The Future of Container Shipping: What’s Next?

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The world is constantly changing and evolving, as new technological advancements continue to materialize. With new findings in technology comes improvements and upgrades in different industries. But what could this mean for a traditional industry like container shipping?

From the looks of it, most people would think that the container shipping industry has not experienced much change in their operations for the past several years. However, that is not true.

During the late 1950’s, cargo was loaded into shipping vessels manually by workers at the dock, and then again unloaded by workers once ships arrived. Eventually, the use of containers transformed the industry, allowing more goods to be stacked and be shipped easier. As a result, ports were forced to rebuild themselves to be able to store the containers, implement huge cranes for their operations, and include highway and rail terminals to send ships directly to the ports. This advancement revolutionized trade and sparked a global economic boom.

But what is the only other way to allow even more goods to be transported? Larger ships! Over the years, ships have gotten so massive that it gets you wondering how they still stay afloat. Companies quickly realized that regardless of the ship’s size, approximately the same number of sailors were needed to operate the ship and less fuel per container was needed to move larger ships. This is a trend we will continue to see, which is largely a reaction to containerization and automation which allows faster loading and discharging of vessels.

Larger container ships are not the only trend the shipping industry is experiencing. Shipping companies are reinvesting into specialized ship types. This is mainly seen in areas of heavy lifting or transportation of certain chemicals. There are extremely specialized ships that are being constructed, with capabilities to only transport specific items, such as parts of offshore windmills. This has developed employees that specialize in ships and trade in niche industries.

Along with the worldwide trend of going green, shipping is also focusing on developing a green image. Innovation has allowed a reduction in the negative environmental impact caused by shipping. There is now an increasing amount of engine improvements, propeller performance, and friction-reducing air cushions. However, this is only just the beginning. As more ships and methods of operating are becoming specialized, the maritime industry is moving more towards an environmentally friendly era.

www.morethanshipping.com/evolution-of-container-ships

www.vox.com/2015/1/8/7513317/container-ship-msc-oscar

10 Future Ships that Would Change the Face of the Shipping Industry

https://www.ajot.com/blogs/full/the-future-of-container-shipping-may-be-smaller-than-we-think

The Dream of Being a Longshoreman

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The Port of Los Angeles is the largest port in the United States. In 2016, 2,050 ships brought $272 billion worth of cargo to Los Angeles. The Port of LA is a crucial piece of importing manufactured goods from China.

A critical piece of this massive operation is the longshoremen, the workers who handle the loading and unloading of the ships in the port. The longshoremen and their union are so critical to port and its trade that they have the power to disrupt an entire supply chain. In 2002, during contract negotiations, the union essentially shut down the west coast ports as a leverage in their negotiation. This caused disruptions not only on the west coast but across the country where goods couldn’t be delivered and across the Pacific where the goods are made. This relatively small union has immense power over the import of goods in the United States.

Longshoreman jobs are coveted. Longshoreman can make more than $100,000 a year and receive free health care, but it is not easy to become a longshoreman. In order to get this dream of a blue collar job paying over $100k, you have to get into the dockworkers union, the Pacific Maritime Association (PMA).

The first step to becoming a fully-fledged member of the union is winning the lottery. In order to get in the union, you have to become a “casual” worker. Casual workers do the same work as union longshoremen for less pay and benefits. To become a casual part-time worker you have to win a literal lottery. The longshoreman union held the first lottery, since 2004, for casual worker spots. This year 80,000 people entered the drawing and only 2,300 will be eligible for part dock work. They all entered with the dream of having the modern day unicorn, a high paying blue collar job. Just because they won the lottery, they aren’t guaranteed elevation to be a full union member.

TraPac Automated Terminal

As the Port of LA and other west coast ports become more automated, the number of dockworker jobs available will not go up. But they also will not go away entirely. Even in the automated terminals at the Port of LA, PAC, humans still have the operate the massive cranes that lift the containers off the ships. The need for the dockworkers will not go away, the demand will just decrease.

The longshoremen in Los Angeles are at the front of the globalized economy acting as gatekeepers of trade. They also have a what can feel like is missing in this globalized world, a well paying middle-class job.

 

Sources: 

http://www.latimes.com/business/la-fi-dockworker-pay-20150301-story.html

http://www.latimes.com/business/la-fi-port-lottery-20170127-htmlstory.html

http://www.dailybreeze.com/2017/06/02/longshoreman-lottery-results-announced-for-long-beach-la-ports-find-out-if-youre-on-the-list/

http://www.scpr.org/news/2017/06/05/72573/why-80k-people-applied-for-2-400-positions-at-la-s/

Would the Increase in Automation at Ports Help or Hurt?

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As time goes on, technological advancements are to be expected. For many industries, the growth of technology is a great thing, as it helps innovate new products in electronics, medicine, and more. But for workers at ports across the world, increases in automation, technology and robotics threaten local workers’ jobs.

