Community Colleges: Benefit or Burden?

Sarkis Ekmekian is a junior at USC majoring in communication. He’s taking four classes, is the show-runner for Speakers’
Committee, public relations chair at Trojan Pride, and is a campus centre consultant at the Ronald Tutor Campus Centre.

He also is a transfer student.

Ekmekian, one of 1,430 transfer students who enrolled in USC in fall 2013, transferred from Santa Monica College, a top feeder school for USC and the University of California. Community college transfer students have a strong presence at USC: 58% of the fall 2013 transfer class were community college students (up from 50% from fall 2012).

The California Community College system is the largest system of not only community colleges but higher education in the nation, with more than 2.1 million students and 112 campuses. According to the California Community Colleges Chancellor’s Office, “70% of state nurses and 80% of firefighters, law enforcement personnel, and emergency medical technicians” are educated at California community colleges.” Furthermore, most California community colleges have agreements with the UC and CSU system in regards to transfer students: 29% of UC and 51% of CSU graduates started at a California community college.

However over the last few years, California Community Colleges, along with the UC and CSU system, have suffered through severe funding cuts due to the Great Recession. Funding for California Community Colleges was “cut $1.5 billion – about 12% of its funding – between the 2007-08 and 2011-12 academic years,” resulting in about 25% of college courses to be cut.

As a result, there has been a significant decline in both the number of transfer applicants to four-year colleges and enrolment at community colleges in California. UCs received 1,653 fewer transfer applications from community colleges in the fall 2013 year, compared with fall 2011. California Community Colleges Chancellor’s Office also reported that “enrolment [in California community colleges] decreased by more than 585,000 students to 2.3 million in four academic years (from 2008-09 to 2012-13) due to severe budget cuts.”

Now that the economy has slowly begun to recover, the California government has been looking to put more money back in state-funded institutions. But do community colleges offer a significant enough economic benefit to the economy to warrant reinvestment from the government?

The state certainly believes that community colleges provide significant economic benefit to the economy. Recently, Gov. Jerry Brown proposed a budget which would increase funding to community colleges by $1 billion. The funding would freeze tuition rates at the current rate of $46 per unit and “allow colleges to increase enrollment by 3 percent. Enrollment [of new students] has been cut by up to 15 percent since 2010.” According to Brown, the additional funding would allow students to transfer faster by increasing the amount of classes, counsellors and academic resources available to students.

According to a report conducted by the American Association of Community Colleges, “in 2012 alone, the net total impact of community colleges on the U.S. economy was $809 billion in added income, equal to 5.4 percent of GDP.” Furthermore, “community-college graduates receive nearly $5 in a return on investment (ROI) for every dollar they spend on their education.” The report also found that associate degree completers earn an average of $10,700 more than someone with a high-school diploma at the midpoint of their career. Furthermore, according to the Pew Research Center, the unemployment rate of those aged 25 to 35 drops from an average of 12.2% for high-school graduates to 8.1% to those with a two-year college degree. The report also found that on average, two-year college graduates will earn on average of $2,000 more than high-school graduates per year.

From an economic point of view, it is evident that it is the state’s best interest to encourage more efficient transferring and graduation rates. According to the American Association of Community Colleges, “U.S. taxpayers paid $44.9 billion to support the operations of America’s community colleges in 2012.” In return society will receive “$1.2 trillion in benefits, the sum of the added income and social savings that the 2012 student population will generate in the U.S. economy.” Furthermore, when students earn more because of their higher education, they also pay more in taxes: “federal, state, and local governments will collect a present value of $285.7 billion in the form of higher tax receipts over the students’ working lives [due to community colleges].”

The proposal for additional funding has been met with approval from community colleges, professors and students who have long suffered from severe underfunding. “We have been underfunded for a really long time compared to K-12 and the UC system,” explained Mary Mazzocco, who is the journalism department chair and advisor for school newspaper “The Inquirer” at Diablo Valley College. “Given how many students we serve, given that we are the gateway for non-traditional college students, and given our role in helping retrain people who lose their jobs… I do feel like that they should at least give us the money to allow us to do the job that they have given us to do. And I feel like they haven’t done that in a really long time.”

Statistically, students who manage to transfer to four-year institutions are successful. According to the University of California’s Accountability Report, “transfer students entering UC since 2004 have a 50 to 53 percent two-year graduation rate and an 85 to 86 percent four-year graduation rate.” By comparison, freshmen from the same cohort who enter the UC system have a four-year graduation rate of 60% and a six-year graduation rate of 84%. According to the Pew Research Center, millennials with a bachelor’s degree or more earn on average $45500 – compared to the average income of $30000 for those with an associate degree.

Rachel Ann Reyes is a student at Diablo Valley College majoring in communication. She has been accepted to UC Davis for fall 2014, and is awaiting responses from UC San Diego and UC Santa Barbara. When she transfers, she will be the first in her family to attend an American university. “I’ve personally really enjoyed being at a community college,” said Reyes. “I think that sometimes community colleges get a bad rep for being almost being a continuation of high school, but I think it’s a great opportunity for people who want to save money. If they are determined enough to go to community college to get their AA degree or transfer, I think it can be a really helpful tool at a great cost.”

However, there are also concerns about the efficiency of community colleges – particularly regarding the students who either take too long or don’t manage to graduate or transfer to a four-year college. In 2009, the average graduation rate from California community colleges was only 25.08%, while the transfer rate was an even lower 14.36%. An op-ed in the LA Times also criticized the inefficiency of community colleges and the burden that it places on the economy: “Community colleges are subsidized through direct state and local government appropriations and through student grant programs. Every student who drops out represents an investment loss by the taxpayers in that student’s uncompleted education.” Through further investigation, they found that “of the full-time, degree-seeking students who entered California community colleges in 2007, more than 35,000 had not earned their degrees three years later, and most of them were no longer enrolled in any postsecondary institution.”

The state has attempted to address the low transfer and graduation rates of community college by pushing “state law requiring guaranteed transfer pathways for graduates of the two-year institutions.” Furthermore, new bills would require the CSU system to accept a wider range of transfer degrees when possible, with the transfer pathways focused on “areas of emphasis rather than majors.”

While Mazzocco realizes the importance that community colleges play in transferring students and awarding qualifications, she also worries that the mission of community colleges has taken a turn for the worse – and that too much emphasis has been placed on just the economic benefits of an education. “Historically community colleges were not just for transfer students, but the state has adjusted our mission – we are now supposed to focus on certificates and transferring,” said Mazzocco.

The campus library at Diablo Valley College in Pleasant Hill is nearly empty at the end of the day as the community college has suffered from budget cuts, its student population down 700 from last fall. Photo: Brant Ward, The Chronicle

The campus library at Diablo Valley College in Pleasant Hill is nearly empty at the end of the day as the community college has suffered from budget cuts, its student population down 700 from last fall. Photo: Brant Ward, The SF Chronicle

“There’s a certain amount of worry that the states push for us to become more efficient and to cut classes that are not high demand, and to focus on certain classes that transfer or go towards a degree,” Mazzocco explained. “For example we’ve added another Mass Communication class because now it’s a part of two or three different majors that transfer. But now I probably have to take feature writing out of the curriculum… because it doesn’t fit into the transfer degree that was agreed upon on the state level… and that’s happening with a lot of classes that are good classes. There’s value to be had to be taking them and offering them, but they don’t fit the pattern that’s being established and are being squeezed out.”

However, there is still a value in attending community colleges that can’t be quantified for some students. “If I had gone to a UC or university straight out of high school, I wouldn’t know what to do,” admitted Reyes. “I think my three years at DVC (Diablo Valley College) have really helped me discover who I am. I got the opportunity to take different classes in different fields and figure out what I liked and didn’t like at an affordable cost. Through that experience I fell into journalism and communication and that is something I really enjoy – I would have never found that straight of high school. Because of community college I am more prepared, and more willing and motivated to succeed at a university because I know what I want and I can apply myself to that.”

