IHS QUARTERLY Q3-2014cdn.app.compendium.com/uploads/user/a33eed35-8a44... · IHS QUARTERLY Q3-2014...

IHS QUARTERLY Q3-2014

US ENERGY ADVANTAGE The scales have tipped

P74

INSIGHTS INTO THE FUTURE From chemicals to crop prices

P6

WHAT IF … CHINA TANKS? Forecasting a hard landing

P20

MARITIME’S METRICS At the center of world trade

P26

ECONOMIC OUTLOOK GDP, capex, oil & gas

P70

COMPETITIVE ADVANTAGEExploring innovative ways companies, cities, and countries can gain an edge.

PRESCRIPTION FOR EMERGING ECONOMIES

INNOVATING THE PRODUCT DESIGN PROCESS

BUILDING TOMORROW’S SMART CITIES

EARNING A SOCIAL LICENSE TO OPERATE

FROM SOCIAL MEDIA TO SENTIMENT INTELLIGENCE

Your source for comprehensive insight, information, and expertise on key topics shaping today’s global business landscape.

We invite you to continue the conversation...

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Join the conversation: @IHS

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THE COMPETITIVE EDGEIHS provides global corporations with information, insight and expertise that enable them to achieve a competitive edge. We help companies stay ahead of the competition by paying attention to the smallest details and by showing them the big picture. IHS Quarterly reflects this mission by providing insight and expertise from our thought leaders to help readers achieve a competitive edge no matter what their industry, be it aerospace, defense & security, automotive, chemicals, energy, maritime, or technology. Our depth and breadth can elevate your understanding of complex issues and give you an edge.

FEATURES

EMERGING MARKETS AT THE CROSSROADS: LONG-TERM DECAY OR RETURN TO GROWTH? The biggest challenge emerging markets face is the ability to maintain steady, long-term growth. Success will come to those that are able to implement the necessary structural changes.By Farid Abolfathi

P 28

IN SEARCH OF BLUE OCEANS Megatrends and globalization are changing the landscape for product companies across many industries. Their future competitiveness will be determined by an ability to produce innovative products, which requires an update in design methodologies.By Jim Belfiore

P 36

CONNECTING TOMORROW’S CITIES As urban centers grow, so do pressures on municipal infrastructure. Cities’ economic and social viability may well hinge on the adoption of smart technologies that reduce congestion, pollution, and energy consumption. By Lisa Arrowsmith

P 44

ALL BUSINESS IS SOCIAL For agribusiness, energy, mining, and many other capital-intensive corporations, gaining the support of stakeholder communities at the local, national, and global levels is as important as winning contracts. The future of the company may depend on it.By Nathalie Wlodarczyk

P 54

SENTIMENT INTELLIGENCE: CONVERTING SOCIAL MEDIA BABBLE INTO BUSINESS ADVANTAGE Analysis of social media is an important tool for spotting trends. But deriving actionable intelligence from social media data requires a sophisticated framework that includes a host of capabilities.By Chris Hansen

P 60

EXPERTISEWHAT IF CHINA’S ECONOMY TANKS? By Elisabeth Waelbroeck-RochaP 20

ANALYTICS MORE TRADE, BIGGER SHIPS Source: IHSP 26

OUTLOOKGLOBAL GDP, CAPITAL INVESTMENT AND OIL & GAS Source: IHSP 70

NUMBERS12 METRICS THAT MATTER Source: IHSP 72

IHS QUARTERLY

#IHSQuarterly

4 | IHS Quarterly | Q3-2014

COPYRIGHT NOTICE AND LEGAL DISCLAIMER© 2014 IHS No portion of this publication may be reproduced, reused, or otherwise distributed in any form without prior written consent of IHS. Content reproduced or redistributed with IHS permission must display IHS legal notices and attributions of authorship. The information contained herein is from sources considered reliable but its accuracy and completeness are not warranted, nor are the opinions and analyses which are based upon it, and to the extent permitted by law, IHS shall not be liable for any errors or omissions or any loss, damage or expense incurred by reliance on information or any statement contained herein. For more information, contact IHS at [email protected], +1 800 IHS CARE (from North American locations), or +44 (0) 1344 328 300 (from outside North America). TRADEMARKSIHS Quarterly & the IHS logo are trademarks of IHS. Other trademarks appearing in this publication are the property of IHS or their respective owners.

IHS Inc.

