Durable high oil prices might kill the main lubricant of globalization. And trigger decisive innovations in the car industry.
Why worry about the Baltic Dry Index (BDI) in a column usually devoted to media and technology? Two reasons. One, the index is an advanced measurement of the state of the worldwide trade, of its growth. Two, we sense tiny drifts in the tectonic plates of globalization. Recent movement in the BDI gives interesting clues on why and where the plates are moving. (Bonus in this week’s box: we forget newsmedia for a moment, its fate looks bleaker than ever).
The BDI has nothing to do with the spot value of Baltic herring. It derives its name form the Virginia & Baltick coffee house in London back in 1744. Still traded in the City, it tracks the cost of shipping raw goods across the planet. In theory, it is an economic indicator in its purest form, deprived of any speculative distortion. It is a precursor in the sense that it reflects the movement of major commodities (iron ore, grain, steel) calculated on a day-to-day basis by monitoring costs on 24 major shipping routes. Exactly three years ago, in August 2005, the index was at 1700. It reached its all time high on May 15th 2008 at 11,465. A 574% increase. Since then the Baltic Dry Index has lost 38% to around 7200. What’s going on?
Two consecutive events are visible here. The first one is the combined explosion of commodities and oil prices. This boom multiplied by a factor of six the cost of sending a ton of steel to China. The second event is the consequence of these soaring costs: worldwide stagflation — lackluster growth combined to inflation pressure. The rise of the BDI also impacts the cost of shipping finished goods back to Europe or America. In the last two years, depending on time and route, the cost of chartering a container vessel has doubled or even tripled. Consequently, shippers are about to do what airlines do: one, pass the increase on to the customer and, two, reduce trim capacity to preserve (or restore) margins — a dual inflation boost at the end of the chain. Maersk, the Copenhagen-based and world’s largest container line is undertaking its sharpest cost reduction in its 103-year history by reducing 12% of its workforce. Traffic departing from the Chinese ports of Shenzhen or Shanghaï is already slowing down a little. This signals a coming drop in demand from importing countries.
The era of cheap oil is gone for good. Gone are the goofy projects such as superfast container-carriers able to halve the time of sending boxes of electronic goods from China or US or Europe (now ships are reducing speeds by 20%). Others will cry over Maersk’s bad timing: two years ago, the company launched the biggest container ship ever built, the 452m long Emma Maersk, able to carry 13,000 “boxes”.
The main lubricant of globalization was the negligible costs of shipping. It’s gone! Now, economists see a coming move: the Neighborhood Effect, putting factories closer to consumers and components suppliers (see story in the NY Times). The change won’t happen overnight — it takes years to setup a production and logistics chain — but the trend is there. In a few years, we might see electronic manufacturers emerge in Eastern Europe or Central America. After all, the first (2001) version of Microsoft’s Xbox was manufactured by Flextronics in Mexico.
Besides altering the supply chain’s geography, durably high oil prices will trigger innovation. (In that respect, green frenzy will help). Again, it will take time. The auto industry in notoriously slow to (actually versus verbally) embrace true innovation on a grand scale. Ten years after Toyota’s first Prius, sales of hybrid cars in the US market are not expected to reach the million mark before 2012 (compared to about 15 million new cars to be sold in the US in 2008). And the truly electric car remains stuck at the prototype stage, this because battery of fuel-cell technology isn’t really there. Not yet but soon say techies and investors…
Amazingly enough, these two technologies, the hybrid and the electric motor, are old inventions. The first one goes actually back to 1901, when Ferdinand Porsche envisioned a dual propulsion system. A more elaborated HEV (Hybrid Electric Vehicle) concept was set in the 70′s by a scientists named Victor Wouk
Even Audi tried it. In the end, the car that became the Prius was conceived in 1993, when Eiji Toyoda, Toyota’s chairman and the patriarch of its ruling family, expressed concern about the future of the automobile (read this excellent story about the birth of the Prius in Fortune). And as the owner of one, I can safely say that, great as it is, the application is still in version 1.0.
As far as the full electric car is concerned, the idea is roughly as old as the automobile itself. Just one example, recently, Google made a great deal of its initiative toward plug-in Hybrid (a Prius with additional batteries to be recharged from the electric network, not the vehicle’s kinetic energy, yielding an intergalactic range of 60 km on a single charge). But the very idea of a public vehicle recharger goes back to 1899, it was invented by General Electric and was called the Electrant. A question you might ask: why were these inventions not adopted by the car industry? Well, technical hurdles are part of the reason. (See the headaches of the expensive new Tesla which holds 6800 laptop-size batteries for a 450 km range). But the main explanation lies into the conspiracy engineered by the Big Three US automakers together with Phillips Petroleum, Standard Oil of California and Firestone Tires. It is long forgotten but, back in the 20′s and 30′s, the United States urban landscape was dominated by public transportation systems. But thanks to the unholy alliance acting under the name of National City Lines, electric tramways and trolleys where methodically removed and burned, paving the way to the individual automobile era (read the insightful book by Edwin Black: “Internal Combustion. How corporations and governments addicted the world to oil and derail alternatives“, or watch the documentary “Who Killed the Electric car” here on YouTube)
A sad, ironic form of justice: The Big Three are now on life support. After decades of mocking the Californian crazies (they often said fags) and their Japanese tin cans (read Honda Civics) they’ve largely lost the initiative. Now, the ball could be back in Silicon Valley as technology will play a decisive role in the making of the new automobile. The region possesses the three components needed for the big automotive turnaround mandated by durably high oil prices: intellectual creativity (for instance the ability to design the complex software-managed systems that will be required for next generations of hybrid cars), capital from companies such as Google, the ability to raise big amounts of money, and the innovation DNA. San Jose as the new Detroit (without the factories)? Possibly yes. –FF