This debate hits especially close to home, as the ports in California alone handle 40 percent of U.S. container traffic. With the ports of Los Angeles and Long Beach being the two biggest ports in America, they are also one of the main employers of the region. Between port operations and commerce, the Port of Los Angeles supplies over 133,000 jobs in the LA area. The Port of Long Beach accounts for over 30,000 jobs in Long Beach alone through its 20 divisions.

If the ports went completely automated, would all these people be out of work?

Of course, the answer is more complicated than a simple yes or no. While not every single employee at each respective port would be out of a job, certain jobs like terminal operators may be at the most risk.

The most recent automation update at ports is in the yard cranes. According to Port Technology, several ports around the world like Singapore, Germany and Holland have already adopted automatic crane use, and local ports have installed a few as well. The technology installed in these cranes allows for precise automatic pick-up of containers, drop-off, and perfect stacking.

Naturally, there are both advantages and disadvantages to adopting automation in the ports. One advantage is the efficiency and accuracy by which robots are able to do work. Automation would allow for a greater amount of goods and containers to get through ports and it would make the transaction turnarounds even quicker.

One terminal in the Los Angeles port that has already adopted automation has seen time spent loading and unloading the ship be cut in half since the switch. This not only creates higher profits for the terminal operators, but it gets trucks and drivers back on the road faster. Additionally, the electric- and hybrid-powered automated machines significantly cut down on carbon emissions, which is better for the environment.

However, with the adoption of automation could also come a huge loss of jobs across the country. As history has shown, when the standardized shipping container was first introduced, over 90 percent of dock workers lost their jobs within 15 years. Of course, current port workers are concerned that history will repeat itself and automation will completely eliminate their current jobs.

While the Port of Los Angeles, in particular, has partially adopted automation, their solution seems to be to keep it that way for now in the hopes that no jobs will be lost. Full automation at a port would take a lot of time and money, but it seems to be where the future is headed. Perhaps in 10 or 20 years, ports across the world will all be fully automated.

Climate change’s economic impact examined in new report

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Climate change is not a concept accepted by everyone and certainly, not by President Donald Trump. But according to a recent study from a team of researchers for The Lancet, years of inaction battling climate issues negatively affected the economy and will continue to do so.

Data points to a massive sum of money spent due to the devastation caused by major weather events, like hurricanes and wildfires. An increase in natural disasters has been directly associated with the deteriorating climate.

“Between 2000-2016, there has been a 46 percent increase in the number of weather-related disasters,” the report stated.“Economic losses linked to climate-related extreme weather events were estimated at $129 billion in 2016.”

 

Those numbers represent 2016, not the even wilder hurricane season in 2017, which saw the damage of Hurricane Harvey and Hurricane Irma, both record-breaking storms, likely costing more than $200 billion all together.

That price tag seems high, but it might be lower than it is officially tallied at, considering the cost of damage can continue to rise months following an event.  Below is a graph detailing the change in unemployment when Hurricane Katrina hit in 2005. Even by June 2006, while the New Orleans employment sum had regained some of its losses, it was not near its previous stable condition.

Therefore, if you assume that costly hurricanes will be prevalent over the next decade or so due to climate change worsened by fossil fuels, then the economy will continue to have problems. Extreme weather has cost the U.S. economy an average of $240 billion per year, and now that total seems to be on the low end for what the future holds.

Sir Robert Watson, coauthor and director at the U.K’s Tyndall Center for Climate Change Research, told National Geographic that natural disasters are not created by climate change, but noted the “intensity and frequency” of such occurrences have been made worse by hotter temperatures.

Obviously, fighting climate change to handle extreme weather starts with the knowledge that clean energy is necessary to adapt as soon and as quickly as possible.

But President Trump and EPA head Scott Pruitt don’t see a need for reducing risk, as the administration hopes to roll back Barack Obama’s standards on curbing carbon emissions in favor of coal production.

The coal industry, however, doesn’t seem like its making a comeback, which means it’s time to favor the environment by focusing on jobs created by renewable energy. These jobs are being created twice as fast as any other industry, via Quartz Media, and mainly include solar and wind installers. The solar industry itself generated roughly 260,000 jobs for Americans in 2016.

Eight of the 10 states where solar jobs grew the fastest voted for Trump in the 2016 presidential election, per CBS, and in Oklahoma, Alaska and Nebraska, solar energy workers grew by 100 percent from 2015 to 2016.

So it seems in four years, Trump won’t be able to single handedly destroy the environment. More people have come to understand the value of renewable energy, which is needed to slow climate change and protect our planet from volatile weather incidents.

U.S. Trade Commission Calls for Tariffs on Solar Energy Products

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Officials from the United States International Trade Commission, an independent federal agency that governs trade, recently announced a range of recommendations aimed at protecting domestic manufacturers of solar equipment from unfairly priced imports, especially from China. Those included limiting the imports of certain solar components and imposing tariffs of 10 percent to 35 percent on certain products.