 

 

The Pixelated Screen: The Sudden Move of Entertainment and the disappearance of Movie Rental Shops

Sam Nguyen wakes up everyday at around 8 AM to drive to work at his movie rental shop, “Video Town,” located in the city of Hawthorne. Throughout the rest of the day, he is met with a string of long-time customers that are either returning a movie or asking him for help on what the best new release is to rent.

“Is this movie good, Sam?” one 5-year-old boy asks, holding up a DVD.

“It’s horrible,” replies Sam, with a little laugh.

Sam has been fortunate enough to be able to keep his shop open for more than 15 years.

Sam, of course, is the exception.

With the sudden business transaction between Time Warner Cable and Comcast that was followed by Netflix paying Comcast for better streaming access, it is safe to assume that a majority of viewership is shifting towards the internet.

And although the majority of the attention is about the relationship between television shows and broadcasting channels, others are also discussing what this new found partnership means for the movie industry and what it has at stake from a financial standpoint.

The movie industry has not exactly been on smooth land. While almost all of the Motion Picture Association of America (MPAA)’s theatrical market annual reports show consistent progress, there are some cautious points to take into account.

Both the numbers at the box office as well as the ticket prices continue to have consistent progress, increasing at a good rate for more than a decade. But what is important to note here is the number of people that are actually taking the time to go to the movie theater.

There has been no consistent increase when it comes to audience. In fact, the graph above shows that the number of audience going to movie theatres appears to have reached a plateau with no signs of progress for the future.

There are a lot of signs that show lack of progress when it comes to the “physical audience” in a physical space.

Even when those movies have left the theaters and begin their way to the land of renting and purchasing movies from specific local businesses, not as many people are racing to get there at midnight.

What caused this very gradual shift?

Back in the mid 1980’s, US citizens would rush to stores in order to access their favorite movies without having to depend on television broadcast schedules telling them when they were going to watch it. In the 90’s, as Blockbuster rose up, making $785 million in profits on $2.4 billion in revenues: a profit margin of over 30 percent in 1995.   However, what is important about Blockbuster’s success was all the profit it made from overdue and late fees from customers who would forget to turn it their rentals as scheduled and the fact that people had no other method of viewing movies, aside from actually buying the movie.

But things have changed.

These “brick and mortar” shops are facing large competition from technological alternatives. Instead of going to a local rental store such as the once-upon-a-time giant Blockbuster, one can now quickly go to the grocery store and pay for their bread and then quickly rent out a movie from a Redbox machine all before leaving the store. It is important to note that a majority of Redbox success comes from the profits they make from late fees they acquire from their customers, allowing it to have a promising future.

redbox market share

Or if that is too much of a burden on people, the existence of Netflix and Amazon provide even more convenience by allowing consumers to access whichever movie they want from the comfort of their home. Netflix started their business model by showing commercials that focused on the fact that DVDs could be mailed to one’s house and one could mail it right back in the same envelope–and with no late fees.

Amazon also provides the same alternative to consumers, allowing them to both rent and buy movies from their website. Blockbuster attempted to compete with these emerging enterprises by creating its own website, but by 2007, it was tanking and going on the verge of bankruptcy (which it declared in 2010).

Even to those that are still seeking a physical space to purchase their product, the opposite is expected. Much like the way that Redbox is offered at grocery stores or outside convenience stores, the interior of the Redbox itself provides lots of options. One has the choice of DVDs, Blu-Ray discs and even video games when searching through the “Box”.

This abundance of product is why locations like Target or Best Buy seem to be struggling a bit when it comes to DVD and Blu-Ray sales. Joanna Cantu, manager at a Best Buy in Lawndale, CA, believes that Best Buy has been able to stay afloat for the moment because of the variety of products they sell when it comes to watching movies.

“Here, one can go into the DVD or Blu-Ray section and see something they like, want to buy it, and then decide they also need a laptop to watch it,” she said.

But the way that both DVD and Blu-ray sales are shifting towards that is hurting the Best Buy stores around the country. In a recent report by Zack.com, analysts reported that Best Buy’s ESP earnings had dropped for last year and were more than likely to drop for this year as well. Even their Zacks Industry Rating was 257 out of 265 (at the bottom 3% of all the companies that it ranks).

Best Buy might still get a majority of its profit from selling laptops, tablets and smart phones, but it is the movie purchases that are still going to stop it from surviving.

So what allows small exceptions like “Video Town” to survive when even big names like Best Buy are struggling?

For one, Nguyen receives a majority of his revenue from both customers wanting to rent the newest movie that is out but also those that wish to rent movies that are not available on Netflix or at their nearest Redbox. Amazon certainly gives Video Town a competitive run for its money but Sam Nguyen has always had a consistent price in his establishment.

Customers have a choice between renting one movie (regardless if it is a DVD, Blu-Ray or VHS) for $3 or purchasing three of them for $5. He rents out video games (he even has video games for Nintendo 64 available in his store) for $2 each and has a section for movie purchases for $5 each.

The other source of profit that Nguyen makes is from late fees. Video Town charges three dollars for every day that people do not return their rentals and the store owner notes that even though the town is relatively small, people will go days without returning their rentals.

“I always wait exactly one week before I have to call customers and remind them,” Nguyen said, “and you’d be surprised how many people I actually have to call.”

Still, there is no denying that movie rental shops are now talked about once in a blue moon. There are overwhelming different forms of getting a movie once it has stopped being shown in the movie theatres.

What is even more threatening is the emergence of taking out this fine line between movie theatres, movies at home, and access to the internet. Slowly, it is becoming all intertwined into one big thing.

Televisions are now being turned into Smart TVs, where you can access your cable channels and switch onto Netflix with the click of a button.

But if that is not enough for consumers, particularly to the younger demographic, Microsoft’s newly released Xbox One now has an update coming up later in March that will allow players to watch video, play games and chat with friends all on one screen. Video includes movies which players can purchase and save in their Xbox One hard drive to watch whenever they want.

There has not been any speculation about Comcast going into the video game console industry, but considering the way that this lure into the Internet spectrum is flowing, one can only assume that Comcast is patiently waiting for the appropriate opportunity to do this.

What is important to note is that both big and small stores, and even vending machines are relying on one thing: customers going to those place consume their products; products, which is important to note, that have to be made.

The music industry has been fortunate enough to see a rise in vinyl sales, but can the same be said for the movie industry?

What happens when DVDs and Blu-Rays are no longer being made?

There is already evidence of these products being hurt by those that simply pirate movies and shows from websites. An 11-employee Independent U.S. film distributor, Wolfe Video, an independent American film distributor had its profits halved due to piracy and costs to mitigate damages from piracy in 2013, according to The Wall Street Journal.

DVD sales have not been having the great track record these past couple of years and there were not many releases for Blu-Rays.

Even Netflix is showing a gradual shift away from their once marketing strategy of DVD shipments to the home.

It is all about accessibility and convenience when it comes to consuming movies or shows and having one product to do that. Everything is a bundle and DVD players or Blu Ray players being sold as sole products (not combined with anything) has not been consistent.

There is only a matter of time before the streaming becomes the only form of consumption and neither Best Buys or even exceptions like “Video Town” will be able to hold on.

Need a Lyft? Ride-sharing and the Rise of Collaborative Consumption

My girlfriends and I with Lyft's famous pink mustache

My girlfriends and I with Lyft’s famous pink mustache

It is Saturday night. You and your friends are planning to go downtown for a few drinks. Instead of calling a cab, someone takes out her iPhone and books a ride with Patrick. He has a friendly smile, a five-star rating, and a white Toyota—with a pink mustache.

Named as one of TIME’s 10 ideas that will change the world in 2011, the concept of collaborative consumption has proved it is a force to be reckoned with. Service start-ups such as Lyft, Uber, and Airbnb are challenging the traditional models of consumption, giving regular guys like Patrick an opportunity to participate in the supply chain. Before, hopping into a stranger’s car may have been seen as reckless and irresponsible, but Rachel Botsman, co-author of “What’s Mine Is Yours: The Rise of Collaborative Consumption,” writes about how technology is enabling trust between strangers. She says collaborative consumption is a “powerful cultural and economic force reinventing not just what we consume, but how we consume.”

