October 9, 2003

The May Report: 10/09/2003: All roads lead to China which needs a currency
adjustment, Lester Thurow argues, noting that even India outsources to China. A
fascinating talk covering many topics by the MIT economist and best selling
author

Editor and publisher: Ron May, ron@themayreport.com, ronaldmay@aol.com,
773-525-3944.
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TABLE OF CONTENTS

The Scoop section:

— Briefly noted, by Ron May
_________________
The Scoop section;
______
Briefly noted, by Ron May

* MIT economist Lester Thurow spoke for about forty five minutes this morning
at the Chicago Athletic Association to an audience of about 175 people in an
event sponsored by BIGFrontier and Acquity. He then took about twenty five
minutes of questions which was followed by a book signing. For once, I was on
time for a morning event.

If I had to pick a headline from Lester’s talk, it would have to be the
emergence of China as a powerful economic force. It is not a matter of the U.S.
vs. China, but rather China vs. just about everyone. Thurow really did not talk
much about China in his main speech, but it came up quite a bit in the Q&A.

Even India is outsourcing to China. Even though China has a higher per capita
GDP than India, three times higher, Thurow said, wages in China are still very
low. Thurow posits that this is a vestige of the communist system in which many
things were and still are provided for free, like housing, energy, etc.

Let me give you the essence of Thurow’s China argument before getting into the
rest of his talk. He pointed out that the way GDP is measured, you can look at
a currency valuation or a valuation based on what is called “purchasing power
parity” (PPP) — how much is that collection of goods in Mexico worth relative
to its worth in China? Based on currency, the Third World as a whole has 17% of
the world’s GDP in currency terms and 34% of the world’s GDP in PPP terms.
China alone has 4% based on currency and 12% based on PPP. So, Thurow argues
that a major adjustment in the value of the Chinese currency, called the RMB
(or Yuan), is in order. The number he proposed is a 50% increase in the value
of the Chinese currency to bring it in line with true Chinese purchasing power.

He also was critical of the fact that our own Treasury Secretary Snow is doing
the negotiating here, noting that this is an issue that should involve General
Kofi Annan rather than just our guy. China’s currency concerns every country in
the world. In the Q&A which is where the subject of China came up in the first
place, the question was asked whether we are headed for some China-bashing as
our own economy lags. Thurow predicts that the outsourcing issue may be a
premier issue in the 2004 presidential campaign because this hits professionals
who are mostly Republican.

Thurow talked about three revolutions: technology, globalization, and the end
of socialism.

In the world of technology he mentioned that in 1700 economists believed that
there was no difference between countries in the per capita GDP because
everyone was in agriculture and all the technology was the same. Today the gap
between rich and poor is 140 to 1, he noted. With the advent of the steam
engine, the industrial revolution took off in Britain and everything changed so
that by 1780 industrialists were richer than dukes.

But Thurow notes that the British were “entrepreneurial tinkerers” because it
was the Germans with their chemical engineering industry who really changed the
game with what he calls the second industrial revolution. That was marked by
the systematic investment in R&D.

The revolution that is taking place today is in six areas of technology from
micro electronics to man-made materials to biotech, and Thurow seemed pretty
sure of himself when he said that he is fairly certain that 500 or a thousand
years from now, looking back on this time, the revolution that will matter most
is our ability to alter our genetic make-up. The four or five inch difference
in height that an NBA star has makes all the difference in the world, he noted.

In the Q&A period Thurow was asked about health care and he noted that half the
expenditure on health is spent keeping people alive in the last six months of
life. He also said that “wellness” can be achieved by getting rid of smoking
and fat, but he did note that being fat is a genetic disease and that our
tendency to overeat goes back to ore-historic man and our preparation for the
winter or lean period. But we no longer get rid of the fat in the winter, so
some genetic engineering may be called for. Thurow said that fat people (moi)
will be eliminated by nature about two million years from now, but why wait for
the problem to be solved when we can do it in five years through genetic
engineering? OK, I may be quoting him a bit loosely here.

Thurow’s argument on healthcare was that it works in a pure socialist system
where the amount of GDP dedicated to it is centrally determined and dictated
and in a pure capitalist system where the rich get it and the poor don’t, but
it does not work in the muddled middle (my words, not his.)

When Thurow arrived at MIT thirty years ago, the computer and information
technology revolution was the hot area, but that has been replaced by biotech,
he noted.