The trade case was led by American solar producers but fought by big buyers of solar panels. Suniva, a Georgia based solar energy company, championed the case for higher tariff on imported solar energy equipment alongside another major player in the industry, SolarWorld Americas. Suniva called the International Trade Commission’s recommendations “disappointing” in a statement, saying they were not strict enough. The company called for the administration to employ stricter restrictions “necessary to save American manufacturing.”

According to LA Times, the company had previously shuttered its solar plants in Georgia and Michigan, and claimed that they could not compete with less-expensive imported solar equipment, principally from China. Big buyers of solar energy systems, however, disagreed with Suniva, saying that a higher Tarrif will drive up the price of solar panels in the U.S., undercut the cost-competitiveness of solar and ultimately reverse the progress we’ve had in promoting solar energy.

Even some of the other manufacturers in the industry disagreed with Suniva’s idea. Twenty-seven solar mounting equipment manufacturers and their domestic suppliers wrote an open letter to the U.S. International Trade Commission in response to the Suniva’s proposal. The companies worry that the high tariffs will raise prices throughout the supply chain and ultimately cost more American jobs than they would save. They argue that cheaper solar products from China have actually been a boon to their businesses and accelerated the adoption of solar energy in the United States, where it now powers millions of American homes and businesses. A representative of these companies, Frank Maisano, says that if President Trump chooses to impose the tariff, “it will set off a chain reaction threatening workers who install solar power projects, utilities who purchase the power, major commercial users of solar power, like retailers, as well as home installers.”

The recommendations from the Trade Commission will be sent to the president by Nov. 13. He will have 60 days to decide whether to accept or to reject these ideas as he makes a final decision, which will come as Mr. Trump is preparing to travel to China next week to meet with Chinese officials on a range of security and trade issues.

 

References:
https://www.nytimes.com/2017/10/31/business/solar-industry-import-tariffs.html
https://www.washingtonpost.com/news/energy-environment/wp/2017/10/31/federal-trade-panel-calls-for-protections-against-imported-solar-panels-which-trump-could-soon-implement/?utm_term=.044f208b909c
http://www.latimes.com/nation/la-na-solar-energy-tariffs-20171101-story.html

Doing business with China

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In the November issue of The Atlantic, Yoni Appelbaum has written an interesting reflection that made me think about the current status of U.S. economy: “Around the globe, those who dislike American ideas about democracy now outnumber those who favor them. […] China whispers seductively to rulers of developing nations that they, too, can keep a tight grip on power while enjoying the spoils of economic growth.” I could not help but wonder whether the “tight grip on power” that China keeps while expands its economic power all over the world, will turn out to be an actual source of strength in the future.

Everybody knows that China is one of the leading holders of U.S.A. securities with 1,200.5 billions of dollars, as listed by the US Treasury. Currently, the U.S.A.  general government gross debt is 108.1 % of the GDP, while the China’s one is only 47.6 %. Additionally, according to Bloomberg, in the United States also the household debt is rapidly raising, and what scares most is that it is raising for necessities. Indeed, the US household debt ($12.7 trillion) has reached more than the size of China’s economy. Yet, the debt’s size and the fact that China holds a big part of it, would not be big problems if the US economy’s growth kept raising greatly: perhaps this is the most important element that we have to take in consideration when we refer to the future of USA’s economy versus the China’s one.

Even though the aggregate data released by the World Bank spread positivity last week, showing that in the 2016 the US’ GDP set to 18.57 trillion USD while the China’s GDP reached only 11.2 trillion USD, the IMF data collected till now offer a different insight into USA’s economic growth. Indeed, the annual change in GDP percentage in the US is only 2.2, compared to the 6.8 percent reached by China. Especially the IMF data referring to the exports of goods report that in the second quarter of 2017 China has reached the value of $566.82 billion, more than the $382.5 billion reached by the USA. What about the trade deficit? According to the United States Census Bureau, in August the United States ran a negative balance of 239,121.25 million dollars between exports and imports. Surely, this complex economic situation reveals that China is growing undoubtedly at a very fast pace. But can free market thrive in a country that exercises a “tight grip” on its economy? By looking at the current data, the answer seems to be affirmative: but what will happen in a long-term? We know that the most valuable sources that a country needs to improve its economy are people, capital and ideas, and how can China foster ideas and innovation through its rules? Last week The New York Times has published an interesting story that portrays very well what means being an entrepreneur in China.

We are used to talking about free market and trade, and the US along with other occidental economy – the German in the first place – have been doing business with China for years pretending that its rules and its way of looking at the market were the same we are used to. Yet, President Xi Jinping “has pushed for strengthening state-owned enterprises and has called on businesspeople to maintain loyalty to the party”, reshaping board seats and making restrictions on abroad investments.