Technology has often times disrupted the economic landscape. Take Lyft as an example. It is a ride-sharing app that markets itself as “a friend with a car.” The economic transaction is more than just an exchange of service; it’s an experience. Lyft is redefining what a ride service is, while normalizing casual interaction during commodity exchange.

Here is how it works. At any point in time, you can open up the app and hail a friendly Lyft driver around the area.

You enter the car, give the driver a fist-pump, and he or she entertains you with a friendly conversation as you are dropped off at your location. The transaction is processed by Lyft so you avoid the awkward paying and tipping process. Using Lyft is vastly different from using a taxi service. Lyft has become popular especially with the tech-savvy and thrifty Millennial generation. The company raised $60 million in its third round funding last May with venture firm Andreessen Horowitz and the company has grown to be available in 22 cities.

According to TechCrunch, Lyft is currently growing at a faster pace than its main competitor, Uber, with a 6% growth rate disclosed by its co-founder, John Zimmer (TechCrunch). Some point out the numbers can be misleading since Lyft currently has a smaller revenue base than Uber. However, when Uber raised $307 million in Series C funding last June, Lyft caught up to having one-third of the weekly ride volume Uber had across all its products. If we dive further into the success of Lyft, we can find there are multiple economic forces at play.

“There’s an app for that” is a now common response to everyday problems. Technology of apps and proliferation of mobile phones have allowed companies like Lyft to reduce transaction costs. People are able to conduct business with private individuals rather than a chain. This process of disruption has reorganized the protocol of commodity exchange. In Lyft’s case, the app redefined the economic structure by asking for “donations” rather than charging “fares” for payment. Since Lyft does not employ a specialized workforce, it came up with a new form of transaction in order to enter the market. The legality of this is as fuzzy as Lyft’s iconic pink mustache, evidenced by the app’s ban in certain cities like Seattle. Major cities like Los Angeles requires Lyft to charge a set fee to continue its service, but the majority of Lyft locations still operate on “donations.”

Perhaps ironically, through innovation, our generation is reverting back to a peer-to-peer localized model. “Collaborative consumption” is often interchanged with “shared economy.” The act of sharing is deeply ingrained in the Millennial culture. Millennials love to share articles, tweets, pictures, location, etc. It seems natural that this behavior trickled down to more tangible things like clothes, cars, and even homes. Economic sluggishness over the last few years has also contributed to this phenomenon, as more people are trying to find ways to make money off of their unused or under-utilized assets.

Think about it. You have a car and a driver’s license. You consider yourself to be a responsible driver, and you give rides to your friends all the time—why not start getting paid for it? Patrick bought into the idea, joining Lyft to make some money on the side.

“I needed a second job to help pay some bills and also to help save up for grad school. I do see myself doing this long term because I can make some extra cash and not have it interfere with my regular work schedule,” he says.

Lyft takes a 20% cut from every transaction. There are also “Prime Time Tips” that escalate rates during high-demand periods (i.e. 11pm on a Saturday night). These tips can go as high as 70%, but the entirety of the increase goes to the drivers. Due to the reduced transaction cost of using a casual workforce and conducting financial transactions online, Lyft fees are also generally cheaper than regular taxi services. Katherine, a college student from California, says she uses Lyft because it is more convenient and affordable.

“I use Lyft because it feels more personal and I feel like I can trust the drivers. Plus it’s convenient to find a car from an app on my phone – I never know which number to call for a taxi or what service is better than another. Plus it’s cheaper. A ride to downtown via taxi can be $14, while using Lyft, I can get a rate as cheap as $8.”

It seems like everyone wins—well, except for the taxi and limo service industry. Formally trained drivers who are screened in a testing and licensing system are now competing with normal civilians. In essence, the barriers to entry to the transportation industry has been compromised. However, this does not mean Lyft does not take safety seriously. In some aspects, Lyft’s screening process is harsher than some taxi companies, with higher age requirements, and stricter standards on criminal records. For instance, Lyft requires no reckless driving or DUI within the last seven years, when the City of Los Angeles only requires three years. In addition, Lyft links your Facebook for verification and provides insurance of up to $1m for the drivers. The car also has to be clean and presentable.

There have also been tensions between governments and the new model. In 2012, the California Public Utilities Commission issued “cease and desist” letters to Lyft along with other similar services. Although the knee-jerk reaction may be the issue of safety, there are many factors contributing to the debate of this new business model. Taxi and limousine companies who once enjoyed monopolies are heavily lobbying against legalizing these services. In addition, many cities rely on the regulation fees these companies pay to operate, fees private ride sharing programs are not obliged to pay.

“To me it’s a really dumb debate,” Patrick says.

“The real concern for the state of California and other states that Lyft operates in is that they see private ride-sharing programs as entities that are taking money from them. They hide under the issue of safety, but their arguments are based off of taxi companies having to pay fees regulated by the state while private ride sharing programs do not. How does that equate to being concerned about passenger safety? It’s really ridiculous.”

The issue of safety is always brought up in these debates. However, it seems like Millennials have more faith in strangers. Katherine says, “the idea of communicating even with a stranger online isn’t quite as daunting anymore.”

“There’s a growing inherent trust between young people in this generation (twenty-somethings), so doing things like calling a cab or organizing a ride share through an app or online service doesn’t seem so out of ordinary, and most don’t think anyone is trying to scam them.”

Patrick says the age of his passengers range from 21-45, which is consistent with the wide belief ride-sharing is embraced mostly by the Millennial generation. Botsman asserts that we now live in a global village, and there is a new importance placed on reputation. In Lyft’s case, transactions are followed by a rating system, from these reviews drivers and users leave a trail. If you average less than 4.5 stars, you are in danger of being dropped. Our ability to collaborate is quantified into a form of “reputation capital,” and it is put in public display, ultimately determining our access to collaborative consumption.

Last September, the State of California became the first state to regulate ride-sharing, or what is now newly dubbed as “transportation network companies.” Depending on how these new rules perform, other cities may follow the California framework in the future.

Ghost Town No More: The Transformation of Downtown Los Angeles

It’s five o’clock on a Friday in Downtown Los Angeles circa 1995. Bankers and businessman check their watches, walk down to their cars, and drive off to their respective homes or apartments throughout Los Angeles. This was the picture of what downtown used to be, a ghost town with vacant offices and a bleak economic outlook for the neighborhood.

Thanks to the emergence of the Staples Center, downtown is no longer the ghost town it used to be. In the past 15 years the neighborhood of downtown Los Angeles has seen a dramatic rise in the number of businesses that have decided to open up shop . But what is driving this dramatic rise?

Many experts believe the growth was buoyed because of AEG’s Staples Center, which is true, but there are several other factors that were just as effective. For example, the creation of Metro Rail, which brought people from Pasadena into this neighborhood, furthering economic activity. Another factor was the completion of the Walt Disney Concert Hall in 2003. There were many roadblocks from 1987 to 2003, but the necessary funds were collected, and it has brought a world-class architecture project to downtown. So we see an amalgamation of investment through private, public, and philanthropic means along with a coincidence of good timing.

The reason why the Staples Center garners much of the praise for this revitalization is because this multi-purpose stadium hosts over 250 events and around 4 million visitors a year, an outstanding number of people to see the revitalized downtown neighborhood. Now, with the construction of LA Live, there are many pull factors like restaurants and bars that see visitors of the Staples Center come early for the event and stay once the event is over. Before the completion of the arena, downtown was best known for the juxtaposition of skid row and financial businesses. In the early 1990’s, banks located in downtown began to consolidate and merge their offices, thus creating empty office buildings and spaces throughout the neighborhood.

