The End of an Era is Nearing….

I wrote about the Australian auto industry in May 2013 (see below).

The Beginning of the End

The recent reports on the auto industry suggest that dire predictions may become a reality soon. The below article in today’s Age newspaper by Lynch and Hawthorne reiterates the hard-to-swallow reality.

Australia’s car industry one year from closing its doors

The below graphic from the article tells the story vividly.

Source: Lynch and Hawthorne (2015) The Age, 17 Oct 2015

Any first year student of economics will tell you that when demand decreases with no change in supply, the quantity bought will be reduced. In an ideal world, the price should come down. But that’s not going to happen in Australia because of high labour costs. In an open economy, we have to compete with the rest of the world, mainly with Asia where labour costs are a fraction of ours. Consequently, Australians find imported cars from Asia a lot cheaper and offer same if not more on quality and style than Australian made cars. This is why the red bar in the Australian chart is heading south rapidly over last two decades whilst the domestic purchases (the yellow bar) is ever shrinking. For now, EU and China have the most healthy domestic auto industries while the US auto industry will follow a similar path to Australia.

 

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Thanksgiving…

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Gratitude is a rare virtue these days. In a society where everything can be bought at a price and valued in dollar terms, gratitude indeed is a rare commodity today. Today marks the Thanksgiving Day in America which is a national holiday dedicated to remember and to be grateful. What an irony that we need a special day to remember to be grateful. But in an increasingly ungrateful world, regardless developed or developing, perhaps it is not surprising. At a personal level, people rely on their financial strength to get what they want, necessities, luxuries, ultra-luxuries, boasting rights, etc. Troubled relationships? No worries; you can build an entire network of ‘friends’ if you have money. Throw a few parties, buy a few expensive presents, put a few ‘likes’ on their Facebook pages, bingo, you’ve built an entire network of ‘friends’. Often, the immediate family members are an eyesore for an ungrateful man or woman because they may remind the person of hundred things that he or she ought to be grateful for. Who wants to remember that humble beginning or the difficult past once you have climbed up the social ladder of wealth and power? People who have lent you a helping hand to complete your education, find that first job, advised you on your career choices, helped you when you were in the dumps, etc. can become a bad dream. Rather, we want others to be grateful for us. So thanksgiving prompts us to reflect, but do you really want to?

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Surviving the digital revolution

Today's young generation may not be familiar with this old machine

Today’s young generation may not be familiar with this old machine

Structural change is already happening. This time, the digital revolution is driving it. Even the post offices are changing their business plans. Gone are the days that people send telegrams or personal letters, thanks to emails, SMS, Skype, Facetime, Facebook, etc. When was the last time that you used a fax machine? It is being made redundant at this very moment. Post offices have become ‘Parcel Offices’ as they earn more revenue from parcel distribution than mail delivery. Thanks to the massive growth in online shopping. Nowadays, it is convenient to shop at eBay or other online store. You do your research online, read reviews online and compare prices online. Once you hit that click button, it takes only a couple of days to receive your treasured buy even from the far away places like Hong Kong to your doorstep. Why would you want to pay 50% or even 100% more for the same product sold at a brick-and-mortar store. And better still, you don’t pay the Goods & Services Tax.

The media landscape is fast changing as well. Print newspaper circulations have been dwindling. Not that people don’t read newspapers. They do it using various digital devices. And it is a much richer experience than reading a passive printed paper. Nowadays, ‘reading’ news is more like an interactive social experience. Not only you read but you also vote and comment on the article straightaway. Trust me, sometimes, it is much more entertaining to read the comments and replies to an article than reading the article itself! And the video embedded in the article provides a short snappy summary – who’s got the time to read long articles these days, anyway? Better still, you could be the news journalist as now you can upload digital contents (news and images) to your favourite newspaper using your smart phone!

The television viewing is changing as well. Now you do not have to sit in front of a TV to watch anything. You can use various ‘Catch-Up’ services provided by Tv networks to watch your favourite programme at leisure using an app on a mobile device. I tell my kids to have a good look at the local DVD hire shop because its days are numbered. Today, it is much more convenient to rent-download-and-watch a movie online than renting from a brick-and-mortar video shop.

Most information service sectors are vastly changing. What about higher education?   Let’s be honest, tertiary education is an information good. Most information industries are undergoing structural change driven by the digital revolution and there is no escape. A more visible change is the closure or downsizing of university libraries. All those old journals and classical texts are gathering dust in shelves. Most printed subscriptions are turning into digital subscriptions. University courses have become accessible to masses with prestigious universities offering subjects for free in the form of MOOCS (Massive Open Online Courses). Although, people are scratching their heads to figure out the business model behind MOOCS. Forget the quality, the trend is to offer online courses, online degrees, virtual classrooms, flip classrooms, digital meeting places, etc. There is little doubt that technological innovations are reshaping the university education. And that inevitably means structural change in universities. Will the brick-and-mortar universities survive the digital revolution? Only time will tell.

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Happiness in all seasons!

