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Ana Nichols, the Managing Editor of the Industry Briefing at the Economist Intelligence Unit, gave a talk on January 30^th, 2014 on the forecasting the trends in the Healthcare industry in 2014.   The full report on all six industries—automotive, retailing, energy, healthcare, financial services and telecoms, is to be found at

http://www.eiuresources.com/Industriesin2014

This report has been published for the past four years, and includes an annual survey of confidence and opinions among business executives.

1.  INDUSTRY SURVEY

The survey done in November 2013 of 647 executives, a third of whom were at the C-suite level, asked about their expectations in 2014 in relation to the global economy as a whole, their particular industry, and then their company.  Did they think that conditions would be better in 2014 than in 2013, worse in 2014 than in 2013, or about the same?  Historically, the sentiment is always much more positive when it comes to specific companies than it is for the global economy as a whole.  Obviously, more executives think that their particular company is going to outperform the market.

If you look at the balance of sentiment, which is defined as the percentage of those who believe that the economy will do better in 2014 than in 2013 minus the percentage of those who believe that the economy will do worse in 2013 (and ignoring the percentage who believe it will remain the same), you get the following figures for the various industries:

As you can see from the chart above, the healthcare industry had the lowest balance of sentiment of all six industries, although the figure listed above of 17% is higher than the negative figure that existed last year.  This is partly due to the pressure that the market has been under.  Overall, the respondents were more positive in the Middle East, and far less positive in Latin America and in Europe, with Europe scoring slightly higher than Latin America.

One of the other questions we asked, to which we got some very interesting responses, was “which country outside the BRICs (Brazil, Russia, India, China) offered the greatest growth  prospects?”  When we’ve asked this question in the past four years, people have always said “developing or emerging markets”.  However, this year overall the respondents starting citing quite a few developed markets.  Although what you would call developing markets came on top of survey, there were quite a few appearances of Japan, USA, Germany, and Canada.  From the healthcare respondents, here were the responses:

Which country offers greatest growth prospects (outside the BRICs)?

Mexico was offered by far as the best growth prospect, followed by a selection of quite a lot of Asian countries (Vietnam, Indonesia, Singapore), one in Latin American (Argentina), but some developed countries as well (Japan, USA, Germany).  Overall, considering all six industries, Indonesia came out on top, so it was unusual to see Mexico on top of this particular list for healthcare.  South Africa also came up higher on the all-industry list of greatest growth prospects.

Regarding the issue of the relatively low balance of sentiment of respondents with regards to healthcare, this is the case despite the fact that overall spending on health care is rising steadily.  This is part of a growing industry, and yet respondents were not very positive about prospects this year.

The one caveat is that this is nominal spending; this means that rapid growth in some countries reflects rapid inflation or population growth, which are some of the factors that is driving spending, particularly healthcare inflation.  There is inflation in healthcare partly because of new products being developed and the need to incorporate more advanced medicines.  But population growth is also quite a large driver of healthcare costs, particularly in emerging markets.  The other drivers we need to talk about are an aging population:  we calculate that about 10% of the world’s population is going to be over the age of 65 over the next five years.  In some countries, that percentage is extremely high, so for example, in Europe it’s around 20%, and in Japan it’s getting near 30%.  This is obviously a big driver of health care costs, because of the sheer amount of care that the elderly need and when they have health problems, they tend to be complicated ones which need a lot of investigation and often a long hospital stay.  This is not just restricted to developed markets; obviously, China has quite a very similar aging problem, although it is not quite to the level of Germany and Japan, which have the highest percentages of population over 65%.

One factor that is not massively driving health care spending growth is economic growth.  We actually calculate that, having undergone a massive boost as a percentage of GDP in 2009, when the economy dropped, the percentage of GDP devoted to health care spending has been lagging behind.  It’s expected to continue tapering off as a percentage of GDP.

Over the world, there is a huge range in how much countries spend on healthcare.  Overall, healthcare spending now swallows about 10.6% of global GDP.  However, the percentage of GDP ranges from 2.4% in Pakistan to 18% in the US.  There are some regions of the world where, despite not being particularly wealthy, health care spending is really quite high.  Latin America’s health care spending, for example, is about 8%, which is not too far from the 10-11% spent in Western Europe.  The transition economies spend a relatively large amount of their GDP on health care, but Asia is a bit low, with the Middle East and Africa being the lowest of all.

In all countries, however, the basic pattern is that the demand for health care is insatiable, which means that the spending on health care will continue to rise.

The next part of the webinar which I will continue tomorrow deals with some of the basic issues in the healthcare field.   Due to commitments today, I was not able to finish the webinar today, so please return to this site later for a complete summary.

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Jason Sumner, Lead Telecoms Analyst at the Economist Intelligence Unit, led a webinar on Wednesday, January 22^nd from London regarding the outlook for the telecoms industry in 2014.  He looked at an industry-wide survey to gauge the sentiment of industry leaders, after which he discussed three key issues that will be facing the telecoms industry worldwide in the coming year:  4G network rollout (particularly in China), M&A activity, and the net neutrality issue in the US.  Finally, he talked about Telco operator strategies during the coming year, where they will be positioning and where EIU thinks they should be positioning in order to take advantage of the global trends in the industry mentioned above.

1.  INDUSTRY SURVEY

Out of the six different industries analyzed by the Economist Intelligence Unit, the telecoms industry was the one that was the most positive in terms of outlook for 2014.  Most respondents think that the conditions for the industry in 2014 will be the same or better than those in 2013.

If you look at the balance of sentiment, which is defined as the percentage of those who believe that the economy will do better in 2014 than in 2013 minus the percentage of those who believe that the economy will do worse in 2013 (and ignoring the percentage who believe it will remain the same), you get the following figures for the various industries:

As you can see from the chart above, the telecoms industry had the highest balance of sentiment of all six industries.  The figure above is the average for all global respondents.  Part of the reason for the upturn in the telecoms industry is because of the upturn in the global economy as a whole.

Here are some sector-specific questions that were asked of the various respondents to the survey.

Most notably of the responses to these questions is the fact that about two-thirds of respondents believe that telecoms will be able to monetize their investments in 4G networks, and in a related question, three-quarters of respondents believe that revenue from data services will make up for lost voice and SMS revenue in 2014.  EIU tends to agree with the respondents on the issue of monetizing investments for the 4G networks.  However, although data service revenue is looking very positive, with companies such as AT&T and Vodafone looking at double-digit growth rates, it is still debatable whether they are going to start making up for lost bread-and-butter revenue of voice and text as early as this year.

Looking at some of the other results, not surprisingly emerging markets are seen overwhelmingly as having the best opportunities, but an interesting caveat to this is that some of the bigger operators are not always looking to expand in emerging markets, potentially because some of those emerging markets are relatively closed to telecoms, such as China, or perhaps relatively uncertain, such as India.

Looking at “big data”, it is definitely believed that it’s going to be exploited this year by telecoms, with about 71% thinking that telecoms will sell more “big data” products and services.  EIU thinks that this is not necessarily an opportunity on the consumer side for operators, but more on the B&B side with anonymized data providing valuable market insights for other businesses such as location-based advertising.

On regulation, respondents are split, so we are looking at a third who agree that regulatory agencies will change rules to allow telecoms operators to monetize more of their customers’ data in 2014I, a third who disagree, and a third who neither agree nor disagree.   Jason Sumner thinks this reflects the various regulatory environments around the world.  There are no clear global trends; there are more regional trends.  So, for example, in the US, as far as operators are concerned, regulations are headed in the right direction.  We will discuss the issue of net neutrality later on in the webinar (see paragraph 4 below).  Europe is a perennial question mark over which way they are going to go.  The EU seems to believe in the need to loosen regulations and allow for consolidation, but national regulators are less sure.

2.  4G—GREAT EXPECTATIONS

The first of the three issues we wanted to look into a little more detail is that of 4G and 4G revenue.  Just as a reminder of the survey question regarding 4G, two-thirds of the respondents believed that telecoms operators will begin to monetize their investments in 4G networks in 2014, and three-quarters thought that data services revenue will make up for lost voice and SMS revenue in 2014.

In terms of the global situation, let’s look at how the 4G network has grown.  As of January 15^th, there were 263 LTE networks commercially launched in a total of 97 countries, a growth of 112 networks  from  the 151 networks launched by the end of 2012.  This number is estimated to grow from 263 to 350 networks in service by the end of 2014, which does include MVNOs (mobile virtual network operators).  This represents about a 33% rise in the number of networks, so the networks keep proliferating

In terms of countries to watch, the EIU is looking quite closely at China.  It is currently in a race to rollout 4G networks and offer 4G services.  Of the three major suppliers in China, China Mobile is definitely in the lead in terms of infrastructure; it’s allocated $3.2B for what will be the largest LTE network in the world when and if it is completed. The Chinese government late last year favored China Mobile’s TV standard and gave them that headstart.   Its competitors, China Unicom and Telecom must wait for the FDD (frequency duplexing division) standard and are resting on their laurels.

So, for example, China Unicom, which is the2^nd biggest operator, did get a TV license, but is not planning to build a whole new network based on that.  It’s actually pursuing a hybrid strategy, by not building its new network but rather upgrading 3G speeds in selected cities, and by doing that it’s able to advertise close to 4G speeds crucially with 3G prices for subscriptions and the devices.  So far, given some of the issues that China Mobile has had with its rollout, they seem to be holding on to their high-end customers.  China Telecom is actually not taking much action and appears to be waiting for its FDD licenses before it moves forward on things.

The situation as it stands in January 2014 is that licenses have been issued, 4G has been launched, but in terms of China Mobile, take-up has been somewhat tepid as compared to expectations.  It also recently launched the iPhone, and that too has been rather subdued compared to other iPhone launches, part of that reason perhaps being because of the price point, but also because iPhones have been in China for quite a while now.  So we think that in the long term, China Mobile is going to be poised to take advantage of the switch to 4G with its big network, but in the short term, the market may favor that hybrid approach by China Unicom.  This all has huge implications for what is or what will soon be the largest M-commerce market  in the whole world.

Just staying on the topic of 4G networks, looking more broadly in terms of pricing and whether returns are being made, 4G pricing is tending to favor operators at the moment; there seems to be less “all you can eat” packages in 4G than there were in 3G.  As previously mentioned, operators like AT&T and Vodafone have seen double-digit rises in data revenue and South Korea has seen some encouraging signs in ARPUs (average revenue per user).

Looking at some data from the GSMA this time, they’ve looked at the situation, and where 4G has been deployed in developed countries, ARPUs are rising from between 10 and 40%, so there are some positive signs early on.  I would emphasis this is at the early stages of take-up, so in the US for example  19% of connections are on LTE, whereas only 2% are on LTE in Europe.  So in the early stages, we are seeing signs of price wars in some developed countries.  There is some price competition going on in the US, where all four operators now have the iPhone.  France is pretty much in a full-fledged price war for 4G.  Here in the UK,  EE is arguing based on some early success that it can differentiate based purely on the network, but we’re going to see 4G competition heat up here to test that.