Los Angeles is a city that, despite the economic woes of its state, can be seen as a beacon of hope with a global interest that has seen investment from several Chinese firms as well as Korean Airlines. This sentiment has become increasingly more evident with the construction of the Wilshire Grand building that is owned by Korean Airlines. The Wilshire Grand building will become the eighth largest building in the United States, once completed. Generally speaking, the more skyscrapers and construction cranes a city has, the healthier their economy is. That is not always true, but in this case it demonstrates that Los Angeles, and the booming downtown, want to compete on a global scale. Sure, the rebuilding of the downtown neighborhood has been a slow process since the late 1990’s, however, according to Nate Berg, “many in the city are hopeful that the Wilshire Grand is part of a new wave of investment downtown that will help the city compete internationally” (Nate Berg, The Guardian). It seems as though Nate’s sentiments are justified in terms of the investments being brought to the neighborhood, when there are plans for chains like Whole Foods, retailers like Urban Outfitters, and several local restaurants who have decided to expand to the downtown area.

In order to put the rise of downtown in context of, towards the end of 2013, “Six parking lots in downtown Los Angeles recently sold for $82 million” according to Dawn Wotapka of the Wall Street Journal. A staggering amount of money for some parking lots that have plans to be turned into an apartment complex. This is just one deal of many that have transpired over the past 15 years, and the figures seem to keep rising.

However, the other side of this story is the issue with occupancy rates, and whether or not there are too few apartments or too many people. Wotapka reports, “With more people flocking downtown, the vacancy rate for apartments has fallen. In the third quarter, downtown Los Angeles had a vacancy rate of 3%, down from 3.3%” Along with the dropping vacancy rates in downtown, which means in increase in demand, the consequence is that the average price of rent jumped almost 4% in the final quarter of 2013.

To shed more light and data  on the rise of housing in downtown, Wotanka found, “There are about 14,000 apartment units in downtown Los Angeles. About 5,100 units are under construction, and more than 3,400 units were built between 2008 and 2013, according to Polaris Pacific, a real-estate sales, marketing and research firm. More than 3,000 additional rental units have been approved, with another 7,000 proposed. Meanwhile, there are only 17 condo units for sale and 68 under construction.”

Although there are some concerns that there has been such a vast amount of investment for housing downtown that we could see a drop in prices, the consensus among real-estate executives is that the demand will still stay fairly constant and strong. This prediction is justified by a recent report on the diminishing availability of apartment buildings and the relationship with rent prices. Since 2010, rent in the downtown neighborhood has increased by 18.2% and is still predicted to grow because of the strong demand.

There has been a rush of residents flocking downtown, but that does not mean that it was equipped with the necessary provisions of a typical neighborhood.Another major indicator of the downtown area boom, although it may seem trivial at first glance, is the addition of Whole Foods to the flourishing neighborhood. The development of a Whole Foods in downtown serves not only high-priced, fair trade organic groceries, but as a symbol of the seriousness of downtown as a vital area in Los Angeles. As David Pierson of the Los Angeles Times reports, is “a major development in the neighborhood’s gentrification efforts.” He is not the only one praising the development of the high end grocery store. City Councilman Jose Huizar recently stated, “Downtown Los Angeles is like a city within the city that needs a diverse range of services – including grocery stores,” Huizar said in a statement.  “Bringing Whole Foods Market to downtown is long-awaited news that represents a major coup.”

But Whole Foods is not the only successful chain that has chosen to explore the downtown area. The recently remodeled United Artists Building, now called the hip Ace Hotel, provides another example of what downtown has become. With locations in London, New York, and Panama, to name a few, the expansion to the downtown area exemplifies the “hip” and “young” vibe that the area now exudes.

Downtown has made tremendous strides and has overcome many obstacles to get the state that it is in today, and many real estate executives believe that the best has yet to come for this burgeoning neighborhood. With rising rents and diminishing vacancy rates, an interesting few years are expected to come in the housing market, with several apartment complexes to be completed. However, in retrospect, you have to look back to the addition of the Staples Center, the Walt Disney Concert Hall, the completion of LA Metro rail lines into downtown, and the subsequent development of L.A. Live as the genesis of this downtown explosion.

The Changing Face of Brick & Mortar Retailers: The Rise and Fall of the Shopping Centre

Edited & Updated

Growing up surrounded by expats in a foreign environment, days at the mall were often a nostalgic subject among my American schoolmates. Indeed, the mall was something of a hallmark for American society to many of us non-Americans. Yet only a few years later, the sprawling shopping centres that were once the favoured activity of families and teens across America, have become relics of a bygone era. Mall mogul and C.E.O. of one of America’s largest privately held real estate companies, Rick Caruso, went so far as to call the traditional mall a “historical anachronism – a sixty-year aberration” that no longer meets the needs of retailers, communities, or the general public. Once known as the ‘temples of consumption,’ the American mall has become outdated and obsolete. Years of haemorrhaging to e-commerce sales has left its mark, driving under anchor retailers and leaving traditional malls increasingly empty. Up from 0.6% in 1999, e-commerce has grown ten times, with sales reaching 6.0% of total retail sales in Q4 2013, according to the U.S. Census Bureau. Meanwhile, total retail foot traffic for the key shopping period of November and December saw declines of 28.2% in 2011, 16.3% in 2012, and 14.6% in 2013. Over the same period, online sales increased at more than double the rate of its brick-and-mortar counterpart. As retailers physical sales as a percentage of the revenue stream drop and e-commerce’s market share burgeon at an expected compound annual growth rate of 13.6%, they are faced with a chilling prospect – adapt or perish.

growth_bigFor malls and brick-and-mortar retailers, the emphasis now lies on what Rick Caruso calls the need for “reinvention of the shopping experience.” Rather than be what was once, according to a 1971 news article, a “monument to big spending and the shopping spree,” the modern mall looks to capitalise on a growing demand for experiential shopping.

“The future of malls is about experience, creating a destination,” says Executive Vice President of Business Development for Mall of America, Maureen Bausch, in an article for Fortune. “It’s about giving the customer an experience they’ll leave their laptop for.” In response to the rising threat posed by e-commerce and declining foot-traffic, real-estate investors and retailers alike have grudgingly initiated plans for the costly redesign and rebuilding of malls across the country. The vision: expand the massive structures to become lifestyle hubs, complete with fitness centers, cinemas, farmer’s markets, massive and unconventional attractions like indoor ski slopes and aquariums.

Rick Caruso, CEO of Caruso Affiliated, speaks at the National Retailers Federation’s annual convention in New York.

Before launching into the spectacle and staggeringly high cost of this overhaul however, it is worth noting the hesitation caused by a culture of surefire investment in commercial property that has hindered, and in some cases, already doomed particular malls and retailers.

The Rise of the American Mall

Following their inception in the 1960s, the spread of malls to suburbia grew rapidly and confidently as downtown areas fell into decline. In a review of one of America’s first enclosed malls, Architectural Record called it  “more like downtown than downtown itself.” As these malls grew in popularity, so too did their bankrolling parents – the Real-Estate Investment Trusts (REITs). Created by Congress in the 1960s, REITs are companies that own and often operate income-producing real estate. These large-scale proprietors enable ‘average investors’ to purchase equity in commercial projects. REITs provide investors with a  pro-rata share of income while offering an easy gateway to the benefits of real estate ownership without the common obligations, risk, or expenses. REITs investors also enjoy special tax treatment – an REIT is exempt from paying federal income tax so long as it pays out 90% of its net income to common shareholders. Though REIT stock took a hit in 2008-9, with many forced to slash dividends to investors in order to free up cash flow caused by the recession’s contractions, most of these dividends rebounded in 2010-11 thanks to severely lowered interest rates. Because REITs borrow money short term to fund their purchase of long term investments, they benefit from the Federal Reserve’s ‘tapering’ or quantitative easing policy. By increasing the money supply, the Fed drives down interest rates to the benefit of REITs.

REIT stock has risen significantly, mirroring lowered interest rates.

