Thursday, October 30, 2003

Raising Taxes for "Education"

The California Insider posts that "Rob Reiner and the California Teachers Association are preparing to file a ballot measure for November, 2004 that would increase commercial property taxes by 55 percent and dedicate the money -- $4.5 billion annually -- to expanded pre-school and K-12 education."

"For education" is used almost as much as "for the children" as an excuse to raise taxes. After all, spending more money on education will make our kids smarter, right?


Study after study after study has shown that more money doesn't improve education. Here's a graph from the Heritage Foundation showing the real (inflation adjusted) spending on education and test scores.

You will see (and the graph is somewhat small) that scores (straight lines) are practically unchanged despite a nearly constant increase in spending (yellow area). Similar graphs posted in this month's issue of Forbes (not yet on-line) show the same thing. A great article I found by Cal Thomas lists all sorts of facts and figures showing the continuing increase of government spending in education and absolutely nothing to show in terms of better education or test scores.

A comment I read recently - I thought by Thomas Sowell but I can't find it - stated that education is not something you can buy by the truck load and dump on the curb of the nearest school to improve children's education. Education has to be sought. It has to be a goal, a priority, driven into students by their parents and the community. We often hear stories of children that show up in this country from some distant land with no understanding of English, then winning spelling bees and other academic achievements in just a few years. This isn't because more money was spent on them, but because they had a drive to learn and excel.

It will be interesting to see how this money grab plays to voters. It is aiming at "education" and it is targeting "evil" businesses who have pocket-fulls of money, so there is a real chance that our uneducated voters will vote to spend more money on our uneducated students.

Wednesday, October 29, 2003

The Electronic Car

I don't mean electric car, one that runs on something besides gasoline - I mean electronic car, one that has it's mechanical systems replaced with electronic ones. A posting at Outside the Beltway got me thinking about the automobile and how it's changing from a hydraulic-mechanical device into an almost purely electronic device. This change is being forced by a variety of factors:

1. Economic - Even the casual observer will notice how electronics pricing has plummeted over the past 10 years. While most people observe that this change has resulted in cheaper and more powerful PCs and consumer electronics, many people miss out on the point that it also means that electrical systems can be used economically in areas where they have never been used before - such as mechanical systems.

2. Safety - Automobile fatalities are one of the leading causes of death in developed countries and a combination of consumer demand and government regulation have driven automobile manufacturers to develop new safety systems for cars. Invariably, these systems are electronic control systems that monitor and provide feedback to the driver or over the car itself. Examples include anti-lock brake systems (ABS) which need a microcontroller, air bags which need an accelerometer and microcontroller and Tire Pressure Controllers (TPS) which use sensors and potentially a wireless communication system.

3. Consumer Demand - Consumers want their cars to be easy to control, easy to operate, comfortable and entertaining. These demands have driven manufacturers to add a variety of systems to automobiles that actually have no direct effect on the car's driving - keyless entry systems, Global Positioning Systems (GPS), and power windows, just to name a few.

While there are several ways to segment these electronic systems, I have put them into the following four groups:

Infotainment - Entertainment and information systems for the driver. These include the mundane, such as the ubiquitous radio, but also include new systems such as "Telematics", of which OnStar is the currently the most popular system. Examples: Audio Deck, Satellite Radio (XM Radio, e.g.), GPS, Telematic Systems, in-car Video (including rear-seat entertainment), Networked Car (wireless links for everything from your cellphone output to your car speaker to internet connectivity)

Powertrain - refers to the system in a car that controls the actual movement of the vehicle, including engine management. Historically, these systems have been hydraulic or mechanical, but with the introduction of fuel injection engines and the need for exhaust control, electronics made their debut in the powertrain and over time have increased their presence: Examples: Engine Control Unit (ECU), Adaptive Cruise Control, Power Steering

Control & Comfort - Dashboard Cluster, Heads Up Display, Remote Keyless Entry, Climate Control, Power Seats & Windows

Safety - Anti-lock Brakes, Traction Control, Airbags, Electronic Brakes, Tire Pressure Controllers

These are all systems that are in cars today and don't include a large number of systems in test-cars or on the drawing board such as collision avoidance systems, drive-by-wire, and other innovations which will increase the electronic content even further.