Scott KeyPresident & Chief Executive Officer

Jonathan GearSenior Vice President – Industrials

Anurag GuptaExecutive Vice President – Strategy, Products & Operations

Sean MenkeExecutive Vice President – Resources

IHS Quarterly

Sheri RhodineVice President, Integrated Marketing

John WardSenior Director, Thought Leadership

Bruce RaynerEditorial Director, IHS Quarterly

Jonathan CassellSenior Manager, Content Creation

Thomas GoodfellowSenior Manager, Thought Leadership

John SimpsonManager, Content Creation

Peter BeddowCreative Director, IHS Quarterly

IHS Global Editing, Design and Production Team

IHS Quarterly Editorial Council

Tim ArmstrongVice President, IHS Automotive

Atul AryaSenior Vice President, IHS Energy

Nariman BehraveshChief Economist, IHS

Mark EramoVice President, IHS Chemical

Dale FordVice President, IHS Technology

Scott LockhartSenior Vice President, IHS Operational Excellence & Risk Management

Tate NurkinManaging DirectorIHS Aerospace, Defense & Security

Zbyszko TabernackiVice President, IHS Economics & Country Risk

VISIONSTAYING COMPETITIVE By Scott KeyP 5

INSIGHTSENERGY - Mexico readies for private investment in its energy industryP 6

AEROSPACE & DEFENSE - Middle East in the crosshairs as insurgent attacks spiralP 7

CHEMICAL - US shale revolution: A boon for European chemical plants?P 8

TECHNOLOGY - Mobile devices spread to the factory floorP 9

ECONOMICS - Modeling the e¦ects of weather on crop price volatilityP 10

AUTOMOTIVE - Electric surge: EV production charges ever upwardP 11

MARITIME - Shipowners slow steam their way to profitabilityP 12

CHEMICAL - Turkish soda ash exports threaten European producersP 13

ECONOMICS - Nigeria emerges as Africa’s largest economy: What next?P 14

TECHNOLOGY - Chip-enabled payment cards: The gold standard for security?P 15

AEROSPACE & DEFENSE - Global defense trade up in 2013 as India, East Asia boost importsP 16

TECHNOLOGY - The drive for industrial energy efficiency gathers steamP 17

HEALTHCARE - Meeting the healthcare needs of an aging populationP 18

ECONOMICS - Small-business job growth as a gauge of US economic healthP 19

SPOTLIGHTENERGY COMPETITIVENESS: THE DAWN OF A NEW ERA? By Atul AryaP 74


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VISION

Scott Key President and Chief Executive Officer IHS

Staying competitive

It takes a lot to stay competitive these days in what is a very dynamic global environment. There are important tactical issues to manage, such as regulatory compliance, cash flow, and quickly shifting demand conditions. And then there are strategic issues that require the ability to anticipate change before it comes knocking on your door. This issue of IHS Quarterly takes a look at some key strategic challenges and opportunities global corporations face today in their relentless e�ort to remain competitive.

One area of coverage explores what we call competitiveness of place—country versus country, and city versus city. In the article What if China’s economy tanks? Elisabeth Waelbroeck-Rocha examines the implications of a “hard landing” for China as a result of the bursting of the domestic housing bubble and what it means for China’s economy and economies around the world. This includes the impact on growth, employment, investment, and interest rates. The scenario utilizes a new simulation tool IHS recently debuted called the Global Link Model. It’s a powerful way for companies to test “what if” scenarios so they can prepare to react quickly to market shocks ahead of the competition.

In Connecting tomorrow’s cities, Lisa Arrowsmith explores the competitiveness of place from the standpoint of emerging smart cities. The article looks at the technology and infrastructure investments required, and how these highly e�cient and livable urban environments will become magnets for business and investment. Cities already generate more than 80% of global GDP, according to the World Bank. Urban centers that invest today to become smarter tomorrow will be well positioned to gain a bigger piece of the pie.

Another area of coverage is competitiveness of expertise. That is, what and where companies need to invest to build new skills to rise above the competition. Three articles address expertise. The first is In search of blue oceans by Jim Belfiore, which looks at the process of product design and the expertise companies need to develop to consistently drive successful product introductions. Two other articles—one on social license to operate by Nathalie Wlodarczyk, and another on sentiment intelligence by Chris Hansen—look at emerging capabilities that many companies are struggling with today. Both social license and sentiment intelligence have the potential to provide a competitive edge, improve financial performance, and build shareholder value.

IHS is passionate about providing information, analysis, and expertise to global companies to help them achieve and maintain a competitive edge. It’s in our DNA, and in the pages of IHS Quarterly.


INSIGHTS

Mexico readies for private investment in its energy industry

In late 2013, Mexico passed historic constitutional amendments that set the stage for opening the country’s state-run energy industry to the private sector. These reforms remove restrictions stipulating PEMEX as the only entity sanctioned for exploration and production (E&P) of hydrocarbons in Mexico—as well as midstream and downstream activities from oil refining through the transportation, distribution, and commercialization of petroleum products.

The government has set an aggressive two-year timetable by which to establish the legal and institutional framework to implement the reforms, as well as the policies governing key areas such as the fiscal regime for new E&P contracts, bidding round procedures, and rules for issuing permits for downstream activities.

A wide range of E&P opportunities could ultimately emerge, not all equally attractive. As oil income will continue to play a critical role in public finances for the foreseeable future, any new upstream market arrangements will have to guarantee income levels for the state similar to those generated by the current framework. Moreover, under the legislation, PEMEX can opt to retain control over certain E&P areas, with the likely result that it will continue operating highly productive areas such as the Southeast Basin (see map).

The downstream segment is also likely to change. The state is to grant permits for oil refining, natural gas processing, storage, pipe transport, and distribution of crude, gas, oil products, and petrochemicals. Mexico imports 400,000 barrels per day (bpd) of gasoline, 100,000 bpd of diesel, and 80,000 bpd of liquefied petroleum gas. Companies will be able to import petroleum products and sell them at retail and wholesale, own facilities to store and transport imported petroleum products, and operate service stations.

