Available on-line at www.eia.gov . The  chart is restricted to carbon dioxide emissions, rather than the more comprehensive view of greenhouse gases that Downturn takes. However, it does make the point that the U.S., of itself, cannot control reaching a condition of global drawdown.

[4] Covey, Stephen, Seven Habits of Highly Effective People, Revised Edition, Free Press (2004)

Recycling the Circular Economy

Recycling is at the heart of the Circular Economy. Embracing the Circular Economy, a post from 21 March 2016 discuses the concept of a Circular Economy, especially as it applies to smaller manufacturers. Embracing the Circular Economy is worth recycling — so here it is:


Embracing the Circular Economy

The Circular Economy

In an industrial sense, the term circular economy refers to a systemic view of resources utilization. It replaces the linear one pass take (from the natural world) … make (something incompatible with the natural world) … and dispose of (that is, burden the natural world with) production wastes along with the product itself at the end of its useful life. Instead, the circular economy envisions closed loop production which minimizes impacts on the natural world. Circular economy begins with products designed with multiple cycles of reuse and recycling in mind. Corresponding industrial processes are designed to minimize interactions which degrade the natural world, including interactions which occur anywhere along the product’s value chain.

Cutting to the Chase

It is readily apparent that a circular economy mindset might lead to lower costs, as well as a better world. The question becomes how to improve on what you are already doing to improve resource utilization. Here are some comments and examples to stimulate your thinking:

BMW i3 Press Kit Photo

BMW i3 Electric Vehicle

>> BMW i3 – The BMW i3 all-electric city car is an example of a circular economy product. Attention to sustainability is obvious in just about everything about the design and construction of the BMW i3. Recycled materials are used extensively.  Plans are in place for disposal of each component of the i3 at the end of its useful product life. For more on the i3, see BMW – A Case Study in Sustainability. [1]

>> Waste Management Corporation – Waste Management makes more than half of its money on recycling and upcycling refuse that people like you and me pay them to take from us. Sustainability – especially the circular economy aspect – Is integral to Waste Management’s business model. For more on how this works, see Waste Management Corp – A Case Study in Sustainability [2] and Waste Management’s 2015 Sustainability Report Update (which is entitled “The Circular Economy Revs Up”!) [3]

>> USBCSD – The United States Business Council on Sustainable Development is a not for profit business association that, among other projects, seeks to match bi-product streams with firms – often in other industries — that can use those bi-products as raw materials. In other words, one firm’s waste becomes another firm’s feedstock, to the benefit of both. See USBCSD’s website [4] for more on their work.

Scrap Tires 350pxh>> Tires – Where Waste Management Corporation seeks to find uses with the broad range of wastes it collects from residences, commercial facilities and industry, the tire industry focuses on new uses for its hard to dispose of product. Tire Recycling: An Industry Success Story was one of the first posts to this blog, almost five years ago. This lightly edited version still provides a useful example today: 


Tire Recycling: An Industry Success Story

(From 29 June 2011) 

American motorists discard a lot of tires; roughly one tire per capita or around 310 million used tires annually. On the average, tire carcasses weigh about 37 pounds, so that’s something like 11 billion pounds of waste rubber and metal every year. In the past, most of these used tires went to dumps, where they were ugly, mosquito – breeding fire hazards. Today, the recycle rate is sufficient to handle this year’s carcasses, while also significantly drawing down inventories at tire dumps nationwide.

Tire dealers add a state–mandated “tipping fee”, usually around $4.00, to each new tire sold. The “tipping fee” is passed on to the tire reclaim firm when the tire reclaimer collects carcasses from the tire dealer. The tire reclaimer converts the scrap tires into some useful form, usually by shredding the scrap tires and separating the rubber from the steel tire cords. The rubber scrap may be processed further, depending on the intended application. 

More than half of the recovered scrap rubber is used as tire–derived fuel, burned as an alternate to coal, primarily to fuel cement kilns. Ground rubber has a multitude of uses, ranging from landscaping mulch, to athletic fields, to molded rubber products, and on to de-vulcanized rubber, which can be used to produce new tires. Those who are interested can download a free report chock full of information on scrap tire products and markets at www.rma.org/scrap-tires. 


One take-away for all manufacturers is that the conversion of billions of pounds of scrap from dangerous eye-sore to useful products came to be through the efforts of a trade association. Trade associations offer a particularly useful vehicle for addressing many of the industry-wide problems and opportunities that Sustainability presents. 

>> Learning from Nature – Proponents of the Circular Economy point out that there are no wastes in biological processes. Everything eventually becomes food for something else. Actually, it is better than that. Biological processes operate at or near ambient pressures and temperatures, as opposed to the energy intensive demands of many industrial processes. I was surprised to learn that the Department of Chemical Engineering where I studied is now the Department of Chemical and Biomolecular Engineering – a strong indication of the growing importance of bio – based products and processes.

>> Books – Consider the entire value chain for books and other printed matter. Start with cutting forests, then the environmental concerns with paper making, ink chemistry, collecting end of useful life products, transportation costs across the value chain, and recycling or disposal costs. Compare all of that that with a Kindle. Replacing a tangible product – or a component of a tangible product, such as the operating instructions – with a virtual (digital) product changes everything!

For Smaller Manufacturers

The ideas behind the Circular Economy are quite powerful and potentially disruptive. Every manufacturer needs to consider how to modify its business model to embrace those ideas. As you can see, there are a lot of ways to approach this – new product development / new manufacturing processes / teaming with somebody like Waste Management or USBCSD / through a trade association / even virtualization – are just for starters, there are many more possibilities.

