Technology & innovation

I thought I'd post this article from the Times as it gives some idea about the way companies have to approach innovation - optimising existing models while developing new ones. This is a good example of the way the private sector leads innovation, and shows how a company has to make sufficient profit to be able to invest in R&D - some of these projects will be decades before they provide a return on the investment. It fits well with oligopoly, and could be an example where government does not want to encourage new entrants, but instead support a single "national champion".

It is also interesting because Rolls Royce is a world-leader, and could be used as an example of an exporter that does gain from a weaker pound. It does face problems (its business model involved selling engines at a loss and making money on the subsequent service contracts, which is not efficient anymore, and it is having to change shape rapidly), but think about how the government could support it in maintaing its global position.

How AI is leading the way on transport tech

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Rolls-Royce technology chief Paul Stein on why the firm’s electrifying ideas could herald a zero-carbon future

September 27 2019, 12:01am

Paul Stein CTO at Rolls-Royce (portrait by Alex Sturrock)

For Rolls-Royce, the world’s second largest manufacturer of aero engines and a company with a distinguished history of pioneering R&D, technology strategy is all about the play-off between optimising existing products and simultaneously leading the charge on developing the low carbon power systems of the future.

“The most pressing issue is how to get the right balance between new technology-led opportunities and existing product evolution,” says the firm’s chief technology officer, Paul Stein. “People will still be buying gas turbines [conventional aero engines] for the next 40 or 50 years, so we have to make sure we keep those products competitive for the long term. But we also have to free up as many resources as we can for driving productivity and for investing in the new.”

Stein explains how technologies such as digitisation and AI are already paying big dividends in design and operational efficiency. After a flight, for example, data from Rolls-Royce’s engines is analysed not only to help schedule maintenance requirements but also to establish the best possible operational parameters. “We pull huge amounts of data from our engines and an artificial intelligence agent crawls all over it to extract behavioural information,” he says. “Did that particular flight use a bit more fuel or a bit less and, if so, why?”

AI is also used to improve the analysis of engineering X-rays and scans, determining the health of engine parts just as doctors use similar systems to help diagnose their patients. “It’s the same technology,” Stein explains. “AI visual processing engines can look at a CT scan of a turbine blade, for example, and make a decision on whether it is good or bad.”

But the most significant technological change on the horizon is the shift towards electric power plants, not just in the aviation field where Rolls-Royce is best known but also in its marine and railway power businesses. Stein is enthusiastic about the possibilities. “Electrification is exciting and fast-moving – and it’s already making an impact. One of our most successful examples is our hybrid electric-train power pack. It’s a Toyota Prius for suburban railways – it’s brilliant because it means that trains can recover energy as they are coasting into the station and also that, when they are sitting waiting, the engine is not running and they are not creating any local pollutants.”

Electric power for airliners is also coming, he says, but is a more complex challenge and will take time. “We are not going to be flying battery-powered A380s but for aircraft carrying up to, say, 90 people there will be hybrid electric technology. For the big stuff – A320 and upwards – the technology becomes even more complex; long term, we don’t really see the impact of electrification there before 2035.” The challenge for this, and other radical technologies that are still some way from commercial viability, is not so much whether to invest but when, he says. “What I worry about is getting the pace right. We want to hit the market at just the right time.”

Quantum computing is another case in point. It offers a dramatic change in potential computer power but for Rolls-Royce it’s a question of picking the right moment and the right applications. “We are keeping a watching brief. There are some applications that fascinate us – materials discovery, for example. If quantum could be applied to that it could be quite interesting.”

When it comes to the skills that Rolls-Royce will require to deliver on its plans for the future, Stein reckons that competing for electrical and electronic expertise is going to be crucial. “Electrical skills are becoming a battleground across Europe – skills in power electronics, battery technology and electrical machine design.” Digital skills are also increasingly important, he adds, but the risk of shortages is offset by the fact that expertise can be more readily bought in. “It’s a bit easier to outsource digital than to do so for some traditional skills because you can create an ecosystem of smaller companies that provides talent to supplement your own.”

