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Sunday, December 3, 2017

Why GE failed

This morning on NPR I heard a well-written piece on the failure of General Electric to thrive. I agree with the points made by Brian Mann, but I want to add mine.

GE under the once-acclaimed Jack Welch featured two management practices. One was the ruthless elimination each year of the "bottom 10%" and the other was Six Sigma systematic quality.

No one dared speak up at the time, but the truth is that many of us believed the "annual bottom 10%" practice to be unfair, inherently political, and ultimately counterproductive. A lot of people refused to consider working for a company that practiced it. It took a while, but the inability of GE to attract creative people in large numbers is a silent factor in bringing the company to its knees.

As for Six Sigma, it's a great idea when you are manufacturing millions of units of the same product: light bulbs, smartphones (the hardware, that is), etc. The benefits of Six Sigma are indisputable in that context. However, Six Sigma does not help you innovate to bring new products to market. That takes a different set of skills and techniques, and you'll find that experts in the "front end" of the business would rather slit their wrists than work under a Six Sigma regime.

Combine these two factors, and you can understand why GE quit innovating. Instead their focus was cost-reduction and financial optimization. After 30 years GE simply ran out of costs to reduce and optimizations to implement; the company became strategically bankrupt. Meanwhile, the easy money that Welch made in the financial markets and that kept investors happy while obscuring the company's underlying problems dried up abruptly after 2008. If you play with fire, you get burned eventually.

I saw something similar happen to Nortel, my former employer, although not exactly in the same sequence. From the mid-1970s on, Nortel was the most successful company across the globe in the telecommunications products space. At one time Nortel was the tenth most valuable company in the world. But it went bankrupt in 2009. How'd that happen? You can find hundreds of explanations, but to my eyes it's simple: the company ceased to offer products that customers were willing to pay Nortel's historic margins for. Despite the heroics of its R&D team in the 1970s and 1980s, Nortel died from a lack of innovation. There were other contributing causes, not the least of which was the adoption company-wide of Six Sigma just when the crap was hitting the fan. All that Six Sigma accomplished, really, was diverting the attention of management and hundreds of the company's best employees to solve problems that just didn't matter in the big picture. When you are bleeding to death, don't obsess over small cuts on your toes.

The Welch philosophies and practices have been injected into the core of most if not all MBA curricula. I hope that B-school professors now reexamine the long-term legacy of Welch and revisit the importance of innovators — something that Steve Jobs, despite his awful personality, understood quite well.

Thursday, August 31, 2017

Organic peroxides at Arkema in Houston

The Arkema chemical plant in Houston makes a variety of organic peroxides under the Luperox brand name. Any type of peroxide is worthy of careful handling — even the hydrogen peroxide you're familiar with at home. Over-the-counter sales of H2O2 at groceries and pharmacies are limited to 3-5% concentration for this reason. Concentrations of 30% or more H2O2 can be quite hazardous. Another clue to the unstable nature of peroxides is that the H2O2 you buy must be protected from light by an opaque container.

Many but not all of the Luperox organic peroxides must be kept chilled to reduce their instability. The plant is no longer able to chill them because of flooding (the same root cause as Fukushima). The organic peroxides themselves are not particularly toxic in relation to industrial organic chemicals overall. However, they produce gas as they decompose, and this gas must go somewhere. Furthermore, the process of decomposition produces heat — that is, it's exothermic — and this heat accelerates the decomposition of the organic peroxides that remain. As the heat builds up, you can conceivably reach the flash point of a decomposition product.

One of the gases produced by decomposition is pure oxygen. Any fire that arises will be fed by that oxygen. Another concern is that the products of decomposition (other than oxygen) when burned can conceivably create airborne chemicals that are toxic. This is true with almost any fire that's fed by industrial organic chemicals.

Sunday, June 18, 2017

A bill we can't pay

The State of North Carolina provides healthcare coverage for its retired employees. For decades, state governments have attracted workers by offering superb retirement benefits as an offset against below-market salaries prior to retirement. My father had this arrangement in Alabama. In the later years of his illnesses and my mother's, they spent less than $500 a year on deductibles, co-payments, and exclusions. Whatever Medicare didn't cover, the State did. Such a deal!

But North Carolina now projects it has a $42 billion unfunded liability for healthcare of current and future retirees who were promised these benefits. That's right, $11,000 of liability per every household in North Carolina… a breathtaking figure. By "unfunded" I mean that the State has no set-asides to cover the $42 billion. When the bills come due, there will be enormous pressure on the State's annual budget. If the State waits for that to happen, it will have only three options:

  • Repudiate, at least in part, its commitment to retirees and current employees.
  • Raise taxes.
  • Cut other programs and redirect their money.
All are politically difficult.