Looking long term, its hard to see why 4G won’t eventually be commoditized like 3G networks, and the big question is whether you can actually differentiate on network quality; certainly operators are trying, and it’s an open question.  Some of the strategies surrounding this we’ll look at in more detail a little bit later.  They are definitely trying to differentiate through partnership, through their own branding, and then through technology as well.  There’s a lot of research going on trying to speed up networks using existing infrastructure which would obviously safe money on capital expenditure.

3.  MERGER DRIVERS STRONG FOR 2014

Let’s turn to the second issue, which is mergers and acquisitions in 2014.

Taking a step back, let’s look at the mergers and acquisitions that took place in 2013.  Based on data from Mergermarket, in terms of total TMT M&A activity, it went up from $320B in 2012 to about $510B in 2013, a 54% increase over the previous year, and also the highest annual value since 2006.  There were so-called 14 megadeals that were above $5B each, and that has been the highest number of those so-called megadeals since 2007.

The Vodafone-Verizon deal  was, of course, a huge part of this, when Vodafone sold its 45% stake in Verizon for $124B; that made up a quarter of the total TMT M&A activity for 2013, and represented 5% of all global M&A.  Without that one deal, TMT M&A values would still would been up 16% from 2012.

In terms of looking at the M&A activity in the sector of Technology, Media, and Telecoms or TMT, it was particularly strong in the Telecoms subsector.  Looking strictly at Telecoms, it was actually up over 100% on the previous year, of course, based largely on the Verizon deal.  It would have actually only have been about 3.8% on the previous year looking if that particular deal was stripped out.

There are reasons to believe that this momentum will carry over in 2014 because of some of the drivers we’re seeing.

• Eliminating competition–There’s a need in some developed markets in terms of competition and price pressure to consolidate and to be able to raise prices.
• Building scale–But there’s also a need to expand internationally, which relates to boosting  top-line revenues,  to building scale for leverage in some of the content partnerships these companies are engaging in, and adding spectrum.
• Cost synergies–There is as well as the ever-present need to achieve cost synergies.
• Favorable economy/market—This last factor is perhaps the most important, with a rebounding global economy, increased deal activity, and the appearance that equity markets are more friendly, we think this is going to carry deals forward into 2014.

There is just one caveat to that:  on the counter side of that, regulators are still wary.  Especially in Europe there is a test case that is coming up, but it’s still unclear that regulators in this part of the world are going to be open to consolidation on a national level.

There are several potential deals in the cards for 2014.  Sprint and T-Mobile are in talks at the moment, but I want to look a little bit more closely for a moment at the potential deal between AT&T and Vodafone.  AT&T is the largest operator by revenue in the US, and it is in increasing competition with other operators in a maturing smartphone market.  It’s at the top of the tree, but there are worrying  signs in terms of revenue.  Vodafone has an enterprise value of about $228B, so if AT&T were to actually buy Vodafone, it would give AT&T the scale to drive up their stock price and earnings per share, which has been relatively flat as of late.  As far as AT&T is concerned, it would give it access to lucrative markets which we believe are relatively saturated such as the UK and Germany; they don’t seem to be interested in developing markets.  The reason why they are interested in Europe is because of that figure I mentioned earlier, that only 2% have LTE connections.  So Europe has yet to adopt 4G on the scale of the US, and AT&T definitely sees this as an opportunity.  The main reason why 4G has lagged is arguably because of underinvestment, and also arguably because the national regulators are keen to keep competition high and consumer prices low.  It’s a bit unclear at this point how AT&T is going to reverse that trend, especially if you add on the complications around some of the privacy issues under consideration, and some of the international politics going on, where some of the national regulators in Germany and elsewhere are likely to question, if only to use it as a political bat to hit AT&T over the head, their involvement in surveillance operations by the NSA.

4.  NET NEUTRALITY TESTED IN THE US

The last issue we will discuss before go into detail regarding strategy is the whole issue of net neutrality in the US and where it might be headed for 2014.  First a little bit of background.

The FCC established the current net neutrality rules in 2010 to prevent AT&T, Comcast, and all of the operators from giving preferential treatment to their own web traffic or hampering competitors.  Verizon challenged that policy in Federal Court late last year, and the situation now is that the decision has come down by a lower Federal Court in early January ruling in favor of Verizon saying that FCC may not impose those rules on ISPs (internet service providers).

So the result is that advocates of net neutrality are fearing that we are seeing a watering down of the whole concept of the open Internet, which would ultimately lead to less consumer choice.  Now Verizon on its part says that it allows them to “innovate,” which reading between the lines means offering tiered pricing for speed, for quality of service, and even going so far as pricing content on the back end for the content provider.

In reality, we think that this is just one skirmish in the wider war over net neutrality in the US.  2014 is going to see quite a few big decisions from the key players:  the operators, the regulator, and even the content providers.  For the operators, I think the question is what to do in light of this small victory.  To us, they seem unlikely to move very quickly to take any radical action like charging the content providers in any major way.  This is for fear of perhaps upsetting the regulator, who is in the midst of deciding which way they are going to go forward, as the case hasn’t yet been heard by the Supreme Court, and also for fear of upsetting the consumers at this point.

Tactically in the short term it does give impetus to proposals similar to AT&T and its sponsored data package proposal which was just announced prior to the court decision.  If you’re not aware of that, it allows third parties to subsidize tariff-free content for AT&T consumers.  Now this proposal was actually made before the ruling, and to us it could indicate some relatively conservative action that operators might take with the fixed Internet because the sponsored data applies to the wireless Internet which technically net neutrality didn’t cover.  To us the operators are looking to a consumer-focused strategy to take advantage of this if they do go forward by making something free rather than losing that PR battle in terms of shutting things down, especially the biggest and most popular content providers.  It would not be good from a public relations standpoint, or even a business standpoint.

So we have yet to see the content providers speak out on this in a big way; I’m sure they are really against it, but are waiting to see how it plays out.  Now the ball is in FCC’s court.  They have a decision to make about whether they are going to rewrite the rules.  There is some hope on the part of net neutrality advocates that the actual concept is still OK but the way they went about it wrong.  One of the judges who made the ruling did say the fears are justified, and acknowledged that powerful incentives do exist for telecom companies to offer preferential access.  So that does give some hope to net neutrality advocates that there is a way to rewrite the rules to bring this concept back.  They could appeal it to the Supreme Court, and if they do end up rewriting the new rules, they need to consider erasing that distinction that they had before between the fixed and the mobile internet, and also coordinating it with the rewrite that is currently going on in Congress of the Telecoms Act.

5.  STRATEGY:  CONNECTIVITY ORCONTENT OR BOTH?

Looking beyond 2014, and some of the strategies that operators might employ, I’ve divided this into three issues.

The first issue is the core business of connectivity.  We’ve heard a lot about OTT (over-the-top:  delivery of video and audio over the internet) taking over and ARPUs declining, and the “dumb pipe.”  In reality, if you look at it, the business of connectivity is not such a bad business to be in, just because it is set to explode.  If you look at developed markets, where our SIMs, although perhaps not LTE, are getting saturated, there is huge potential for M2M (machine-to-machine:  technologies that allow both wireless and wired systems to communicate with other devices of the same type) and all sorts of devices becoming connected and having SIM cards.  And then if we look in developing markets, there is huge potential still for mobile phones to be connected.  And then following that, the M2M trend will keep continuing or even happening simultaneously in developing markets.

This is a good segue into the second issue, which is mobile content and applications.  Another opportunity is the fact that software is actually going mobile.  In the short term, this is causing a lot of fear and panic:  no one can quite tell who the winners and losers will be.   But holding the connectivity trump card is quite an advantage in the new mobile environment.  In order to really accelerate those revenues, though, it will be about partnering up.  We’re already seeing some exclusive deals of the operators with especially popular content such as music.  We’re seeing AT&T partner up with Beats (music streaming service) in the US; Vodafone has done a similar deal with a music streaming service in the UK.  This goes a long way to avoiding the commoditizing of the network.  It’s really about competing in consortiums, even in the B2B (business-to-business) space.  We see some operators partnering up with healthcare software providers; they have found that they are able to really share ideas and create something new with those partners by mixing up software and the idea of making software mobile.  The software companies don’t necessarily have the expertise to think about the potential for connectivity and what it can bring to their service.

So we’re going to see small bets across the ecosystem start to pay off.  Right now the operators are in the midst of making loads of little bets; we’re kind of a stage where there’s uncertainty around what customers are ultimately going to accept.  But we are starting to see the outlines of where M2M is going to be headed.

The third and final issue is, we hear a lot about data analytics potential.  Our survey respondents are quite bullish on the idea that telecoms are going to be able to exploit this opportunity.  Clearly there’s potential, it’s unclear exactly where and how the opportunities will emerge.  There’s a lot of data being generated, you have to think that a lot of it is going to be worthless, so you can’t just think that every piece of data is going to be interesting.  I think we are just at the early stages of figuring that out.

Having said that, I think there are a lot of positive trends, at least positive for those holding the data, in the fact that consumers seem to have accepted that bargain of data in exchange for free services.  On the positive side for telecoms, the industry is actually very good at using internal data to understand its customers and usage patterns.  But it does need to get better at utilizing it and monetizing it externally.

Some of those promising areas are in the B2B space, where we are looking at location-based advertising, with some interesting things being done around logistics, city planning, transport solutions for big events, etc.

QUESTIONS AND ANSWERS

1.  What is outlook for GOOGLE? 

Google is creating fiber networks in several US cities.  Will it become direct competitor to AT&T?  You can never say never, but they are unlikely to go full-scale into the fiber business, but in a limited way, it serves purposes.  It is a great experimenter, they can experiment on superfast networks in this way.  It does put pressure on the operators like AT&T and Verizon to roll out faster networks.  AT&T has argued that the demand is not there for superfast connections.  But with pressure from Google, it is reconsidering.

2.  What about rural areas and emerging markets?

It is growing opportunity.  Overall main opportunities is in urban areas, but it is spreading to ever smaller cities as they are connected by broadband.  It depends on a few factors, such as connectivity, device prices, and user knowledge.  These last two factors are getting less important.  Some companies are looking at satellite market in rural areas.

All of those things apply in Africa.  One thing that makes Africa unique is that they are a 2G continent.  There is great potential there, but for the operators it is about taking things slowly in terms of technology.  Making applications for feature phones (2G), and educating public about mobile phones is promising.  In these places where there is a gap, there is massive mobile penetration albeit 2G.  There is a push towards 3G smart phones, but there is a great push towards services.  There is a huge opportunity to provide services over mobile devices.  The impetus is coming from governments mostly, but operators need to show the way in growing how it can be tied to development goals in Africa.

3.  Could you say more about net neutrality?  Will telecoms starts charging YouTube and Facebook for bandwidth?
Things are in limbo in the short term, it does give operators are a tactical advantage because regulations are beginning to go their way.  The conservative court Supreme Court may go the way the previous appellate court already went.   The operators won’t go full bore at this point. 