Chuck - FranceThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington

(Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.


[1] http://jerasustainabledevelopment.com/2014/10/04/bmw-a-case-study-in-sustainability/

[2] http://jerasustainabledevelopment.com/2015/01/30/waste-management-corp-a-case-study-in-sustainability/

[3] Download for free at http://wm.com/sustainability

[4] www.usbcsd.org

 

Radical Uncertainty

Sustainability and Uncertainty

A Sustainable business, says Adam Werbach, is one that is able to thrive in perpetuity. [1] The same definition also applies nations, civilizations and even humanity as an entirety. The term “perpetuity”, however, involves anticipation of the future, so that appropriate actions can be taken in the present.

“Prediction is very difficult, especially about the future” – attributed to Niels Bohr, (or maybe Yogi Berra).

In some circumstances, prediction is not so difficult. For example, it is easy to predict that a roll of two dice will result in an outcome between 2 and 12, and the probability of each outcome (from 2 to 12) is readily calculated. Insurance companies prosper because probabilities of morbidity, mortality and other risks within suitably defined groups can be reliably estimated.

However, prediction becomes increasingly difficult as situations become increasingly complex and the set of possible outcomes becomes less well defined, as they do in the real world. Uncertainty prevails. And it gets worse:

“Radical uncertainty refers to uncertainty so profound that it is impossible to represent the future of a knowable and exhaustive list of possibilities to which we can attach probabilities… when businesses invest, there are no dice with known and finite outcomes on the faces; rather they face a future in which the possibilities are limitless and impossible to imagine.” [2]

The concept of “radical uncertainty” originated in macroeconomics. [3] Macroeconomics, of course, deals with the aggregate economic behaviors of large groups of people, their enterprises and their governments. Aggregated economic behaviors can be viewed as systems that can, at least in principle, be modeled mathematically. Such systems are usually complex, with components that interact, time dependences and feedback loops. When complex systems are perturbed, outcomes can be quite surprising. This applies to macroeconomic systems and to other complex system, especially those where human behaviors are involved.

Here are several examples where complex systems might well threaten a firm’s, a nation’s, or even humanity’s ability to thrive in perpetuity in today’s globalized world:

>> Climate Change – As a recent post to this blog explained, the term “Climate Change” refers to a set of negative effects expected from warming of the Earth’s atmosphere due to human – induced increases in the concentration of greenhouse gases — especially carbon dioxide – in the atmosphere. The atmosphere and its behavior as expressed in weather patterns is a complex system indeed. The nature, magnitude and timing of effects (changes in weather patterns) due to increases in greenhouse gas concentrations remain to be seen.

>> World Financial System: Over the last half century or so, the American economy has experienced recession about once a decade. Over that time, the financial systems that support national economies have globalized and changed in very significant ways. In 2007 – 2008, a major disturbance occurred that, we are told, very nearly resulted in total collapse of those financial systems. Instead, we experienced about seven years of pernicious recession.

However, very little has been done to make those financial systems more robust to future disturbances. The periodic occurrence of recessions suggests that the financial system is not stable. If the episode of 2007 – 2008 very nearly resulted in total collapse of the world’s financial system, worse may well be in store in the future.

>> Global Epidemic: The 20th century witnessed a dramatic reduction in epidemic outbreaks of communicable disease. In the aftermath of World War I, an outbreak of “Spanish” influenza resulted in more deaths than the war itself. “Childhood diseases” including mumps, chicken pox and measles (along with many other once common diseases) have all but disappeared.

However, a recent outbreak of Ebola fever in Africa emphasized the ease with which today’s global transportation system can change a local outbreak into a global catastrophe. Further, science has learned that pathogens can evolve rapidly into new forms that require new vaccines or new treatment techniques – which may require considerable time to find, prove, and distribute.  

>> Black Swans: Nassim Taleb teaches us of the ubiquity of Black Swans:

“A Black Swan is an event, positive or negative, that is deemed improbable, yet causes massive consequences”

“… the world is far, far more complicated than we think, which is not a problem, except when most of us don’t know it. We tend to ‘tunnel’ while looking into the future, making it business as usual, Black Swan free, when in fact there is nothing usual about the future.” [4]

What to Do?

The world, then, may well be “far, far more complicated than we think”. Radical uncertainty may be considerably closer to the norm than we appreciate. If so, how does an individual, a firm, a nation, or humanity as a whole best approach the future? Look for some thoughts on that in the next post to this blog.

Chuck - SedonaThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.


[1] Adam Werback, Strategy for Sustainability (2009), Harvard University Press, page 9

[2] Mervyn King was Governor of the Bank of England during the financial crisis of 2007 – 2008. This quotation is from his 2016 book The End of Alchemy – Money, Banking and the Future of the Global Economy.  This book includes a full chapter entitled Radical Uncertainty: The Purpose of Financial Markets.

[3] Dr. Frank Knight, often referred to as the “father of macroeconomics”, introduced the concept of radical uncertainty in a 1921 academic paper, Risk, Uncertainty and Profit, University of Chicago.

M. Keynes, likely the most influential economist of the 20th century, devoted Chapter 12 of his best known work, General Theory of Employment, Interest and Money (1936) to the concept of radical uncertainty. (Keynes, incidentally, did not hold a degree in economics, doctorate or otherwise. He studied mathematics, emphasizing probability, at Cambridge.)

[4] These quotations are from Nassim Talib’s New York Times bestseller The Black Swan (2016) Talib and his book are both engaging, as well as perceptive.