How I work: Paul Stein, CTO, Rolls-Royce

My days tend to be quite disparate. I spend some of my time on technical reviews, finding out how our various teams have been doing with their existing developments, and also listening to their analyses of new technologies.

I spend time as an executive team member; all of us on the executive team wear two hats: our functional hats and the hat that is about how we can all make Rolls-Royce an even greater company. That second hat is about people. As senior leaders we devote a good deal of our time to our people. It sounds trite but it’s true – we really are a people business.

I talk a lot to governments around the world – in the UK, Germany, Singapore and the US – as they have a big role to play in creating the right environment for new technology.

And recently I have been talking more to the media, to get the message across about how Rolls-Royce can be part of the solution to this changing world that we find ourselves in.

CV

1978 – Graduates in electrical & electronic engineering, Kings College London

1996 – Managing director, Roke Manor Research

2006 – Director-general, research and technology, Ministry of Defence

2010 – Joins Rolls-Royce as chief scientific officer

2016 – Director, research and technology, Rolls-Royce

2017 – Chief technology officer, Rolls-Royce. Appointed to executive leadership team

The view from IBM by Andy Stanford-Clark

The combination of sophisticated computer modelling with the power of artificial intelligence to crunch real-world data has already kicked off a revolution in high-tech engineering, according to Andy Stanford-Clark, chief technology officer of IBM UK & Ireland. “You can build a software model of a physical system and feed it with data from Internet of Things sensors so you can go through all the ‘What ifs?’ in the model before you go into the physical system.”

This is known as a Digital Twin; it enables companies like Rolls-Royce to build and test incredibly accurate computer facsimiles of aircraft engines in the same way the likes of Airbus build flight simulators to help train pilots on their planes before they graduate to flying the real thing. “Digital Twin modelling is going to have a huge impact across a whole range of industries.”

When it comes to deciding when to invest in up-and-coming new technologies where the business case is not so clear-cut, FOMO plays a part in decision-making, he adds. Take quantum computing. “In the future, a quantum computer might be able to quickly solve a problem that would become extremely large or time-consuming to do on a conventional computer.” So its potential to tackle intractably complex problems is almost mind-boggling, even though it is a long way off being commercially practical, yet. “Even though it’s early, now is the time to explore quantum. Those who delay until the technology is perfected risk falling behind on the shorter term benefits we are already starting to discover, today.”

Negative/low interest rates are not all good

Savers feel the bite of negative interest rates
Well-heeled Germans considering putting their savings in Berliner Volksbank now have cause to think again.

From the start of this month, anyone opening an account will not only earn no interest on any deposits above €100,000 (£87,000), they will also have to pay 0.5% a year for the privilege of having the bank look after their cash.

ECB president Mario Draghi as ‘Count Draghila’

Other banks are also reported to be considering introducing what have been dubbed strafzinsen (punishment rates), as the effects of the ultra-loose monetary policy run by the European Central Bank (ECB) — already causing ructions in the financial world — make an impact on consumers.

Falling savings rates have been an especially sensitive topic over the past few years in Germany, where people are often reluctant to buy shares and where home ownership, at about 50%, is close to the lowest in Europe.

On average, Germans hold more than 40% of their financial assets in the form of bank deposits, and the savings rate, at about 10%, is almost twice the average in the eurozone.

When ECB president Mario Draghi again cut interest rates last month, the tabloid Bild published a photomontage of the outgoing bank chief with fangs, dressed as a vampire.

“Count Draghila is sucking our accounts dry,” said the headline. “The horror for German savers goes on and on.”

According to Germany’s banking lobby, the ECB’s low-rates policy is costing its members €2.4bn a year — a financial burden they are keen to share. Yet the banks are aware that they will have to tread carefully to avoid provoking a backlash and driving away customers. Rather than imposing negative rates across the board, most appear likely to quietly increase fees and charges instead.

About 400 of Germany’s 1,300 banks and sparkassen (savings banks) have already done just that this year, according to Biallo, a financial portal.