4.  Can Telcos beat Facebook and Google?
No, they can’t, and they don’t need to.  For a huge Telco, it is not going into an advertising model, but keeping with subscription model.  They can’t overthrow Google, but the market for information is huge and growing, and there is no reason why they can’t enter that market in intelligence ways, starting with B2B data.  It gets around current regulations, AT&T is hoping that there will be relaxation of regulations regarding use of consumer data in new Telecoms Act.  Their data is good vs. Google regarding location.

5.  How successful will EU be to unifying telecoms market?

It’s anyone’s guess.  There are chances to achieve portions of ambitious plan to unify the market.  But some aspects:  roaming fees, for example.  It is about providing something to operators in return to giving up fees for consumers.  Consolidating the market or having underlying infrastructure is a more difficult task.  National regulators need to be convinced; there will be testing of individual markets to see what direction telecoms regulators are going in this area.

6.  How big is M2M opportunity for operators or is this just hype?

There is hype about it, but operators are already making money in this area , and it is growing fast although from a low base.  It is about B2B services rather than consumer side.  Crucially there are government incentives to go green and the consumer wants to save money, so smart meters and connected cars will face increased demand.

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On Wednesday, January 22nd, the Economic Intelligence Unit sponsored a webinar on their forecast for the Energy Industry in 2014, part of a series of six industry-wide webinars that the EIU is putting on based on their industry reports that came out at the end of 2013.   I already did a post on three of those other webinars, on the retail and consumer goods industry, the automotive industry, and the financial services industry in 2014.

This webinar is on the Energy Industry in 2014, was presented by Martin Adams, the Editor for Energy based in Hong Kong, with additional commentary by Peter Kinnan, Lead Analyst for Energy based in London.

1.  UNEVEN EXPANSION

Global energy consumption is forecast to grow by 2.9% in 2014, up from 2.7% growth last year.  This means steady growth in this sector, but it is an uneven expansion.  There are significant differences between sub-sectors:   the growth in natural gas, nuclear power, and hydroelectric power are growing by around 3%, whereas coal and petroleum products will experience slower growth at around 2%.  Non-hydro renewables, on the other hand (solar, wind, geothermal) are experiencing 17% growth.  In terms of market share, however, the tables are turned, as renewables are as yet a very small percentage of the total global energy consumption.

2.  SURVEY RESULTS

The disparity of growth  rates in the various subsectors goes a long way in explaining the marked difference in mood among the various respondents who were surveyed by the EIU.

These survey results will be referred to from time to time during the rest of the webinar to illustrate various points.

Next, Martin Adams will discuss each sub-sector individually, starting with oil.

3.  OIL

Although many respondents believe the oil price will dip below US$100, the EIU does not:  it believes that Brent oil price will average above US$100, probably close to US$105.  This represents a fall from US$109 in 2013.

One of the biggest factors effecting the price of oil is whether we will see significant new tensions in the Middle East and North Africa.  Based on the survey results (see chart in paragraph 2), only about a fifth of respondents believe that Middle East tensions will be greater in 2014 than in 2013.  This is partially because the survey was done in November, as a diplomatic breakthrough took place in the talks by the West with Iran regarding its nuclear program, leading to an interim agreement.

In any case, whatever happens to the political risks in 2014, the market is going to be comfortably supplied this coming year, and that accounts for the slight slip in prices for Brent crude oil from US$109 to US$105.

Where will the new oil production come from to meet the consumption demand?  New oil production activity will be centered on Iraq, Brazil, US and Canada.  In particular, US energy security and oil supply infrastructure continue to improve.  Iraqi oil production is being impacted by the situation in Syria, but nevertheless EIU expects that their production will be among the fastest growers  in 2014.  Brazil will experience growth, as drilling in ultra deep water continues.  A lot of the excitement in the oil and gas world is centered, however, in North America.  The oil tar sands in Canada and in the US there is a shale gas and tight oil boom.  The International Energy Agency (IEA) came out yesterday saying that in 2013, the US increased oil supply more than any other country has done in the last two decades.

Already, the US, which is already the second biggest energy consumer in the world, has benefitted in terms of its energy dependency.  Its net oil import dependence is at 34% in November 2013, according to the US Energy Information Administration, down from its peak in 2005 of 60%.  A lot of what the US imports is from the oil sands in its friendly neighbor Canada.

All of this means that non-OPEC oil production growth has been outpacing that in OPEC.  The oil output in 2014 will increase a little over 3% from last year in non-OPEC countries, whereas the growth in oil output for OPEC countries will be a little less than 2%.  There has been some disruption in production in OPEC countries such as Libya due to political turmoil.  In Iran, it is the sanctions which have had an impact.

In the US, which is at the heart of the non-OPEC growth story, although the supply situation is much improved, things have been held back by a pipeline network that is struggling to keep up.  In 2014, there will be some improvements in infrastructure that will start to kick in.  As a result, the gap between the two main oil price benchmarks, the West Texas Index (WTI) and Brent, is going to narrow.  There has been a lot of focus on the mismatch between the two benchmarks in recent times.  But as supplies start to move more smoothly around the US, we’ll start to see WTI edging up slightly even as Brent falls, thus narrowing the gap.  Its also worth noting that the IEA yesterday drew attention to how fast demand in the US has been growing.  It grew faster in the US than in China for the first time since 1999.  The WTI/Brent differential is going to be slice in half, to just under $6 in 2014.

Another factor influencing the US oil supplies in the long term is the decision on whether to let the Keystone XL pipeline, which would carry oil from Alberta’s oil sands down to the US, be built or not.  That decision, which is controversial especially with environmentalists, has been long-delayed, much to the frustration of the oil and gas industry, particularly in Canada.  However a decision is expected in 2014, perhaps even in the coming months.

3.  NATURAL GAS

EIU thinks that natural gas is the fossil fuel that is going to do better this year, certainly in terms of consumption growth.  A lot of this is thanks to Asia.  In places like China, Taiwan, India and South Korea, the appetite for gas is growing quickly.

In China, you’ll see that there is going to be a substantial dip from 20% growth in 2013 to about 15%.  In India, Taiwan and South Korea, the change will be positive, from about 2-4% growth.  These trends will continue into 2015, as growth increases to around 5-7% in those countries.

This increasing Asian gas demand is keeping gas prices higher there than in the rest of the world.  Where are the supplies going to come from?  Once again, it is the US that is pivotal when it comes to the supply of natural gas market because of the shale gas revolution.  One of the biggest questions is “what is the US going to do with all of this new gas?  Will it start exporting it to Asia in the form of LNG?  It’s not just a question about what the US is going to do, it’s also a question of what will happen in Canada.  Those two countries are going to be increasingly competing for energy markets.  On the EIU energy website , they argued there that, although Canada has been giving more initial approvals for LNG, it is the US that is better placed in the long run to catch the larger slice of the Asian market.  There may be  more approvals in North America in the coming months.  However, in the long term it is Australia that will grow the most in terms of LNG capacity in the coming decade, overtaking Qatar as the world’s top LNG exporter by the end of the decade.

Like gas from the US and Canada, Australian gas is mainly targeting the Asian market.  This year, two giants projects, Gorgon and Queensland Curtis LNG projects, will start up, boosting the supply by an amount that is roughly equivalent to the annual capacity of Malaysia, which is in itself another important LNG player.

When the US and Canada get their acts together, they are going to face some pretty stiff competition from Australia.  It will be interesting to see how they proceed with approvals in the coming year.

4.  COAL

Coal is another area where the US is pretty much in the center of things.  Like many countries around the world, coal has been a mainstay in the US for energy generation.  However, the regulatory environment is getting much harsher for the coal industry.  What happens this year could change the face of the American coal industry forever.  Despite the strong opposition in Congress to signing climate change legislation, Barack Obama has been pushing  the Environmental Protection Agency (EPA) to take regulatory steps to clamp down on emissions.  And in 2014 the EPA is due to finalize what look like stringent emission standards for new power plants that could go so far as to effectively make it impossible for new coal plants to be built.  Any measure that would be that strict would face legal challenges, causing the process to become more drawn out.  There will also be rules for existing coal plants that are going to follow the rules for new coal plants.  These are viewed with even more trepidation by the coal and electricity industries.

So far, US producers have been able to find overseas markets to export more to.  In the past this has included Europe.  As Europe’s economic recovery remains somewhat fledgling, coal is still going to look like an attractive option in European eyes because it is relatively cheap.  However, it is really China that is underpinning global coal demand and supply, as it accounts for almost half of each.  The Chinese government has been making a push to do something about the awful air pollution problem that affect many parts of the country.  Coal suppliers are worried about the impact of new measures that are designed to slow coal consumption and cut down on emissions.  Recently, we have seen the air pollution reduction targets that the central government has agreed to in recent weeks for China’s 31 provinces.

Nevertheless, China will have a very hard time weaning itself of coal.  Coal is cheap as well as plentiful in China.  The country has the world’s third largest reserves of coal.  Another reason why coal demand in China is going to be sticky is that the main alternative, which is to import more gas, is pretty costly compared to sticking with coal.  Even the latest regulations governing provincial emissions are not necessarily that ambitious.  So Chinese and global coal consumption is going to continue to keep edging upwards.

5.  NON-FOSSIL FUELS:  NUCLEAR AND RENEWABLE ENERGY

The topic of China is a natural segue into the next topic of non-fossil fuels, because the Chinese government has been trying to push its economy towards less-polluting fuels.  It has put up more nuclear reactors and wind turbines.  As far as atomic energy is concerned, four new reactors are going to come online in 2014.  However, it’s not just China:  South Korea, Russia, and India are all going to add a few new reactors each this year.  This will push global nuclear capacity to grow much estimated 373 gigawatts (GW) in 2013 to about 381 GW this year (growth of 8 GW).  That’s not the kind of explosive growth that the nuclear industry experienced before the Fukushima nuclear accident in Japan in March 2011; on the other hand, it’s not the collapse that was predicted by some people after that incident.  In the US, the growth of natural gas is the factor that is constraining possibilities of nuclear expansion, with some nuclear power plants even being shut down.

Plentiful supplies of cheap natural gas also crimp the opportunity for the growth of renewables, given that renewables remain expensive.  Despite that and the other problems that renewables face, they are achieving remarkable growth.  To be fair, although still expensive, the prices of wind turbines and solar panels have fallen in recent years.  China has helped to push things along by making such equipment cheaper with large-scale production.  Pollution has been a driver of China’s progress on renewable energy, especially given the growing impatience of the general population with the problem.  Also, there is a desire to give China’s domestic equipment makers in the wind power and solar sectors more of a market at home.  Energy security concerns feature into this as well, as do concerns about global climate change.

Speaking of action regarding global climate change, we don’t see an awful lot of reasons for optimism when it comes to international climate change negotiations.  These were supposed to lead to a treaty to replace the Kyoto Protocol, and that successor treaty is meant to be signed in December 2015.  Our survey respondents, like us, are pretty skeptical that we’re going to see much progress on that front this year.  Only about a fifth of them expect a breakthrough over the next 12 months.