These systems are adding to a steady increase in the amount of electronics in the average automobile, despite the fact that electronics are getting cheaper:

So, what does this all mean?

o For the average consumer, it just means that your car will just become pretty darn nice, very safe, and much easier to control.

o The replacement of mechanical systems with electrical systems makes the car lighter, thus improving gas mileage.

o While more gas efficient, all these new systems require additional power that will not be manageable with the existing 12/14V battery system. According to Gartner, current 12/14V alternators can deliver up to 2 kilowatts of peak power, with the battery lending an additional 4 kilowatts peak power. A loaded, upscale vehicle could require as much as 12 kilowatts, and by 2010 this number could reach 20 kilowatts, fueling the need for higher voltages. Several manufacturers are exploring new battery and power systems for new cars which are likely to start hitting the street by the end of the decade.

o I would argue that as the average car becomes more electronic, that transitioning from the internal combustion engines to Hybrid Electrical Vehicles (HEV) or to full Electric Vehicles becomes easier from a design and manufacturing standpoint, and in consumer acceptance. The main issue in this area, however, will continue to be infrastructure.

o From a business standpoint, it means that those companies that are providing hydraulic and electrical systems need to diversify into electronics as soon as possible (this is not an issue with the vast majority of the "Tier 1" suppliers in this industry). In addition, it provides an opening for electronics providers who do not serve this market to get into one of the last, large manufacturing segments left in North America.

It should be remembered that the automotive industry is one of the largest industries in North America, contributing over 3% to the U.S. $10 Trillion Gross Domestic Product (GDP) and U.S. automakers collectively purchase nearly $120 billion of goods and services. Both domestic and foreign manufacturers have set up manufacturing or subassembly sites in nearly every state, and unlike other industries, U.S. domestic production is not going overseas. In fact, production in the U.S. is expected to increase by over a million units within the next five years to 17 million units. However, the U.S. percentage of worldwide production will decline somewhat, dropping from 29% in 2002 to 27% by 2007.

If possible, manufacturers should try to participate in this market, but certain structural changes taking place in the automotive supply chain are making this difficult, which I will go into more detail on a future posting.

Friday, October 24, 2003

The Economy and Corporate Analysis

The way I like to think about the economy is as a funnel. The top part of the funnel is the U.S. Economy, which if it does well, flows money into the key industrial areas, which then buys products from my Company.

Likewise if there is no money in the economy, the chances of money "trickling down" to my product are lower (the economy could do well and our major segments not, but this is just a general model which I would then break out any segment specific issues). So using this model, I do an analysis using the following steps:

Step 1 - U.S. Economic Picture
In order to get a U.S. forecast I track ten U.S. economic indicators on a monthly basis. There are a variety of places for these, but one site that has good historical data is Neat Ideas. I am not going to list all of them, but there are the "big two" which are posted and commented on incessantly by the mainstream press: GDP and unemployment.

There is no doubt the U.S. economy is growing, with 4Q03 estimates on the order of 4%, which makes it surprising that we have fools like Gephardt saying this is the "worst economy since the depression". The reason that he can get away with some of this rhetoric is the unemployment picture, which hasn't kept up with economic growth.

There have been a variety of explanations for this issue ranging from the fact the unemployment is a lagging indicator to the issue of structural changes in manufacturing. However, I think the next two graphs provide some good insight on the issue. The first shows that U.S. industrial output is picking up. The second explains why unemployment is still lagging: productivity - the amount of goods output over labor input, has skyrocketed recently, meaning that businesses have increased output while holding labor steady.

While there has been sideways movement of manufacturing, it is up significantly over the last few quarters, along with an increase in productivity. The question is: how long can businesses keep up this productivity increase? The answer to this question indicates when hiring will start significantly improving.

Based on the other six indicators I track and other forecasts, I estimate that the hiring picture will improve significantly in the 2Q of 2004, just in time for the elections.

Step 2 - My Company's Major Industries
My Company participates in the high-tech field, but its major markets are Personal Computers (PCs), cellphones and consumer electronics. While these products by and large are not manufactured in the U.S., purchasing decisions, pricing and purchasing volumes are made here. In addition, the U.S. is one of the largest markets for these products, so tracking the U.S. demand will point to where these segments are going.

In the PC market, consensus estimates all have the market seeing a recovery this year with several years of volume growth being forecasted.

In the cellphone market, after a flat two years after the 2001 implosion, forecasts keep being revised upward every several months"

The other area I look at is the electronics supply chain, which includes semiconductors ("computer chips") and printed circuit boards (PCBs). Both have shown dramatic improvement lately in their Book to Bill (BB) ratios, which is the ratio of new orders over shipments. Anything over 1.0 means that companies are seeing more orders than they are currently shipping.

The only indicator lagging is semiconductor equipment, meaning that capacity in the manufacturing plants ("fabs") are still not 100%. Estimates of capacity utilization are currently 80% and a continued improvement in semiconductor production should raise the equipment BB above 1 in the first part of next year.