Carbon, America and the World

Climate Change

For a business to be Sustainable – that is, able to thrive in perpetuity [1] – requires that the world remain a viable place in which to thrive, in perpetuity. The world faces a number of substantial threats to its continuing viability to support a prosperous humanity. Climate Change is arguably the most discussed of these just now. Unfortunately, Climate Change is highly politicized and not generally well understood.

To clarify:

Climate Change refers to significant changes in the world’s climate that diminish the natural world’s ability to adequately support humanity and its civilizations.

Climate Change, in the sense intended here, refers to an increase in the global mean temperature.

Climate Change, then, is a set of negative effects caused by Global Warming.

Global Warming, again in the sense intended here, results from a “greenhouse effect” – a change in the composition of the earth’s atmosphere that results in retaining a greater portion of the energy from sunlight.

Carbon Dioxide (CO2) is a rapidly increasing “greenhouse gas” component of the earth’s atmosphere.

Energy generation from combustion of fossil fuels contributes most of the approximately 34 billion metric tons of CO2 that are currently being added to the earth’s atmosphere annually.

Most of the world’s nations, through the United Nations Framework Convention on Climate Change (UNFCCC), have reached agreement on the necessity to reduce global CO2 emissions quickly and significantly.


The American Situation

At a meeting of the UNFCCC in December 2015, President Obama expressed an intention for the U.S. to reduce its greenhouse gas (essentially CO2) by 26% to 28% below 2005 levels, and to do so by 2025 (that is, 8 years from now).

This graph, from U.S. Department of Energy’s Annual Energy Outlook 2017, projects America’s energy related CO2 emissions to 2040 in a number of cases (sets of assumptions). As you can see, none of those cases provide substantial reductions in CO2 emissions, compared to present levels.

CO@ Emissions Projections

The Global Situation

Global CO2 EmissionsThe graph labeled Figure 9-1 [2] plots global CO2 emissions, broken out as emissions from OECD [3] countries (which include the USA) and non-OECD countries. Add the two together to get total global emissions (for 2016, approximately 13 billion metric tons from OECD countries + 21 million metric tons from non-OECD countries approximates 34 billion metric tons). Annual emissions from the OECD countries are projected to be approximately constant over the period through 2040. Annual emissions from the non-OECD countries are projected to increase substantially.[4]

Two points here: (1) Annual global CO2 emissions are projected to increase, not decrease. (2) Even if the USA could drive its CO2 emissions to zero, that reduction, of itself, would not prevent total annual CO2 emissions from continuing to increase, not decrease.

So, in order to contain Global Warming and it’s predicted negative effects (meaning Climate Change), annual global CO2 emissions need be reduced substantially, pronto. However, the Department of Energy’s figures, based on existing policies along with world demographic and economic projections, indicate that emissions will continue to rise, at least through 2040.

What to Do?

The USA can institute policies that directly affect its own emissions. It can only influence, not control, the emissions of other countries. Here are three possible approaches that the USA might choose to take. None of them can promise to radically reduce annual global CO2 emissions within the next decade or so.

Whatever it Takes: This approach posits that the USA forgets about costs and domestic economic growth, shuts down existing U.S. emissions sites on a crash schedule, and uses moral suasion, political pressure and an open checkbook to persuade other countries to follow suit.

Lead by Example: The approach starts by embracing, then building on President Obama’s expression of intention to reduce emissions. From there, the USA would lead by further reducing its emissions, while using diplomacy, economic incentives and coalition building to encourage others.

Pragmatics: The USA could continue to encourage the development and implementation of economically viable technologies, continue to research new emissions control and decarbonization approaches, and work with other nations to encourage them to do likewise on a mutually beneficial basis.

Considering present and your expectation of future political and economic realities in the USA and elsewhere, what do you think the USA should do? What approach should your business or organization take?

My House with Solar Panels

Google Map View of Chez Chuck, with Solar Panels

Thoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.


[1] Adam Werbach, Strategy for Sustainability, Harvard Business Press (2009), page 9

[2] The graph labeled Figure 9-1 is from the U.S. Department of Energy’s International Energy Outlook 2016 (IEO 2016). The Annual Energy Outlook and the International Energy Outlook are available fro free download at www.eia.gov

[3] OECD, the Organization for Economic Co-operation and Development, is a group of 34 relatively developed countries. The USA is a member.

[4] The non-OECD countries are growing significantly faster than the OECD countries, both demographically and economically. People in less economically developed countries understandably want to catch up with those in OECD countries on a GDP per capita GDP basis.

 

Producing the Tesla Model 3

Everybody knows that Elon Musk has a “problem” – how to ramp up production sufficiently to fill the nearly 400,000 orders for Tesla’s new Model 3 in a timely manner. The production rate increases required are comparable to Henry Ford’s “problem” –ramping up Ford Model T production a century ago.

One post from May 2016 compared Musk’s “problem” with Ford’s “problem”. A subsequent post elaborated on plans for Model 3 production. They are both reprised below, to provide some prospective when the hype builds up around the start of actual Model 3 production, expected in the third quarter of this year (2017).


Henry and Elon (From 1 May 2016)

I’m writing this post just one month after Tesla Motors’ Model 3 electric automobile was introduced and made available for advance orders. As you may have heard, in the first week following that introduction, Tesla received more than 325,000 orders, with $1,000 deposits – reportedly a record for any product, ever! Now, a full month from launch, the order book reportedly totals around 400,000.