Suffice it to say that there are many barriers to renewables, including the lack of direction in global climate change policy that was just mentioned.  There are low carbon prices in Europe, and we are expecting the EU to announce today its strategy for long-term climate and energy targets policy to 2030.  It looks as if the EU is not going to include renewable energy targets in its policy, but rather it will rely on carbon emissions targets.

Despite all of those dampening factors for renewables, they are going to make remarkable progress, with 17% growth projected in 2014, double-digit growth albeit a little less than last year’s growth of 22%.

If climate change negotiators were able to agree on a framework for forceful global action, the prospect for renewables would be much different.  Emissions on fossil fuels will reach nearly 160% of the level that were at in 1990.

6.  PREDICTIONS SUMMARY

• Average Brent oil price in 2014:  US$104.75/barrel
• WTI-Brent spread to narrow to US$5.78 in 2014
• Chinese coal demand to rise by 4%
• Non-hydro renewables to surge 17%
• Fossil-fuel emissions to hit 159% of 1990 levels

7.  QUESTIONS AND ANSWERS

1.  You said you are not optimistic about the outlook for climate change talks in 2014.  Why is that? 

We’re pessimistic that we will any major progress this year.  At the most recent set of talks which were held in November 2013 in Warsaw, we had the usual sort of 11^th-hour compromise hobbled together, which didn’t bode well for progress in the next round, which will be held in Peru in December 2014.

Before that, we expect to see developed countries being pressured to lay out their own contributions to carbon emissions cuts.  Negotiators have avoided the word “commitments” which would be overly concrete so they call them “contributions.”

Even in Europe, which is a traditional leader in this area, we are seeing willpower being strained a little bit.  The European debt crisis, of course, has raised many questions about how Europe can pay for its climate commitments, particularly its subsidies for renewable energy.  The German Energy Minister just  yesterday said that his country was at the limits of what it could pay for green energy.  You’ve got utilities complaining about subsidies for renewables and the impact its having on them.  They are closing down some conventional plants which they say are not economical to run.  The industry is complaining that the energy costs in the EU are higher than in China and also higher than in the US.  In the US, you have brakes on any climate change legislation getting through Congress.

On international talks, the big problem is that there is an impasse between the developed economies, particularly chiefly the US on one side, and the developing economies, chiefly China on the other side, where each points the finger at the other and there is no agreement on who should bear responsibility for carrying the costs of any future cuts.  I am pessimistic about identifying a way of getting around that before the next meeting in December of this year.

2.  Do you see the shale revolution spreading further outside of the US in 2014?

The shale revolution has been talked about a lot in the past four to five years, and we’re seeing a pretty dramatic increase in total US gas production.  If you look at what people were forecasting five or six years ago, it would be that the US would become an importer of LNG.  However, what we are actually seeing is that by the end of the decade, US will become a net exporter of LNG, largely due to the increases in gas production and the ability to direct supplies to international markets other than the US.  This has created a chain reaction of other countries exploring their unconventional gas potential.

In most other regions such as Europe, Asia, and Latin America, shale gas will develop much slower than in the US.  The countries that are likely to see development in shale gas output will be China, Australia, and perhaps Argentina, although the resources are more liquids driven, in that they are in the form of shale oil rather than shale gas.

Some countries in Europe have started the exploration phase, but have shown quite little progress so far, such as Poland.  The UK is getting more interested.  Ukraine has awarded exploration licenses for shale gas exploration and development.  However, some countries in the EU have issued an outright ban on fracking, such as Franc, or have put in place a moratorium on shale gas development until they get more knowledge  on the potential environmental impacts.

So there has been quite rapid growth in the US in the past five years, which will set the stage for the US to be an exporter of LNG.  There is one terminal already under construction, and another four have been approved for export to non-FDI countries.  However, we won’t see US LNG on the market until towards the end of the decade, when you’ll see a fairly substantial impact on supply in the 2020s.

China is another country that takes shale gas very seriously, mainly because of its acute dependence on coal.  Its gas consumption is growing rapidly, and to avoid too great a dependence on gas imports, whether it’s pipeline or LNG; they want to develop their own unconventional gas assets.

I would expect that, outside of North America, the pace of the development of shale gas to be fairly slower than that experienced in the US in the past five years.

We have seen a lot of hype over the past couple of years about China’s potential.  No doubt there are some big resources there, and you’ve got Shell and some other majors there exploring, in addition to some ambitious government targets in place.  However, people have really woken up to the barriers to shale gas production since that initial surge of hype, such as:

• a different kind of geology than you have in the US
• water shortages in many of these regions where the resources lie
• service industry is not in place
• no access to pipelines
• gas pricing reforms needed

It’s going to take a long while for things to pick up in China with regards to shale gas production.  That being said, there have been interesting figures that came out recently that said that shale gas production shot up 600% last year in China, but it’s still from a very small base, only 200 million cubic meters.  The target for 2015, which is just next year, is 6.5 billion cubic meters.  It’s really a lot to expect China to meet those targets.

3.  What are the forecasts for Japan, given its total dependence on energy imports?

Japan saw a great disruption to its energy supplies following the Fukushima nuclear accident in March 2011.  Since then, they’ve had to import more fossil fuels, a lot more LNG, wood, and coal.  We anticipate that, in accordance with the policies of the current government under Shinzo Abe, Japan is going to gradually try to bring back those nuclear plants.  We think that in the end that many of the nuclear plants that have been mothballed will have to be put online again in order for foster economic growth, but this has proven very difficult politically.  We will therefore continue to see a high degree of fossil fuel dependence.  Because the nuclear plants that were shut down, its imports such as coal, oil and LNG have increased, so we are likely to see that situation continue for some time.

Japan reneged on its emission reduction targets in recognition that, while some nuclear plants will come back on line, some never will.  Unfortunately for Japan, it is very heavily dependent on energy imports because it has few natural resources of its own.

4.  What impact will the expansion of US oil and gas production have on developing suppliers in sub-Saharan Africa, such as Angola, Nigeria, and Mozambique?

We’ve already seen impacts on exports from African countries to the US, and as the shale oil revolution continues in the US, you are going to see those impacts.  The natural reaction of those African countries is to look to other markets, probably in Asia.

The most severe impacts of the reduction of US dependence on crude oil imports has not been on Middle East oil producers, but more on exporters from West Africa and also Algeria.  If you look at the direction of oil trade figures in terms of volume, suppliers such as Nigeria, Angola, and also Algeria have seen their exports to the US fairly substantially cut, so they will have to find replacement markets elsewhere.  The obvious destination for that crude oil is markets in Asia, especially China.  In the longer term eventually, if the US maintains lower levels of oil import dependence–which is what we are forecasting—eventually you will see impacts on Middle East OPEC exporters as well.

The most direct impacts of the reduced US oil dependence has been on West Africa exporters, mainly because of the kind of oil produce is the kind of light, tight oil that we are seeing produced in greater volumes in the United States.

5.  How will LNG exports from Russia compete with US, Canadian, and Australian supplies? 

All of those are going to want to focus on the Asian market.  The situation in Russia is that most of its gas exports have been directed to a pipeline to Europe.  As with oil, the growth market in terms of consumption for gas will be Asian markets.  Since there have been new suppliers, and suppliers that have scheduled to rapidly increase their capacity in recent years, such as Australia, and the likelihood that North America will start to be an LNG exporting region as well, you are starting to see Russia look towards the Asian market as well for both pipeline and LNG exports.  There  is already is one terminal from which Russia exports LNG in Sakhalin and that goes to Asia.  It’s small in terms of total volumes.  There is another LNG project that is just being sanctioned, and that’s Yamal LNG which is intended to supply both Europe and Asia.  There are another two which could get sanctioned over the next couple of years.  Russia is realizing that if it doesn’t get on the “LNG train” so to speak, it may miss out on its ability to capitalize on the growing Asian market for gas

There has been a reorientation of Russia’s gas export policy.  Gazprom will no longer have its monopoly on gas exports.  There have been some tax concessions that have been given for Arctic offshore development which would include gas, but the sanctioning of the Yamal LNG project is quite significant as it indicates that Russia sees one of its future intensive growth demands for its gas will be in Asian markets, and that includes LNG.

6.  Why do you feel that the US is better placed than Canada for long-term LNG exports? 

Both Canada and the US have these large shale gas resources.   Canada has 573 Trillion cubic feet, and the US has 665.  Both are going to try and capitalize on those resources and ship LNG to Asia.  They both have their own advantages.  Canada is a little closer to Asian markets.  In our judgment, the infrastructure in the US is just closer to being in place:  its import facilities can be converted into export, and you’ve got a more developed pipeline network.  In both countries, there are some pretty big regulatory hurdles which will cause questions in the minds of investors.  The advantage for the US is that its LNG won’t be oil-indexed, so it priced off US natural gas prices, which are currently very low compared to what LNG costs in Europe and even more so to what it costs in Asia.  So the advantage is that LNG from the US is likely to be much cheaper than what could be gotten elsewhere from others exporters that index their price of LNG to oil prices, which are still fairly high.  There is a certain price advantage, even if you take into account the cost of production and transport to the Asian markets, which Asian consumers can take advantage of.

At the same time, there is concern that Australia will get there first and carve out a share of the Asian market.

7.  Will the US government legislate for crude oil export this year, and if not, when?

There has certainly has been growing clamor from some in the industry for exports to be allowed, at the moment they are not allowed generally.  At the same time, there is going to continue to be reluctance on the part of government.  Those IEA figures that came out yesterday showed that demand in the US is also growing even as its supply is.  That implies that official reluctance is only going to be strengthened.  There is already a lot of debate over whether the US should be exporting LNG or whether it should just keep its gas supply for the domestic market.  The export of oil is allowed under certain circumstances, but to open it up for general export would raise issues of energy security.

8.  Are you skeptical regarding China’s new provincial-level approach to reduce air pollution that was released recently?  Do you think these measures will have much impact?

It’s one of those situations where the glass could be considered half full or half empty, depending on how you look at it.  It’s definitely a step forward.  You’ve got 11 provinces out of 31 that are now obliged to reduce PMT.5 by a certain percentage, which varies on the province, by the year 2017.  “PMT.5” measures small particle pollution.

The other provinces will be judged based on their PM.10 reduction, which deals with larger particles.  From a human health standpoint, it’s a positive development, when you bear in mind that perhaps half a million people each year die in China due to air pollution.  But even the very ambitious PMT.5 cuts that they’re talking about in the case of, say, Beijing, which is committed to reducing its PMT.5 by a quarter, will only bring Beijing to double the legal limit that exists in the US.  Even so, China has still got to achieve these new targets; the current ones have been ignored quite a lot in the past.  Doing so will require strong national oversight and it’s not really clear that you’re going to get that, although the public pressure is certainly getting stronger.  If you ask what they means for coal producers, for example, it’s a sign that figures such as 10% coal consumption growth which we saw in recent years are behind us.  Although coal consumption growth is currently edging up slowly, it will begin to taper off later in the decade.