Step 3 - My Company's Products
The next step I take is to look at data for my Company's particular products (I actually try to do a full Porter Model which analyzes all aspects of my industry, but I am trying to keep this posting somewhat brief).

For my particular products, I have already seen great improvement in volume demand based on the upswing in the markets I outlined above. The one area which has prevented my company from improving it's top line is Average Sales Price (ASP), which has seen significant erosion over the past two years.

However, the tide seems to be turning there as well. As volume increases in the above segments and manufacturing capacity tightens at my Company and its competitors, I have seen all our major customers scrambling to lock in long-term volume contracts, meaning they are locking in pricing

In addition, in my particular market and in some associated markets, there have been areas of spot shortages, which is probably another reason purchasing managers are looking to lock in contracts.

Step 4 - Conclusions
Based on this analysis, I have provided the following conclusions to my Masters:
1. The U.S. economy is growing. Growth will continue accelerate in 2004 and employment will start showing significant improvement by the second quarter.
2. All Major Markets that we participate in are showing volume growth and will continue to have growth in 2004.
3. ASPs, which have been the weak point in growing our top line revenue so far in 2003, are stabilizing due to tightening of manufacturing capacity in our market. This fact means that we should be able to grow both volume and revenue in 2004
4. Based on these conclusions, both expansion and hiring should be planned for the coming fiscal year.

Step 5 - Personal Conclusions
The above analysis is a part of my job, which I am judged on, so the analysis was done as impartially as possible since a huge screw-up will likely make me an unemployed Window Manager.

Based on what I see, however, I don't see the economy being a big stick for the democrats in next year's election. There are certainly other issues which Bush will be weak, but the economy - probably the biggest issue for the out-of-power party - won't be a large factor.

Tuesday, October 21, 2003

No Such Thing as Foolproof Security

...if anything in this life is certain - if history has taught us anything - it's that you can kill anybody - Michael Corleone, Godfather II

...all someone needs is a willingness to trade his life for the President's... - Frank Horrigan (Clint Eastwood), from In the Line of Fire

These quotes came to mind as I read the story and discussions over the recent "compromising" of airport security where a college student snuck boxcutters past airline security onto two Southwest Airline flights. There was the predictable political response that "someone should be fired" and other finger pointing towards the TSA, Homeland Security and other agencies.

The fact of the matter is that there is no foolproof security system, especially when it comes to public transportation. It is a physical impossibility to screen every passenger, every piece of luggage. By default this means it's possible to get contraband onto an airplane.

This issue points out the fallacy of our current airport security - focusing only on the weapons rather than also trying to screen the people who would use them. As the above quotes point out, there is no foolproof security system, even when all you're guarding is one man. This is why the Secret Service takes seriously any "threats" made against the President and canvasses locations for known loonies days before a President arrives on the scene. The Service profiles and keeps close tabs on anyone who they think might want to hurt the President.

The same can't be said for normal Americans who travel. We have to rely on a system designed to catch every weapon that comes through it, when this is, in fact, a physical impossibility. A better method - to do additional screening of those whose profile matches those who have done harm in the past - has been deemed "bad" in our society, making us less safe.

Box cutters don't down airplanes, Muslim extremists down airplanes. The student who snuck the weapons had no intent to harm, making the box cutters innocuous devices. On the other hand, innocuous devices can kill - a metal ball point pen can be stuck into the jugular. It's people who want to terrorize and kill Americans using any tactic available that we need to stop. If we stop them, the periodic stories of contraband getting through (and this will never end) will continue to be college students with an axe to grind rather than someone who wants to create real harm.

Sunday, October 19, 2003

Trying Out "Social Networking"

I have been reading about "Social Networking" applications for a while, most notably a few articles at TechDirt and others which have pointed out that there is a funding "bubble" in this space. My opinion was that I didn't see a revenue or profit stream from this market since it is used mainly for "socializing" and would have problems finding an application in business. While dating services can make money, I don't see VCs getting a return on their investment by this segment becoming a giant revenue maker. They are likely hoping that Yahoo, Google and the other main portals will buy into this space to increase their traffic flow (like Google's purchase of Blogger, which you are currently reading), but if these companies become interested, it will be a make versus buy decision and I am doubtful that the VCs will see a 10x return on their investment.

I was invited this weekend to join Friendster and since I was spouting opinions about its market, I thought I would join and check it out.

My first impression is the same as before I joined: it looks like a good way to meet people for socializing and to fill your Little Black Book. It is also probably a good way to hook up with people with similar hobbies, especially those that require a lot of people like Civil War Re-enactment. However, its usefulness as a business tool is questionable, at best.