READ THIS! Discussion Monday

Germany hits the skids

Europe’s biggest economy is reeling from trade wars, Brexit and the drive for electric cars. Will Merkel turn on the taps? Don’t bank on it, says Peter Conradi

The Sunday Times, October 13 2019, 12:01am

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As several hundred of the great and good of the German car industry held their annual get-together last week in Nürtingen, a small town outside Stuttgart, there was little to lighten the mood.

The past few months have not been kind to the companies behind Mercedes-Benz, BMW, Volkswagen and Porsche. Still paying the price for their role in the Dieselgate emissions scandal that has hung like a noxious cloud over the industry for four years, the car-makers now face a global trade war alongside the uncertainties of Brexit.

Looming above everything is the transition from a century-long reliance on petrol and diesel power to electric traction, which has so far been led not from their traditional strongholds of Munich or Wolfsburg, but by Silicon Valley upstart Tesla and from the Far East.

“What is going on at the moment is brutal for us,” Peter Schwarzenbauer, a member of BMW’s board, told bosses at Nürtingen. “We have always faced headwinds but in the past there was also the possibility of compensating for them.”

“We can’t be under any illusions,” agreed Jürgen Stackmann, head of sales for Volkswagen. “The next years are going to be tough.”

It is not just the car-makers — which, together with suppliers, employ about 830,000 people across Germany — facing such headwinds. The mood across swathes of industry in Europe’s biggest economy is increasingly grim as indicator after indicator points to a country teetering on the edge of recession.

Underlying it is a more fundamental question: is the export-driven model that has fuelled Germany’s astonishing economic success over the past decades nearing the end of the road?

The latest batch of official statistics, although contradictory, gave little cause for cheer. Optimism provoked on Tuesday by an unexpectedly upbeat 0.3% rise in German industrial production in August proved short-lived.

Two days later came the news that exports in the same month had dropped by 1.8% (on a seasonally adjusted basis), steeper than expected and the sharpest decline since April. Industrial orders were down in August, too, largely on weaker domestic demand.

We have to wait for the release of September’s gross domestic product figures to know whether the German economy has formally entered negative territory for the first time in six years, but the outlook is not good. “We will [probably] have a contraction in GDP in the third quarter, and thus a recession,” Uwe Burkert, economist at LBBW bank, told Reuters.

The immediate cause of Germany’s malaise lies in the worsening global economy, sparked in large part by Donald Trump’s trade war against China, which is now spreading to Europe.

If Beijing carries out its threat to reimpose 25% tariffs on American cars, Mercedes-Benz, which builds the 4x4s it sells to China in Alabama, and BMW, which exports its models from a plant in South Carolina, will be among the hardest hit. German exporters face further pain as a result of this month’s World Trade Organisation ruling allowing America to impose tariffs on EU goods — also up to 25% — in retaliation for subsidies paid by European governments to Airbus that it has deemed illegal.

Then there is Brexit. German exports to the UK plunged by €3.5bn (£3.1bn) in the first half of this year. Britain, which as recently as 2016 was the country’s fifth-biggest trading partner, has dropped to 13th place, behind Poland, according to Holger Bingmann, president of the BGA, a trade federation.

A hard Brexit would have “catastrophic consequences for German foreign trade”, he warned last week.

The longer-term impact of Britain’s departure could be even more damaging: like other EU countries, Germany fears competition from a buccaneering, lightly regulated “Singapore on Thames”.

It has so far been left largely to the European Central Bank (ECB) to attempt to break up the storm clouds that have been gathering not only over the German economy but, by extension, over much of the eurozone. Its president, Mario Draghi, in one of his last acts before stepping down at the end of this month, cut interest rates from -0.4% to -0.5% and announced a resumption of quantitative easing (QE), vowing to buy €20bn of bonds a month until inflation climbs back up to the 2% target.

The move has been much criticised — including, it emerged last week, by experts on the ECB’s own monetary policy committee, who wrote a letter to Draghi and other members of the bank’s governing council days before their decision last month, warning them against resuming bond purchases.