Current coal consumption levels in China are clearly unsustainable.  Even though it has contributed to its vast economic growth, it has also contributed to its air pollution and emissions problems.  There is a little bit of a tug of war there between the vested interests behind China’s emission standards.

Even before China came up with more concrete measures recently, it had stopped granting approvals for new coal-fired plants in the East of the country.  Certainly coal is recognized as a big problem, but not so much for reasons related to climate change, as for to the problems with health effects due of air pollution, such as lung cancer rates which have risen a great deal in Beijing.

9.  Can you provide some more information on China’s key role in non-hydro renewables? 

China has pursued a fairly aggressive policy since the mid to late 2000s on non-hydro renewables, starting with wind power.  It has set some very gung-ho targets with respect to installation, more recently doubling its target.  We’ve seen a surge of investment into manufacturing capacity, we’ve seen a lot of installations going up, but over capacity has become a problem.  You’ve also got problems such as installations that aren’t hooked up to the grid, and even if they are hooked up to the grid, they are underutilized because the grid doesn’t like taking all of this inconstant renewable power.  The policy makers have been trying to find an answer to that, and continuing to up your targets is one approach.  The benefit to the rest of the world is, although China has come in for a lot of criticism for giving state support to the industry through subsidies, production has greatly increased for wind power and solar, (although in the case of solar its due to a large part to European subsidies), and that has driven down the price of solar panels and wind turbines.

This concludes the webinar, the one I will post tomorrow will be on the telecoms industry.  

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On Thursday, January 16^th, the Economic Intelligence Unit sponsored a webinar on their forecast for the Financial Services Industry in 2014, part of a series of six industry-wide webinars that the EIU is putting on based on their industry reports that came out at the end of 2013.   I already did a post on two of those other webinars, on the Retail and Consumer Goods Industry in 2014, and on the Automotive Industry in 2014. 

This webinar on the Financial Industry in 2014, was presented by Steven Leslie, the lead analyst for Financial Services in the EIU.

1.  MAIN TRENDS IN 2014

First of all, there is a synchronized upturn in the major developed economies.  The US recovery is deepening, and is broad-based, despite the disappointing job report for 2013 Q4.  Europe is still struggling to recover, but at least is now showing positive growth.  Japan’s economy is finally on the move and is looking stronger.  Outside of the developed economies, however, there are tighter financial conditions.

In the world overall, however, there are tighter financial conditions.  China, India, and Brazil all need economic reforms to stabilize their growth.  Some capital will be fleeing developing economies; they had an inflow of capital before because of their highest interest rates, and their good economic performance.  Now there are doubts about policy choices, and the interest rate spread between the developing economies and the developed economies is tightening.

All around the world, the eyes are on the Fed, which is cutting down its money printing as it tapers off the so-called quantitative easing program.  On the interest rate side, there will be no official rate hikes in US before the third quarter of 2015.

2.  THE FED, TAPERING AND THE RISK OF BUBBLES

Ben Bernanke says the Fed will reduce its bond buying as part of the quantitative easing program by about US $10B/month, to US $7.5B/month, with further cutbacks in store.  Janet Yellen who takes over the Fed in 2014, has stated that she intends to pursue the same policies as Ben Bernanke, at least for the time being.

The Fed was concerned about instability in asset markets.  The question everyone is asking is:  is another asset bubble forming?  There is certainly some froth in some markets; for example, US equities rose by 30% in 2013.  But there is plenty of spare capacity and workers looking for employment in the US.

The inflation rate remains low.  Tighter Fed policy would push rates higher, curbing asset prices.

The monetary exit strategy was always going to be complicated in any case.  Janet Yellen must balance support for economy with concerns about asset bubbles.  Some capital will flow out of emerging markets.

However, the scaling back of quantitative easing in December 2013 did not produce the same run by investors that was seen back in June 2013, as if the market has already factored it in.

3.  POSITIVE FACTORS in 2014

The following are the positive factors in 2014 that will be helping the global economy.

• Rising asset prices, particularly for equity and real property
• Steeper yield curves following the rise in Treasury yields
• Resolution of legacy issues of the financial crisis, especially in the US
• Developed countries equity index is higher than the emerging markets equity index
• Sluggish economies like Brazil are still creating increases in property prices.

There will be short-term pain for those holding bonds with lower yields and steeper yield curves.  The interest rate spread should be positive, which is good for fixed-asset holders like insurance companies, and pension funds.

In recent months, there has been settlement of lawsuits and resolution of issues regarding mortgage financing and mortgage bond issuance in US.  Mortgages are less of an issue in Europe and Asia.  There they were investors rather than originators of the mortgage debt.

4.  NEGATIVE FACTORS IN 2014

The following are the negative factors in 2014 that will be hindering the global economy.

• Regulatory headwinds:  Basel III and G-SIBS, the Volcker rule in US, and the MiFID in EU
• Weak economic growth in some key markets, including developing economies
• Continued losses on portfolios of existing bonds

The Basel III rules are largely in place and are going to be completed by 2019.  Regarding G-SIBS, some institutions have been designated but have not yet had to put on a capital buffer yet, which will come in future years.  Certain non-bank G-SIBS have been designated by the board in Switzerland.

In US and Switzerland, there are additional national regulations.  The Volcker rule in the US tries to manage proprietary trading.

The new basic law MiFID in EU will change how the securities industry works, and will control the impact of derivatives market in line with the last G20 summit of leaders agreement to reduce risk.

EU will sustain growth, but at very low level.  Japan not much better but at least sustained from last year.

This weakness will begin to turn around with the growth in developed markets, but will not reach the high point that had been reached before 2008-2009.  There are continued losses on portfolios of existing bonds.  Fixed-income mutual funds in 2013 had single-digit losses in US.

5.  SURVEY RESULTS

Based on a survey of 152 respondents in the financial services industry, the positive sentiment outweighs the negative.  77 respondents felt that the business conditions for their company would be better in 2014 than in 2013; 61 felt that the business conditions would be the same in 2014, and 12 felt that the conditions would be worse than current conditions (2 respondents were not sure).

70% felt that banks in their market would be less likely to fail (vs. 15% who said they would be more likely to fail).

66% felt that investors would favor low-cost investments, as opposed to 11% who disagreed.

59% felt that key financial markets will lose ground to upstarts, as opposed to 24% who disagreed.

41% felt that the global market for IPOs would roar back, as opposed to 31% who disagreed.

6.  INTERNATIONAL FINANCE BECOMES TRULY GLOBAL

The global crisis in 2008-09 was an inflection point for emerging market catch-up.

Developing countries went from about 28% of GDP involved with the financial services industry to a forecast 40% this year.  The industry remains concentrated in relatively stagnant OECD countries, with the concentration being even starker in insurance and fund management.  In insurance market, developed market has 85% of all premiums, with developing countries having 15%.

So not all markets are as global.  Current financial firms are still concentrated in more stagnant economies of the north.

7.  CUSTOMERS USE MOBILE TECHNOLOGICIES INSTEAD OF BRANCH BANKS

Mobile banking and payments are on the rise, since many more people have phones than banks accounts.  Tablets are increasingly popular, as is depositing checks by taking a picture.

Internet access is allowing banks to reconcile accounts from remote locations.  Payments systems allow increasingly going cash-free or cash-light payments.

Banks are scaling down branch network in US; this is not true, however, in emerging markets where branches are underbuilt.

The rest of the webinar was devoted to questions & answers.

1.  What about US Bank results in 2014?

These are a bit of a bellwether.  Mixed bag as you would expect.  Economy is sustaining growth, but still weak.  Banks have paid out for the most part TARP bailout funds.  Some of them did well, some did poorly.  Economic expansion is helping certain segments, e.g., in automobile lending, credit card lending, and activities tied to consumer purchases.  Banks have started to take hit in mortgage refinancing.  In US mortgage rates are tied to 10-year treasury yield.

Wells Fargo had a very good Q4, which is aligned to consumer and mortgage lending.

Banks aligned with commercial lending had a much harder time.  Trading desks had a tough year and a tough quarter, due to the change in the interest rates.  Commodities and currencies will face difficulties ahead.  Realignment of costs and staff in US banks.

2.  How QE might effect emerging markets such as those in India and Latin America?  Are there any measures that could moderate this effect?
We are heartened to see in May, Ben Bernanke started to indicate that Fed was going to wind down QE in the so-called “tapering”.  There was a run in emerging markets with currencies falling and investors pulling out assets.  However, this was an overreaction to a normalization in the interest rate cycle.  That has been priced in and there was no such recurrence in December 2013.  In general we have a bullish outlook on emerging markets.  Some countries are in bad position because of fragile current account deficits or trade deficits:  Brazil, India, Indonesia, Turkey and South Africa are most at risk.

East Asian countries have built up very large currency reserves so markets like China and SE Asia nations are in a strong position to resist financial crisis.

3.  How do you see microfinance in 2014?

There will be a special report on microfinance around the world later on this year at EIU, by the way.

Expectations of the microfinance market depend a lot on the policy framework, which is currently up in the air.  It’s pretty stable in Latin America; Peru and Bolivia have markets that are continuing to grow.  India suffered a big setback in microfinance sector in the state of Uttar Pradesh a few years ago.

There is an ongoing debate whether microfinance will be regulated at a national level in India.  Legislation has not advanced and will not advance until after the election later on this year.

4.  Can banks get on solid footing with stress tests?

Cautiously optimistic outlook on banks in EU.  Should be helped by economic recovery.  They have fewer legacy issues but haven’t dug themselves out yet like the US Banks have.  Some of the policy issues are really important.  They need to keep a close eye on them.

Policy framework has lost influence, because past stress tests that passed later failed banks.  Stress tests will be stricter and closely watched.  There is a lot of concern about performance of EU banks.

5.  Bubbles bursting in property markets

No signs of that in recent years.  If anything, developed country banks pulled back from property in emerging markets.  There is not much exposure beyond their own economies.  Recent regulation has cracked down on any of those exposures.  Little chance of collapse in Latin America having any spillover effect in global economy.

Regulations are pretty tough, and there are a number of chances to measure their impact on bank profitability and GDP.  International level Basel III rules, EU rules, and national rules add up to a heavy burden.  That said, they will probably have a long-term net positive effect on sustained economic output because of the damage that previous financial crises had, although there will be a short-term deleterious effect on economic output.

Regulatory changes in developing countries:  focus has been previously on changes in US and Europe, such as Dodd-Frank or MiFID.  Liberalization in China is occurring with the opening of capital accounts.  More local changes in insurance regulations in Latin America as they go to more risk-based systems of regulating insurers.

6.  Will the trend towards a price cap on consumer credit stifle demand?

I’m not an expert.  Expectation would be that it would stifle demand.  Most jurisdictions have restrictions on so-called “usury”.  Payday lenders have restrictions in the US, for example.