This benefit has not, however, translated into economic recovery for most malls. Following the 2008 collapse, consumer and personal spending as well as retail sales sunk to record-lows. Bottoming out in 2009, personal spending was down -1.5% from a high of 0.6% while retail sales slumped to -3.0% over the same period. Yet across the board, these losses were expected to reverse along with rising economic activity. As Jeff Jordan points out in his 2012 blog post for Quartz, however, vacancy rates and rents have “shown virtually no improvement” despite economic revival. As REITs and retailers have reshuffled their finances to accommodate for this lag, the focus has shifted to luxury goods and overseas sales. The rising demand for value or luxury items has been well-documented, in the fashion industry, between supermarkets, and even with malls. This polarisation has resulted in a widening gap that leaves many middle-market brands (and their respective malls) in a literal no-man’s land. For example, mid-market retailers like J.C. Penney and Sears, concerned with market saturation and oversupply, have begun cutting back on stores, raising mall vacancy rates across the country. In contrast to the relative stability achieved between 2002 and 2008 vacancies at regional malls spiked to 9.4% in Q3 2011, according to a Reis Report. The mid-market, as a whole, is expected to decline by 1-2% per year through to 2017, according to a recent article in Forbes.

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Industry-giants like Simon Property Group have already adjusted for this market shift. The group recently isolated its ‘traditional’ properties saying that “it will spin off into a separate company its strip centers and smaller enclosed malls.” At the same time, REITs have capitalised on the rapid recovery of the nation’s affluent, seeing increased performance in Class A malls, which demand the highest rents. In comparison, Class B and C shopping centres that serve lower- to middle-income crowds remain in deep trouble. While vacancy rates for Class A malls have dropped back to and even below their pre-2008 levels, B and C malls are faring significantly worse with vacancies still 40% above pre-recession levels. The future of these malls, who occupy the mid-market position and are removed from the now-bustling and hip areas in-town, is bleak. Though some have been successfully converted into community centers, churches, and schools, their ultimate demise (and demolition) seems almost inevitable.

Middle-market stores like J.C. Penney have seen a crippling decline in foot traffic and sales-per-square foot.

Towards the Future

Despite this apparent impending doom, however, there is hope for the better-off malls and retailers to achieve success. Many malls have adjusted their offerings for the digital era, selling products less conducive to online sale, like jewellery and sporting apparel. At the same time, a more diverse selection of stores, particularly small brands, keeps things interesting.

“The industry was effectively finished, no one wanted to shop at a store anymore,” says Ton Van Dam, a Dutch businessman and shopping center tycoon. “But we have evolved, and now they come to try and compare different brands, to engage with the product.”

Ton Van Dam

A founding partner and former investor in Multi Corporation, a shopping centre developer responsible for more than 180 shopping centres across 12 European countries, Van Dam stresses the need for a complete shift in the way retailers operate.

“It is all about selling and sharing the experience” he goes on to explain. “The main focus now is experiential shopping, creating an in- and out-of-store experience and community that…motivates people to be part of it in person, to share it with their friends.”

The experiential focus Van Dam describes is already a fast-emerging trend among retailers. British fashion-house, Burberry, made waves as was one of the first to offer a digitally-integrated shopping experience. In its flagship store, full-length mirror screens in the fitting rooms correspond with radio chips in clothing to show the item being worn on the runway. Store associates recommend products based on data from iPads that log all the items a customer has previously purchased in store or online, allowing for a more personalised shopping experience.

“The aim of these efforts is to bring Burberry’s online brand environment, Burberry.com to life in a physical space for the first time” says Burberry Chief Creative Officer Christopher Bailey.

Burberry’s in-store experience merges the digital feats of its Burberry.com ecosystem with the personalisation and attention to detail in its stores.

In the US, Verizon Wireless debuted its first ‘Destination Store’ at the Mall of America. A dynamic space that allows customers to interact and engage with the products on offer, the store includes six ‘lifestyle zones,’ that give customers the opportunity to use the technology in scenarios relevant to them.

The Verizon Destination Store encourages customers to interact with products in scenarios relevant to them.

Malls have like the Mall of America have diversified their offerings by expanding into non-retail categories. The Minnesota-based mall is hoping to become more of a destination, planning to include an office tower and J.W. Marriott on site. The Dubai Mall, the world’s largest, plays host to 75 million people a year. It features a 10-million litre aquarium with over 400 sharks and rays, as well as a ski slope and an ice rink.

The Aquarium at the Dubai Mall, the world’s largest.

Harnessing the power of e-commerce as opposed to resisting it, these malls and retailers are working to transform the shopping experience. Digital and online sales offer a host of measurable metrics that allow companies to form a deeper understanding of their customer. Basic tactics include the personalisation of the shopping experience, dynamic pricing strategies, and easy-access to post-sales service.

“The digitalisation of our brand has been one of the biggest challenges faced by the company,” says John Clarke, Vice President of External Communication at the 140-year old HEINEKEN International. “But it has also given us fantastic ways through which to better understand our customer, their habits, their preferences. It has really altered the way we approach our communications.”

In addition, digital sales have greatly altered the supply chain. Customers now visit stores to compare products, only to buy them online later. Similarly, customers can request in-store pickup, allowing retailers to stock precise amounts of particular products and offer a more tailored product selection. Today, the shopping experience begins end long before customers cross the threshold of a physical store. More and more the brick and mortar environment feeds off of what is happening online, anticipating customer needs. In Apple’s retail stores, ever the shining beacons of forward-thinking retail, technology called iBeacon, which uses short-range technology to track how customers move around in-store, sends relevant promotions in the form of push-notifications.

The integration of digital into the actual product, too, has gained stead. Heineken created “the Sub,” a pressurised countertop  beer tap that chills a chosen ‘torp,’ a mini-keg of torpedo-like design in order to pour the perfect beer without even leaving the kitchen. HEINEKEN International offers several of its 250 different beer brands in torp-format. Merging physical and digital, the Sub measures which torps are consumed most frequently and makes recommendations via a smartphone app to order more torps of the same or similar brand when they run low.

The Heineken ‘Sub,’ allows beer enthusiasts to swap different beer brands in the form of ‘torps.’

The number of behemoth malls that dot the American and global landscape almost certainly prevent them from going extinct, however bad business may be. But for many of these malls, which occupy the traditional space, their success depends on the ability of management and brick and mortar retailers to enhance the mall experience.  The nation’s top malls leverage their sheer size to go beyond retail, moving instead to engage their customers with a relevant, changing tenant mix and exciting design, their success shows there is still viability in the mall model.

The Resurgence of Some and the Death of Many

The number of malls that dot the global retail landscape almost certainly prevent them from going extinct, however bad business may be. Success, though, hinges on the ability to adapt to the changing retail climate. For many of the malls in the traditional space, their age, location, and design mean it may well be too late. Built for a past retail heyday, the already uphill battle to transform retail combined with a massive oversupply of property, the fate of these malls is mostly decided.

For the nation’s top malls, though, the ability to leverage their sheer size to go beyond retail, moving instead to engage their customers with a relevant, changing tenant mix and exciting design, and achieve success shows there is still viability in the mall model. For now, the experiential shopper is entertained. But one must ultimately wonder, for how long?

The Cost of Hollywood: Runaway Production

Hollywood, California: long synonymous with film and television production; the Mecca of the entertainment industry. If you weren’t here, you weren’t anywhere. That said, movies and TV aren’t all about entertainment. To the hand that feeds them, they’re investments, and huge ones at that. Putting together a budget for the production of a film is a complex and intimidating process. That’s where state-based tax incentives come in, easing the financial burden and encouraging productions to stick around the area to generate future economic benefits. However, such incentives have spread to other states and countries, disrupting California’s film business at its core and bringing into question it’s worth.

Dubbed runaway production, it has waged a war of attrition on Hollywood production over the last decade, and if not for the government incentivized projects (represented by black on the graph below, provided by runaway production outreach program FilmWorksLA), 2010 would have been a record low year for Los Angeles productions.