The question now is “can Tesla produce enough cars to fill those orders before the folks in the queue get tired of waiting and demand their fully refundable deposit back?” Sounds like a fair question, especially considering: (a) that Tesla produced only about 52,000 cars in all of 2015, (b) that Tesla will want to continue to produce their existing Model S and Model X cars, presumably in increasing volumes, and (c) that lots of additional Model 3 orders will keep rolling in. As a practical guess, let’s rephrase the question this way: “can Tesla deliver a cumulative 400,000 Model 3 automobiles by the middle of 2019 without retarding growth of their other product offerings?”

Henry Ford’s Model T

Let’s start to answer the Model 3 production question by considering Henry’s Model T of a century ago. Ford introduced the Model T as a practical and affordable automobile for everyman in late 1908 and started deliveries in the 1909 – 1910 model year. Here are the production figures:

Ford Model T Production Figures

1910 Ford Model TStarting at zero, it took Ford about four and a half years to produce the first 400,000 Model T Fords. Unlike Tesla, Ford did not start with 400,000 orders in hand. Henry Ford had no idea, from the start, how many he would be able to sell: “everyman” had not even dreamed of owning an automobile in 1908. So, Ford didn’t know how much manufacturing capacity he would need, nor did he know how raw materials would be sourced in sufficient and timely quantities.

For Ford, it was necessary to vertically integrate from iron ore deposits to metals castings all the way through finished vehicles in order to assure adequate supplies of all of the components necessary to keep production going. Tesla has integrated vertically to build a “gigafactory” sufficient to mass produce batteries in the quantities that Model 3 production will require. The “gigafactory” is already in operation, although far from full capacity.

Compared to Ford and his Model T, Tesla has a century of manufacturing technology to draw on, along with the infrastructure that supports an industry that can produce about 15 million vehicles annually. With 400,000 orders in hand (and the $400,000,000 from the deposits), Musk and Tesla are certainly in a much better position to find financing for the facilities and capital goods necessary to produce the Model 3 than Ford was in 1908.

Building and operating a 21st century automobile factory that can produce 400,000 automobiles by the middle of 2019 is a big job. The manufacturing technology is impressive, but it’s not rocket science. By the way, Elon Musk is a rocket scientist – he is the Chief Technical Officer of SpaceX, maker of 21st century rockets.

Will the Tesla Model 3 deliver fast enough? Bet on it!


7 May 2016 – Additional Comments

On 4 May 2016, Elon Musk and Tesla’s management team held a conference call for business analysts and the financial community. Model 3 production planning was a primary area of discussion. Here are a few points that build on last week’s post:

Production Rate: Musk announced that Tesla intends to reach the 500,000 cars per year rate in 2018, instead of 2020 as previously indicated. I take that to mean total production of all three models, not Model 3 alone. The blue line on the graph labeled Model T Production indicates that Ford significantly exceeded the half million cars per year production rate in the 1914 – 1915 model year. The production rate in 1910 – 1911 was 53,192. So, within four years Ford increased production by more than ten times. Now, Tesla says they will do almost exactly the same thing – from about 52,000 in 2015 to about 500,000 in 2018 – in three years rather than four.

Operating Leverage: In a discussion on costs, Elon Musk mentioned that “our operating leverage means fixed cost relative to variable cost is going to improve dramatically”. How much is “dramatically”? The red line on the graph labeled “Model T Production” indicates the per vehicle selling price. For the 1910 – 1911 model year, Ford charged customers $780 for a Model T. The price was reduced to $550 for the 1914 – 1915 model year. That 29.5% price reduction was made possible through Ford’s increase in operating leverage.

Ford was selling the Model T into an entirely new market. Each time he reduced the price, he created an entirely new customer segment. Ford used price to keep his production rates increasing and the improvement in operating leverage funded the price reductions – with some left over for Ford and his Company.

 “Hell-bent on becoming the best manufacturer on earth”: Musk pointed out:

“Thus far, I think we’ve done a good job on design and technology of our products. The Model S and Model X are generally regarded by critical judges as technologically the most advanced cars in the world. We’ve done well in that respect. The key thing we need to achieve in the future is to also become the leader in manufacturing.”

Excellence in manufacturing operations results in high product quality levels and high throughput rates – hence strong operating leverage. It worked for Ford a century ago. It is working for Tesla today.


Everybody in manufacturing should read (or re-read) Henry Ford’s autobiography. The parallels between what Ford said and did with what Musk is saying and doing are truly remarkable. Of course, it goes without saying that a century does make a difference and a Tesla Model 3 isn’t a Ford Model T. Learn from Ford anyhow.

By the way, last week Elon Musk’s SpaceX recovered (landed) a rocket on a barge at sea, at night. SpaceX designed and manufactured that rocket. SpaceX will reuse the rocket, reduce the price for future satellite launches, and increase their throughput and their operating leverage. Musk and his crowd do know how to do things well.

Chuck & Joan in ParisThoughtful comments are always welcome.

…  Chuck Harrington

(Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.

Model T Photo: Creative Commons via Wikipedia

 

What the Frack?

On January 17th of this year, the Annual Energy Outlook for 2017 (AEO 2017) was published by the Energy Information Agency, part of the U.S. Government.[1] The AEO examines U.S. domestic energy production and consumption, with extrapolations[2] into the future. Information from the AEO 2017 provides information and insights relevant to business management. This post focuses on petroleum and natural gas production through hydraulic fracture and directional drilling techniques (“fracking”).

America and Petroleum

The graphic labeled “Energy Consumption” is from the AEO 2017. The brown line indicates that petroleum and related liquids fuels about 35% of America’s energy current energy consumption.[3] Further, it indicates little change in annual petroleum consumption over the next 24 years, given the assumptions used to extrapolate the AEO’s “reference case”.