7.  Emerging markets—are they truly important for business?
Finance as opposed to other businesses are seen as a network business; it is less open than the consumer goods business, for example.  Access to markets is more difficult.  On the other hand, despite WTO and other agreements, a lot of growth in emerging markets is not open to global  competition.  Securities markets is the most open.  In other areas, they are not open because of the market structure but because of rules which are difficult to change.

Regarding some initiatives to opening, Central Bank in India is considering allowing global banks to have branches in India if they set up subsidiaries in India.  In other places such as Indonesia, there are troubling signs of a clampdown on operations of banks in terms of domestic ownership.  DBS in Singapore is giving up its effort to take over a large bank in Indonesia, for example.

Financial activates are much more restricted because of the network nature of the business.  This was highlighted by the financial crisis in 2008-2009.

8.  Are banks of developing countries seeing opportunities in China’ liberation of renminbi trading?

They are taking up opportunities and that market is booming.  Part of gradual liberalization or capital controls in China.  No “big bang” like in Russia, but very gradual.

It’s worth pointing out the quite extensive expansion of Chinese banks overseas.  Hong Kong bank just received approval of opening branches in US.  ICDC, the largest bank by capitalizationk, is opening up in Argentina and other places.

It’s part of the growing trends towards global expansion of emerging market banks.

I thank the EIU for putting on such an informative webinar and I hope to look back in December 2014 to see how closely their forecast came to the actual performance in the coming year!

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EIU Webinar—Automotive Industry in 2014

On Thursday, January 16^th, the Economic Intelligence Unit sponsored a webinar on their forecasts for the Automotive Industry in 2014, part of a series of six industry-wide webinars that the EIU is putting on based on their industry reports that came out at the end of 2013.  I already did a post on one of those other webinars, the one on the Retail and Consumer Goods Industry in 2014, on January 18^th.

This week I intend to do a series of posts on the other 5 industry webinars, starting with this one.  The webinar was presented by Ana Nicholls, a Managing Editor at EIU covering the automotive industry.

1.  INDUSTRY SURVEY

Some of the data that the EIU used to gauge the prevailing sentiment within the industry came from a survey done with respondents from the various industries covered by the series of EIU reports (including the automotive industry).  They were asked about their expectations for 2041 for

• The global economy in general
• Their particular industry
• Their particular company

There were three basic categories, those who felt that the industry would be doing better off in 2014 than in 2013, those that felt that the industry would be doing worse off in 2014 than in 2013, and those that felt that the industry would be doing about the same in 2014 as in 2013.  The EIU took an “index of sentiment” by taking the percentage of respondents that thought the industry would be doing better minus the percentage that thought the industry would be doing worse.

As a point of comparison, let’s take a look at the index of sentiment for the various industries that were asked about in the survey.  These are listed in the chart below in order from those with the most optimistic outlook to those with the least optimistic outlook.

Note that the automotive industry, with an index of sentiment, is less positive than some industries and in addition is less positive than the average across all the industries.  However, although less positive than the average, it is still better than a shift from a negative index of sentiment that prevailed last year.  This is a sign of confidence in the global economy as a whole, although you cannot say it is the level of a “ringing endorsement.”

If you look at the index of sentiment for the automotive industry listed above (32), that is the average across the various respondents from different parts of the globe.  If you look at where in the world the index of sentiment was the highest with regard to the automotive industry, that would be the Middle East.  The place in the world with the lowest index of sentiment towards the automotive industry was Latin America, followed by Europe.

Another interesting question that asked in the survey was “which country offers the greatest growth prospects outside the BRIC (Brazil, Russia, India, and China) countries?”  In the previous years, the answer focused on emerging markets, but this year there was a mix between emerging and developed markets; about 2/3 answered that emerging markets would have greater growth prospects, and 1/3 answered that developed markets would.  One of the BRIC countries, China, was receiving a more bearish assessment from the respondents, in that 2/3 of them were worried by an overreliance on the China market, in case the economy overshoots and there is retrenchment.

2.  REASONS TO BE CHEERFUL

The EIU has some reasons to be somewhat cheerful about the automotive industry in 2014.  First of all, 2013 was a record year for global car sales, and it looks like 2014 will be a record year as well.  The world passenger car market will grow by 4.7%, as compared with 3.6% in 2013, with the commercial vehicle market growing by 5.2%, as compared with 1.6% in 2013.

But there are risks that the automotive industry faces in 2014, among which are:

• The gap between developing and developed markets is narrowing
• Shift in monetary policy in developed markets
• Structural problems in developing markets
• Possible credit bubble in China

One of the underlying reasons for these risks is in the flow of money:  in the past, low interest rates in developing countries caused investment to flow there.  With interest rates there rising, and China deliberately attempting to slow the credit bubble, the funds to the developing countries may be flowing back to the developed countries.

Out of the BRIC countries, in only one of them (China) did automotive sales rise; they fell in the other three (Brazil, Russia, India).

The US automotive market was predicted to be stronger than the China market, but the actual figures show that the sales figures in the US turned out weaker than predicted.  In fact, Asia is no longer the faster growing region:  North America is.

3.  EUROPEAN RECOVERY?

Out of the respondents questioned, 69% felt the European market is likely to stay subdued.  Some European markets are recovering more strongly, but growth even there will still be on the order of 1%.  There may be a few markets like Italy and Portugal that declined so much because of the Euro crisis that they will report strong growth in 2014 by comparison.  In fact, if you look at the performance of all the various countries of Western Europe, the growth figure depends on how far they fell during the Euro crisis.

4.  SHIFTS IN MONETARY POLICY

Since passenger and commercial vehicles are big-ticket items that often require loans to purchase, the automotive industry is strongly effected by shifts in monetary policy because this effects how readily available credit is for those loans.

As mentioned in paragraph 2, money flowed to developing markets because of better returns, but there may be reduced capital flow to the emerging market because of shifts in monetary policy in developed countries.

Another factor which has a big effect on the automotive industry is the price of oil.  46% of the respondents said that rising fuel prices would dampen car sales.  Oil prices will soften in 2014, and fall to US $93/barrel by 2018 (by BRENT measure).  It could fall even faster, as demand is falling and supply constraints are easing.  There has been a trend towards increasing fuel efficiency of vehicles, but the impetus to buy fuel-efficient vehicles dies down as oil prices case.  For example, in the US you can see sales of 4X4s or SUVs are picking up, showing that the American public has less concern about fuel efficiency than before.

In some developing markets, however, oil prices will rise as subsidies are removed by the government.  This is already a factor in the Indian market.

5.  CHINESE PLAYERS

Will Chinese automobile manufacturers such as Geely, Chery, and SAIC follow the successful path of South Korean carmakers such as Hyundai?  The Chinese carmakers are losing market share domestically, and are increasing their exports.  54% disagreed that Chinese and Indian carmakers would start to penetrate developed markets, however.  69% agreed that emissions and safety standards played to the advantage of western carmakers.  Since those standards are not as high in the Middle East and Latin America, those markets are easier to penetrate.  However, one of the notable things that happened in 2013 was a Chinese car got a 5-star rating for safety, the first time this has happened.  Although Chinese players are not yet in a position to make an assault on Europe or North America, it will be interesting to see their performance in the developing countries in the coming year.

As for the European market, however, 69% of the respondents agreed that it would remain subdued, forcing further job cuts and further consolidation.

That is the main portion of the presentation.  The rest was taken up by questions and answers from those attending the webinar.

6.  QUESTIONS AND ANSWERS

1.  What about the high-end market for automobiles?

This has been doing extremely well throughout the slump, with Rolls Royce, Audi, Jaguar, and Land Rover reporting records sales, even in Europe.  It is a mixed picture going forward, however.  There are signs that some luxury brands aren’t doing as well as others.  There is much more worry about branding, and that is particularly noticeable in China.  The Chinese attitude towards luxury brands is changing as more and more people can afford them.  Ferrari is deliberately restraining sales in China to retain the air of exclusivity.

The luxury market will not outperform the regular market as it has in the past few years.  The oil price index may affect this, particularly at the top end of the market, because many of the extremely wealthy derive their income from the energy industry.  As oil prices drop or ease back, therefore, there is less wealth in the Middle East and in Russia to be spent on luxury goods, including luxury automobiles.

2.  What about trends in Indian auto registrations?

The Indian economy as a whole is growing; however auto registrations are on the decline because of other factors holding back the market.

3.  Which car makers are benefiting from the upturn in the global economy?

Carmakers doing the best are the ones doing well in China and US, the largest markets: GM, Ford and Volkswagen.  Volkswagen is doing well in China and has topped GM, although it is not doing as well in the US.  Ford is not as big as GM and Volkswagen in China, but is obviously doing well in the US.

Fiat has suffered in Brazil where the car market is dropping, as it is in Latin America as a whole.  The biggest loser is Peugeot, because it is focused on Europe; in addition, it has not had the product lineup that Renault has.

One of the other factors that affects auto industry is where production is, based on currency shifts and demand shifts.  Toyota has experienced a drop in sales, because they were affected by flooding in Thailand, the tsunami, and strong yen.  As these factors disappear, they will affect all Japanese carmakers, including Toyota.

Given the long-term horizons that production planning has to undergo, it’s a delicate balancing act.  Production in W. Europe will continue to fall; carmakers are heading to production in China, Brazil, and Mexico.

4.  Any data are on which countries have the greatest potential in car sales relative to GDP?

EIU did a study a few years ago, China had the most potential based on forecast for GDP growth and relatively low car stock.  China has caught up a lot of that gap; car stocks are where they should be based on GDP/capita.

There is potential for catch-up growth in Indonesia.  One of the other areas of potential is the US, which has surprisingly low car stocks relative to wealth levels.  That is the reason behind rise in car sales there.

There are some countries where there is greater car stock than needed.  For example, in Malaysia, a lot more people have cars due to local production, and so growth levels won’t be high there.

5.  What is the situation in Central and Eastern Europe?

They had a particularly bad slump after 2008-2009, partly because it had had such a huge surge up to 2007, and pent-up demand had gone.  Car sales in Ukraine are still down 60% compared to 2007.  There is potential for catchup growth in theory, but economies are not particularly strong.  Forecasts for Russia, for example, are not particularly bullish; their economy will grow only slightly in 2014 (it declined in 2013). Central and Eastern Europe should see a recovery based on how far it dropped during the global slump.  The exception is Poland; it will remain relatively strong over the forecast period.

6.  What is the situation in Latin American countries?

One of the biggest surprises recently is that Brazil  has been overshadowed by Mexico, across all figures:  GDP growth, car sales, and car production.  Mexico was extremely strong in 2013, with Brazil turning in a disappointing performance.  The same will be true in 2014.  That is partly due to the relation to the growing US economy through NAFTA, but demand is growing within Mexico itself.  In Brazil, however, demand remains subdued.  The economies that will be strong in Latin America outside of Mexico will be Argentina, Peru, and Venezuela.

7.  What is the biggest differentiator between India and China in terms of car sales and growth?

In terms of wealth alone, China is richer.  There is a much better spread of wealth there than in India, and it has more sustainable growth potential.