With interest rates already so far into negative territory, critics fear a further loosening of monetary policy could provide little or no boost to the eurozone economy. The onus, they argue, is instead on countries with strong public finances — namely Germany and Holland — to give their countries a fiscal boost by taxing less or spending more.

Germany, on track to run a budget surplus for the sixth year running — a rarity among the world’s largest economies — certainly has the scope to open the sluices. It is not just outsiders — such as French President Emmanuel Macron, who ruffled feathers in April by asking whether the German economic model had “perhaps run its course” — who are urging it to do so.

Such sentiments are also heard these days within Angela Merkel’s ruling Christian Democrats. A paper published last month by the Union of the Middle, a centrist group within the party, called on the government to spend more, especially on infrastructure — much of which, from broadband provision to roads and bridges, is in surprisingly poor shape.

The response from Chancellor Merkel so far has been a resounding “nein”. Pursuit of the schwarze null (black zero) — a balanced budget — is an article of faith among the German Establishment since a “debt brake” imposing a strict limit on borrowing by both the federal government and those of its 16 states was added to the constitution in 2009, in the wake of the financial crisis.

Surprisingly, perhaps, one of the firmest advocates of fiscal orthodoxy is the finance minister, Olaf Scholz, who is from the Social Democrats, the junior partner in Merkel’s coalition.

The German economy has weathered past crises and may be able to get over this one too, especially if Trump scales back his trade war and — as began to appear more likely this weekend — a Brexit deal is done.

Yet the slowdown has also raised broader concerns about the longer-term viability of an economic model that has become heavily dependent on exporting cars and other manufactured goods to China and America.

Almost two-thirds of Germany’s Dax 30 index is made up of “old economy” industries such as machine tools, chemicals, cars and finance, compared with just 40% in the US, noted Jörg Zeuner, chief economist of Union Investment. He added: “Germany feels the impact of weakening world trade more than others — and has turned into the economic tail-light of the eurozone.”

The country’s car-makers, slow to climb on the electric bandwagon, are playing catch-up. Last month’s Frankfurt motor show saw Volkswagen launch its first purpose-built electric car, the ID.3, which it says will ultimately be as important as the Beetle or Golf. Mercedes dazzled with a sleek, battery-powered concept version of its flagship S-class.

Yet, while the internal combustion engine showcases Germany’s traditional engineering skills, the heart — and as much as half the cost — of an electric car is its battery, a sector dominated by the Chinese and other Far Eastern suppliers.

Recent years have seen a scramble to establish joint ventures between German and Asian firms, while China’s CATL, the world’s leading maker of car batteries, is about to start work on a €1.8bn plant in Arnstadt, east Germany, from which it will supply BMW and Volvo, among others.

Peter Altmaier, the economic affairs minister, and Bruno Le Maire, his French counterpart, are also pushing for European companies to go it alone, hoping to see billions of euros — some of it public money — ploughed into an Airbus-style consortium to make batteries.

However successful Germany’s move from petrol and diesel proves, margins on electric cars are lower than on traditional ones, obliging manufacturers to keep making gas guzzlers for now.

The relative simplicity of electric motors means they also require far fewer workers — a point highlighted by BMW’s Schwarzenbauer, who wondered aloud at Nürtingen about the thousands of engineers at his company who are specialists in internal combustion engines.

“We can’t simply brush away the fact that we have many workers who are really worried about what is going to happen to them,” he said.

Those headwinds do not look like easing any time soon.

Great supply-side article - investment

Pension cash could bankroll start-ups

Plan to pour £50bn into venture capital would bring higher risks and rewards

Peter Evans

October 13 2019, 12:01am, The Sunday Times

• Economics
• Politics

Successful start-ups such as the food service Deliveroo have relied on overseas investmentALAMY

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Up to 5% of private sector retirement pots could be invested in venture capital funds under plans being considered by government and the pensions industry.

The move by the state-owned British Business Bank (BBB) and a group of the biggest providers of defined contribution (DC) schemes would unlock billions for promising start-ups, but potentially put retirement savings at risk.