I will give it some time and will invite some of my "friends" on board to get their opinion, but so far I see this as basically a dating service for young adults.

Some of the "friends" registered on the site are people having fun. There are at least a few cars looking for others to "rev their engines". Sweden, Countryof is also a member. Since this whole concept goes back to "Six Degrees to Kevin Bacon", several Kevins are also on the site, proving that, indeed, there are only six people between you and him.

Friday, October 10, 2003

The Death of the Fabless IC Model?

An article from EE Times today described a speech from the president of Nvidia, who made the following statement, which EE Times noted, raised a lot of eyebrows:

"A small fabless company is fundamentally long-term intractable," he said. Huang argued that given the increasing resources necessary to field a chip and the diminishing markets for application-specific products, the only survivors in the fabless world would be companies that "identified a broad swath of applications that could be met with a single piece of configurable or programmable hardware. Only then can they achieve the volumes necessary to survive."

This is one of those high-level general statements which might apply to a few fields, but does not apply to every single segment. He is correct that it is taking increasing amounts of capital to get an IC company off the ground, mainly due to the skyrocketing costs of mask sets, which are now over $1 million at the latest process nodes. But plenty of niches still exist where a nimble company with unique technology can create a "one-off" product and generate a large number of sales. They then have to maintain this lead as new companies and eventually the majors enter this field.

Thursday, October 09, 2003

The Digital Hand

Sort of a follow-up to my post below on the "Immutable Laws of Consumer Electronics", I found this posting on a VC website which discusses the "Digital Hand", which is a marriage of Smith's Invisible Hand with Moore's law. It has a lot of the same concepts which I put in my posting, which are pretty obvious to anyone who is trying to make a buck in high-tech these days.

The Digital Hand

Tuesday, October 07, 2003

More on Mot

This caught my eye this morning since I don't believe it:

Galvin insists semi spin off not tied to his departure

Analysts and others have been telling Mot to spin off this division for years, especially after it fell out of the top 10 last year. Two weeks after Galvin announces his departure, they announce the spin-off. That isn't a coincidence. It isn't until near the bottom of the article that we see what's going on:

Galvin declined to say whether he would seek a position with a separate Motorola SPS company.

They are going to parachute him into the new corporation. This has happened a number of times with other spinoffs with CEOs keeping some sort of title in the parent and working at the spinoff and collecting big salaries for both (see: Dwight Decker and the companies of Rockwell, Conexant, MindSpeed, Pictos, etc.)

Thursday, October 02, 2003

The Immutable Laws of Consumer Electronics?

Is there such a thing? Here are a few suggestions:

- Integration will always Increase (essentially a restatement of Moore's Law)

- Size and Weight will Always Decrease (ditto). Maybe a corollary to this that devices will become portable.

- Cost of Storage Will Always Decrease (Moore's law covers various RAM and Flash devices and a lot of writers have suggested a Moore's law for magnetic and optical storage)

- Analog will move to Digital (audio moved from tapes to CDs, video from VHS to DVD. Moves are afoot for digital TV and radio. Is digital power in our future?)

- Moving parts will be eliminated when at all possible (which is why magnetic storage is removed from devices whenever solid state storage is able to replace it). Another aspect of this, however, is the MEMS movement, which is going to try to do to mechanical devices what semiconductor manufacturing has done with electronic devices: shrink and integrate.

- Monochrome will move to color (photographs, TVs, printers, PDA displays, Gameboys, cellphone screens)

- Wired to wireless

- Gilder would suggest a law on bandwidth (I actually think he tried to promote a "Gilder's Law" for broadband to compete with Moore in silicon)

- Gates would put one on personalized content (non-recordable media to recordable media being but one aspect)

- Styling is increasingly important - In portable electronics styling has become more and more a differentiating feature. Cellphones are as much a fasion accessory as a tool for communication. Ditto MP3 players. I think laptops have a segment in this area. Apple is probably the only player who has done a good job on this in the desktop area.

- My personal one on the list is Window Manager's Law: Consumer electronics and the components that make them in the long term are all commodities and making money on either is VERY hard

This last case is why we have such a large emphasis on branding and a rush to streamline manufacturing and operations ("I'm sorry, we just sent your job to India"). There is no difference between an HP and a Dell computer - they use all the same components from the same suppliers. The winner will be the one who has the most efficient operations and the best sales channels to move the equipment (the brand helps the channel).

Any others?

Wednesday, October 01, 2003

Welcome to my blog. Commentary on anything that catches my eye.