On one hand USA is letting China enter in its free market and make deals with its companies, allowing this country to increase its exports in USA and so strengthen its economy growth. On the other hand, China is not playing by the rules. Indeed, the occidental view on free market is highly different from the China’s one. The problem it is not the one which Trump often refers to, that is China stealing jobs to US workers. In fact, the problem is subtler and concerns more the fact that, in order to make fair deals, both the parties involved should play by the same rules. Yet, as revealed by Bloomberg, in order to do businesses in China foreign entrepreneurs need joint ventures to help their companies to “navigate the complex Chinese business environment”; an environment made of strict rulers and a strong government control that still struggles to let its entrepreneurs make free choices.

Therefore, in this way China can control and reduce any form of competition, the main component of free market. Perhaps, more than focusing on China stealing jobs from US workers, the U.S. government should start thinking how much China is taking from its companies by not playing by the rules set by the WTO.

The trade relationship that U.S. and other occidental countries started with China –assuming that their economies would have benefited from it- might eventually endanger our market and especially our idea of free market.

 

 

 

 

 

Brexit Trade Implications: What Now?

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Following the referendum held on Thursday, June 23, 2016 to decide whether the UK should leave or remain in the European Union, the entire world questioned what Britain’s exit from the EU would actually entail for British – and global – businesses. While there are many moving parts still up in the air, one thing is certain: Britain will have to reach a new trade agreement with the European Union. This task will be highly complex and be carried out under the immense pressure of a two-year deadline.

 

Once the United Kingdom’s formal decision to leave the European Union was notified to the European council of EU leaders, under article 50 of the Libson treaty, the UK was given a formal notice of leave from the EU. Article 50 demands a two-year timeframe for the UK to renegotiate a new legal basis for trade relationships with the remainder of the EU (however, it does enable an extension if needed).

 

The trade discussions must consider the framework for exporting and importing goods, like food and cars, two very important imports and exports for the UK, and the basis for continued services trade, such as legal advice on a big company takeover to and from the EU. Britain’s trade negotiations also must ponder changes to customs procedures, passport controls for business travel, and regulation on safety standards, health and environmental issues.

 

All the aforementioned decisions, however, are contingent upon whether or not Britain undergoes a “hard” or “soft” Brexit, said BBC News.  Hard and soft are terms that were used increasingly in  debates focused on the circumstances of the UK’s departure from the EU. While there is no concrete definition for either term, they are commonly used to refer to the closeness of the UK’s continued relationship with the EU following Brexit. On one end of the spectrum, a “hard” Brexit would entail the UK refusing to comprise on issues like the free movement of people, even if it meant leaving the single market. On the other extreme, a “soft” Brexit would more closely resemble Norway, which holds a single market (as opposed to a common market with free trade) and is forced to accept the free movement of people as a result.

 

According to The Guardian, it will be challenging for the UK to pull off a trade deal in a meager two years, particularly if the option of joining the European Economic Area (EEA) is pursued, but the British government is hesitant to accept any freedom of movement as a quid pro quo.

 

While the entire idea behind Brexit is to instill change within the British government and trade policies, John Forrest, the head of internal trade at DLA Piper law firm told The Guardian, he did not think having the UK continue carrying on trading with the EU under the same free movement principles is out of the question. “…that means freedom of movement for goods, people and capital between the UK and EU will continue to operate.” For the millions of people who campaigned and voted for leaving the EU on that Thursday in June of 2016, this possibility will be a tough pill to swallow.

 

Modern Monopolies

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Google and Amazon don’t look like traditional monopolies, but that doesn’t mean they don’t have monopoly power. Google dominates 80% of the online search market and Amazon 87% market share of the e-book market.

It is harder to recognize these tech giants as monopolies because they do not have a tangible product. Whereas, it is easier to notice how our choice of airline or cable company is limited.

A Brief History of Antitrust in the United States

The United States Congress passed the Sherman Antitrust Act in 1890 in an effort to prevent companies from having monopolies that stifle competition, harm consumers or raise prices. The Sherman Act, along with the subsequent Federal Trade Commission Act and the Clayton Act, is the core of American antitrust law.

These antitrust regulations were enforced aggressively by the Justice Department from the 1930s until the 1960s. Then came Robert Bork, the Yale Law professor and failed Supreme Court nominee. Bork argued that the only concern of regulators should be if prices for consumers were dropping. His ideas became the policy of the US Department of Justice when he became solicitor general under Richard Nixon and have remained the mindset of the government until today. Bork’s ideas on antitrust are at the center of modern American antitrust regulation enforcement.

In Move Fast and Break Things Jonathan Taplin argues that Amazon, Google, and Facebook would all be prosecuted under antitrust laws if it wasn’t for Bork.

Are Google and Amazon Monopolies?    