The 5% figure is understood to have been suggested as appropriate for balancing the risk of backing young companies — many of which fail — with the upside if they go on to succeed. Assets in DC schemes are forecast to exceed £1 trillion by 2029, according to the BBB. Diverting 5% of that to venture capital firms would mean a £50bn funding boost.

The government has spent several years examining how to release some of the cash held in private sector pensions for investment in fast-growing businesses. This would help Britain mirror the large amounts of growth capital available in America and China.

Many of the country’s most successful start-ups, such as the food service Deliveroo and cyber-security developer Darktrace, have taken investment from overseas funds because the money they need is not available from those based here.

In America, 98% of venture capital funding comes from institutions such as pensions and insurance companies. It is much rarer for that to happen in Britain because of what the Treasury described last year as a “negative feedback loop”, where long-term low interest rates, a lack of skilled investors and relatively few public listings mean backing fast-growing companies is seen as a higher risk.

A report last month by the BBB and the consultancy Oliver Wyman said one way of mitigating the risk would be to create an investment vehicle to pool pension contributions in a fund of funds. The report did not rule out the possibility of investing directly in start-ups.

Are we already in recession?

Ambrose Evans Pritchard in the Daily Telegraph every Wednesday - a great read for big picture analysis.

The global manufacturing downturn is spreading to the once-resilient service sector in a string of countries, threatening to tip the world economy into a broad recession unless there is a swift response from the authorities. 

IHS Markit said the US service industry saw the sharpest drop in headcount since late 2009 last month as firms battened down the hatches and cut excess capacity. Companies are being forced to lower prices to hold onto market share.

“The US slowdown signals are multiplying,” said James Knightley from ING. “We were well aware of the problems in manufacturing given the trade war, but it is clear that there are problems brewing in other sectors. The latest developments will keep the pressure on the Federal Reserve to ease monetary policy further.”

The ISM non-manufacturing index told the same story, dropping to a three-year low with new orders suffering the most damage. Capital Economics said that the combined service and manufacturing indexes in the US are now at levels  “consistent with a recession” in the past.

Germany’s service sector finally buckled as well in September after seeming to shrug off the manufacturing slump and the crisis in the car industry for most of this year. The inflows of new work are falling in absolute terms. "The slowdown was even worse than first feared. A technical recession now looks to be all but confirmed,” said IHS Markit.

While the eurozone as a whole is still above water, service growth is barely enough to offset the industrial contraction. The currency bloc is now perched on the boom-bust line and vulnerable to the slightest economic shock.  “There’s little doubt that winter has arrived for Europe, but the big question now is whether it is mild or harsh,” said Nomura.

The chart has 1 X axis displaying Time. Range: 2016-10-20 08:38:24 to 2019-10-10 15:21:36.

The chart has 1 Y axis displaying Values. Range: 50 to 62.5.

The Federal Reserve still has room to cut interest rates and relaunch quantitative easing but it may have waited too long to preempt metastasis as the economic cycle sputters out, given the long lags before monetary stimulus filters through.

The Powell Fed has come under heavy criticism for claiming that the US economy faces no more than a ‘mid-cycle’ slowdown and requires no more than precautionary rate cuts. The deeply-inverted yield curve in the bond markets suggests that the underlying threat is more serious. Recessions begin on average nine months after the curve inverts. This episode started in May.

The Fed continued to sell bonds and shrink its balance sheet (QT) long after stresses began to emerge in the funding markets, and especially in the $2.2 trillion ‘repo’ segment that plays such a vital role in lubricating finance.

This has led to a global dollar shortage and transmitted a shock through the offshore funding markets. It has tightened conditions in Europe and Asia, and compounded the global damage from the US-China trade war. The New York Fed is now injecting liquidity but the level of excess reserves in the banking system is still too low.    

The European Central Bank is close to exhaustion under current policies and legal limits. A study by Bank of America warned that the spectre of “quantitative failure” now looms over global markets as negative rates and ever more convoluted forms of monetary stimulus start to do more harm than good.

