Regarding GE's China Avionics Deal

The potential for conflict between economic growth of US companies and US employment is perhaps no better exemplified than in the recent reports of GE setting up an avionics venture in China. Especially since GE's underperforming CEO, Jeff Immelt, the man ultimately responsible for this offshore business and job-creating venture, is also chairman of the president's special US job creation council.

Last week, the Wall Street Journal ran this piece about the venture,

"During a factory tour in South Carolina, Jeffrey Immelt smiles and cuts me off after I ask another question about his new venture in China:



"I'm done," says the chief executive of General Electric. "This was reviewed by the Commerce Department and the Defense Department."


If Mr. Immelt's response seems a bit edgy, it's probably because I raised a topic that has much of U.S. business on edge too: How to compete in China without giving away the store. And specific to General Electric: What's to keep GE's new avionics joint venture with China from transferring the best of U.S. technology abroad, empowering a new set of Chinese companies to challenge U.S. aircraft makers?


China watchers are anxious about this venture. Avionics— the "brains" guiding navigation, communications and other operations on an airplane—are at the pinnacle of American know-how, where the U.S. is still highly competitive. It's also technology the Chinese military covets.


GE says it has built protections into the venture, but the debate can get heated.


"To suggest that there are going to be firewalls that will stop this technology from going to the Chinese military is approaching laughable," says Rep. Randy Forbes (R., Va.), who sits on the House Armed Services Committee. "The fact that GE would say that is shocking."


You could substitute many industrial companies for GE in this equation, because over the last 30 years most have struck their own difficult bargains with China's many state-owned companies. China is the world's fastest-growing major market, and in return for access the country frequently demands technology or other know-how. China then absorbs that technology and uses it to battle global competitors, selling products that are often heavily subsidized by China.


That has happened in a range of industries, including autos, electronics and energy. Siemens now competes internationally against Chinese high-speed rail companies that sell products partly based on technology gleaned from an earlier joint venture with the German firm.


The U.S. has restrictions on the export of certain technology that could threaten U.S. security, but it appears less equipped, or less organized, to contend with this broader challenge: what to do about the threat to many business sectors posed by China's state-sponsored industrial juggernaut.


"We've been passive in deciding how to deal with China's aggressive industrial policies," says James Lewis, who worked on technology-transfer issues at the Commerce Department and is now at the Center for Strategic and International Studies.


"U.S. companies are making the right decision from a business point of view, but it might not be the right decision for the country," Mr. Lewis adds.


"It's unclear whether anyone in the U.S. government took a look at the GE deal in terms of U.S. competitiveness—the future of the aviation industry 10 or 20 years out," says an executive who advises companies working in China. He worries that a heavily subsidized Chinese jet program, enhanced with U.S. avionics, could eventually clobber Boeing. "China has an incredible ability to distort markets, and we can't be reacting after the distortion has taken place."


Clyde Prestowitz, a former U.S. trade negotiator who writes on global economics and business, says China is violating World Trade Organization rules that prohibit making technology transfer a condition of market access. "In a normal market the avionics would be done for that plane in the U.S. and we'd sell it to China," he argues.


GE says it wasn't forced to give up its technology for market access. Instead, it sees this joint venture as a valuable piece of an existing global network of joint ventures and supplier relationships between the world's big aviation companies.


"Technology is the heart and soul of our company," says Rick Kennedy, a GE spokesman. "Why would we give away our future?"


In its China project, GE will develop a new generation of its avionics operating system with state-owned Aviation Industry Corp. of China, which supplies China's commercial and military aircraft industries. The business will be based in Shanghai and owned 50-50 by the two firms.


GE says its half of the work load will chiefly be handled out of GE facilities in Florida, Michigan and Britain. And it expects that capturing new business through the joint venture will both boost exports from its U.S. operations and add jobs.


The venture's first big customer: Commercial Aircraft Corp. of China, which is developing the C919 passenger jet to compete with Airbus and Boeing. The joint venture will also sell its avionics to aircraft makers globally. GE's current operating system is already on the Boeing 787.


As for the Chinese military, GE says it has spent nearly three years developing a compliance program that it believes won't let the military near its technology. GE will run the compliance office and will vet all hiring. AVIC is forbidden from sharing information with its military business. And people who leave the venture must wait two years before they can take any Chinese military-related assignment.


Still, China is an authoritarian country with a weak legal system. It is difficult to imagine that any technology deemed worthwhile in the GE/AVIC venture wouldn't somehow find its way onto the next-generation Chinese jet fighter. GE says that its system is specific to commercial use, not military. And if there were evidence that information had gotten to the Chinese generals, the joint venture would be shut down.


Kathleen Palma, who handles trade compliance for GE Aviation, says GE determined that U.S. export licenses weren't required for the technology involved, but the company nonetheless briefed the Commerce Department and the Defense Technology Security Administration several times. She says the U.S. government appeared satisfied. A spokeswoman for DTSA said GE said it was "complying with all applicable laws." A spokesman for the Commerce Department referred questions back to GE.


GE has manufacturing operations elsewhere in China, and it isn't alone in giving a lift to China's commercial jet program. Other U.S. companies have a piece of the action, including Honeywell, Hamilton Sundstrand, Rockwell Collins, Eaton and Parker Aerospace. Airbus has manufacturing operations in China.


What is uncertain is whether these companies will remain part of China's aviation calculus once they are done being useful, and whether Chinese companies will supplant them. That transition has happened in other industries and is a mainstay of China's "indigenous innovation" industrial strategy, which is explicit about "metabolizing" foreign technology and making it China's own.


GE says that if it hadn't linked with AVIC in a joint venture a competitor would have, which is very likely. Mr. Immelt, the CEO, says he'll take responsibility if the venture goes wrong. "It's on me," he says. "It's on me."


But the reality is more complicated. When it comes to China and its ability to shake global industries, the ramifications of GE's decisions—and the decisions of many other American companies—are on everyone."


There are a number of interesting aspects to the GE avionics venture.

First, Immelt claims he is 'responsible' for the venture if it "goes wrong."

"It's on me" he was quoted as saying.