Over the past several decades, the U.S. has consistently consumed considerably more petroleum than it has produced. The difference has been imported, much of it from the Middle East. Since imports must be paid for, petroleum imports have resulted in a substantial drag on the U.S. economy. Further, securing continuing petroleum supplies from overseas has been a major determinant of U.S. foreign policy.

The graphic labeled “Net Energy Trade” illustrates that, in the years around 2006 – 2008, the U.S. imported amounts of petroleum equivalent to over 25% of its entire annual energy consumption, net of any petroleum exports!

Then something dramatic happened. U.S. domestic production increased rapidly from about 2010, resulting in a major decline in global petroleum prices. Accordingly, retail gasoline prices declined by about half during the last six months of 2014, resulting in boost to the U.S. economy that, in my opinion, triggered in the end of the Great Recession. Think of it this way: when a boatload of crude oil arrived in 2013 at $100+ per barrel, the U.S. shipped a boatload of greenbacks overseas in payment. By 2015, the price of crude was less than $50 per barrel and the number of boatloads imported dropped sharply. So, the U.S. shipped many fewer greenbacks overseas in payment. The rest stayed at home, within the U.S. economy. Since we are talking about millions of barrels every day, the difference really matters.

The Fracking Revolution

Fracking – petroleum and natural gas production by directional drilling plus hydraulic fracturing – is a truly remarkable technological innovation. Look again at the graph labeled “Energy Consumption”. Notice the rapid increase in natural gas consumption from 2010. That too is due to fracking. As a fuel, natural gas is complementary to petroleum. Petroleum fuels primarily transportation. Natural gas fuels mostly stationary consumption, including industrial uses, commercial and residential heating, and especially electric power generation.  

Natural gas is difficult and expensive to transport, other than by pipeline. Fortunately, the U.S. already had a domestic pipeline network in place as the huge increase in natural gas production due to fracking became available. Prior to the advent of “fracking”, global natural gas prices generally followed petroleum (crude oil) prices. The increase in natural gas supply in the U.S. resulted in natural gas prices that are not pegged to petroleum, and that are considerably lower than natural gas prices elsewhere.

Implications, Domestic and International

>> Energy Independence: Due to increased U.S. domestic production of petroleum and natural gas, the AEO 2017 projects that U.S energy exports will exceed imports by 2026, using “reference case” assumptions. That means that, if necessary, U.S. energy production would be sufficient to satisfy America’s energy requirements, without relying on OPEC or anybody else.

>> Industrial Economics: U.S. domestic prices for natural gas are substantially lower than elsewhere in the world. This provides U.S. industry with two competitive advantages in global trade. First, energy costs are low. Second, many important petrochemicals can be produced from natural gas, resulting in lower raw materials cost for many products.

>> Petroleum and Natural Gas Reserves: Fracking is used in geological formations that are different from those where conventional petroleum and natural gas production methods are used. That means energy production becomes possible in geographic areas where it is otherwise infeasible. It also means that the world’s potential reserves of petroleum and natural gas have increased substantially.

>> International Development: Fracking technology can and will be applied in other countries. Correspondingly, many nations that lack conventional petroleum or natural gas production may be able to become producers, thus reducing dependence on foreign sources and gaining a degree of freedom from global energy prices.

>> Cleaner Fuels: Petroleum produced by fracking is generally light and sweet. That means it is easy to refine, with few byproducts such as sulfur or heavy metals. Refining light, sweet crudes is relatively energy efficient. Accordingly, less carbon dioxide is produced when light, sweet crude is produced and consumed. Natural gas is even cleaner.


There is a lot more information worth discussing in the AEO 2017. Look for more posts on other AEO 2017 in the future.

Chuck - Blue SweaterThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.


[1] The AEO 2017 is available for free download on the Energy Information Agency’s website, www.eia.gov

[2] I use “extrapolations” rather than “forecasts” to emphasize that the AEO is projecting present and recent past information into the future based on certain assumptions. The “reference case” refers to a “business as usual” set of assumptions that do not anticipate government policy changes or technological innovations, other than those already in place.

[3] Note: U.S. annual primary energy consumption is about 100 quadrillion BTUs.

 

The Globalization Gap

The Fly-over Zone

“The fly-over zone” is David Stockman’s term for the middle portion of the United States; the vast expanse roughly bounded by the Appalachian and the Sierra Nevada mountains. Stockman holds that people in the fly-over zone think differently from those on the coasts.[1] The election results from last November tend to agree.

In my view, Globalization, with its economic and social repercussions, provide insight as to why the fly-over folks think so differently from those on the coasts. In essence, Globalization has benefited Americans whose income relies on professional services and intangibles over the last several decades. Those who depend on tangibles, again speaking generally, have done considerably less than well.

 International trade, especially in consumer goods, and large-scale migration from less economically developed nations to more developed countries are two primary factors driving polarization of opinion about Globalization here in America, as well as in the European Union.

Free Trade

Global free trade is fundamental to increased and increasing global standards of living. Since the end of World War II, international economic history records a succession of moves to facilitate multinational trade by removing tariffs and other barriers to trade. One result is truly multinational companies, like GE or Nestle. Another is globalized value chains, even for small companies. Companies and consumers everywhere benefit from the lowest prices available anywhere in the world.

But it isn’t all good. Employees in some nations suffer as lower cost competitors abroad take business and jobs. Some nations import much more than they export, resulting in escalating debt. Some nations use access to resources as an economic means to political ends, like the recent Russian cuts in natural gas supplies to Europe or the OPEC oil embargo in the 1970s.