Barnaby Martin, the bank’s credit strategist, said the ECB’s actions are becoming counter-productive. “Households and corporates are saving more not less, debt is being repaid not utilised, and banks are tightening rather than easing lending standards,” he said.

Household saving rates in the eurozone have been rising since late 2017 as people put aside more money to make up for lost interest. They have risen 1.1 percentage points in Germany to 11pc.

Companies have also been saving more, paying down debt and hoarding cash as a safety buffer. This may now be distorting eurozone money signals. Shweta Singh from TS Lombard said the seemingly robust growth of the M1 money supply  - 8.4pc year-on-year - is not as healthy as it looks.

“Firms are not raising their cash holdings in anticipation of a ramp-up in capex. Instead, they are turning increasingly cautious about access to credit. The ECB’s bank lending survey shows a tightening in loan standards for the first time since 2014,” she said.

Fiscal policy will have to take much of the strain from now on but there are barriers on both sides of the Atlantic. The US fiscal stimulus is fading and will turn to net contraction of 0.5pc of GDP (annualised) this quarter. The Democrats in Congress are in no mood to extend President Donald Trump a lifeline by agreeing to fresh round of budget largesse - except on their own political terms.

Europe has ample scope to boost spending but is hamstrung by the Stability Pact and Fiscal Compact. Any stimulus is likely to be piecemeal and too late to head off a deepening downturn.

Giovanni Zanni from Natwest Markets forecasts net fiscal expansion for eurozone as a whole of 0.4pc in 2020, led by the Netherlands (0.8pc), Germany (0.4pc), Italy (0.3pc) and France (0.1pc). Other forms of ‘quasi-fiscal’ support will ultimately kick in from green funds.

It helps but it is not enough to counter the sledge-hammer blow of a full global downturn, should that occur. Much therefore depends on Donald Trump’s state of mind as the impeachment noose tightens. 

If he opts for a quick trade deal with China and dials down his threats against Europe the relief may be enough to unleash a wave of pent-up spending by companies and to restore animal spirits worldwide.  If not, the mounting contagion from manufacturing to services may prove unstoppable.

Nice short piece on the regions & industrial policy

By David Smith in the Sunday Times; I've highlighted key bits:

Andy Haldane, the Bank of England’s chief economist, gave an interesting speech in his capacity as chairman of the government’s industrial strategy council — reminding us that the government still has such a strategy. Speaking at St James’ Park, home of Newcastle United football club, he had some killer facts on regional income disparities.

The gap between the richest region — London and much of the southeast — and the poorest — typically the northeast and Wales — is 150%. Having narrowed between 1900 and 1980 but widened since, it is now back to the levels of the early 20th century. Regional income disparities are twice those in France and three-quarters larger than in Germany.

Haldane, who says he has been engaging in “deep hanging out” across the country in recent years, identified six factors that determine whether a place is “left behind” or not. They are: transport and connectivity; schools and education; housing and shelter; high streets and social spaces; good work and fair pay; and money and finance.

Haldane, who has tested his factors around the country, provides the example of Ashington, the town in Northumberland that was the birthplace of footballing legends Bobby and Jackie Charlton and Jackie Milburn and has its own dialect, Pitmatic.

Ashington, said Haldane, failed on all six factors. It has no train service, thanks to the Beeching cuts of more than half a century ago, and is less well-served for public transport than 70 years ago. The local school now performs well but in the town “too many people are stuck in the educational slow lane”. Its high street, despite a recent makeover, “remains a shrine to bookies, charity shops and high-cost credit providers”.

When it comes to jobs and pay, Ashington has one of the world’s most advanced paint manufacturers, but it employs only 150. Youth unemployment is above the national average and, though unemployment overall is lower than since the last pit closed in 1988, there is income insecurity. Finance is available, but much of it at punishingly high interest rates. Housing availability is an issue, as is housing quality.

What can be done? Industrial strategy is part of it, as you would expect from Haldane, but so are infrastructure and connectivity, education and skills and other factors. There is a lot to be done, and I’m not sure our politicians are capable of it.