The fourth option is to reduce the unfunded liability now by dropping any retiree healthcare coverage to people who begin working for the State as of 2018. This option has no obvious pain, and therefore I predict that the General Assembly will adopt it. But it's not painless. It substantially reduces the attractiveness of working for the State, which operates in a free market for labor. Either salaries will have to be increased to compensate — putting pressure on the State's budget, again — or the quality of the State's workforce will fall. The latter is bad, too.

This problem is not limited to the public sector. I had worked for Nortel for 24 years when the company went bankrupt. Prior to bankruptcy I had expected both a pension and healthcare coverage during retirement. I will still get the pension because the federal Pension Benefit Guaranty Corporation has assumed the liabilities of Nortel's pension plan. (There are concerns that PBGC is itself underfunded.) However, PBGC does not guarantee the healthcare coverage that I would have enjoyed during retirement. This leaves me with "naked" Medicare unless I supplement it with a Plan D and a Medigap plan that I pay out of pocket for. I'll have to see whether my history of prostate cancer disqualifies me from such coverage (or makes it unaffordable) in whatever scheme President Trump and the Congress eventually replace Obamacare with.

Most private employers have already quit offering any benefits to future "retirees", whether pensions or healthcare. In such a company there is no practical difference between retiring and simply quitting. In lieu of retiree coverage, private sector employers offer a "defined contribution" plan such as a 401(k). Although I have taken advantage of 401(k)s to the extent I could, there are several problems with the concept:

  • Wall Street makes far more money from fees on millions of individual 401(k) accounts than on hundreds of professionally-managed investment funds. Don't be astonished that Wall Street loves the 401(k) concept.
  • Very few individuals have the discipline to save enough 401(k) money to cover their day-to-day retirement spending beyond Social Security plus their healthcare expenses beyond naked Medicare.
  • Many individuals are not knowledgeable enough about finance to manage a six-figure 401(k) or even to select who should.
In the South we say "This dog jus' don't hunt". If you're into laissez-faire, that doesn't worry you. But it worries me. I don't know how all this will play out in the next 30 years. The needs of the elderly for financial assistance will conflict with the needs of the young for current income. That's inter-generational political war.

Wednesday, May 31, 2017

Calling on Germany and Japan

President Donald Trump makes me long for the days of President George W. Bush —  something I would have thought impossible. But I agree with Trump on one point, in the same way that I agreed with President Ronald Reagan that the national 55 mph speed limit had to go.

The U.S. spends 3.3% of its Gross Domestic Product on the military. Compare the figures of our major allies:

  • South Korea = 2.7%
  • France = 2.3%
  • Australia = 2.0%
  • United Kingdom = 1.9%
  • Italy = 1.5%
  • Germany = 1.2%
  • Spain = 1.2%
  • Japan = 1.0%
  • Canada = 1.0%
The outliers are Germany and Japan, each of which has a large GDP and can afford to spend more. Before the Berlin Wall came down, Germany did spend more. They cut their military spending to the bone when the pressure went away. But now Vladimir Putin has increased pressure on the Baltic states, and it's time for the Germans to step up. Similarly, as China strengthens its military, it's time for the Japanese to step up. NATO adopted 2% as a guideline in 2014, and that seems like a reasonable number to me. I am not a reckless hawk, but neither am I an absolute pacifist. I believe that nations must maintain reasonable defenses against aggression.

The wallet of every American is being raided to provide cover for nations that can and should carry more of the burden themselves. There is an enormous "opportunity cost" to American citizens when we allocate 3.3% of our GDP to the Pentagon. That's too much. 2.5% should suffice. One reason why we spend 3.3% is to fill gaps left by the Germans and the Japanese. Trump is right to raise this point, although his absurdly boorish behavior distracts from the issue.

When Chancellor Angela Merkel of Germany recently said that Europe can no longer depend on the U.S. for defense, I would agree with her if she meant to say that Europe cannot depend on the U.S. to a disproportionate extent. But it's unhelpful and inaccurate for her to characterize an American request for fairness as turning our backs on Europe.

I'm aware that the Germans and the Japanese were militaristic threats to the entire world less than 75 years ago. There is an irreducible risk that they could become militaristic again, but it seems to me that such a risk is acceptably low — and certainly far lower than the risk of Russian or Chinese aggression.

Lastly, Americans should applaud that France takes its military commitments and remember that France rejoined NATO fully. Disregard the comedy of Robin Williams; the modern French military is quite capable. Did you know that the left flank of the ground invasion of Iraq in 1991 was primarily French? They performed very well.

Saturday, May 6, 2017

Are Dutch electric trains powered by wind?

A friend recently shared this story from several months ago to his Facebook page. I want to elaborate.