So, the benefits of free trade are widely spread, but difficult to recognize or quantify. The negatives, on the other hand, are localized and specific – those who have lost their livelihoods to free trade are not happy. And that unhappiness has resulted in political resistance to new trade pacts and movements in several countries to revise or rescind existing agreements.[2]

Migration

In 2013, author and investment banker Dan Alpert[3] wrote:

“The past twenty years have seen a transformation of the global economy unlike any ever witnessed. In the time it takes to raise a child and pack her off to college, the world order that existed in the early 1990s has disappeared. Some three billion people who once lived in sleepy or sclerotic statist economies are now part of the global economy. Many compete directly with workers in the United States, Europe and Japan in a world bound together by lightning – fast communications. Countries that were once poor now find themselves with huge large surpluses of wealth. And the rich countries of the world, while still rich, struggle with monumental levels of debt – both private and public – and unsettling questions about whether they can compete globally”

Alpert’s thesis is that the world suffers from gross over-supply of labor, capital and productive capacity. Capital moves readily across national borders seeking higher returns – meaning productive investment opportunities. When excess productive capacity exists, businesses don’t invest in more. Excess labor, looking for work and stimulated by numerous local wars and conflicts, continues to migrate from developing world countries toward developed countries.

The circumstances that Alpert describes do exist and significantly define world economies and the businesses that drive those economies. These conditions will continue until fundamental global imbalances change. That change may be gradual, spanning years, or quite rapidly, like the economic equivalent of an earthquake.

Chguck - Juneau AKThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.

Container ship graphic licensed via www.dreamstime.com


[1] David Stockman was former President Reagan’s budget director. He now writes extensively, especially on political / economic affairs.

[2] For more on this, see “Trade, at what price?” in The Economist, April 2nd – 8th 2016 edition, page 27

[3] Dan Alpert’s The Age of Oversupply, Penguin Group (USA) LLC (2014) is offers much more on this.

 

Knowledge Workers and Tomorrow’s Jobs

President Obama, in his 2015 State of the Union address, proposed that America’s community colleges be made tuition free.[1]  With advancing technology, including on-line instruction, that seems to me to be a sensible step. But only a step. America’s education system needs a comprehensive overhaul in order to educate enough people rapidly enough to meet the rapidly changing demands of the 21st century, rather than those of the 20th.

Peter Drucker discussed this need for what he termed “knowledge workers” and provides his usual profound insight to the matter. Here is a post from a year ago that discusses Drucker’s ideas. It is well worth repeating.    — C.H.


Peter Drucker and the Knowledge Worker (from 10 January 2016)

Peter Drucker is arguably the most widely respected of the 20th century management consultants. Drucker wrote over 30 books on management, which are largely focused on human behavior. His 1999 book, Management Challenges for the 21st Century, offers a forward looking assessment of what demographics suggested would be the key problems facing manager in the early decades of the 21st century. Drucker’s concept of a knowledge worker – those whose work is focused on knowledge and its applications – is central to this book. He contrasts knowledge workers with manual workers – those whose work is essentially focused on things and the manipulation of things.

The Knowledge Worker

With his characteristic bluntness and surety, Drucker states:

“Knowledge-worker productivity is the biggest of the 21st century management challenges. In the developed countries it is their first survival requirement. In no other way can the developed countries can the developed countries hope to maintain themselves, let alone to maintain their leadership and their standards of living.”

Drucker credits Fredrick Taylor’s “scientific management” for the awesome improvements in manual worker productivity that characterizes 19th and 20th century industry and agriculture in the developed countries. According to Drucker, those increases in productivity have been the primary source of incremental wealth in the developed world.

The industrial engineering concepts that constitute “scientific management” are quite portable, so they can be quickly applied anywhere, using workers with little education or training. Developing countries have lots of people, many with rudimentary educations at best, who are willing to work for close to pre-industrial wages. Developed countries have aging populations and declining birthrates, hence much higher wage expectations.  

The bottom line is that labor intensive, repetitive manufacturing in the developed countries simply isn’t competitive in this globalized world, a few special cases excepted (at least for a while). Developed countries need sophisticated work based in knowledge, rather than in method. Economies in developed countries need knowledge workers. As Drucker puts it:

“The only possible advantage developed countries can hope to have is in the supply of people prepared, educated and trained for knowledge work. There, for another fifty years, the developed countries can expect to have substantial advantages, both in quality and quantity”.

What To Do?

There have always been knowledge workers, so much is known about knowledge work. Much can be learned about knowledge worker productivity from professional firms such as surgical practices, legal firms, architectural firms and accountancy firms. Today’s medical practices, for example, have several types of knowledge workers – specialized nurses, radiological technicians, physician’s assistants and such – that enhance the productivity of physicians, the practices’ key resource..

For manufacturing firms that intend to become and remain Sustainable, significant changes in organizational practices and organizational structure will be needed. This means new and innovative business models. Obviously, doing all of this will require study, careful thought and even more careful implementation. There isn’t any real alternative to embracing the change. Start by reading (or re-reading) Peter Drucker’s Management Challenges for the 21st Century !

Chuck - Austrian AlpsThoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are always welcome.


[1] For more on my thoughts on President Obama’s proposal, see: http://jerasustainabledevelopment.com/2015/01/24/tomorrows-talent/

 

Idiocy Squared?

15 January 2017

Yesterday (14 January 2017), I watched SpaceX launch a cluster of ten communications satellites into precise orbits, while returning the launch vehicle to an autonomous barge in the Pacific Ocean. I’ve been following rocket launches since I saw the first Vanguard rocket self destruct on its launch pad in December, 1957, to the chagrin of the entire nation.[1] Yep, I’m a technology buff. Technology fascinates, amazes and delights me. Maybe that’s why I became an engineer.  — C.H.