Well, GE's decade of shareholder value destruction has been "on him," too, it would seem, but that hasn't led Immelt to do anything to address the problem, has he? He's still being paid millions each year by the firm's equally-ineffectual board while continuing to run a lackluster, needlessly-diversified conglomerate.

Second, it's pretty clear that the place where most of the jobs will be created by this China-based venture will be....China! So much for Jeff demonstrating to other US executives how to create US jobs.

Third, Clyde Prestowitz' charge that GE's, and other major corporations' being forced by China to surrender technology as a term of operating in the country is a clear violation of international trade laws to which China has agreed to operate. Why isn't GE, the US government, or any other company pursuing these issues through appropriate international venues?

Fourth, if GE is a leader in this business, wouldn't it's refusal to cede its technology to the Chinese leave the latter with second-tier vendors whose new commercial aircraft would be inferior to those of Boeing and Airbus? Thus making GE's decision the very reason it will be problematic?

Fifth, who, with a brain, really believes that if GE ever discovers evidence of its technology inappropriately being transferred to the Chinese military complex, it will ever be able to do anything about it? The technology will be gone. The venture's closure will only hurt GE. And it's not likely the Chinese would let GE remove anything- money, people, equipment- if they didn't choose to. Just imagine the prospect of GE employees and property seized by Chinese, and subjected to interminable holding while the Chinese dared anyone, including the US government, to act to get them back.

Sixth, contrary to GE manager Rick Kennedy's contention that technology is the "heart and soul" of GE, so why would they compromise future returns, the answer is simple. Pressure to meet short term profit goals by a poorly-performing CEO- Immelt.

Seventh, there is clear evidence across several other product markets that the Chinese will take the technology they want, then kick the US venture to the curb and compete with those same companies internationally. Why does GE think it will be any different?

There are so many reasons to doubt the wisdom of this GE venture that its truly shocking that the US government has allowed it to go forward.

I had one thought while reading the Journal account of this disaster in the making. It was the Soviet Union's Nikita Kruschev chortling that Western capitalists would sell (to Communists) the rope with which they would eventually be hung, so hungry for profits, and shortsighted were they.

Sound like Immelt's GE? It does to me.

GM, China & Technology

I found the recent article in the Wall Street Journal discussing GM's China business to raise some interesting questions.

Unsurprisingly, GM management feels constrained by Chinese rules which demand technology sharing in exchange for investing for substantial growth.

Fortunately, one theme of the article is the risk both Ford and GM take if they expand, only to find themselves in an over-supplied market. Which would not be too hard to imagine, as every auto maker views China as the last great untapped market. I'd say it's more likely that there will be too many producers, driving prices and margins down.

But on the technology topic, there's something that puzzles me. Most vehicles are more assemblages of supplier components than they are totally manufactured by the company whose name is on the car. Thus, much of the technology in a modern car may be purchased off the shelf from existing vendors.

I suppose there are some proprietary transmission, engine and perhaps high-end electronics. But what can't be bought from suppliers can be bought, disassembled and reverse engineered.

The article mentions GM closely guarding its Volt technologies, which I found to be laughable. Nobody buys the thing in the US without hefty government subsidies. I have trouble believing China will have a ready-to-use, adapted power grid to handle the Volt.

To some extent, I think that companies wishing to do business in a country become embroiled in situations much like those of extractive industries. When you are bound to a location, the host country can pretty much demand whatever they like, even change terms, and the companies being victimized have to constantly reassess their decision to operate in that country.

It seems that GM and Ford will continue to experience this dilemma for the foreseeable future, with ongoing risk for their investment and whatever truly proprietary technology they offer.

The iPad, The Laptop & Schumpeterian Dynamics

This week has seen some interesting fireworks between Intel and various analysts concerning the future of personal computers and laptops.

Specifically, upon learning of Apple's blowout quarter and torrid pace of iPad2 sales, many pundits have pronounced he laptop effectively dead. With a generally-acknowledged 2% p.a. growth rate, the former desktop killer has been itself eclipsed by X-pads of several varieties.

I had the occasion recently to assist a friend in buying an iPad2. What I saw caused me, prior to the flurry of this week's analyst and pundit remarks, to conclude that the laptop as a home device has seen its best days.

It began with a visit to Barnes & Noble. My friend picked up a Nook, sneered and asked why she'd ever want to read books like that? A few minutes later, she wanted to buy one! When I saw the $249 price of a color screen Nook, I told her to wait and visit the nearby Apple store to check out an iPad.

Specifically, per my prior posts, I suggested that she buy a pad made by the firm selling it, and that she choose one with more applications than simply ebook reading. I had in mind that she could replace a laptop's functionality at a fraction of the price, with much greater ease of use.

How right I was.

She asked me to accompany her to the local Apple store a few days later. After steering the Apple rep to some specific topics of interest for my friend, we left the store and discussed what we'd heard. We returned about an hour later and she bought an iPad2 without the cellular modem.

As expected, the post-sale support to configure her iPad was superb. She left the store with iTunes, a web browser, text writing and ebook apps on her device, plus a few books to start. It took no effort for the iPad to recognize my friend's home wireless network and connect.

Since then, she's been attached to the device whenever possible.

And, just as I expected, she no longer needs to use a laptop, with its long bootup time, operating system and hard drive. Instead, the solid state, unbelievably small and thin iPad does everything she needs as a casual user who does not run a business on a laptop. Whatever questions she has can be answered during the store's afternoon workshops held, for free, just for that purpose.

It's no surprise to me that Apple is selling all the iPads it can assemble. And why laptop sales have faltered.

I doubt I'd buy another laptop, except for business purposes. For home use, traveling and general non-business daily use, it would be difficult to see why an expensive laptop would be necessary.

Despite Intel's attempts to rebut the analysts' 'death of the laptop' theme this week, I believe the latter are correct. Schumpeterian dynamics are hitting laptops with a vengeance.

Just as lighter, cheaper and better laptops eventually made consumer desktop computers obsolete, so, too, are the many X-pads, particularly the iPad, rapidly cannibalizing laptop sales growth.

Yet another reason not to sell Apple short, literally, just yet. But I wouldn't want to be caught holding equity in HP or Dell.

Going Wireless for Everything

For some time I've been observing the potential for the disintermediation of cable offerings by less expensive alternatives. My focus had been primarily on cable-provided television, which has become much more significantly affected among younger adults.