In the post-civil war era, John D. Rockefeller’s Standard Oil had a monopoly over the oil industry. Standard Oil controlled every stage of oil production and distribution. They did everything from own the refineries and pipes to building their own oil barrels and hiring scientists to discover new uses for oil products. Standard Oil’s monopoly ended when, in 1911, the relatively new Sherman Antitrust Act was used to break up Rockefeller’s monopoly into 30 individual companies.

Unlike the monopolies of the robber baron era, Google and Amazon lack a tangible product. They don’t have physical control over all production of steel or ownership of all phone lines. With Google or Amazon, there isn’t anyone or anything standing in the way of someone creating a new search engine or e-book market. However, their domination of their respective markets limits the ability for a new competitor to be successful.

The Supreme Court has defined monopoly power as “the power to control prices or exclude competition.” This definition also includes an assumption that the company has a majority market share. Using this legal definition as a guide, let’s see if Amazon and Google have monopoly power.

Source: Author Earnings

86% of all e-book sales in the United States occurred on Amazon in 2016, according to Authors Earnings’ February 2017 report. Amazon’s monopoly market power gives them the ability to control prices or even stop all books from a publisher from being sold on Amazon. Amazon’s ability to control prices makes them not only a monopoly but also a monopsony.

An example of Amazon’s monopsony power was evident in Amazon and Hachette Books’ 2014 pricing dispute. During their pricing dispute, Amazon stopped all presales of Hachette books and caused shipping delays. In this case, Amazon was exhibiting more monopsony qualities, when one buyer controls a market because through their control of the distribution of books they are the largest buyer of books. Since Amazon is the largest seller of books Hachette was forced to bend to Amazon’s will. Hachette was ultimately able to win a little and in the resulting deal with Amazon was able to gain more control over how their e-books are priced on Amazon. As a whole because Amazon occupies such a dominant share of the e-book market its sheer dominance allows it to set prices.

Source: Stat Counter

Google, like Amazon with their sector, has monopoly market share in search. According to Stats Counter, in September 2017 Google had an 85% market share of internet search in the United States.

Further proof of the market consolidation of the search market is the Herfindahl-Hirschman Index (HHI) score, which measures the concentration in a particular market. Antitrust agencies consider a market with a score of 2,500 to be highly concentrated. For example, after the American Airlines and US Airways merger, Reagan National Airport had an HHI score of 4,959. The search market has a score of 7,402.

 

Google’s monopolistic power goes beyond just its monopoly market power over search does. Google not only controls search, but they are also own the most popular created the modern version of horizontal integration.

Google, along with Facebook, dominates the online ad market. Google and Facebook essentially have a duopoly of all online advertisings with more the 60% of all internet ad revenue, according to an analysis by Reuters of their quarterly reports. Google controls everything from the service that hosts ads on websites to the service that buys ads to put on the website to the website user analytics to the web browser people use to access a website. John Marshall, the publisher and editor of Talking Points Memo (TPM), describes being a publisher that relies on Google’s suite of products as like being “a serf on Google’s Farm.” If Google changes how they distribute ads they can completely ruin someone’s livelihood. For example, earlier this year there was the YouTube “apocalypse.” Google changed its policies and algorithm for determining if a video on YouTube should not have ads. The result was some video creators losing 80% of their daily income.

Are These Monopolies Good?

For consumers, Amazon’s monopsony of the e-book market looks appears to be good because they get lower prices. Amazon has not done anything to harm customers. Their low prices are one reason why regulators have not come after Amazon.

Nobel Prize-winning economist Paul Krugman argues that one of the reasons why Amazon is able to control the market is its ability to kill buzz. Book sales rely on buzz from word of mouth. However, if Amazon does not carry a book you are less likely to buy a book and then the book will not be as widely read, have less buzz and not sell as many copies. Krugman asserts that “By putting the squeeze on publishers, Amazon is ultimately hurting authors and readers. But there’s also the question of undue influence.”

Monopoly power can also lead to a stagnation in innovation. If a company does not have another company with the potential to compete with them there is no motivation to innovate. If you have such a large market share there is no incentive or need to innovate to get new users or to maintain your existing user base or its revenues.

Even if Bing had a substantially better product it would still struggle to make a dent in Google’s user base. It wouldn’t necessarily lead to Google to innovate as well because Google’s market power and horizontal integration make the switching costs high. These high switching costs reduce your likelihood of using a new search engine. Furthermore, even though the barrier of entry for creating a new search engine or website is low, but Google’s horizontal integration makes it difficult for any new company to break through.

Snapchat Story

Instagram Story

An example of competition and the potential for innovation is Facebook and Snapchat. In 2013, Facebook tried to buy Snapchat for $3 billion, but Snapchat turned them down. Snapchat and its growing user base remained a Facebook competitor. This competition should indeed push both platforms to innovate. However, instead, Facebook chose to essentially copy Snapchat’s features. Instagram introducing stories was an attempt to copy Snapchat stories. Facebook only tweeted Instagram stories a little to differentiate themselves from Snapchat, Facebook. Even though Instagram stories were not an innovation, they are still an example of completion producing new features for consumers. Facebook’s cloning of stories appears to be on track to both maintain and grow its user base. Currently, according to Jumpshot, Snapchat currently has the largest share of new users, but their share is shrinking and Instagram’s is growing.