Elon Musk and the Vision Thing

Elon Musk is an interesting man. He envisions the future. Then he acts on that vision in a systematic (and courageous) manner. Actually, he goes beyond “systematic” – he insists on thinking from first principles,[2] rather than on starting with the present art. At the same time, he remains focused on his vision, to the consternation of many.

This post focuses on two of Musk’s businesses – SpaceX and Tesla — and examines the visions they embody, with examples of initiatives in place to realize those visions.

SpaceX’s Vision:

SpaceX designs, manufactures and launches advanced rockets and spacecraft. The company was founded in 2002 to revolutionize space technology, with the ultimate goal of enabling people to live on other planets.

That’s right – Musk’s vision for SpaceX is nothing less than colonizing Mars.[3] The purpose of SpaceX’s commercial launch program is to fund the development of the technology necessary to do so. That technology is complex and its development will be enormously expensive. Keep in mind that SpaceX is already doing things that only governments have done before (and some that nobody has done before). Also remember that the Apollo program that sent astronauts to visit moon – but not live on the moon – was, at its peak, consuming about 4% of the entire federal budget!

Here is some of the technology currently under development:

>> Advanced rockets and spacecraft: The Falcon rocket and the Dragon spacecraft are both original designs, developed from first principles as steps on the way to Mars.[4]

>> Reusable launch vehicles: Yesterday’s SpaceX launch vehicle was safely landed, joining launch vehicles from about a half dozen earlier SpaceX launches. The objective is to reuse them. Reusable launch vehicles are the key to sharply reduced costs. Imagine the cost of an airline ticket if the airplane could only be used once. Look for a SpaceX launch using a previously used rocket within this year.

>> The Falcon Heavy: With three times the lift capacity of the current Falcon 9, the Falcon Heavy is scheduled to test launch this year. Trips to Mars will require massive lifts into orbit.

>> The Raptor engine: SpaceX has test – fired a new rocket engine that will burn liquid methane instead of kerosene. Liquid methane will provide considerably more thrust per unit of mass than does kerosene. Methane is also available on Mars, so methane refueling on Mars could facilitate return trips!


Tesla’s Vision:[5]

The point of all this was, and remains, accelerating the advent of sustainable energy, so that we can imagine far into the future and life is still good. That’s what “sustainable” means. It’s not some silly, hippy thing — it matters for everyone.

So, Tesla is about accelerating the advent of sustainable energy. Wind energy, solar energy and hydroelectric energy are all potentially Sustainable, but none of these are directly applicable to vehicles. However, if the vehicle is powered by electricity, all of them are applicable. So, Tesla makes electric vehicles. Tesla also recognizes that it cannot, of itself, make enough electric vehicles to make electric vehicles the world’s standard. There are many constraints to doing that.

Here are a few of them:

>> Vehicle performance: Drivers expect electric vehicles to perform at least as well as petroleum fueled vehicles. Hence Tesla’s emphasis on acceleration, comfort, handling, safety and related matters.

>> Style: Drivers like cool, classy, functional cars. Tesla vehicles turn heads.

>> Range: Drivers expect electric cars not to strand them. That requires that vehicles have a range between fueling that compares their current vehicles, and that refueling be available almost anyplace. That’s why Tesla cars have 250 – 300 mile range between recharging, and why Tesla is so intent on building recharging facilities worldwide. Tesla is not waiting for somebody else to do it for them.

>> Batteries: Over 15 million new cars were sold in the U.S. in 2016, and several times that many worldwide. For electric vehicles to become a substantial portion of those numbers, a ready, reliable source for suitable batteries is necessary. That’s why Tesla is building a giga-factory – the largest factory in the world – to produce the batteries. Again, Tesla isn’t waiting for somebody else to do it for them.

>> Update 1/19/2017 : Tesla just announced that it will increase its investment in the giga-factory by $350 million in order to manufacture electric motors and drive trains for Tesla automobiles. Yet again, it appears that Tesla sees a need to produces hundreds of thousands of 200 – 400 horsepower motors that meet their requirements, rather than wait for somebody else to do it for them.

>> Price: In order to sell enough vehicles to even begin to make a difference, Tesla has to produce vehicles that sell at mass market price points. Hence the coming Tesla Model 3.

>> Production Technology: In order to meet drivers’ expectations at a mass market price while generating a reasonable profit, Tesla is re-inventing vehicle production technology from first principles. It will be interesting to see just how the Model 3 is produced.

>> Marketing and sales: Tesla regards the existing authorized dealer model of vehicle sales as inefficient. Instead, Tesla wants to use Amazon – style sales methods. Not surprisingly, existing dealerships are resisting fiercely.

>> Self-driving vehicles: In 2015, there were 35,092 people killed in traffic accidents in the U.S. alone.[6] Tesla believes that self driving technology can reduce that figure by at least a factor of ten. Accordingly, all Tesla vehicles produced right now come equipped with the necessary equipment to do this. As self driving technology becomes more commonplace (and traffic regulations change), insurance costs most drop sharply, not to mention the reduction in human suffering. This technology addresses the human side of triple bottom line Sustainability, as electric power addresses the environmental side.

>> Critical mass of vehicles: To make a real difference, electric vehicles have to become a significant fraction of the world’s fleet of vehicles. Tesla cannot even hope to produce anything close to the number of vehicles needed to do that. That’s why Tesla made its large body of patents available without charge to all manufacturers that want to produce electric vehicles.