He did not move to biotech without paying the appropriate homage to Bill Gates,
the world’s richest man who Thurow says follows a great tradition in which the
richest man throughout history has been the person who controls key resources:
Julius Ceasar, the Sultan of Brunai, a Chinese emperor, etc.

Bill Gates is the world’s richest man, but he really owns nothing and makes
nothing. It is the shift from an industrial to a knowledge society. By the way,
Thurow does note that the biggest mistake in business history — one to the
tune of $559B — was when Steve Jobs decided not to sell his operating system,
but rather tied Apple’s fate to the sale of hardware. If he had chosen the
smarter strategy, he could have been Bill Gates.

The story on globalization was a bit more murky. Thurow noted that we are less
globalized today in some ways, but also pointing out that economies know no
national boundaries. Economic activity is dictated by the laws of economics, he
said: where can you produce the goods the cheapest, and where can you sell them
for the most? Economies used to be local, but there is no Chicago economy
today. There was no “American economy” in 1880, he said.

But specific economic policies of countries do come into play, it appears to
me, and when you consider what he said about China, that is especially so.

What has changed is that governments were functioning in the role of referees
when it came to the economy — actually they have been like air traffic
controllers, Thurow said. But now they must build the airports and become
players themselves. That point is confusing to me a bit because I thought that
the Japanese have been players in economic terms for a long time. I have to
admit that Thurow’s arguments on globalization seemed to need a bit more
flushing out.

The third revolution is the end of socialism which happened in 1978 in China
with the adoption of capitalism; 1989 in Eastern Europe and 1991 in the Soviet
Union. All three rejected socialism as the model to emulate. Thurow said that
socialism does not work in the long run because no one will take the risk of
working a hundred hours a week to stay poor. Capitalism taps into a basic human
drive: greed. To illustrate his point on the failure of the socialist ideal
throughout the world, Thurow used the kibbutzim in Israel which he says are
dying out.

In fact, Thurow said that Darwin got the terms “survival of the fittest” and
his notion of getting rid of the unfit from an economist of Darwin’s time,
Herbert Spencer.

In what appeared at first to be a digression, Thurow asked what the oldest form
of payment from one human to another is, and no, he said it is not
prostitution. It is professional music, and he cites evidence going back 6,000
years. Well, today we have the disappearance of a major CD store for
Harvard/MIT students that has been there for years. That is because the
students download their music from the net and don’t pay for it.

Thurow predicts that this will be the fate of many businesses which will endure
a similar blow to the one the CD producers have suffered. Following today’s
trend line, he notes that by 2011, there will be no more CDs sold, and
presumably no more produced.

Thurow commented on the current recession and the job situation by saying that
the numbers that most economic observers quote are very misleading. Thurow
argues that “probably 99% of the people laid off were working for profitable
companies.” This is a big change from the past where a company stood or fell on
its own profitability, but now everything is determined relative to market
expectations, so a profit of less-than-expected is interpreted as a loss.

The big problem in the so-called jobless recovery is one word, thurow argues:
productivity. He argued that we are in a “job losing recovery” since 100,000
jobs are being lost per month, totaling about 3 million since George Bush took
office in 2001. He said that by election day 2004, George Bush may become the
first president since Herbert Hoover to see fewer jobs in the economy when he
is up for re-election than when he came into office.

I got a little confused by his numbers, but tthe essence of what Thurow said
was that we have a 2.4% growth rate in the GDP, but we have a 5.4% (and he also
mentioned 6.8%) growth rate in productivity, so to create a new job we have to
have a 7% growth rate. Did I understand that correctly? As long as the increase
in productivity due to the internet, etc. continues to grow, it is harder and
harder to create new jobs.

I was also a little confused about Thurow’s posture toward President Bush. He
did not blame President Bush for the “job losing” recession, but he implied
that the president will have to pay the piper for the poor job situation.

It remains to be seen if this is just a one-off deal or if Steve Lundin is
really raising the bar. As local gadfly Brian Connolly commented to me, this
event was in a different class from other events Lundin has thrown. Even a Don
Schultz does not hold a candle to Lester Thurow, and certainly, as Connolly
commented, “one Thurow is worth a thousand Learmers.” I would like to give
credit where it is due. Steve hit the long ball on this one, much the way Sammy
did last night with his 450 footer. Keep it up Steve! On November 13th, Lundin
has the author of The Naked Corporation, David Ticoll, who will speak about
transparency in business.