How to Deal with These Monopolies

Those who align with Robert Bork would argue that there is no need to break up Amazon or Google because the prices for consumers are not being raised. In the case of Google, there was never even a price paid by the consumer.

But as we explored there are downsides to these monopolies, so what should we do about them? Are our antitrust laws from over a century ago built to regulate companies with products the bills’ author could have never imagined?

Jonathan Taplin has purposed a series of possible ways to break up or regulate digital monopolies like Amazon and Google. In a New York Times opinion piece, he laid out three possible regulatory options: option one is to block the major digital players from acquiring each other. Another possibility is to treat them like public utilities—which would require them to license out their patents. Or a third option would be to remove the “safe harbor” clause from the 1998 Digital Millennium Copyright Act, which according to Taplin allows companies “to free ride on the content produced by others.”

Actually, breaking portions of these new monopolies would require the Justice Department to return to its pre-Bork hardline position on antitrust. So maybe the best way to deal with these tech monopolies is to institute some creative regulations to curtail some of the more negative effects of their monopoly power.

 Sources:

http://www.history.com/topics/john-d-rockefeller

https://www.nytimes.com/2014/10/20/opinion/paul-krugman-amazons-monopsony-is-not-ok.html?_r=0 

https://www.nytimes.com/2014/11/14/technology/amazon-hachette-ebook-dispute.html

http://fortune.com/2017/07/28/google-facebook-digital-advertising/

https://www.forbes.com/sites/jeffbercovici/2013/11/13/facebook-wouldve-bought-snapchat-for-3-billion-in-cash-heres-why/#45529df343de

https://www.recode.net/2017/9/19/16308788/snapchat-instagram-sign-ups-new-users-us-global

 

America’s Trade Deficit with China, Explained

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As of August 2017, the U.S.’s trade deficit with China was just over $239 million[1]. America exported approximately $80.2 million[2] to China while China imported over $319 million[3] to the U.S. There are numerous reasons for this imbalance, but being in deficit may hurt the U.S. economy in the long run.

The reason why the U.S. receives goods from China (mainly consumer electronics and clothing) is because China can produce goods at lower costs than the U.S. can. The benefits are felt in the pockets of Americans every day. China’s competitive pricing is the result of two factors:

  1. China has a lower standard of living. Therefore, companies pay lower wages to their employees.
  2. The Chinese yuan is partially fixed to the U.S. dollar. Also known as ‘pegging’, it is the act of a country or government’s exchange-rate policy attaching the central bank’s rate of exchange to another country’s currency[4]. It stabilizes the exchange rate between China and the U.S., which is advantageous for large importers like China.

However, in 2016, China began relaxing its “pegging” in an attempt to gain traction from market forces to increase the value of the yuan. As a result of this action, the dollar to yuan conversion has been volatile and China’s influence on the dollar remains high.

How exactly does China hold power over the U.S. dollar? Chinese companies receive dollars as payments for exports to the U.S. These companies deposit the dollars into the banks in exchange for yuan to pay employees. The banks then send the dollars to China’s central bank. It stockpiles them in its reserves. This reduces the supply of dollars available for trade. Therefore, it puts upward pressure on the dollar’s value, thus, lowering the yuan’s value. This cycle could potentially give China leverage over U.S. fiscal policy.

Another major reason why an ongoing trade deficit with China could be detrimental to the U.S. economy is because its financed with debt. What if China decided to call in its loans?

China also helps keep U.S. interest rates low by buying Treasurys. If China stopped buying Treasurys, interests would rise and potentially throw the U.S. and the world into recession.

The deficit puts a heavy burden on the manufacturing industry, as well. For U.S. companies to compete with China, they must either lower their costs (this could potentially put them out of business) or outsource jobs to China, but this option hinders U.S. job creation.

 

 

 

 

 

 

 

 

 

 

President Trump has promised to lower the trade deficit with China by imposing duties on Chinese imports. However, many Chinese imports are made up of raw materials sent from the U.S. Trump’s tariffs would reduce profits for these American companies who ship material to China, resulting in price raises of the products shipped back to the U.S. China might retaliate and raise its tariffs on imports from U.S. companies. If this is the case, Trump might be the biggest factor to hurt the economy.