However, in the past few weeks, I've had personal experience and talks with friends involving cutting various wired communications or entertainment services to go wireless.

For example, a few weeks ago I finally terminated my landline telephone and associated ATT long-distance service. I'd had that phone number since 1999, but, increasingly, it was turned off and disused. My cell phone provides effectively free long distance, while the landline's total monthly costs, including long distance, mostly due to legacy regulatory fees and taxes, was in the neighborhood of $40-50.

I don't actually know of a single adult, including those, like me, over 50, who has moved within the past two years and installed a landline telephone. Not one. One squash partner is now considering following my lead on dropping his landline, since he's become angry with Verizon's forcing him into Fios at much higher prices than he used to pay for phone and internet.

Next, a cycling partner asked me about alternatives to cable television, as she feels she gets virtually no use from it at all, for about $60/month. As one of the few subscribers to AppleTV, considered a failure even by Steve Jobs, she often watches "tv" with her daughter on an Apple laptop propped up on their dinner table. Her daughter finds various sources for content- Hulu, YouTube, to name just the most obvious two.

We discussed how she could buy a high-end Tivo with web access, connect it wirelessly to her internet service, and obtain her movies and older television series content via Netflix through the Tivo. Plus directly access all the websites from a television, rather than the Apple laptop.

Then I ran into a squash friend with whom I discussed dropping landlines. She wasn't so fixated on cable television, but asked what I thought could be options for dropping her high-speed cable internet service. She confided that both of her sons, who are on the same wireless plan with her, use their Android cell phones for internet access, in effect making them cellular modems for their laptops. I agreed that she could just do that and save those monthly charges. She has an Optimum Online triple play package for about $150/month, so dropping the phone and internet may save her more than $100 of that.

I related the conversation I'd had with my other friend about dropping cable television, and this friend thought about that, as well. Overall, she could recover the full $150/month from Optimum and simplify her life, as she prepares to return to Canada in the next few years. Further, she noted that she didn't need a Tivo to get Netflix, since her kids had left a PS3 at home, which now serves as a platform for Netflix, as does the Wii.

One woman I know who moved into an apartment last year after a divorce skipped the landline and internet access, simply searching for other wireless signals in her complex rather than paying the $60/month for said connectivity.

It's expected nowadays that 20-somethings use cell phones and whatever internet connection they find at work or in their neighborhood to save on cable, internet access and conventional telephone expenses. But I think it would surprise many strategists at Comcast, Verizon, Cablevision et.al. to discover how many older, well-educated, higher-income adults are cutting as many cords, cables and wires as possible in their homes to save money and consolidate communications and entertainment budgets. I suspect it's happening among older Americans of that segment far faster than was forecast perhaps even just a year ago.

The Perils of Technology Investing: RIM & Cisco

I'm always surprised when media pundits and analysts are surprised that one-time dominant technology firms exhibit flagging total returns. Consider two recent examples, RIM, the maker of the Blackberry, and Cisco.

The nearby price chart for the two firms and the S&P500 Index for the past twelve years demonstrates several points.

The first is that buy-and-hold for technology stocks is very risky, even coming in different varieties of risk. For example, RIM rose, then fell precipitously in the early 2000s, only to rise stupendously by 2008, then stall and falter. Such volatility would have tried any shareholder's patience.

Meanwhile, Cisco entered its lost decade after the late-1990s technology stock bubble collapse. Both would have been good bets, in 2000, to hold, if you believed in long-cycle holding for technology issues.

However, of all the companies to experience Schumpeterian dynamics, I suspect technology firms are the most vulnerable.

Why?

Because, being at the cutting edge of technology probably attracts more smart, well-funded and motivated competition than being in, say, laundry detergent. The intricacies and dynamics of early-users and trend followers, plus the nature of technologically-based competition can cause market shares to plummet almost overnight.

Prior to the iPhone, who would have foreseen RIM's demise? But what was an interesting sideways expansion by Apple of its iPod vehicle into personal communications has essentially wrecked RIM, probably for good.

Technology companies seem to be especially vulnerable to what my old Chase Manhattan boss and mentor, Gerry Weiss, and his former GE colleagues Don Heaney and Jack Grossman, identified in the 1970s as competition from different arenas.

What they meant by the term and characterization is exemplified by Apple's iPhone. A company from one sector finds that its strengths and capabilities would completely undermine the business models of existing firms in another sector, creating a new competitive arena. The new entrant, Apple, rewrites the rules and redefines the nature of competitive offerings in the existing sector.

In contrast, Cisco seems to have succumbed to conventional competitive forces in its traditional product/markets while squandering resources on new products which didn't develop profitably. This is a more classic example of how technology firms age and die. Their original business segments become saturated or attract competition, while their new initiatives prove to be less successful than their original ones. Growth slows, spending on new products fails to ignite new profit streams, and the company's total returns stagnate as investors become disenchanted.

I read with some humor this morning's Wall Street Journal piece involving Ralph Nader. According to the article, Nader first bought Cisco shares in 1995, and, by 2000, his $1MM position constituted a third of his portfolio.

"At Thursday's closing price, his stake is valued at $278,460....."Just think of what people who have been loyal to them have endured (Nader) said. It's absurd." He said he didnt' sell his Cisco stake because he thought the shares would rebound."

I actually laughed when I read that quote of Nader's. Loyalty? To a technology company? What does Nader think equity invesetment is, a close friendship? Nader's experience demonstrates how not to approach investing in technology firms.

The only thing that's absurd is Nader's blind faith that a firm leading one of the hottest technology areas of the 1990s- network routers' would retain its dominance and relevance in the same manner for another decade.

Technology issues offer prospects of rapid gains, but rarely have successful second acts. My equity portfolio strategy profited nicely from owning Cisco at one time, but it never re-entered the portfolio after 2000.

Buy-and-hold investment styles in specific technology companies is risky and typically unsuccessful due to the dynamic and hyper-competitive nature of the segment.

Carlos Slim's Track Phones: Marketing In Action

Last week's post on ATT's proposal to buy T-Mobile focused mostly on the market concentration among the top three wireless firms.