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California’s legislation on film production credits was established as a defense system to incentivize production in-state. “The motion picture and television industry is responsible for 191, 146 direct jobs and $17.0 billion in wages” in California, according to the Film Commission of California. In an interview with the Los Angeles Daily News, Louis Friedman, producer of 2013’s Lone Survivor, believes production planning around tax credit is “’the single most important financial decision made” and it “affects both the creative look and financial bottom line from day one.’” This production season is bread and butter for the highly skilled – and highly populated – pool of artists, technicians, and other crew people in the state.

However, that legislation has served as a model for other states’ and regions’ incentive programs to surpass. In California, the program was “crafted with limits, from a $1 million minimum to $75 million maximum [in regards to overall budgets] on feature films, and further restrictions on drama series,” not to mention a lottery system that deals with the high demand. This leaves out a lot of areas of production, as major tentpole films’ budgets soar higher and higher and TV shows take bigger and bigger slices of the market. Sensing this sitting-duck situation, the film lobbies of other regions responded.

Canada was the first big player to encroach on Hollywood’s territory in any serious way, putting into law their first production tax incentive in 1997 (just one year after the “all-time high in 1996” of film productions in Los Angeles, noted by  FilmWorks). For awhile, Variety reports, “it was only lower-budget series for cable that set up shop outside of Southern California…usually in Canada…[b]ut now the network-studio congloms play a kind of incentive sweepstakes” and pit California cuts against out-of-state cuts. As Variety points out, “these days studio chiefs insist that filmmakers…take advantage of out-of-state incentives…[whose] savings are crucial in a franchise-obsessed era when big-budget movies commonly cost north of $200 million to produce.”

States like New York, North Carolina, Louisiana, Michigan, and many others got into the game. Kevin Klowden, director and managing economist at the Milken Institute’s California Center, estimated a total loss of “4500 production jobs…between 2005 and 2012,” compared with the “7900 production jobs the state should have gained during that period.” New York now has a $420 million annual cap on tax credits, compared to California’s $75 million cap, and has begun to offer additional incentives for productions that complete post-production work in New York as well. Stan Spry, founding partner of up-and-coming management and production company The Cartel, knows this reality very well: “Tax incentives and rebates have been a massive part of our financing plan. We’ve been able to finance up to 40% of production budgets due to incentives…why stay in LA when you can save almost half the money somewhere else?”

Another industry professional, Michael Karnow, creator of SyFy’s Alphas, mentions for that show “we shot in Toronto to save money,” but out-of-state locations “could end up being an asset. It can turn out to be very exciting to turn a problem into an opportunity, and not only let the benefits be financial, but creative.” He mentions Breaking Bad as such an example, one of the most groundbreaking shows of the last decade…almost completely shot in New Mexico, and tailored specifically to the state. It’s interesting to note the original pilot of Bad was written to take place in Southern California…until AMC heard those incentives calling.

This competition, though, now faces the same question that California does: what exactly are the economic benefits of these incentive programs? Other states and countries realized Hollywood was a state of mind, and put into action measures to replicate that mindset for cash-desperate filmmakers. At its peak around 2010-2011, 42 states were offering over $1.4 billion combined in tax credits to productions, hoping to reap economic gains. However, it helps to recall that California’s incentives were built to keep productions inside of its already-developed infrastructure, not to lure runaway production away from Michigan or New Mexico. Historically, California remained the center for production because it housed the developed pool of workers, artisans, and talent, aged like fine wine. Other states don’t have that history, and therefore may not have the job force or economy in place that would benefit from film and television productions.

Take Michigan: leading up to 2011, $57 million had been given out annually to productions each year, with high profile movies like Oz, The Ides of March, and Transformers 3 basing their filming in the state. The problem here became that the Michigan Film Office did not have to disclose the true costs/benefits of the program. Responding to fervent state government criticism, who believed the program wasn’t bringing the economic growth its proponents promised, the program was scaled back in 2011, capping total credits at $25 million and changing the classification of the credits from tax breaks to grants. Michigan legislature, led by Gov. Rick Snyder, now “obligates the [Michigan] Film Office to report back on the specific movie projects that it finances; and to openly declare the criteria it uses to award subsidies,” according to the Tax Foundation. Snyder argues this new criteria makes transparent expenditures that were once “hidden in the tax code.” The Tax Foundation analyzed Michigan and other states’ specific programs, and ruled the incentive programs “distort[ed] the allocation of resources, provide[d] only temporary jobs and benefit[ed] special interests at the expense of the taxpayer.” Other states have scaled back recently as well, with only 35 states offering incentive programs currently.

However, there’s still been a huge increase of programs spanning the globe, and California and its competitors face a race to the bottom. New Los Angeles Mayor-elect (and therefore Prime Minister of Hollywoodland) Eric Garcetti is well aware of this possibility. “’We lost feature films. That’s sad. They may come back to some degree, but probably by and large won’t.’” Instead of competing neck and neck for the most generous incentives, Garcetti wants California to stay ahead of the curve, focusing on creating an environment for a wider spectrum of media production. His plan is to remove the $75 million cap, and make incentives a more viable option for premium cable shows, commercials, visual effects, and even videogames. Garcetti admits he’s seen unfavorable studies, projecting the state seven cents on every incentive dollar spent, but believes there is an unseen multiplier in effect due to California’s historical place as the home of production, and that productions spur economic activity up to five times that incentive dollar’s worth.

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Garcetti has charmed his way into many meetings in Sacramento already, but he is facing strong opposing arguments from other neglected California groups. A coalition, made up of the MPAA, the Directors Guild, the Teamsters, and the IATSE artisan union, will work to “win over powerful [opposing groups]…such as the California Teachers Assn.” Groups like the teachers believe more Hollywood tax cuts are merely “giveaways to the glitterati,” similar to the arguments that shut down other states’ programs’ momentum. The Tax Foundation rebuffs Garcetti’s and groups like FilmWorks’ arguments about the film and TV’s  key place in states’ economies, believing state legislators should make sure they’re not just lining the pockets of “one particularly vocal and connected industry.” While it is certainly true that the Clooneys and the Spielbergs don’t need much pocket padding, California is a unique economic home of the production worker, and Garcetti wants to make sure it stays their home. An ally, assemblyman Mike Gatto, quoted in Variety, says, “’incentives offer a return on investment that has more to do with individuals’” than studios. “’This is about the regular, workaday people who make a living from production.’”

Despite questions of its long-term economic worth, California undoubtably has a large group of uniquely skilled workers that are facing the possibility of major disruption and possible migration. Garcetti’s planned innovations are important to the future of the state now that Hollywood has proved to not be as stationary as it once appeared.

 

Interviews with:

Stan Spry, Co-Founder and Head of Production, The Cartel Management & Production, West Hollywood, California

Michael Karnow, writer & creator of SyFy’s Alphas, Venice, California

Other sources:

MPAA, State-by-State Statistics  http://www.mpaa.org/policy/state-by-state

Tax Foundation, http://taxfoundation.org/blog/filmworks-blog-criticizes-tax-foundation-industrys-dependence-film-tax-credits

The End of the Australian Automotive Industry

When a Toyota Camry Hybrid rolls off the assembly line in the port city and Melbourne suburb of Altona, the mid-sized sedan is shipped to 13 markets from New Zealand to the Middle East and the Pacific Islands. At one point, Australia was a production hub that allowed large automakers to tap into thriving auto markets throughout the South Pacific and Middle East. But by 2017, Toyota will stop manufacturing the Camry and other vehicles in Australia ending the country’s once vibrant automotive industry.

Toyota’s departure follows the announced departures of Mitsubishi, General Motors (GM) and Ford. In 2013, GM and Ford blamed the strong Australian currency and small local market as reasons for the closing of its manufacturing operations. Industry experts predicted Toyota would soon follow, despite appeals from Australian Prime Minister Tony Abbot.