I don’t know that I would go as far as Connolly’s “thousand Learmers” comment,
but it is refreshing to leave an event feeling enlightened and intellectually
challenged. Some of Thurow’s stuff is standard fare in his speeches.

The bit about the three types of patents: cluster, submarine and picket, I
heard him talk about a year ago. The bit about the knowledge officer (Gates
“demoted” himself from CEO to Chief Knowledge Officer — effectively) and the
sea monsters vis-a-vis European fears about genetic engineering of food is all
old stuff, but if you haven’t heard it before, it’s new.

Thurow’s point about patents was that they are essentially a bargaining chip.
You have to have lots of them, even if you have no intention of using them, to
play the game. Dell has 36 patents in supply chain management which they can
pull out of the hat at any time and use to sue another firm or gain some kind
of concession with. That is the logic behind picket patents which (if I
understood correctly), allow a company to surround a patented technology they
want to get without paying for it, and then use all the peripheral patents as a
bartering tool to get the core technology that they want. The Japanese use
picket patents, Thurow said, and IBM and HP have what he called a “patent
treaty.”

Thurow did explain why he called his new book, “Fortune Favors the Bold,” which
is a variation on the ancient Roman belief that “fortune favors the brave.” His
argument was that you may die being brave, but you will surely die being a
coward because if you cut and run, you could be killed by your enemy simply by
having him hit you in the back and there would be no danger to him. Being
brave, you may die, but being a coward you will surely die. Thurow believes
that the same goes for boldness in business. Another theme Thurow touched on
was that we should not aspire to being business leaders, but rather should view
ourselves as explorers.

At some level much of the talk was a series interesting digressions, but it
remained true to the overall framework. One of the most interesting had to do
with gender issues. Throughout history, men have had an enormous advantage
because of superior physical strength: from the hunting period where the
ability to get protein was key; to the agricultural period where warfare was
the key; to the industrial era where coal mining was crucial to economic
success. But today, there is no area where men have an advantage over women
based on physical strength, Thurow noted, pointing out that a friend of his
told him the best pilot in the Israeli air force is a woman.

Thus, brain power is key and women collectively have at least half of that in
the world, but Thurow observed that Arab societies that still treat women as
subservient will be at a disadvantage down the road for not using their women
in their economy.

Thurow mentioned one Moslem sect in northern Pakistan that does educate women
and they say “educate a man and you have educated a man, but educate a woman
and you have educated a family.”

The Arab world is a “basket case,” (that is what I wrote down and I have not
had time to go over the tape) Thurow said, noting that fewer books are
translated into Arabic throughout the entire Arab world each year than are
translated in Spain every year. He also said that the illiteracy rate in Arab
countries among women is about 80%.

Some facts Thurow comes up with (and I must admit, he appears to have an
enormous command of detail), just strike me that they will not stand up under
closer scrutiny. He said that the way we came up with 65 as a retirement age
was that Bismarck pulled the number out of the air at a time when the average
person lived to be 46. His argument was that based on that logic, we should not
offer retirement today until a person reaches 94. Retirement is essentially a
vacation at the end of one’s life, Thurow said, noting that his own father who
died a year or so ago at the age of 94 had 29 years of vacation at the end of
his life.

He also observed that by and large Americans abhor vacations and that our
system of vacation is essentially what it was in the 1950s, whereas in France
they have a standard six weeks along with many more holidays. He added that
Americans like “capital intensive vacations” — the power boat rather than the
canoe trip.

There were at least three or four other fascinating topics. One was the way
that Ireland became a more successful economy than Britain, by eliminating a
corporate income tax and luring many firms. Greece and Portugal remain the
poorest countries in Europe which is just where the Irish were a while back.
The Greek prime minister told Thurow (don’t you love it when we have speakers
like Lester or David Hale who actually talk to the decision makers) that he was
not going to go the Irish route, but Thurow noted that he has no selling
proposition for his country and that is what countries must do — sell
themselves, that is. That is what Thurow meant when he said that countries must
build airports rather than be air traffic controllers. Bob Ingersoll told me at
breakfast after the talk that the Irish have set up a lot of call centers and
that they exploited the Common Market labor pools. But they are losing jobs
now, Bob told me.