In subsequent discussion of the proposed deal, Michelle Caruso-Cabrera, a co-anchor and reporter on CNBC, made a very interesting point. Rather than focus on the two major wireless firms, ATT and Verizon, she noted that Mexican billionaire Carlos Slim's Track Phone pre-paid wireless business had the highest growth of any wireless firm.

I can't vouch for exactness, but I believe the data she cited showed Slim's firm adding more subscribers in some recent multi-year period than all three competitors who weren't ATT or Verizon. I believe MetroPCS was one of the firms, and T-Mobile may have been another.

In any case, it got me thinking about segmentation and consumer behavior, always favored topics due to my academic roots in marketing theory and practice.

I'm aware of how differently P&G and Colgate-Palmolive market in third-world countries, as opposed to higher per capita income European and US markets. Specifically, much of their volume moves through neighborhood bodegas with little product display capacity, selling to consumers with little disposable income. Thus, package quantities tend to be much smaller. Detergent might be sold by the envelope, rather than, as in the US, in a money-saving giant bottle.

That said, it makes sense to me that someone with business and cultural roots in a country like Mexico would naturally see the value of pre-paid wireless phones. Rather than take the American vendor route of replacing large monthly landline phone bills with similar-sized, or larger ones for much more feature-rich, multi-functional smart cell phones, Slim chose to offer smaller-sized bites of valuable wireless service to poorer consumers.

The result? Faster subscriber growth in a simpler market. You can bet that Slim's customers probably aren't constantly watching videos or netsurfing on their phones. They're probably happy to have such a powerful, yet inexpensive communications tool on their limited budgets.

When asked, an ATT official made some mention of possible interest in the pre-paid market. And, of course, it's no shock to observers that, for purposes of the proposed acquisition, ATT seeks to define the wireless market to include pre-paid, thus lowering the effective market share of the combined firms.

However, to me, Caruso-Cabrera's comment was eye-opening. Recalling the unsatisfying, mediocre total equity price performances of ATT and Verizon, relative to the S&P500, which appeared in last week's linked post, I can only imagine how Track Phone would look if it were public and standalone.

Just because a product aims at a lower-priced segment doesn't always mean it's lower-quality. That characteristic is, ideally, in the mind of the consumer. And Carlos Slim's people have apparently hit a very good sweet spot, offering affordable doses of a very desirable, powerful service, wireless, to lower-income consumers.

A great marketing story. I love it.

And Another Thing......

In today's earlier post, I described some of the blather which comprised David Faber's noontime half hour on CNBC this past Wednesday. As I listened to the program again today, while multi-tasking, an on-air conversation reminded me of one more verbal blunder on Wednesday's edition of the program which had slipped my mind.

Somewhere in the middle-late portion of that program, Kaminsky was on his anti-technology jag again. At some point, a guest, either the Evercore guy or some portfolio manager- I think the latter- was asked about, I believe, Twitter. It was something estimated to be worth about $4B, and it wasn't Facebook.

In any case, the $4B number was tossed out, and this guy says, to paraphrase,

'Well, it probably will be worth $4B at some point, just not now.....maybe in a few years....'

He went on to essentially advocate holding the issue.

Kaminksy, meanwhile, was silent. I was incredulous.

Yes, and in a few years, what, maybe Yahoo will turnaround? Wal-Mart will come up with a strategy that works during economic expansions?

Isn't this sort of thinking about future large market caps the way the original technology bubble grew? Yes, it is.

There's a fine line between buying something before it's generally recognized to be as excellent performing as it may be, and buying something years in advance of a big total return payday. Kaminsky, of all people, with his fund management background, should know this. I expected him to excoriate the guest.

Instead, he was mute.

You can't make this stuff up.

What Lesson Did the Phone Wars Provide for Energy Policy?

Holman Jenkins, Jr. in last Wednesday's edition of the Wall Street Journal, provided a very concise view of the evolution of mobile telephony in the US and Europe. He discussed how the US eschewed the unified, monolithic European GSM mobile standard. And how Nokia, one of the originators of that standard, is nearly dead, while Apple and Google, thanks to the US indecision on such a standard, flourished with new approaches.


Isn't this a commentary on government's unwanted, unnecessary intrusion in sectors where competing private solutions drive better ultimate solutions?


Jenkins describes the process as messy and inefficient, but, in the end, delivering superior results. Nokia has run into the arms of Microsoft, having fallen on hard times after initially leading in the GSM standards setting process. Jenkins ended his piece,

"The lesson for the new Nokia and everyone else is an old one: Nobody knows anything, and there's no substitute for messy, wasteful competition as a finder of solutions to problems we didn't even kow we needed solutions for. Whether the mobile world will settle into one proprietary or many proprietary ecosystems is far from decided."

Interestingly, from my reading of Amity Schlaes' The Forgotten Man several summers ago, those cries of how competition is so messy and wasteful are the very same arguments that FDR and his minions used to seize control of so much of American business. They decried the waste and inefficiency of free market competition, only to stifle innovation and mismanage the economy for most of the 1930s.


There's a larger lesson here. Right now, and in a technologically intensive sector- energy.

Doesn't Jenkins' illustrative tale of the mobile phone sector over the past few years suggest that we are making a horrific mistake by acceding to demands for monolithic, command-economy directives to subsidize and produce certain energy- wind, solar, ethanol- without subjecting them all to real, fair economic forces?

What ever happened to price as a market signal? As gasoline prices rise, largely silently, above $3/gallon, pundits predict a weakening of the US economy. So be it.

I wrote this post back in the summer of 2008 after reading a WSJ piece on Air Force experimentation with synfuel for jet aircraft. We have lots of coal and a known, reliable process to liquify that energy source to burn instead of gasoline or jet fuel.

If you worry about sending dollars abroad to buy oil, then promote synfuels. If you're simply worried about carbon emissions, then admit that you want to turn the US standard of living back about 110 years.

But this government system of choosing energy source winners is going to end badly. Market forces may entail some initial waste and inefficiency, but the result is the best solution, with much less long term waste and inefficiency, while satisfying consumer needs and desires. The latter of which is the point.

Not to have government dictate what consumers want, and how they'll get it.

GM's Misleading Volt Launch

There was a fair amount of media hype over GM's launch, earlier this week, of its Volt automobile. Coverage ranged from the expected to the ridiculous.