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How much influence can seasons have on the psychic of the people? A quite a lot by the looks of the Finnish experience. Finland enjoys such extremes of temperature and daylight; almost perpetual daylight of the summer sun and mercilessly cold winters and arctic gloom (Alho, 2002). Often daylight in a typical winter day reduces to twilight only!  No wonder why Finns don’t sleep and party  hard during midsummer. Obviously they’ve got a lot of catching up to do. Apparently, the entire country shuts down for the 5-6 weeks that follow midsummer. Summer is that important to Finns. In winter the psychic is totally different and the upbeat party vibe vanishes. According to a Somalian taxi driver who drove me to my hotel from the Helsinki airport, people go ‘crazy’ during winter. Well I can imagine that. But in the tropical Sri Lanka where I come from, there’s only one season – summer, 365 days, pretty much 12 hrs of day time and 12 hrs of night-time throughout the year. And there’s no distinct variation in the general mood of the people throughout the year.  I must check the world happiness report to see whether there is a correlation between number of summer days and people’s happiness level. Well, I will leave that question for my next research project.

Posted in general, lifestyle, spirituality, travel | 2 Comments

The Begining of the End

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This is no brainer. The writing has been on the wall for decades! Yet, we refused to accept the fact that the Australian auto industry has been dying. Billions of dollars have been given to the auto companies as handouts which artificially propped up the industry. But the business case never staked up. A few weeks ago, I wrote on this blog that money would have been better spent on education and R&D (see  the article here). The harsh reality is that we have become a high cost production center and we cannot compete with Asia on labor costs. Consistently high Aussie dollar also did not help. So how can we survive and have some sort of manufacturing activity here? The answer is ‘innovate or perish’. Gone are the days that we can rely on low-end manufacturing and assembly of automobiles. It has to be high-end R&D, that’s where our competitive advantage is. We have highly skilled auto engineers, a fair share of innovators and an advanced stock of infrastructure. So our auto manufacturing sector might be reduced to the design and manufacture of prototypes, concept vehicles and component technology improvements. But this is cold comfort to the thousands of auto workers who have already lost jobs or about to lose jobs. But if we take the high-end design path, at least we should be able to keep some workers and supply lines fully employed in the auto industry. Unless we embrace this new reality, it’s going to like throwing pearls to pigs!

Image courtesy – http://www.webwombat.com.au

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Climate Change Insurance

floods

Today we have insurance policies for almost everything – health, house and content, fire & theft, life, disability, income protection, mortgage, motor car, travel, and so on. We even have funeral insurance. One insurance provider politely sells it as “to protect your loved ones from the potential financial burden of paying for your funeral costs”. Yes, we want to be insular from every possible unknown. But how does insurance work? Its pretty simple – people pay money called an “insurance premium” to an insurer. In return, the insurer promises to make some payments to the insured party if an adverse event occurs.

Why do people buy insurance? Uncertainty is a fact of life. People face risks every time they take a shower, drive a car, board a plane, walk across the street or make an investment. Insurance can mitigate at least some of these risks. Presumably, an insurance buyer is concerned with the probability of various outcomes. Economists refer these different outcomes as ‘probability distributions’. For many environmental problems, it is not possible to state with certainty what potential outcomes a particular policy will have. This is because scientific forecasts themselves often are uncertain. For example, consider the potential damage from climate change. Most scientists now agree on the potential impacts of climate change, such as sea level rise, species losses. But the timing and extent of those losses are uncertain. Can the insurance industry handle future catastrophe risks?

The insurance industry faces a number of problem here. The insurance premiums required for all types of aforementioned insurance policies bar climate change can be easily estimated because such events have happened many times in the past and therefore insurance companies have a fairly good understanding of probability distributions associated with each potential outcome. Climate change, however, is a different kettle of fish. It involves catastrophic events.Therefore, probability distributions are not known. Catastrophic events can strain the capacity of the insurance companies and their ability to cover such losses and private insurers may be reluctant offer insurance without a government guarantee.The available evidence also suggests that reinsurance is heavily skewed toward the coverage of relatively small catastrophes.

Another non-trivial issue is what economists called ‘adverse selection’. By definition, those who are willing to buy  a flood insurance are those who live in a high flood risk area. The implicit assumption here is that people only buy insurance if it is profitable for them to do so.Therefore, insurance providers lose money or the insurance is “too expensive”. Flood insurance is different from other natural disasters where insurers can effectively take risk by pooling across different regions.

The issue is further complicated by the expectation that governments should bail out people in every possible natural disaster. This is a valid premise as far as the disaster is unprecedented or catastrophic. Of course, the immediate humanitarian assistance by the government to victims of natural disaster of any magnitude makes sense. If an individual built a house on a flood plain knowing the potential risks and then demands compensation from government in every single flood event then it equals to abuse of public funds. Governments may consider imposing mandatory flood or fire risk insurance in such cases. This would help the insurance industry to develop insurance products and to bring down premiums as many people buy the insurance. By the way, after the floods in Queensland last year, people who had insurance could not recover costs because of the ambiguous interpretation of flood definition by the insurers. Since then, much work has been done to rectify the issue.

Coming back to climate change insurance, many who advocates immediate action to climate change interpret greenhouse gas abatement as an insurance and argue that for the same reason as people are willing to secure against hazards of all sorts, society should be willing to spend some money to protect itself against adverse climate effects, particularly since these may be irreversible and potentially disastrous.

A few insurers are ready for climate change – See the Sydney Morning Herald article here.

Image courtesy of piyato FreeDigitalPhotos.net

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http://jananda.jalbum.net/Autumn/

Check out my new album – Autumn: Nature’s Splendor on Display at http://jananda.jalbum.net/Autumn/.

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