The operator of passenger trains in the Netherlands announced — or was interpreted as announcing — that all its electric trains would be powered by electricity generated from wind turbines. That's good. Wind turbines are not without their own issues, but they're clearly preferable to fossil fuels as a source of electricity.

To understand what actually happened, let's review a few things about electricity. I'll overlook some of the fine points in the physics.

  • There are many ways to generate electricity; the primary ones are organic fuels (natural gas, coal, oil, biomass), nuclear, geothermal, wind, tidal, and solar. Once the electricity has been generated, however, it's all the same. The essence of electricity is intentional, non-random movement of electrons. After the electrons are forced to move, an observer cannot tell what caused it. The word fungible is helpful here, although we usually here it in an economics class. Moving electrons are fungible.
  • With the technologies available today, there is virtually no storage in the transmission and distribution networks for electricity. The instantaneous supply of electricity from generating plants must match the instantaneous demand for electricity across the customer base. Otherwise something bad happens, like a brown-out or electric clocks that no longer keep accurate time. Of course, the demand for electricity fluctuates second-by-second, hour-by-hour, month-by-month. It's quite a challenge for the suppliers of electricity to dynamically adjust their generators to match the consumption in real-time and to keep all those generators synchronized. (This is one of the particular challenges for large-scale solar generation — something I'll blog about another day.
  • Electricity is bought and sold in units of kilowatt-hours. To illustrate, if you have 10 incandescent 100-watt bulbs in your house and you turn all of them on for an hour, you will have consumed 1 kilowatt-hour of electrical energy. In North Carolina, 1 kilowatt-hour costs a residential consumer 11 cents. At my house I pay the 11 cents to Duke Energy, which either generates the energy itself or buys it from another company at a wholesale price substantially lower than 11 cents. With the difference between what Duke charges me (pardon the pun) and what it costs them to acquire or to generate electricity, Duke pays for the transmission and distribution infrastructure such as transformers and lines, its billing systems, etc.
  • In many countries a consumer of electricity can contract directly with a specific generator of electricity to purchase so many kilowatt-hours at a negotiated price. This is a financial transaction, not an engineering transaction. Why would a consumer of electricity do this? When the price of electricity is deregulated, as it is for the largest industrial and commercial customers almost everywhere, the buyer can often find electricity at a price lower than the published standard price. On the other side of the transaction, the producer of the electricity may be operating on speculation in a market that is highly competitive and dynamic, so they may want to pre-sell their product in order to lock in their future revenues. The important thing to remember is that regardless of how the electricity is bought and sold, the actual electrons used by the purchaser are still fungible.
With that background, let's see exactly what the railroad did.

Over the course of 12 months, the railroad calculated its total energy consumption: 1,400,000,000 kilowatt-hours, or 1.4 terawatt-hours. Instead of paying the published rate for the 1.4 terawatt-hours, the railroad contracted with a specific supplier for the energy over a 12 month period. The supplier chosen by the railroad is wind-based, but the transaction in the financial markets would have worked exactly the same way if the supplier had been nuclear-based or coal-based.

The provider of wind-generated electricity would have sold its electricity one way or the other, either through similar deals or at the published rate. In other words, the railroad's purchase did not increase the total amount of electricity being generated from wind. Rather, that happened when the wind turbines came online in the first place…the occasion that should have generated a lot of excitement among the public.

Are the trains actually being powered by wind? Remember, all the electrons are fungible. Furthermore, the flow of power into the railroad's catenary varies second-by-second as trains accelerate and decelerate. So does the flow of power out of the wind turbines, for the simple reason that the prevailing winds change speed and direction constantly if slightly. Because the instantaneous supply of wind-generated electricity cannot be correlated exactly and continuously with the instantaneous usage by the railroad, it's inevitable that some of the electricity used by the railroad will come from non-wind sources at least some of the time. (Only 13% of electricity in the Netherlands comes from wind.) Likewise, at night when there aren't many trains running, the wind turbines are still producing power. Those electrons are going someplace, but not to the railroad.

It's imprecise to say, therefore, that the railroad is being run by wind-generated electricity. But it's good PR for the railroad.

Sunday, April 23, 2017

Involuntary denied boarding - right or wrong?

For 35 years I've been a frequent flyer. Not once have I been denied boarding because of an oversold condition, much less been chosen involuntarily to "de-board" (what a word!). Three reasons why I've avoided this:
  • My status in frequent flyer programs. Airlines go out of their way not to anger their most frequent flyers.
  • People flying on business usually pay high fares because they buy their tickets on short notice. When administering an oversale, airlines often sort passengers based on how much they paid for their tickets: lowest priced, first off.
  • I avoid booking a flight if no advance seat assignment is available — an indication of a possible oversale. Although holding a seat assignment is no prophylactic against misfortune, holding a reservation without a seat advancement (except on airlines like Southwest that don't offer preassigned seats) is asking for trouble. By the way, Southwest does oversell.
Nevertheless, IDB (Involuntarily Denied Boarding) happens to other people and someday it may happen to me.