Another differentiator is demographics.  China has an aging population. The number of people within car-buying age is shrinking.  India, on the other hand, has a huge under-15 population that is getting close to car-buying age in 5 to 10 years.  India is a stronger one in terms of growth in the medium-term, whereas China is a stronger one in terms of growth in the shorter term.

8.  What is the effect of the investment in infrastructure on car sales?

In developing markets, infrastructure has a powerful effect on car sales.  Commercial vehicles are used in building the roads themselves.

9.  What about the alternative-fuel vehicle market?

The sales of electric vehicles has been relatively poor, perhaps due to the declining oil prices.  The growth was strong in 2013 but from lower levels.  Outside of urban areas, infrastructure is crucial to the growth of purely-electric vehicles (the so-called “chicken-and-egg problem”).

Hyundai is launching the first mass-produced hydrogen fuel-celled vehicle.  Sales will be small.  Toyota will launch theirs 2015.  That is starting to become a real prospect by 2020.  Although they are extremely expensive compared to regular vehicles, these have much more potential than electric vehicles because of their much better range.   You will start to see a shift from electric to hydrogen fuel-celled vehicles by 2020.

NOTE:  Thanks to the EIU for putting on such an informative series.  I appreciate the fact that they take questions from the webinar audience; sometimes the most interesting details of the webinar come from the answers to those questions!

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Before going into the four core modules (Shadow, Mind, Body, and Spirit), the third chapter discusses the most basic part of Integral Theory.   As a reminder, the shorthand for Integral Theory is AQAL, meaning All Quadrants, All Levels, All Lines, All States, All Types.   The first of these five dimensions of consciousness is that dealing with quadrants, and this chapter tries to get the reader to get a feeling of awareness of these quadrants.

1.  Quadrants, the Four Dimensions of Being

If you take the two basic ways of dividing the world, into the dimensions of the individual vs. the collective, and the interior vs. the interior, and cross these two dimensions, you get the four-fold division of consciousness as seen in the above chart.

• In the upper left corner, you have the individual interior (your thoughts, feelings, intentions and psychology)
• In the lower left corner, you have the collective interior (your relationships, culture, and shared meaning)
• In the upper right corner, you have the individual exterior (your physical body and behaviors)
• In the lower right corner, you have the collective exterior (your environment and social structures and systems)

By the description of each quadrant, there is an equal sign with a one-word shorthand for each of the quadrants.   The individual interior quadrant can be referred to as the “I” quadrant, the collective interior can be referred to as the “WE” quadrant, the individual exterior can be referred to as the “IT” quadrant, and the collective exterior can be referred as the “ITS” quadrant.

The basic idea behind integral life practice is that doing exercises that allow you to explore each of the four quadrants of experience, you will be learning how to engage in your life in the most holistic or integral fashion.

2.  The “I” quadrant

The “I” quadrant represents your interior as a conscious individual.    You do not have direct access to the conscious of others; you can only infer their conscious thoughts through their external behaviors.    In a similar way, your “I” space is invisible to others.

What are the contents of the “I” quadrant?   Your thoughts, ideas, intentions, motivations, purpose, vision, values, worldview, and life philosophy.

The best way to access your own “I” quadrant is to practice introspection and stillness so that you become aware of the contents of your interior consciousness.

3.  The “WE” quadrant

Any relationship you have constitutes a “WE” space, because it consists of the shared feelings and emotions you and the other person share.   In order to share a “WE” space with another person, you need to have mutual recognition, communication, and shared understanding.   Language is a tool for creating and maintaining this “WE” space.    If you are just stuck in an “I” space, your may have feelings, but there is no way for you to have any confidence that the person you are in a relationship with understands what feelings you have or indeed shares them unless you create a “WE” space that allows you to communicate those feelings.

The best way to access your “WE” quadrant is to engage in some form of communication.

4.  The “IT” quadrant

As opposed to the “WE” space, where you try to understand the interior of another person, the “IT” space is the perspective where you look at the surface of things and/or people, and sense their properties or behaviors.    For example, you may get clues to the person’s interior space by observing their exterior behavior.    Seeing a person smile may give you a clue that they are happy, or seeing that person frown may likewise give you a clue that they are not.

The best way to access your “IT” quadrant is to engage your various senses and observe the outside world.

5.  The “ITS” quadrant

The “ITS quadrant is where you look at the exterior, but not of individual things or people, but groups of them.    You become aware of their interactions, which form a system.    Nature or society are what are found in the “ITS” quadrant.   Rather than communications themselves, which connect the interiors of people, the communication medium is what connects them externally.

The best way to access your “ITS” quadrant is to observe the interactions or connections between the objects and/or people of the world.

6.  A Feel for Integral Awareness

Rather than process your understanding of the quadrants on an intellectual level, you can get a more intuitive understanding of them by doing the following exercise:

• Picture the four quadrants in your mind, or refer to a diagram of them like the one listed above.
• Start with the “I” quadrant.   Gain an awareness of this quadrant by examining your thoughts and your intentions using introspection.
• Now expand your awareness to the “WE” quadrant, by imagining your relationships with various other people in your life.
• Next expand your awareness to the “IT” quadrant by feeling the state of your physical body–are you hungry, sleepy, comfortable, etc.?
• Finally expand your awareness to the “ITS” quadrant by thinking about the interactions you have with others and with your environment.   You are part of the physical environment and interact with it, and you are part of the social environment and interact with that as well.
• Think of your job, your health, or your relationship with a partner.   Which of the quadrants tends to come up in your awareness?
• Now try thinking of your job, your health, or your relationship from different quadrants.
• All of those different types of awareness are arising within the larger space of your own integral awareness which connects these four types of awareness or quadrants.    That open awareness is what Ken Wilber sometimes refers to as Big Mind, as opposed to the smaller mind we sometimes inhabit when we are looking at ourselves or the world from only a single quadrant.

The AQAL framework is the theoretical basis of Integral Life Practice, but this exercise is a great introduction to understanding the connection between Integral Awareness and Integral Life Practice.    It is the endeavor of engaging in different practices which exercise those different types of awareness that were outlined in this section.

And with that, I will start on the next 4 chapters, which cover the four core modules of Integral Life Practice.

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In this last chapter of his book Project Planning, Scheduling & Control, Dr. James Lewis goes through some recent trends that affect project management.

1.  VIRTUAL PROJECT TEAMS

In 1991, the majority of projects were done by teams that had most members located at least in the same city, if not the same building.   Now there is a market increased in virtual teams whose members only meet through communication channels such as e-mail, conference calls, or file-sharing platforms such as Sharepoint, Google Drive, or Dropbox.

However, despite the appearance of making communication easier, technology increases the burden on people in the following ways:

• Increases burden for those communicating across large time differences
• Increases chance of misunderstanding due to language differences (the “lost in translation” phenomenon)
• Increases chance of misunderstanding due to cultural differences

One book Dr. Lewis recommends regarding overcoming cultural differences is by Terri Morrison and Wayne Conaway called Kiss, Bow or Shake Hands (Holbook, Mass: Adams Media Corporation, 2006).

2.  TECHNOLOGY

One of the problems about technology is that it is, like a hammer, only a tool.   It doesn’t automatically make you smarter because you are wielding a tool it took some smarts to create.   In fact, like any tool, it can cause damage if used incorrectly.   The biggest danger is that senior management sees project management as simply using scheduling software.    Just because you can make a schedule, doesn’t mean you can keep to it.

Sharepoint and other project collaboration tools are useful, and becoming used more and more on projects, so if you want to learn how to use these tools, check out The Social Media Bible by Don Safko and David K. Brake (Hoboken, N.J.; Wiley, 2009).

Just put all this technology in perspective; it’s just a better way to communicate with people, which is the core of what project management is all about!

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In chapter 19, Dr. James Lewis talked about project managers and their vertical relationships in the upward direction, that is, with senior managers.   In this chapter, he talks about project managers and their vertical relationships in the downward direction, that is, with the project team members.

Dr. Lewis starts out with the observation that we generally know more about getting high performance out of our capital equipment that we do about getting it from the people who run the equipment.   An additional problem in the IT application area is that many individuals who have strong technology focus are introverts who often lack people skills.

Peter Drucker once said that a manager must get people to go beyond the minimum acceptable performance level in their jobs, because that minimum acceptable performance level is the survival level.    However, since the company is competition with other companies that are constantly moving forward, the organization needs to constant improve itself in order to survive vis-a-vis that competition.

1.  BELIEFS ABOUT PEOPLE

One place to start is to start thinking about what your beliefs or your paradigm is with regards to people in the workplace.   Answer the following questions:

• Do you think most people want to do a good job?
• Do you believe most people are motivated by pay or by the work itself?
• Do you trust most people to keep on working even if you aren’t around?
• Do you think that most people are pretty “straight” with you, or that most of them have hidden agendas that they are trying to advance?
• Do you believe that you must protect yourself from political maneuvering by other would-be managers?
• Do you think people will take advantage of you if they get a chance?
• Do you think you can depend on most workers to do what they say they will do?

Were your answers mostly negative, or mostly positive?   Dr. Lewis contends that the attitudes you have will dictate what kind of behavior you find in those who work for you.

One thing that reinforces our beliefs as outlined above are the processes which filter the information we receive, the processes of deletion and distortion.    We either do not allow into our awareness information that would contradict our beliefs, or we take the information and distort is so that it conforms to those beliefs.

2.  MOTIVATION

Abraham Maslow’s Hierarchy of Needs postulates that our human needs can be placed in five categories, listed below in order from lowest to highest:

• Physiological
• Security
• Social
• Esteem/Recognition
• Self-Actualization

Most recognize the truth in this model, but our incentive schemes often don’t match that realization.   Most organizations concentrate on reward systems that emphasize the lower two levels, and give employees external rewards that meet their physiological and security needs.   However, Daniel Pink in his book Drive: The Surprising Truth about What Motivates Us (2009) makes it clear that research indicates that all true motivation is internal to the person.   You don’t have to pay a person more to do something that he or she is already driven to do.   To achieve high levels of motivation, a person must be given work that in and of itself meets his or her internal drives or needs.

3.  NEGOTIATING AND INFLUENCING

Each of these topics require entire books to do justice to them, so Dr. Lewis recommends the following books:

• Cialdini, Robert B.  Influence:  The Power of Persuation (New York: Quill, 1993)
• Patterson, Kerry, Joseph Grenny, David Maxfield, Ron McMillan, and Al Switzler Influencer: The Power to Change Anything (New York: McGraw-Hill, 2008)
• Fisher, Roger, and William Ury, Getting to Yes (Penguin, 1991)
• Stone, Douglas, Bruce Patton, and Sheila Heen, Difficult Conversations (New York: Penguin, 2000)

4.  DEALING WITH POLITICS

One of the first things you find out as a project manager is that dealing with stakeholders is often more challenging that dealing with project team members or senior managers.   The reason is that stakeholders often do not understand the nature of the project or worse, don’t care about the project.    Communicating with them in a way that makes them understand the project and care about its outcome is challenging.   Even more challenging is the fact that some of the stakeholders are at odds with each other so there is literally no way of satisfying them all.