The latter, of course, featured former GM exec Bob Lutz crowing about how wonderful the Volt was to drive, and how profitable it would be. When asked about the latter topic, Lutz first cited his lack of current information about it, then proceeded to assure the reporter that he was sure that all the key component costs would decline with volume, and the vehicle would make tons of money for GM.

Bob curiously- or not so- failed to mention those hefty federal government subsidies for buying a Volt. Without which, demand would likely slow to a trickle.

Seeing videos of the car, I'm struck by its ugliness, if not plain design. Like so many GM vehicles, it fails to excite. Nobody, including Lutz, has discussed various features or interior details which are always the subject of reviews of other new cars. I have this sense that the Volt is a sort of electrically-powered equivalent of a Volkswagen, i.e., simple and relatively spare. Nothing to write home about.

Except the currently-chic electric power thing.

On that note, a pundit on CNBC weighed in on how poorly-prepared the US electrical grid is in the major cities in which the Volt might actually make some sense. With a fully-charged range of about 40 miles before resorting to the gasoline engine to charge the electric batteries to run the motor, the guy pointed out that the car is truly practical only in the larger US cities with fairly dense populations. As such, he noted that few had power grids and capacities which could take a hefty dose of Volt users.

And, of course, there's the embarrassing fact  that most of that juice comes from coal. So all that good feeling of avoiding burning gasoline is offset by the reality that the Volt owner is causing more emissions-creating coal to be fed into power plants in his city.

Lastly, the GM CEO who gave a CNBC interview was largely incapable of explaining his rather stratospheric claims of something north of 200 MPG for the car on a cross-country road trip. He boasted that you could drive the car across the US like any conventional gasoline-powered vehicle, then botched a simple explanation of how, with an 8-gallon gas tank, that would work. I'm still a bit unclear myself.

So much for marketing. But, then, this is GM. They haven't done effective marketing since Alfred P. Sloan left the company, have they?

Price Comparison Mobile Phone Apps vs. Websites

Sometime early last week I heard or read a news story concerning Amazon offering a free mobile phone shopping application. If I understood it correctly, the online store released the app so that shoppers could take a cell phone picture of an item or its barcode, or type in its name, and Amazon would provide price comparisions from other retailers or sources. The app was available prior to Black Thursday.

I don't use my cell phone for shopping or finance, but I quickly considered how this technological development would affect various web-based comparison shopping services. Again, I don't use them, but I have a pretty good idea what they are. A quick Google of the topic produces results including PriceGrabber, Bizrate, Nextag, Smarter, and more. It doesn't take much intelligence to realize that maintaining such a website is expensive and provides revenues and profits to someone.

Thus, Amazon's new cell phone comparison shopping app represents a Schumpeterian type of technological and retail structural advance which could well doom those websites.

I'm assuming Amazon's app disintermediates those other websites. But even if it used them, as well, Amazon's position as a retailer makes it different. Very much like a financial broker filling orders from its securities inventory before going to the markets. Or the original Sabre airline reservation system.

When a vendor offers a comprehensive service involving comparison shopping, it is slipping customers into a closed system of its own design. That can't be comforting to the owners of those older comparison shopping websites.

Will they gradually lose traffic and value? I haven't seen a business story about this phenomenon. Perhaps it's too early to assess the behavioral changes of shoppers and the effect of those changes on the older comparison sites. But it's hard to believe that they won't now be in some trouble or, at least, have significantly more competition with Amazon's entry into the fray.

Ray Ozzie's Parting Shot At Microsoft

I haven't yet written about Ray Ozzie's departure from Microsoft. Somehow, I missed the October 19 article in the Wall Street Journal. However, I think it's a watershed event for Microsoft, and not a good one.


The end of the piece states something I think needs to be clear upfront,


"Mr. Ozzie is a legendary technologist in the computer industry, whom Mr. Gates once called "one of the top five programmers in the universe." "


I can't recall all of Ozzie's successes, and don't feel like Googling his bio right now. Suffice to say, he's legendary, and for good reason. Thus, his role as Chief Software Architect should have made a huge difference, in a good way, for Microsoft. Instead, here are added passages from the Journal article,
 
"According to one person familiar with the situation, Mr. Ozzie decided to quit Microsoft because "he has accomplished what he wanted to accomplish" at the company. His major contribution to Microsoft was in helping it shift the company to focus on cloud computing, in which more computing chores move into data centers rather than being executed on PCs operated by users.


But several current and former Microsoft executives say Mr. Ozzie failed to exert the kind of leadership many of them hoped for after he took over the title of chief software architect from Mr. Gates in 2008. These people noted that Mr. Ozzie did far less public speaking and other similar high-profile duties than Mr. Gates did, especially in his latter years at the company. Those kind of public ambassadorial duties have long played an important role at influencing employees within Microsoft itself, these people said.


Mr. Ozzie also clashed with other executives at the company, particularly Steven Sinofsky, now the president of Microsoft's Windows division, these people added. Mr. Ozzie appeared to lose a key battle with Mr. Sinofsky two years ago when control of Live Mesh, a data synchronization technology developed by Mr. Ozzie's team, shifted to the Windows organization at the company.


About a year ago, oversight of another initiative Mr. Ozzie was involved in, its Windows Azure cloud computing technology, moved to the server and tools business run by the division's president, Bob Muglia.


Mr. Ballmer in his email said that the role of chief software architect was "unique" at Microsoft and he won't fill the position after Mr. Ozzie's departure. A Microsoft spokeswoman declined to make Mr. Ozzie available for an interview or comment beyond the email."


Given Microsoft's lost decade of total return performance, as contrasted with Ozzie's accomplishments, I think one would tend to discount Microsoft's version and give Ozzie the benefit of the doubt for what went wrong at Microsoft.

It sounds believable that the internal squabbles at the firm derailed much of what Ozzie had hoped to do. One can only guess at what was lost by giving Live Mesh and Azure to company functionaries. After all, you have to recall that the crew that Ozzie found at Microsoft when he arrived in 2005 is responsible for the firm's total return performance since then. The first nearby chart shows that, when compared to the S&P500 Index, the technology giant comes up, at  best, about the same.