It's easy to criticize the airlines for overselling, but think about it. People who hold reservations sometimes don't show up at the last hour for a variety of reasons. Often times it's business people whose schedules get screwy; we rebook our flights at the last minute. Sometimes people traveling for personal reasons like vacations become ill or have a flat tire or don't arrive early enough at the airport to complete check-in and screening. No doubt, airline employees who work at ticket counters have heard 10,001 explanations, most of which are probably truthful, for missing a flight.

An airline could choose the most conservative policy to never, ever oversell. (For many years JetBlue took this approach; I don't know whether they still do.) The statistically likely consequence would be unused seats on flights. Some people wanted to travel on those not-full-at-departure flights, but a strict policy never to overbook would force them onto other flights instead. Those are silent inconveniences that you'll never hear about.

Furthermore, airlines run on relatively thin profit margins. They make their money with volume. On a 150-seat airplane, the difference between carrying 140 passengers and carrying 150 is often the difference between profit and loss for that flight. Why are airline margins so tight? The Southwest effect. Twenty years ago when Southwest was still an insignificant factor in the airline industry, ticket prices were relatively high and "load factors" — the average percentage of seats sold — could be as low as 60% for an airline to make money. Now ticket prices are relatively low, and filling an airplane is more important. Oversales help the airlines offer low fares. The government could absolutely prohibit overbooking, but the effect would be higher ticket prices. Is that what you want? Maybe, maybe not.

The attitude of the government has been that the free market should sort this out. The government does set minimums for IDB compensation, and the government does publish the rates at which each airline has IDBs. ("Involuntarily" means the gate agent could not buy cooperation by offering vouchers or, in the most rare of circumstances, hard cash.)

Let me make two other points. You might think your seat is safe after you've boarded, but actually your seat is not safe until the airplane leaves the ground. I've seen planes pull away from the gate, taxi, return to the gate, change passengers, and then leave the gate again. It happens, although seldom.

Lastly, an airline reserves the right to put its own employees on a flight and to remove you to make room for them. This can happen even when a flight has not been oversold. To illustrate, assume that 100 people board a plane that has 100 seats. There was no oversale. Suddenly and unexpectedly a replacement pilot is needed in the city that the flight is destined for. The airline has the authority to remove a passenger so that the pilot can take that seat. This happens every day, but usually the airline induces someone to relinquish a seat voluntarily. If incentives don't work, however — on the day before Thanksgiving, incentives don't — fewer people overall might be inconvenienced by denying boarding to one person.

Can this be abused? Definitely. A poorly run airline can find itself short a crew member simply because of the airline's own incompetence. And there's always the possibility that the CEO of the airline bumps a paying passenger. But think twice about eliminating an airline's flexibility to put its own employees on a flight that has no empty seat.

The last word: avoid United. American and Delta treat their customers better.

Sunday, April 16, 2017

Getting elected is different from governing

Corresponding with a friend in the U.K., I found myself explaining why President Donald Trump did not have enough support from Republicans in Congress to repeal Obamacare. In countries like the U.K. that use the Westminster system, failure of a prime minister to win a big vote often leads to dissolution of Parliament and a new election. The U.S. Congress isn't like that.

But more importantly, the episode illuminates the difference between getting elected and governing. The former takes only a crude coalition of voters on a given day. In the case of Trump, he was elected by an uncohesive coalition:

  • Middle-class Americans aggrieved by lost economic opportunity, allegedly attributable to globalization.
  • Religious conservatives.
  • Secular but ideological conservatives (e.g. Ayn Rand followers, deficit hawks), many of whom lean Libertarian.
  • Upper-class New England elites (a traditional Republican constituency).
  • The wealthy who want their taxes reduced.
  • The military-industrial complex that wants an increase in defense spending.
Trump and his campaign operatives succeeded in getting such a diverse coalition into polling booths last November in sufficient quantity to win… a remarkable achievement, regardless of one's political persuasion. Governing, however, requires a carefully crafted, long-term coalition of politicians and political agents. The six groups I've identified have different ideas about what Trump should do in office. It's no surprise that the Trump administration appears inconsistent.

By the way, this situation is not unique to Trump or even the Republican Party. Democratic President Jimmy Carter had basically the same situation in 1977, and like Trump he tended to staff the Oval Office and his Cabinet with people from outside Washington. Although the post-1981 Carter became a figure beloved by nearly everyone, the pre-1981 Carter was so unpopular that he failed to win reelection. Indeed, Senator Ted Kennedy nearly defeated Carter for the Democratic nomination.

Will 2020 be a repeat of 1980?