Thurow noted that Turkey is the Mexico of Europe as the supplier of cheap
labor, but it is losing ground to China. Dell is moving its operations from
Malaysia to China, he said.

A short lesson in international economics and trade deficits was given by
professor Thurow. He explained that because of compound interest a country
can’t keep a trade deficit going for long because the country soon ends up
paying just interest on the interest.

But the U.S. is not paying off debt through interest payments, he said. We are
selling our assets, he argued, noting the Chrysler/Mercedes deal and the sale
of Rockefeller Center. In total we have sold three thousand billion dollars of
our wealth, but Thurow pointed out with mixed emotion that we still have thirty
two thousand billion dollars to go.

Another interesting side note was Thurow’s comment about Swiss Air which
fifteen years ago was the most profitable airline in the world. They ended up
being like the ugly girl at the dance who is left at the end of the evening
(Lester, I thought you MIT boys were politically a little more correct than
that.) The Lufthansa model which linked them to airlines like Delta in a
complex web of international service or the Southwest Airlines model which we
all know well won out over the Swiss Air model: an airline that remained
strictly a national airline.

Thurow argued that Swiss Air could have cashed out with billions if it had sold
its very valuable landing rights in the mid-1990s and distributed the profits,
but that would have meant an airline voluntarily shutting down and even though
it was a private company, it was treated as a national resource in Switzerland
so no CEO would ever think of such a thing.

Time is now short and I have to go if I am going to get to the Kellogg event on
India and China.

* I have not given you a “Ron’s Random Walk” section for a while, so here is
some trivia I have picked up along the way.

— I sat next to a Ph.D. student in communications at Northwestern at
Intelligentsia coffee shop. He is teaching a class at UIC and working on his
dissertation. The title of the dissertation is “Wrestling with the Audience:
Fan Culture Online” and it is about wrestling online. Dan told me that a
Kellogg professor, Rob Kozinets, has done some work in the area he is
interested in. Rob coined the term “netnography.” He also mentioned the work of
Nancy Baym who has been writing about online communities since 1995 based on my
Google search. One book listed on Amazon by Nancy is “Tune In, Log On: Soaps,
Fandom, and Online Community”, December 1999. Dan can be reached at
d-weisberg@northwestern.edu.

— Another person I happened to run into was Bruce Beal who answered my
standard query about what he does with this retort: “I fix juries.” And indeed
he does. There is a whole industry centered on the science of jury selection.
Bruce is a sociologist, so he deals with demographics. The heavy hitters, the
psych people, don’t come in until later. Bruce’s firm, Trialgraphix.com, has
250 employees and is headquartered in Minneapolis with offices here and in six
states. They provide full service litigation services including all the
graphics that one might find used in a trial. Their local number is
312-666-1400.

— Walking down Broadway on Tuesday I noticed that Bean.net is closed. There is
a “No trespassing” sign in the windows and a “For rent” sign as well.

— Tim Smith tells me that he is getting a far more favorable reception at
events outside the Chicago area than he is right here at home. He singled out
the CSA as an organization he is a corporate member of (paid his $2,500) but
does not seem to be able to get their attention.

Tim is concentrating his efforts on the utility industry as a vertical and he
is looking at technology associated with that industry which brings him to the
subject of embedded systems, machine to machine communications and new data
base structures. An example is a nuclear power plant which must communicate
with systems, and manage hard assets and machines. Last year, 150 million PCs
were shipped, but there were in the neighborhood of 1.5 billion embedded
processors shipped. That could be a chip on a machine, but each chip has data
requirements. Tim is building the readership of his publication Wiglaf which
now has about 1,000 subscribers (free subscription.) And since he is
concentrating on an industry vertical, his readership is now global. At
national conferences in utility sector, he is treated very differently from the
way he’s treated here, he told me.

Anyway, he called me to tell me that he submitted an article for publication in
a San Diego-based technology online newsletter called T-Sector and was told
that they would be happy to publish it for $350.

We discussed how similar that sounds to a local tech pub that used to do the
same thing and Tim noted that this pub (which shall remain nameless for the
moment) now publishes one original content article for every fifteen other
articles it essentially repackages. They have become an aggregator.

— I had breakfast with Bob Ingersoll after the Thurow talk today. He gave me a
few “scoops.”

Jeff Coney was renewed for his ITEC contract about six months ago.