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References

[1] https://www.census.gov/foreign-trade/balance/c5700.html

[2] https://www.census.gov/foreign-trade/balance/c5700.html

[3] https://www.census.gov/foreign-trade/balance/c5700.html

[4] http://www.investopedia.com/terms/c/currency-peg.asp

 

Revised-Observation on Wechat Marketing: The Next Monopoly of the Chinese Advertising Market

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Observation on Wechat Marketing:

The Next Monopoly of the Chinese Advertising Market

 

Yutai Han

Midterm Project for JOUR469

Professor Kahn

Oct/08/2017

 

It’s amazing how much information an app can tell us about Chinese culture. Wechat, a social networking app developed by Tencent and first unveiled in 2011, is arguably, one of the most well known social media products in China. A TV commercial articulates the idea of Wechat as the only app you’ll need over the course of a typical day in your life: wake up and check up on the social feed, use Wechat Pay to buy breakfast, read articles published on Wechat channels (where ads will show up in the form of video commercials, banners, and integrated promotions), work on Wechat while texting friends simultaneously, shop and pay with Wechat, play games with friends on Wechat, etc.

This is the modern Chinese life—a life fully realized online, and integrated seamlessly with the virtual structure of mobile social networking. In this dimension created by Wechat, the user’s attention is attracted by new ways of integrated social advertising. Ads are placed using precise algorithms of user metadata so that the ad fits the needs of the user. Would it be the case that, because WeChat and Facebook are inherently social networking platforms that generate profit from their user data, and Facebook makes as much as six times profit from advertising than Tencent does through WeChat, does Wechat have the potential to outrun Baidu and Alibaba, and become the most powerful unicorn in the Chinese ad market?

One argument for that speculation is that Wechat has an enormous user base. With close to a billion monthly active users spending an average of 66 minutes everyday on the mobile App, Wechat has taken over both the work and social scene, replacing traditional communication methods such as email and messaging service in China. Tencent, its parent company, along with Baidu and Alibaba, together occupy over 60 percent of the total domestic advertising market in China, and are forecast to attract 15.5 percent of the global market in 2017, becoming the world’s second largest market of its kind. Looking at Tencent specifically, its online advertising revenue increased 55 percent to roughly 10 billion yuan for the second quarter of 2017, while social advertising, which derives mainly from WeChat, grew by 61 percent to about 6 billion Yuan. Online advertising accounts for 18 percent of Tencent’s total revenue. In comparison, Facebook has two billion monthly active users, and a profit of $9 billion. About 98 percent of Facebook’s total revenue comes from advertising, according to Facebook’s earnings report in the same quarter. It’s fair to say, then, that Tencent still has potential for market growth in social advertising. Tencent’s main source of revenue now comes from add-on services from video and mobile games, making 65 percent of its total revenue, which is not a surprising fact because one will see that a mobile game in the style of League of Legends, has gained popularity among the youth like a tropical storm. It was so popular that the official newspaper, People’s Daily, criticized it for bewitching the youth and called for formal regulation.

 

 

One can think of Tencent as a behemoth of products: Tencent videos is Netflix; WeChat is Facebook plus a prevalent and advanced mobile payment system, and there’s Tencent games; VR/AR firm acquisitions, etc. However, despite numerous branches of organizations, WeChat is arguably the most important for Tencent. According to a behavioral study conducted by a Tencent think tank, 92 percent of the interviewees choose to pay with their phone. Convenience stores, e-commerce websites and restaurants are the primary scenes for mobile payments. Artificial Intelligence comes in to play to dig out the valuable data for more precise targeting. On the other hand, because Wechat is a behemoth of products, user tend to rely heavily on them for their daily activities. The users expect a reliable experience when they are using Wechat, to the extent that even a minor bug of the social feed could cause everyone to panic. To add to that panic is when there are too many ads appearing on the user’s screen. This is perhaps why people think that WeChat has been unusually prudent in its advertising placement: too many ads appearing on a user’s social media feed could degrade a user’s experience. Wechat is only allowing one advertisement per day to appear on a user’s social feed. Facebook’s Instagram, has so many ads that I would lost count on the amount I see when scrolling down the screen. In addition, Instagram is rolling out methods that would me harder to discern whether the post is an advertisement recently. The ads on Instagram appear to be less professionally produced, and resembles the form of a totally innocent product you would see on your friend’s feed. However, on Wechat, one can easily spot the difference between the ad and other posts. But sometimes because it’s professionally tailored to attract attention, the audience might just click on it to see what happens. A friend could comment under the ad, or even talk to the company. This is part of an effort to establish the image of the brand.

(image source: https://blog.tacticrealtime.com/how-to-advertise-to-chinese-tourists)

The next reason is Wechat’s self-claimed efficiency of targeting consumers through use of data generated from Tencent’s other popular lines of internet products, such as Wechat Pay. One illuminative case happened recently when Wechat targets Chinese tourists traveling to foreign countries. According to the U.S. Travel Agency, Chinese residents took three million trips to the U.S. and spend $7,200 per trip, more than those of any other country. Travel exports to China were values at $35 billion, or 1.8 percent of U.S. GDP. $11 billion is related to education spending.