Dr. Lewis recommends that for larger or more complex projects, project managers have assistants that can take care of many of the administrative tasks involved in project management in order to free them to deal with political issues.

5.  SKILL BUILDING

For those who feel they are not good at people skills, Dr. Lewis closes the chapter with a positive note:  like anything else, dealing with people is a skill that can be developed by anyone.   However, it is not a technical skill, but more of a performing art.   One unconventional suggestion that Dr. Lewis gives is from John Grinder, the cofounder of Neuro-Linguistic Programming who says that good managers should all take an acting class!   You won’t win any Academy Awards for your performance, but it will increase your performance as a project manager.

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In this chapter of his book Project Planning, Scheduling & Control, Dr. James Lewis tackles the political sensitive issue of working with senior managers.

He starts off with the observation that many project managers get promoted from positions of being a technical specialist.   Not only does the technical specialist need need new skills to be a manager, but he or she needs to speak a new language in order to communicate with senior managers.

Many technical specialists when they become managers are more passionate about the technical work they are managing than the managing itself.    If you end up hating the “management” part of being a project manager, getting really good at it won’t make you like it better, but it will help you do make the best of your job.

1.   MEETING THE NEEDS OF SENIOR MANAGERS

Project managers are evaluated on how well they meet the goals and objectives given to them by the managers to whom they report.   Most commonly, you are expected to achieve the performance, cost, time and scope (PCTS) targets for your projects.

Way back in Chapter 1 Dr. Lewis describes how only three of the four project targets can be dictated.  The fourth constraint or target will be a function of the nature of the job.    As a visual picture, think of a triangle written on the surface of a balloon.   As the balloon is pumped with air, the area covered by the three vertices of the triangle will change.   Those three vertices are analogous to the three project targets that can be dictated.   But the fourth constraint, the area contained by the triangle, will depend on how much air is pumped into the balloon.

Senior managers CANNOT dictate all four targets.   If the functional relationship is given by the formula

C = f(P, T, S)

then the value of C, or the cost of the project, will be a function of

• P = performance requirements (technical and functional)
• T = time required for the project
• S = scope or magnitude of the work.

If the senior manager dictates what P, T, S are, and then says the project has to be done for a cost of C, then that manager may end up being unreasonable.   To bring in the cost of the project for a cost of C, you may have to reduce the scope, the requirements, or extend the time of the project.    Something may have to give.   If the senior manager is constitutionally incapable of understanding this fundamental point, then you are being set up for failure.

Let’s assume that the P, T, and S targets have been dictated because of organizational needs.  It is your job as project manager to determine what it will cost to meet those targets, within some sort of tolerance such as 5% of the estimate.    It is the senior manager’s job to either

• authorize the costs to meet those targets, or if only a lesser amount of funds are available given the organization’s budget, to
• authorize the adjustment in the P, T, or S targets that would allow the project to be realistic brought in for the amount of costs that are feasible.

2.   EDUCATING MANAGERS

Many managers will not understand the more structured approach you are taking.   Dr. Lewis relates a story of a project manager who showed his boss a proposed schedule for the project, and the boss asked what the thin trailing line was at the top of the bar chart representing the schedule.  The project manager explained that it indicated the earliest and latest finish times for the task.  If the task were completed later than the latest time shown by the float line, then the end date for the project would slip.

The boss came back and hour later with a revised schedule, saying “I’ve taken all that float out of the critical path–you should be able to finish earlier.”   The boss didn’t understand that, by definition, there is no float in the critical path, but only in non-critical paths.   By removing the float from the non-critical paths, he did nothing to make the project itself finish earlier.   Make sure your manager has a clear understanding of what you are trying to accomplish, so that they do not get unrealistic expectations.

3.  USE THE HBDI PROFILE

Chapter 5 of Dr. Lewis’ book was on “Whole-Brain Project Management.”  This went into the various thinking styles that people have.    There are four thinking styles which are represented in quadrants starting with A in the NW corner and going around counterclockwise.

• A quadrant–prefers thinking in terms of “action”
• B quadrant–prefers thinking in terms of “process”
• C quadrant–prefers thinking in terms of “people”
• D quadrant–prefers thinking in terms of “ideas”

Make sure you identify the thinking style of your senior manager, and try to communicate with them and make presentations to them using the type of thinking style that manager prefers.

NOTE:   I was at a District Executive Committee meeting for District 30 of Toastmasters, when an exercise was presented to all of the Area Governors to identify their thinking style.   It turned out that my preferential style was D–I’m an “idea” person, it looks like.   Following in terms of strength, were B (“process”), C (“people”), and A (“action”). The purpose of the exercise was two-fold.   First of all, in our speeches and in our interactions with other club officers, we needed to have greater awareness of the different thinking styles of others.   We needed to start incorporating elements that spoke to each “constituency” or quadrant, and not just stick to the familiar style we are strongest in.   But the second reason for introducing this exercise came in the next segment.   We were told to break into divisions, and have each Area Governor write down in a square which quadrants were our first and second preferences.    At the end of this, each Division Governor noted that, as a team, ALL four quadrants were covered by at least one Area Governor for whom it was their first or second preference.

4.  UNDERSTANDING THE MANAGER’S POV

You need to identify what criteria your boss will be evaluating you on, and on how the manager will be able to know whether those criteria have been achieved.   You will be focusing on your project, but the manager will be focusing on all of the projects, especially on the business case which gives the justification for the project’s very existence.   If there is a proposal for a change in the project that will affect the return on investment, for example, reducing it because the project will take longer than expected, then you should bring this issue to the senior manager right away. If the ROI of your project suddenly becomes less than it was originally, to the point that it is less than another project that had been considered, then that project may become more viable than yours.

5.  FIND A MENTOR

One way to understand the manager’s point of view is to have one of them be your mentor.   What is in the senior manager’s background or experiences that led them to be in their position?   Don’t be afraid to ask your senior manager to coach you in areas they think you need to improve in.   Another form of mentorship is through reading popular books on managing.   You can combine these two approaches, mentoring and reading, by asking what business books your senior manager is reading.     Read those books yourself, and discuss them with your senior manager!   You’ll learn more not just about the subject matter, but about the way your senior manager thinks and approaches his or her job!

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In this chapter of the book Project Planning, Scheduling & Control, Dr. James Lewis talks about becoming more effective, not just as a project manager, but as a human being.    That is one of the central messages of his book, frankly, which is that the core of being an effective project manager is being able to treat your project team members well as human beings.    The way to get more out of your team members is not to treat them as a human resource with the emphasis on the word “resource”, as in a commodity which they perceive as being a renewable resource.    You should treat them as a resource with the emphasis on the word “human.”    This requires you to learn how human beings are motivated, and also in the process what motivates you as a human being as well.

1.  PSYCHOLOGY OF ACHIEVEMENT

According to Brian Tracy in his book The Psychology of Achievement (Nightingale-Conant, 2010), the following five conditions must exist if you are to be successful:

a.  You must have peace of mind, or freedom from fear, anger, and guilt

b.  You must have good health and high energy

c.  You should have loving relationships with people

d.  Financial freedom

e.  A sense of fulfillment, or self-actualization

2.  LAWS THAT GOVERN OUR LIVES

There are several laws which govern your ability to perform in order to achieve success.

a.  Law of Control

An internal locus of control is having a sense that you control your destiny and the events in your life; this sense is called self-determination.     Conversely, if you have an external locus of control, then life will seem just like a series of random events, like Winston Churchill’s sardonic definition of history as being “simply one damned thing after another.”   

b.  Law of Belief

What we believe, we make real.  Once we hold a belief, we delete or distort information which may conflict with that belief.

c.  Law of Expectation

The beliefs we hold create in us expectations for how things will be in the world.   These expectations become self-fulfilling prophecies.   In the June 2012 edition of Scientific American, there was an article called “Armor Against Prejudice” about the phenomenon of “stereotype threat.”   This is where students about to take a test fear confirming derogatory stereotypes about one’s social group, and because of that preoccupation end up performing poorly on the test, thereby confirming the stereotype in a self-fulfilling prophecy.    The way to combat stereotype threat is for students, before taking the exam, to participate in essay-writing assignments, in which students reflect on what matters to them—boosting their positive self-image and making them resilient against internalizing any racially-based stereotypes.

3.  SELF-CONCEPT

Self-concept consists of three components:

• One is your concept of your ideal self, or your concept of what you would like to be
• Second is your self-image, or your image of yourself as you are actually like
• Third is your self-esteem, or your feelings about yourself

To boost the self-esteem of you and others on your project team, you should plan small wins for yourself and others.  Begin at a level at which you and others on your project team can perform, and move up from there.

4.  PROGRAMMING THE MIND FOR SUCCESS

If you do not believe you can do something successfully, you will most likely not be successful at it.   But how to you believe you can something successfully, if you haven’t yet done it?   Here is a major secret to success:   behave as if the thing you want to achieve is already a fact.

One another way to achieve something is to emulate the behavior of those who have already achieved it and turning them into your role models.

When you get ready to do something, besides believing that you can do it, you should actively imagine or picture yourself in that situation.   Visualize yourself actually performing well, and you will greatly improve your chances of succeeding.    Will it absolutely guarantee success?   No.

However, it reminds of the quote from John F. Kennedy when he announced to the nation on April 12, 1961 that he was embarking on a space race with the Soviet Union to put a man on the moon by the end of the decade:  “For while we cannot guarantee that we shall one day be first, we can guarantee that any failure to make this effort will make us last.”

One of the elements of picturing yourself succeeding at a task if by creating affirmations or goals, positive statements that are in the present tense that affirm your achievement of that task.   Rather than saying, “I would like to see the project succeed,” which puts the event somewhere not even in the future, but in a hypothetical future, you should say, “The project is a success.”   You should create this affirmation at a time when you are relaxed.    In that state of relaxation, practice repeating your affirmations while picturing them in your mind.

NOTE:  You can use your own affirmations, or those of a skilled neuro-linguistic programmer such as the British hypnotist Glenn Harold.

Finally, one last word of caution about programming your mind for success:  you have to be willing to reduce the time you spend with people who have a negative outlook.

NOTE:  I found this out through painful experience when networking that, if I would ask for career advice from somebody and they gave me a lot of negative advice I would not ask that person again.    Since I am fluent in Japanese, I asked someone about the possibility of being a consultant to either a Japanese firm or to a firm that wanted to do business in Japan.    Someone told me I should ask a certain person who was a consultant in such a capacity.   That person was so passionately pessimistic about the possibility of me ever becoming a consultant that for a while, I was really down in the dumps.   However, I snapped out of it and then realized the truth:   the person was being pessimistic about my being a consultant not necessarily because of an objective evaluation of the merits of the idea, but because frankly he didn’t want the competition!

5.  CONCLUSION

Success can come to you only if you place people first and practice the Golden Rule, which is the moral foundation of all of the world’s great religions.   You may be the manager of a project team, but you need to treat your team members as if they are equals, at least on the basic level of humanity.

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