The next chart shows the same two series for a much longer timeframe. In that chart, you can discern that Microsoft has actually lost value over the past decade. More so than the index.

So I wouldn't put a lot of blame for what didn't work on Ozzie. I suspect it's more like a software wizard being sucked into the large, slow-moving blob that has become Microsoft.

His warnings to the firm, as he left, sound on target to me. What I heard on CNBC the other day was that Ozzie predicted that millions of new future users will access the internet and software via cell phones and tablets, while Microsoft, clinging to PC and server operating systems, will lose out on controlling and profiting from that future growth.

Reviewing Ozzie's track record, versus Ballmer's, this isn't a very hard call to make in favor of the former.

Mulally's Misleading Comments On Car-Based WiFi

I happened to catch Alan Mulally's appearance on CNBC last week, just after he also presented or was interviewed at the Wall Street Journal's All Things Digital conference.

Mulally made a huge deal out of Ford being the leader in placing online applications into vehicles. I can't swear I recall all of the features he mentioned, but the network's program co-anchors were aghast at all of the distracting activities Mulally assured viewers were available in new Ford cars.

When challenged on how dangerous these non-driving activities would be, the Ford CEO kept intoning, like some sort of mantra,

'eyes on the road, hands on the wheel'

He then assured the co-anchors that at least key applications were voice-activated, so everything was perfectly safe.

Then Erin Burnett, one of the CNBC co-anchors, mentioned the research which I, too, have read, concluding that simply talking on a cell phone, rather than with another occupant of a vehicle, while driving, took one's attention off the road and out of the car.

Mulally punted on that one, admitting the research was true, but essentially saying that it was still safe to use Ford's on-board online apps while driving.

This is nonsense. Mulally is clearly skirting a very serious and potentially lethal issue.

First, like the failure of government regulators to catch the budding housing finance bubble in time, the DOT is apparently asleep at the wheel, pun intended, on this issue, as well.

Where is the governmental machinery to make Ford prove it's internet doo-dads placed within reach of a driver won't cause drivers and passengers in other cars to become casualties?

It doesn't take a genius to figure out that young, inexperienced drivers are going to be caught up in these conveniences and take out other vehicles as they busy themselves with texting their friends or Googling God knows what while driving.

We all know someone who has, or nearly has wrecked a car while trying to operate a complicated sound system in a car. Or have watched some youth or adult on a cell phone either hold up traffic while they talk, or cut into traffic and nearly hit another vehicle as they concentrate on their call.

We need less distractions in cars, not more.

Mulally's and Ford's irresponsible attempt to capture the image of a high-technology, forward-looking, internet-vehicle equipped car maker is going to end badly.

I was very disappointed to watch Mulally try to duck, evade and deny the obvious danger that his company's new on-board internet toys will bring to driving.

Electronic Trucks Or Cars? Jobs vs. Ballmer On PCs et.al.

The Wall Street Journal's All Things Digital conference played host to an arm's length spat between Steve Jobs and Steve Ballmer concerning the future of personal computers.

Jobs likened PCs to trucks, capable of doing heavy duty tasks, but not as well-suited to single, evolving applications as various newer digital devices, e.g., iPods, iPads, iPhones, etc.

Ballmer, on the other hand, derided Jobs' description and assured everyone that PCs were getting more valuable and individualistic with each passing year. And, for good measure, just in case they weren't, Microsoft was putting Windows on cell phones and tablets, too.

Or, to quote Ballmer directly,

"People are going to be using PCs in greater and greater numbers for many years to come.

Nothing people do on a PC today is going to get less relevant tomorrow. There are usage cases- whether those are done today on PCs or on alternate devices- that are going to grow in popularity."

Maybe so. But let's consider the real core issue- replacement cycles and associated software.

Which do you believe people replace more often- cell phone or laptop/PC? I'm guessing it's their phone.

Ballmer may be correct that people will still use a PC, and those applications done on only a PC, such as finance, spreadsheets, complex word processing, will remain there. But use in greater numbers? Only as youngsters become teens and acquire low-end laptops.

I don't think the number of computers/person is going to rise. And I suspect the average personal laptop age will increase, as well.

Instead, people will focus their energies for new devices and applications on cell phones, tablets and music devices.

As usual, Microsoft's CEO is fighting the last war, desperately clinging to the hope that large-scale software on PCs will continue to maintain Microsoft's value as a company.

I suspect Jobs' perspective on digital device growth rates and usages are more on target.

Palm's Demise

Yesterday's Wall Street Journal provided some recent news on the fortunes of once high-flying Palm, Inc.



Back in the day, over ten years ago, PalmPilots were a major step forward in electronic organizers. I had, and still have, an ancient, non-communicating Sharp Wizard, in which I store contact information and notionally keep a schedule.

PalmPilots added a local communicating capability which made them a coveted toy among young professionals. I think it's fair to say they were the first widely-used PDA.


How things have changed. The Journal article noted that the RIM Blackberry and Apple iPhone swamped the PalmPilot.

Though Palm eventually brought out its own integrated PDA/cell phones, they became also-rans, having great difficulty being accepted by the major cell networks, ATT and Verizon.

The nearby price chart of Palm and the S&P500 Index illustrates how the firm's fortunes stalled, then plunged, in recent years. It's now down about 50% in value from five years ago.

According to the Journal piece, common equity holders have little chance to realize any gains, since private equity group Elevation got very sweet terms for a $460MM investment in the company that gave it a 1/3 interest.

While the article cites one analyst as valuing Palm at $600-700MM based on research and marketing 'assets' from spending, the company's nearly $600MM of cash might be more indicative.

Palm seems to be a prime example of Schumpeterian dynamics. Once a category leader, it failed to anticipate or deliver on the next big thing in its space, the integration of PDA and cell phone. As a distant third in the race, it just isn't really worth much anymore.

When is the last time you even saw someone with a Palm Pilot?

I suppose some entity might eventually bid some fraction of the alleged value of the firm, as the cash is spent. But it's not even clear what the patents or brand are worth anymore.

It's a lesson in the way markets are supposed to work. Rather than expect some government intervention to save every job and company in sight, Palm illustrates how ailing or failing companies become low-priced fodder for some other entrepreneur, thus clearing the market of old assets and recycling them, if possible.