According to the South China Morning Post, Grace Yin, director of WeChat Pay’s international operations, told the Rise technology conference, “We will first make WeChat Pay available for Chinese customers when they travel outside [China],” Yin said. “We want Chinese customers to enjoy the same services when they go abroad, so the surge in outbound travelers will be the first market WeChat Pay targets.”

The National Holiday in China has just ended. According to an official report, the U.S. ranked number sixth in countries that have the most transaction using WeChat Pay. The marketing plan for WeChat looks like something like this: before a tourist even board the plane, WeChat can employ data to recognize that the user has searched for plane tickets inside WeChat and place ads by American brands to develop potential customer relationship. Partnering with Citcon, WeChat has also been promoting and installing mobile payment methods in the U.S. and starting in December, two of the Luxe Hotels in Los Angeles will be accepting payments via WeChat and Alipay, according to the LA Times.

“For the first time, we are making it possible for US brands to directly reach this audience through sophisticated targeting,” Poshu Yeung, the company’s vice-president of international business, said in a statement.

(image source: ChinaTechInsights.com)

What does he mean by “sophisticated targeting”? During its panel Advertising Week 2017, Steven Chang, Vice President of Tencent, introduced the “ONE Tencent” marketing philosophy, in which the key marketing insight is Tencent’s integration of its services through bid data computation, AI, and cashless payment to help clients develop their brand.

“Collectively, Tencent’s products form a ‘connector’ which is not just changing the way people live and think, but redefining the way brand communicates with consumers, ” said Chang.

Here, WeChat functions as the bridge between the virtual experience at the core of advertising and the specific advertising appearing in a user’s social media feed. WeChat is able to target different subgroups of users, using complicated algorithms that take into account a user’s marital status, age group, and even the cellphone model that the user owns. Furthermore, the algorithm computes the influence factor between a possible consumer and their friends on WeChat and places the ad based on the possibility of clicking an ad, which in turn maximizes ROI (Return On Investment, a measurement of the efficiency of advertising budget).

This is very similar to Facebook’s method of mining user data from “likes” on brand pages and posts. However, the fundamental difference is that WeChat was conceived for a consistently user-friendly mobile experience, and therefore has less ad space compared with that of Facebook. The advantage of this mobile-first design is that Tencent can successfully gain tons of users’ data generated by their Wechat payment records. And because Wechat Pay is actually convenient and anyone with a smartphone could learn it in matter of a few seconds, it grows loyal customers that uses Wechat Pay on a daily basis. The data will then be used for ad targeting purposes, of course, which some may consider to be ethically problematic. But what if targeting methods can serve a good purpose to society? Isn’t it the case that technology companies start with the intention to serve to some kind of common need? Then, what might the purpose be?

Adam Smith provides an important vision. “The great secret of education is to direct vanity to proper objects,” wrote Adam Smith in The Theory of Moral Sentiments. In this sense, if used properly, sophisticated marketing methods could direct human vanity toward higher ideals in a consumerist culture. One possible way that would make big companies such as Tencent and Facebook look less evil is the understanding that it’s the appetite of the consumer that they’re merely serving. Advertising producers would often borrow elements from popular culture for inspiration, because popular culture is an indication of what most people would turn to after a day’s work. Thus, the cycle of appetite and advertising is reflexive. Advertising is based on appetite, but the appetite is constructed by advertising in the first place and reinforced by unobtrusive and tailored advertisement.

We are seeing clever marketing examples on WeChat, such as Jo Malone London, which resulted in a 35 percent higher click rate and more than five times Return over Investment (ROI). The idea of the influencer is that people want to follow the hip. The fashion trend will be crafted by some carefully crafted identity, perfect in every way on social media. Instagram adopts more or less the same method to promote consumption. Now, through the use of data and influencers, the Jo Malone Valentine campaign did two things. First, it’s able to target loyal customers to buy a more expensive fragrance box sets because it’s Valentine’s Day. Second, people who are likely interested will be directed to a basic unit of fragrance when they click on the link. The ad itself feels romantic and good to look at, especially if one has a date. Thus, the customer will first be lured to click on the link, and then they will check out the product, and read reviews. If an influencer endorses the product and gives it a good review, the customer will more likely to buy the product.

(source: https://ad.weixin.qq.com/case)

To sum up, WeChat has a strong potential to become the next monopoly of digital advertising in China, and further drawing the global advertising spending into China, as more tourists and the Westernized youngsters prove themselves to be the bread and butter of luxury consumption. What’s more, as China’s economy gradually shifts from industrial production and cheap labor, it will need another backbone to rely on, and that backbone will be the domestic consumers. As a result of this shift in national economic direction, more research money will be funded in search of better advertising returns and marketing methods. As a behemoth of products all serving the purpose of social networking, Tencent already has a foot forward in data-gathering and a golden weapon to use.