Elon Musk says that starting an automobile company in the U.S. is “idiotic”, and that starting an electric vehicle company is “idiocy squared”. Chuck says that if Tesla is idiocy squared, then SpaceX is exponentially so. But I like the way Elon Musk thinks. He reminds me of Henry Ford. The world needs people like them — people whose vision and actions transcend accepted bounds. Musk may be idiotic, but I do own some Tesla stock.

Chuck - Red RocksThoughtful comments and experience reports are invited and appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.


[1] For those who were not around in 1957, the U.S. and the U.S.S.R. were heavily engaged in the Cold War. The U.S.S.R. shocked the U.S. by launching the Sputnik 1 satellite in October 1957. The clear implication was that the U.S.S.R. was ahead of the U.S. in rocket technology, hence had an important military advantage. Catching up with the Soviets was so important that the Vanguard launch attempt was televised live.

[2] Nobel Prize winner Daniel Kahneman explains thinking from first principles and why it is so uncommon in his bestselling book, Thinking, Fast and Slow, Farriar, Straus and Giroux, New York (2011)

[3] For more and SpaceX and for a presentation on the Mars project, see SpaceX’s website at https://www.spacex.com

[4] In contrast, the Atlas V launch vehicle, which is used to compete with SpaceX for commercial launch business, is the latest in a series of Atlas rockets that began in 1957. The original Atlas was, in turn, a descendent of the German V-2 rocket from World War Two.

[5] For more on Tesla and on Elon Musk’s vision for Tesla, see: https://www.tesla.com/blog/master-plan-part-deux

[6] Traffic fatalities figure from: https://en.wikipedia.org/wiki/List_of_motor_vehicle_deaths_in_U.S._by_year

Advancing Global Competitiveness

The HBS Report

The Harvard Business School conducted a study on America’s competitiveness within the global economy. The study defines competitiveness this way: [i]

A nation is competitive to the extent that firms operating there can compete successfully in domestic and foreign markets while also lifting the living standards of the average citizen.

One way to measure a nation’s competitiveness is by following that nation’s balance of trade – the difference in value of that nation’s exports and imports. An excess of exports over imports yields a positive balance, while an excess of imports over exports yields a negative balance, or “trade gap”.

The Bureau of the Census has this to say about America’s balance of trade: [ii]

The trade gap in the United States increased to $42.6 billion in October 2016, up $6.4 billion from a downwardly revised $36.2 billion in September. Exports recorded the biggest decline since January due to lower shipments of food, industrial supplies and materials, automobiles, consumer goods and soybeans while imports reached the highest in 14 months. Balance of Trade in the United States averaged negative $13.521 billion from 1950 to 2016, reaching an all time high of positive $1.946 billion in June of 1975 and a record low of negative $67.823 billion in August of 2006.

This graphic puts that into rather vivid perspective:

U.S. Balance of Trade Graph

As you can see, America’s balance of trade was roughly even from 1950 until 1975, when the balance turned sharply negative following a rapid increase in imported crude oil prices. Matters got much worse after about 2000.

To beg the obvious, America’s persistently large and negative trade gap, especially since the millennium, indicates that America does not “compete successfully in domestic and foreign markets”. Accordingly, “lifting the living standards of the average citizen” has not occurred. This is not surprising, since a trade gap is paid for by exporting cash in lieu of goods, bleeding the U.S. economy. Quite obviously, this is not sustainable.

It is my personal conviction that the dramatic decrease in the price of crude oil experienced in the latter half of 2014 is the key trigger to the relative improvement in the performance in the U.S. economy since that time. That reduction in international crude oil prices is directly attributable to the corresponding sharp increases in U.S. crude oil production, due to “fracking”.

What to Do?

Crude oil imports are an important part of America’s trade gap, but only a part. Manufactured goods are another major portion. Many other economically developed countries have positive balances of trade in the manufactured goods sector – it is not impossible. Nor is it easy. Action is needed at all levels, from individual manufacturing firms to the federal governments. Many earlier posts to this blog address competitiveness, especially for smaller manufacturing firms, as will future posts.

The Harvard study mentioned above offers an eight-point plan for policy improvements at the federal level. That plan, believe it or not, strikes me as a starting point that the incoming Trump administration might actually find actionable:

Eight-Point Plan

  1. Simplify the corporate tax code with lower statutory rates and no loopholes
  2. Move to a territorial tax system
  3. Ease the immigration of highly-skilled individuals
  4. Aggressively address distortions and abuses in international trading systems
  5. Improve logistics, communications and energy infrastructure
  6. Simplify and streamline regulation
  7. Create a sustainable federal budget, including reforms to entitlements
  8. Responsibly develop America’s unconventional energy advantage

Thoughtful comments and experience reports are always appreciated.

…  Chuck Harrington (Chuck@JeraSustainableDevelopment.com)

This blog and associated website (www.JeraSustainableDevelopment.com) are intended as a resource for smaller manufacturers in the pursuit of Sustainability. While editorial focus is on smaller manufacturers, all interested readers are welcome.


[i] Michael E. Porter et al, Problems Unsolved and a Nation Divided  – A Harvard Business School Survey on U.S. Competitiveness, Harvard Business School, Cambridge MA, September 2016. The study is available for download at: http://www.hbs.edu/competitiveness/research/Pages/research-details.aspx?rid=81. It is well worth reading.

[ii] This quotation is from www.tradingeconomics.com/united-states/balance-of-trade (a service of the U.S. Bureau of the Census, accessed 31 December 2016). In the interest of clarity, some figures have been restated from millions to billions and the terms “negative” and “positive” have been substituted for the corresponding “-“ and “+” symbols.