Darcy is selling her magazine (the hard copy pub) to a female publisher who
wants the rights to the “Women in Black,” the “Top 100″ and the “Top 50
Companies.” So even though Darcy keeps the on-line pub, she gives up the rights
to continue those issues. I asked Bob what Darcy sold the paper for and he
speculated that it was well under $100K, perhaps $25K, he said. That sounds
about right.

Bob also told me that Pary Singh, one of the founders of Ethnic Grocer, has
started a VC fund in Oakbrook. Apparently Crain’s had something on it.

We talked a bit about Ian de Hueck and his activities. Bob thinks he may be
essentially out of biz. Venture Craft was his main activity and that domain
site I wrote about, SmartSpot, does not appear to be operating as a business
any more.

Bob said that Roberto Melo of dChain told him recently that he is still making
a go of it with cheaper labor in Panama. Cheaper labor is referring to
developers and the like.

Bob also told me that the way Bill Miller made his money was by selling Golf
Digest to the New York Times twenty years ago. Bill just returned from a trip
to China and that is in tomorrow’s report where I write about the TiE event
from last week and the Fulgoni talk.

* The attendees at this event were from a more diverse group than the usual
audience at a BIGFrontier event.

Here is a list of the companies (I won’t say how I got it) that were
represented at the event, and it may give you a sense that indeed this was a
different crowd. Some regulars like George Nelson were there, but in general it
seemed like a higher class of people and Nick Andrus was not there. But Chris
Dalton was one of the sponsors, well that’s a story for another day. Hey, the
“Old Ron May” appears to have slipped back for a moment with that comment. I
saw Fred Kush, by the way.

WHITTMANHART
Acorn Ridge Group
Athabasca Financial Inc
United Printers’ Alliance
MindSight
MESA Technology
myFootpath, LLC
AdaptiveHR
Urban Retail Properties Co
SDL International
Liberati
Trammell Crow Company
Caliber Communications
C.S. Carstens Consulting
Herzenberg Associates
Morningstar Inc
Usable Systems, Inc.
Initiate Systems
Commonwealth Capital Advisors
nVISIA, LLC
Knappnetwork
Brinks Hofer Gilson & Lione
LoSasso Advertising, Inc
Doculabs
Solution Technology, Inc.
Janovsky International
Mechanical Engineering Department
Arnstein & Lehr LLP
Strategic Accounts
FNWeffer Associates
D&B Sales & Marketing Solutions
Illuminate, Inc.
Performics
Sigman Associates
DePaul University
Swift Current Consulting L.L.C.
Tomorrow’s Software, LLC
The Jigsaw Group
Carmichael Lynch Spong
Fimat Facilities Management
JK Realty
ThinkFAST
MIT Enterprise Forum of Chicago
Finance Leaders Association
Corvus Blue LLC
Covista Communications
Neo Pharm
Magus Solutions
Chicago Systems Group
Herbst Marketing
WESTWOOD ONE
Global TradeSource
PuttingPen2Paper
OMNI Enterprise Computer Solutions
Bio-Imaging Research, Inc.
Lederer Consulting
UBS Financial Services Inc.
CentraLytics, Inc.
Fathom Solutions
Subconit Solutions
Prospex Inc.
Kanbay Incorporated
Canning Associates, LLC
Argend Business Services LLC
The Davidovitch Group
Direct Services Inc.
Peter Haag Consulting, Inc.
Stagnito Communications, Inc.
Kodukula & Associates, Inc.
Candida Corporation
DePaul University.
Binary Machines, Inc.,
Thornton-Tomasetti Engineers
International Trade Association of Greater Chicago
JPMorgan
DS Services
Industrial Technologies Inc.
Acme Steel Company
Kuhn Capital
Goodbay Technologies, Inc.
Bankers Life and Casualty
JigZaw Inc
NASA Illinois Commercialization Center
Fimat Facilities Management
INRange Management Systems
W2 Unlimited
Taglen Software Solutions, Inc.
Kanbay Incorporated
Hines
FFM, Inc
Chicago Systems Group
Wiglaf
Barrington Consulting Group
The Localization Institute
Arrowmark Communications
America’s Health Today
Chicago Systems Group
UBS Financial Services, Inc.
Argonne National Laboratory
LifeScience Partners LLC
TLC Associates
Argonne National Laboratory
The Art Institute of Chicago
BIGfrontier