For an unfortunate example of intervention, read the next post.

Ocado Ltd.'s Grocery Strategy

I've always had a special affection for the grocery business. Perhaps it's because my second job, as a teenager, was working for Matarelli's Grocery in Peoria Heights, Illinois.

Matarelli's was a literal corner grocer. Situated across from the Pabst Brewery, it received a steady stream of shift workers buying food for lunch, as well as many upscale housewives dropping off shopping lists or picking up orders.

The store was run by two elderly Italian spinsters, and their brother. It was a great job for many reasons. Their management style was decidedly "Theory Y," working us hard but fairly. If you knew to ask not, "may I go home now," but, "do you have more work for me to do," the sisters would send you home early, but pay you until closing.

They hired two delivery boys each year, with the job passing down to two new seniors at the Catholic high school I attended. If you happened to know the prior two guys, you had a decent shot at this dream job.

Working at Matarellis meant alternating weekends and working half the after-school afternoons during the school year. In summer, it was alternate weeks. We stocked shelves, carried orders to cars, stored the weekly distributor's massive deliveries, drove to pick up produce, and, best of all, drove the store's station wagon on deliveries.

This last part was, by far, the best aspect of the job. As a 16 year-old, we were being paid to drive someone else's car up to three times per day. The tips were fantastic, and I learned a lot about people's daily lives, as we were in so many kitchens on delivery runs.

Thus, I was fascinated by Tuesday's Wall Street Journal piece concerning UK grocer Ocado.

Though it initially looks similar to the failed San Francisco grocer, Webvan, founded and run so ineptly by some former Andersen Consulting execs years ago, Ocado seems to be better-grounded in customer needs.

The article notes that the firm does very well in Britain because of the country's bad weather, limited parking and ubiquity of high-speed internet access.

The company invested in proprietary warehouse picking systems, virtually automating the order-assembly process. This is very much more advanced, but along the lines of a concept a colleague and I had a few decades ago, when we worked together at Chase Manhattan Bank.

Now, however, online orders make the customer's side of the process easier and cheaper. Ocada has made great strides on its side, as well.

The Journal article concludes by comparing Ocada with its US counterpart, Freshdirect. When I noticed former Citigroup EVP, Lotus and Priceline CEO Rick Braddock is now the latter's CEO, it made me even more confident this business has finally arrived.

Both Braddock and the finance chief at Ocada stress sustainable profitability now, not merely logistical skills. It may take a little time, but one can't but help think this is a trend that we'll see more of in the future.

Larry Ellison Changes Course

You have to admire Oracle CEO Larry Ellison's ability to read trends and adapte his company's strategy as necessary.

In fact, Oracle has been on my equity strategy's selection list four times in the past year. That's a testament to Ellison's ability to keep Oracle consistently growing revenues at high rates while still outperforming the S&P on total return.

Yesterday's Wall Street Journal noted that Ellison had recently changed course and, after eschewing hardware businesses for years, suddenly pounced on the ailing Sun Microsystems. If memory serves, Ellison first tried to buy a key software business that Sun owned, and couldn't get it. Evidently worried that it would fall into a competitor's hands, and seeing his rivals begin integrating software and hardware, Ellison moved to take Sun.

He said, according to the Journal, that,

"Oracle will focus on selling such combination systems to businesses. Mr. Ellison said they will cost less and perform better than systems that use parts from different companies.....he expects systems that combine hardware and software to become a multi-billion dollar market."

One would surmise that Ellison and his executives have foresee a change in economics from having Oracle products flexibly work with various hardware systems to being cheaper by being integrated with just one hardware line.

It takes an open-minded, secure CEO to be able to see changes in trends, acknowledge them and take action to accommodate them.

Not many companies can perform as well Oracle under Ellison's leadership.

Apple Joins The eReader Business

Today's much-heralded announcement of the Apple tablet brings Apple into even broader competition with Amazon.

Several weeks ago, I discussed this impending event with a business colleague who has had involvement with other companies entering the electronic book reader business. In a few short years, the niche most recently pioneered by Amazon's Kindle is getting rather crowded.

For example, Barnes & Noble debuted a reader, as has Sony. Now Apple brings its prowess to the category.

A glance at the two nearby price charts for Amazon, Apple & the S&P500 Index for the past 5 years, and then for the companies since Apple's inception, tells an interesting story.

Over the past five years, Amazon's and Apple's equity price moves have been surprisingly coherent. While both suffered somewhat through the last year's market troubles, both delivered performance significantly above that of the S&P. The pattern of the price moves almost leads one to conclude that Amazon now behaves in a quasi-technology issue manner.

Looking at the same three series from the mid-1980s, it's rather shocking to see that, in a much shorter timeframe, Amazon has created more return for its shareholders than has Apple. And, again, looking over the longer term, the recent nearly-identical patterns of the two firms' equities moves is stunning. If I'm not mistaken, Amazon began performing like Apple around the time of the Kindle's introduction.

This morning's Wall Street Journal features articles focusing on Apple's battle with Amazon over pricing of titles and relationships with publishers, as well as, on the technology front, its continuing march into new product areas.

If I were handicapping this race, I'd have to bet on Apple. For several reasons.

First, by controlling the entire business system, including in-house product design, as a software and hardware producer, Apple has more natural advantages over the long term. My colleague and I discussed how likely it will be for Apple to release, in future versions, an iPhone-like tablet, where the phone application becomes a freebie.

Second, Apple cut its teeth on this business model with the iPod, which has consistently outperformed MP3 players. At a stroke, Apple can neutralize Amazon's history with publishers, simply through its contracts for epublication on the tablet.

Third, Apple has a much more visceral brand loyalty than does Amazon. In a product space becoming crowded with entries, the vaunted Apple brand, distribution system, and customer service are all advantages which will bring share to the tablet. By comparison, Amazon is simply a place where you buy books online. And maybe some music, if you don't use an iPod. Perhaps rent or buy videos, as well.

I just don't think Amazon has built strong enough brand identity for what is coming in this product/market space to withstand Apple's assault on the ereader category.

Finally, if Apple only competes on a par with Amazon, it's already won. For Amazon, it's a defensive game of mitigating share loss. Perhaps the tablet will expand the overall market, but with its expected higher price, probably not share that was going to Amazon. For Apple, any sales of tablets and content through its online site are net additions.