In an article in the Financial Times detailing GM’s departure, former GM Chief Executive Officer Dan Akerson said, “The decision to end manufacturing in Australia reflects the perfect storm of negative influences the automotive industry faces in the country, including the sustained strength of the Australian dollar, high cost of production, small domestic market and, arguably, the most competitive and fragmented auto market in the world.”

The strength of the Australian dollar has negatively affected the domestic economy for many years, not only resulting in lower auto sales profits, but has also hurt the tourism and hospitality industries among others.

But how did the Australian dollar get so high in the first place? Economists point to Asia as the main reason. Australia has a strong trade relationship with many Asian countries and Asia’s demand for Australian natural resources has propped up the dollar. Volatility in the U.S. and EU economies has also made Australia a stable place for speculative investment, which has contributed to the dollar’s strength.

And the stronger the currency, the more expensive it is to produce goods domestically. Since the dollar has stayed consistently high, the manufacturing industry has dwindled, as Australia tries to support traditional economic drivers, such as housing.

The Australian dollar has risen more than 20 percent against the United States dollar since 2011 and more than 10 percent against the Japanese yen since 2012. The Reserve Bank of Australia constantly describes the Australian dollar as “uncomfortably high.” The current value of the Australian dollar has dipped to $0.90 per U.S. dollar in recent months due to the Reserve Bank of Australia slashing interest rates to a record low 2.5 percent.

Aus v US Dollar Oct 2013

GM noted that at the Australian dollar’s peak, making things in Australia was 65 percent more expensive compared to a decade earlier. And retail has remained flat in recent years as consumers spend less and save more.

The higher the Australian dollar, the more Toyota, GM and Ford lost in export markets. More importantly, cars made in Japan or Korea could sell in Australia for a cheaper price than cars manufactured in Australia resulting in a loss of market share in the domestic market.

Toyota’s departure is especially wrenching, because of all the automakers in Australia, Toyota was the most commercially viable. Exports in growing automotive regions, like the Middle East, allowed for additional manufacturing volumes and economies of scale.

Though the loss of Toyota only results in a loss of about 4,000 jobs, unions argue that the end of the auto industry could lead to the loss of 50,000 skilled jobs across all car and automotive component industries and, ultimately, trigger a recession.

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The History of the Australian Automotive Industry

John and David Shearer, who were agricultural machinery manufacturers and inventors, built the first car in Australia in 1896. The isolation of the country forced those interested in owning a vehicle to create, design and produce cars on their own. By 1909, Ford began importing the Model T and GM and Ford began producing vehicles in the country after Australia lifted a ban that didn’t allow production of foreign car bodies.

In 1963, Toyota began importing small, low-cost cars competing with companies like GM, Ford and Chrysler, which had a combined market share of 86 percent. After nine years of selling cars in Australia, Nissan and Toyota asked permission to build factories and manufacture cars.

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By 1982, the automotive industry employed more than 70,000 people in Australia, but according to a 1990 study conducted by the Massachusetts Institute of Technology (MIT), it wasn’t a great place to work. The Australian automotive industry ranked lowest in workforce flexibility, human resources management and overall management.

In 1991, exports reached $1 billion, but more and more imported cars began to enter the market. Between 1989 and 1996, the amount of imported cars, primarily from Japan, increased by more than 10 percent from 29.8 percent to 40 percent of the market. And by 2003, only 28,000 people had jobs building cars and that number steadily decreased throughout the 2000s.

GM discontinued the Pontiac brand in 2008 and GM’s Australian exports declined by 86 percent. By 2009, only 16 percent of cars on Australian roads were built in Australia, while cars built in Thailand comprised 15 percent of the local market. Not only had Australia stopped making cars for the world, but they’d stopped purchasing and driving the cars they made.

Who’s to Blame? 

Seeing the industry seize before their eyes, the Australian government provided a $52 million grant to Ford in 2006 to expand design operations. And before Toyota decided to pack up its manufacturing hubs and layoff Australian employees, Australian Prime Minister Tony Abbot vowed to do everything in his power to keep the giant Japanese automaker in Australia.

But being the last major producer of cars in Australia has major drawbacks. First, Toyota can no longer find savings in costs due to increased levels of production. Projections show that the cost of doing business in Australia will only continue to rise. Lastly, it’s unlikely young Australians will want to enter the automotive workforce since career opportunities would only be limited to Toyota’s manufacturing hub in Altona.

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So, who’s to blame? Automotive manufacturers lost more than $1.5 billion on local manufacturing over the past decade, despite receiving more than $3 billion in taxpayer funding over the same period. Many critics have argued that CEOs at major automakers used Australia as a cash machine. But it’s hard to compete in a market where cheap foreign cars no longer have to pay high import tariffs. And when the dollar gets too high and Australia stops becoming a production hub for Asian countries, Toyota starts building more cars in Japan.

The Impact on the Australian Economy

By 2017, the Australian automotive industry will be no more, and it could have a profound effect on the Australian economy. But the levers that forced Toyota, GM and Ford to end manufacturing, might still be Australia’s biggest concern.

Though Australia is transitioning to more traditional economic drivers and away from former powerhouses like mining and manufacturing, the country must be prepared to deal with a rising unemployment rate.

Dave Smith, a secretary at the Australian manufacturing workers union told the Australian Herald Sun “when you take a person’s job and the dignity that goes with that job, it creates enormous social problems.”

“When Mitsubishi closed, a lot of workers fell into drug and alcohol problems, domestic violence issues, suicides, mental health issues and all these things need to be carefully managed because they will happen,” Smith continued.

For Australia to come out of this transition and “perfect storm” of external factors, as former GM Chief Executive Akerson noted, they’ll need to rely on the continued recovery of the United States economy.  In addition, Australia will need to improve trade with China, currently Australia’s biggest trading partner. And most importantly, the Australian government needs to create the right conditions for new businesses and innovation to occur within the island continent.

Sources: Wealth Daily, The Sydney Morning Herald, RTE News, Herald Sun News, The Car Connection, Financial Times, The Wall Street Journal, GMA News, ABC News, Toyota, D.C. Haas

GDP is an Outdated Idea

According to Diane Coyle, an economist and author of GDP: A Brief Affectionate History, we tend to think about GDP as a natural object, like a mountain, river or lake. But GDP isn’t a thing; it’s an idea – an idea that made the U.S. economy $500 billion bigger in 2013.

Why does the world revolve around an idea that hardly anyone understands? GDP can impact elections, influence major political decisions and determine whether countries can continue borrowing or be put into a recession. In addition, though utilizing the GDP might’ve been a good statistical measure of the economy during the twentieth century, it’s become increasingly inappropriate for an economy driven by innovation, services and intangible goods, argues Coyle.

The GDP was created because of the Great Depression and people first referred to it as national income. In the decades that followed the Great Depression, national income transitioned into gross national product and eventually Gross Domestic Product.

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But around the 1950s and 1960s, the GDP began to have too much power. If a country needed help from the World Bank or the United Nations, it needed to know its GDP.  When the Cold War began, GDP began to reflect the success of a country and distinguished winners and losers.

When the GDP, a statistical measure of the economy, begins to have an inflated importance that defines whether your country is doing well or not, politicians begin to look at is a measure of their success as well. But what the GDP doesn’t do, as Robert F. Kennedy famously spoke about, it doesn’t measure the “health of children, the quality of their education, or the joy of their play. It doesn’t include the beauty of our poetry or the strength of our marriages, the intelligence of our public debate or the integrity of our public officials.”

Not only is GDP out of touch with our current economy, but economists also warn that GDP is a tool only to be used to measure market activity and not a country’s prosperity. GDP needs to be redefined, restructured and/or replaced in order to enact progressive change. Case in point, GDP tends to rise when crime or pollution increases or when households accrue more debt. When the United States pays to fix the damage from a hurricane or tornado, the GDP actually goes up.

That raises the question, what does a post-GDP world look like and how can we promote a measure of economy that defines real progress in the United States?  Justin Zorn, a public service fellow at Harvard University, argues that we need comprehensive indicators that are empathetic to core elements of national wellbeing in the 21st century, including economic mobility, strong families and communities, entrepreneurship, health, education, environmental quality and public safety.

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We shouldn’t leave GDP behind, but our ability to collect data and analyze it in new ways opens up the window for innovation in national accounting. With the capacity to tell stories with data in new and more complex ways, we can find an objective truth – a truth that can do better in measuring the prosperity of a nation.

Sources: Huffington Post, PrincetonNPR

The Red Blood (and Blue Collar) Cells of the Port of Los Angeles

Thirty miles south of the city proper lies the heart of L.A.’s economy: the Port of Los Angeles. In the words of the Port’s economist Michael Keenan, “logistics is the Silicon Valley of Los Angeles,” and the well-oiled machine of the San Pedro harbor proves that statement. While our tour out on the water was relatively quiet, my drive there and back provided me a firsthand look at the worker ants of this Los Angeles behemoth: the port truck drivers. Looking into their role specifically, I came across a recent article in the Los Angeles Times focused on a recent battle the truck drivers have faced as Los Angeles and other ports across the nation classify the truckers not as higher-paid employees, but independent contractors. Freed of the responsibility of guaranteeing higher wages and working conditions, ports are reaping the benefits while the truckers suffer.

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Out of a total 75,000 truckers who serve the ports of the United States, 15,000 of those work in the Los Angeles/Long Beach port area. They handle more than a “trillion dollars of cargo annually.” A common trucker works a six-day week, up to 14 hours a day, and takes home about $200. According to the report in the Los Angeles Time, “the median earnings of an independent contractor is…$29,000 a year, compared with $35,000 for a trucking company employee.” Even though trucking companies control their business, where and when they work, and what their fees are, most drivers are still considered independent contractors in company eyes, and have to pay for gas and repairs on the company-owned trucks, reducing their earnings further.

Throughout this, trucking companies desperately work to find more drivers, claiming a shortage of workers. Here’s a graph from the American Trucking Associations:

driver-supply-demand-projection-420x148

However, drivers respond, if such a shortage actually exists, why are their real wages still kept so low? Wages for the trucking industry grew 2% less than the entire private work force. Either the trucking companies are drastically overstating their need for drivers as an excuse to avoid more risk in this post-recession world, or the number of truckers is truly declining due to other reasons. Amongst those reasons may be the large number of truckers approaching retirement age and others, like the frustrated parties in Los Angeles, leaving the field for greener and less uncertain pastures.

Trucking, once “one of the backbones of the blue-collar middle class,” according to Jared Bernstein of the Center on Budget and Policy Priorities, has turned into “sweatshops on wheels.” So far in L.A., “400 complaints” have been filed to the state agency, and a few have already gained rulings confirming their misclassification as independent contractors. Due to these early successes, the number of potential lawsuits may grow, and the thriving port of L.A. is going to have a problem on their hands.

Other source:

http://www.overdriveonline.com/driver-shortage-countdown-to-a-capacity-crunch-and-a-boost-in-rates/

Over the Top: the Emergence of Arctic Ocean Trade

The north polar view of the world is not a common perspective, most of us may know it from the white on blue flag of the United Nations. However this view of the world may become increasingly common as the effects of climate change on the Arctic Ocean have opened new opportunities for Arctic trade routes. The opening of these trade routes is of particular interest to certain actors and nations and has the potential to change the face of global trade.

The Polar Paths for Shipping (The Globe and Mail)

 

A dream of the seventeenth century explorer, Henry Hudson, the fabled Northwest Passage over Canada was first navigated in 1906 by the Norwegian Roald Engelbregt Gravning Amundsen, who was also the first explorer to reach the South Pole. The other Arctic Sea route is the Northeast Passage over Russia’s northern coast, more commonly called the Northern Sea Route it is a Russian-legislated shipping lane

Scientists predict ice-free summers by the end of the decade and navigable winters by the mid 21st century. Regardless of how one may feel about environmental politics, the question of the polar caps melting is not one of “if” but “when.”

The Russian Federation has already started developing infrastructure to service the Northern Sea Route. Between 2009-2013 maritime traffic has improved from a handful to several hundred. So far Norway and Russia have been the primary navigators but in the past few years Chinese shipping giant COSCO has turned its eyes northward. Huigen Yang, Director General of the Polar Research Institute of China announced in 2013 that as much as fifteen percent of China’s maritime trade may travel the route by 2020.

A visual comparison of the Northern Sea Route (Blue) to the Suez Route (Red). The Northern Sea Route is 40%, or 12-15 days shorter than the traditional Suez route. (via wikimedia)

The Arctic region is governed by a combination of international agreements such as the UN Convention on the Law of the Seas (UNCLOS) and multilateral governance institution such as the International Maritime Organization (IMO, a UN Agency) and The Arctic Council (AC). The Arctic Council is made up of the eight nations that intersect the Arctic Circle: The United States, Canada, Russia, Norway, Finland, Iceland, Sweden, and Denmark by virtue of Greenland. In the past few years the AC has passed agreements on search and rescue and the IMO is finalizing a shipping ‘polar code‘ that is expected to be in place by 2016.

Most data estimates suggest that roughly 90% of mercantile trade is shipped. For China the potential of arctic routes could represent savings of hundreds of billions of dollars  “Once the new passage is opened, it will change the market pattern of the global shipping industry because it will shorten the maritime distance significantly among the Chinese, European and North American markets,” said Qi Shaobin, a professor at Dalian Maritime University according to China Daily. Not to mention China’s traditional route to European ports passes through pirate infested waters that the Arctic Route would avoid.

Infrastructure is still the key obstacle to the expansion of trans-Arctic trade. So far Russia has been the only player to make significant commitments to development by reopening research stations and arctic ports. Canada has done little aside from accepting a legal framework on paper. Notwithstanding there has been an increase in maritime activity through Canada’s Arctic waters:

Northwest Passage Transits 1903-2013 (Globe and Mail)

At a meeting in Stockholm with USC students in the summer of 2012 Gustaf Lind, the Swedish ambassador to the Arctic Council, accepted the possibility of Arctic Ocean Trade routes but noted “I don’t think we will see much shipping for quite some time.” Mike Keenan, an economist at the Port of Los Angeles, noted “you need long stretches that are regularly free of sea-ice and right now you don’t have that.”

There is an undeniable economic advantage to Arctic Trade Routes to connect not just China to Europe but China to the East Coast of the United States. Currently the typical shipping time from Shanghai to Rotterdam is twenty-five days, from Shanghai to Los Angeles is thirteen days and then seven days by rail to reach New York. Rotterdam to New York is another nine day sail. However a Northern Sea Route to Rotterdam from Shanghai would shorten the journey to ten days making a Sail from Shanghai to New York via Rotterdam last nineteen days. This number could be even shorter without a stopover but it already is faster than the current path from Shanghai to New York taking rail from Los Angeles.

The Port of Los Angeles, which along with the Port of Long Beach is the busiest container port in North America, is currently the fastest way for good from China to reach consumers in most of the United States. It represents a huge economic asset that handles $260 billion of trade throughout the US. According to Keenan “3.6 million jobs throughout the U.S. are related to the port’s activities.”

Whether Arctic Sea Routes posed a challenge to the port’s position seems an unlikely prospect for the port to consider in the near future. In addition to the infrastructure problem Keenan noted that “there’s simply too many variables to make any predictions for the port.” In terms of adapting to a changing trade environment “there’s a limit to what [the port] can do if you have a serious time advantage.” Keenan further noted that “the priority should be to focus on climate change and sea level rise” and pointed to the Port’s respectable environmental record and investment in clean technology.

Perhaps it is too early to quantify the effect of Arctic Sea Routes on global shipping but even if there is a long term threat to the Port of Los Angeles the sheer volume of trade between Asia and Los Angeles accounts for over ninety percent of the port’s volume. Mike Keenan asserted “cargo will always come here.”