The momentum and nature of the competitive situation would seem to favor Apple- again.

An Old Idea Gets A Fresh Start with Technology

Thursday's Wall Street Journal had an article which really brought back some fond memories. It was on the back page of the Marketplace Section, concerning a pick-up grocery business in France.


A colleague and I also conceived this business back in 1987. Of course, 23 years ago, one was restricted to fax and phone. The problems still remain, but the nature of the business is otherwise better.

It's always struck me as the optimum mix of Peapod's delivery service and shopping in a store. I think many people have time to pick up a pre-selected and packaged order, but don't want to waste time with the mostly low-value-added task of the actual, physical stock-picking.

Now, with cheaper and more practical, effective communications, via cell and internet, ording grocercies is much easier than it was over 20 years ago. The business also features easier billing and fulfillment. For example, consider this passage,

"The warehouse model means Chronodrive doesn't need more than a dozen employees per location, so costs are low. But customers shop according to a list- there are no impulse buys at the checkout."

The drive-through model allows for less expensive site selections. The Journal article describes how French Chronodrive stores are located near highways and neighborhoods with lots of middle class families. They expect a terminal penetration of some 4-5% of the French market.

I've always believed that one could get people to buy the toughest non-sight items, produce and meat, by simply having a 'no questions asked' return policy for the first month. Once people felt comfortable with the product quality, and their ability to return bad 'fresh' food, I think they'd learn the habit of ordering those, as well.

Ironically, for me, at least, this harks back to my high school days. I worked at Matarelli's, a literal corner grocery store in my modest-sized downstate Illinois town. We were one of only two grocery stores that delivered. Our prices were SRP (suggested retail price) to cover the cost of our "free" delivery, and the store was known for its excellent meat quality.

However, many customers would telephone their orders to the two Italian sisters who ran the store, driving by a few hours later to pick up their boxed orders.

I hope this French business works out well, and makes an appearance on our shores soon.

On Technology & The H-P Microsoft Closer Tie-Up

I skimmed through the Wall Street Journal piece this morning announcing H-P's closer ties with Microsoft. From what I gleaned, it's largely aimed at corporate cloud computing and similar product/markets.

Well, I'm here to tell you- after 4 hours wasted on a Microsoft-generated PC problem this morning- that the H-P-Microsoft relationship isn't the one to improve.

It's the Norton-Microsoft or McAfee-Microsoft interfaces.

If you are like me, your laptop periodically greets you in the morning with a sign-in screen and the notification that Microsoft's Windows operating system security updates thoughtfully invaded your machine during the night and rebooted it for you.

Hopefully, you think, the damn thing will still work.

Not this morning.

I won't go into exhaustive detail. Suffice to say, I spent a full hour on the phone with Comcast, rewired two laptops directly to the cable modem, and opened countless system management windows for the Comcast technicians in their quest to get my connection operating.

Only late in the process did I realize, as a backup laptop connected directly to the modem and the internet, but this machine did not, that there was a reason Norton Anti-Virus no longer appeared in the icon tray. Nor responded when I clicked on the icon.

The Windows security update had obviously corrupted the Norton program, causing it to simply die in place. But not become uninstalled.

Thus, every other internet access program was still waiting for the crippled Norton security program to allow it to connect. Which it couldn't do. Only when another machine was hardwired directly to the modem was it able to bypass the crippled security program's iron grip on my internet access.

Once I uninstalled Norton, everything worked.

Silly me. Why didn't it occur to me right away that Microsoft would so carelessly reach into my machine, disable my anti-virus and firewall while leaving it in place, then silently leave me to figure out the damage. And how to overcome it.

Instead, I wasted an hour with Comcast, 10 minutes with my computer technician, subsequent troubleshooting of my wireless router and time spent re-installing Norton.

I'm sure I'm not alone. The Comcast technician, who was both pleasant and very skilled, remarked that they have waves of this type of malfunction during periodic Windows security updates. And that Zone Alarm was notorious for causing these sorts of issues, too.

You would think, by now, that Microsoft would have figured this out. That, at least, its updates would alert you to the fact that it had corrupted your firewall and anti-viral software. Or, heaven forbid, actually detect that program first, then download updates designed not to corrupt your resident security program.

But that would require some actual sensitivity to customer needs and concerns. Something of which Microsoft has never shown itself capable.

Google's Misunderstood Android Phone

Since the launch of Google's Android cell phone recently, much discussion has focused on Google vs. Apple. On how big a lead the iPhone has, how many units sold, users, applications downloaded, etc.

This all misses the point.

In fact, the Android provides an example of what my old boss at Chase Manhattan, Gerry Weiss, and his team at GE, in the 1960s, identified as 'arena competition.'

Portraying GE's businesses in arenas, they noticed way back in that era how cable and other entertainment forms could and would have impacts on GE's television and related businesses. The most damaging sorts of competition, they found, were when one company inadvertently entered another arena other than its own, typical product/market, in order to support business strategies in its core areas.

These new entrants often undercut the profitability of the business models of the existing competitors because their main focus was on another sector.

Google is following online eyeballs from PCs to cell phones. In order to control the environment, they want to control the operating system. To do that, they simply added the commodity platform, too. A new cell phone.

Because they don't want to earn all, or even most of their profits from the cell phones, they represent a danger to other cell phone makers. And, as one pundit noted, to Microsoft, by reducing that company's market for mobile operating system sales.

Apple? Google probably doesn't really care that much about the iPhone, per se. Rather, they care about extending their advertising business to the cell phone market.

If they can support healthy growth in ad revenues on cell phones with minimal outlays for Android, or break even, they have probably met their objectives.

In the process, they are reducing the carriers to "operators," teaching people to buy a phone, then choose the network, and disrupting a product/market they don't really even see as central to their profitability, except as it supports and facilitates continued ad revenue growth.

Rather like IBM cannibalizing all manner of products, services and labor as mainframe computing applications marched out of the first areas, into more accounting, inventory and other business processes. How many purveyors of supplies and services to old-fashioned offices of the early 1960s were put out of business by IBM, while IBM only saw rising mainframe and applications software revenues?

It's the same for Google and its Android.