But before any of that can happen, numerous institutional reforms must be implemented, including:• Transforming PEMEX into a productive state

company with a culture that can address corruption, timely decision making, and strategic planning;

• Expanding the National Hydrocarbons Commission to organize bid rounds for E&P contracts, administer

such contracts, and regulate E&P operations; • Adding responsibilities to the Energy Regulatory

Commission to grant permits for storage and pipeline transport and for the distribution of crude, oil products, and petrochemicals, as well as to regulate the crude and oil products pipeline system.

Various opportunities for international oil companies are on the horizon. And while it is unlikely a bid round involving new contract structures will take place in the next two years, PEMEX may begin approaching companies to establish preliminary agreements for participating jointly in bid rounds of open areas, or partnering in legacy areas, if constraints to negotiate the transfer of E&P rights directly are removed.

By Pedro Martinez Lara, senior research analyst, Latin America

upstream, IHS Energy

bit.ly/PedroMartinez

For more information on Mexico’s energy reform, visit ihs.com/Q13MexicoOil

Mexico City

MEXICO

UNITED STATES

Deepwater

Sabinas–Burro–Picachos (gas)

Tampico–Misantla (oil)

Veracruz (gas)

Sureste (Southeast) (oil/gas)

Burgos (gas)

PEMEX is likely to cede control over Mexico's vast, less-productive oil/gas basins

Areas projected to be opened to participation by international oil companies after completion of Round Zero

Exclusive areas for PEMEXAreas under partial control by PEMEX (open to association with third parties)Open areas (available for bid rounds)

0 480km

BasinsShale resources potentialOil fieldsGas fields

Source: IHS

https://www.linkedin.com/pub/pedro-mart%C3%ADnez-lara/29/775/60b

http://www.ihs.com/Q13MexicoOil

http://www.ihs.com/Q13MexicoOil


Middle East in the crosshairs as insurgent attacks spiral

Attacks by non-state armed groups (NSAG) around the world have increased rapidly in the past five years. Aggregated open source data collected by IHS Jane’s Terrorism and Insurgency Centre shows that the number of attacks by such groups has increased each year since 2009—almost doubling during the period from 9,911 in 2009 to 18,524 in 2013.

An NSAG attack is defined as an incident in which an individual or organization commits an illegal act of politically or ideologically motivated violence against persons or property—with the aim of coercing others to adopt or comply with its objectives or to submit to its authority—that results in death, damage, or disruption.

Last year marked a dramatic escalation in the number and lethality of such incidents—with recorded attacks jumping 39% and combined militant and non-militant deaths up 60% over 2012. Overall, non-militant fatalities attributable to NSAG actors numbered 39,044, with a further 39,932 wounded.

The epicenter of 2013 activity was the Middle East, with significant pockets of violence radiating out to neighboring regions in Africa and South Asia. The Middle East accounted for well over half of all attacks (10,056) and non-militant fatalities (27,759) worldwide. Asia was the second-most active region for NSAGs, with 5,259 attacks, followed by Africa.

Syria, the most attack-prone country in 2012, experienced a notable upsurge in violence as the anti-government insurgency intensified in 2013. A sharp increase in activity by militant Islamist groups, in particular, drove attacks in Syria 76% higher in 2013—to 4,694—as the country emerged again as the top global hot spot (see figure).

Al-Qaeda in Iraq, which began playing an active role in the Syrian anti-government insurgency in 2013, helped drive sharp increases in the number of recorded attacks in Iraq (52%) and non-militant fatalities (148%) over 2012. Iraq recorded almost double the number of suicide attacks of any other country and finished 2013, as it did the previous year, with the second-highest number of overall attacks.

Pakistan and Afghanistan, respectively the third and fourth most active countries for NSAG attacks, both recorded a decrease in incidents in 2013. Notwithstanding the downturn, the Taliban—Afghanistan’s most prominent NSAG group—could yet exploit uncertainty as to whether a status of forces agreement will be negotiated ahead of the withdrawal of international forces from Afghanistan at the end of 2014.

Notable among Asian countries experiencing an uptick in insurgency in 2013 were Thailand and the Philippines, both of which recorded 445 attacks. The Barisan Revolusi Nasional, Malay-Muslim separatists, carried out 441 attacks in Thailand in 2013—a 112% increase over 2012—making it the world’s most prolific NSAG last year in terms of attributable attacks. In the Philippines, a total of 142 attacks were claimed by, or attributed to, the New People’s Army in 2013, an 89% increase over the 75 attacks recorded in 2012.

By Matthew Henman, manager, IHS Jane’s Terrorism and

Insurgency Centre, IHS Aerospace, Defense and Security

bit.ly/MatthewHenman

For more on this and related topics, visit ihs.com/Q13Insurgencies

20132012Syria

Iraq

Pakistan

Afghanistan

India

Yemen

Bangladesh

Philippines

Thailand

Egypt

Syria and Iraq top the list of insurgencies

2,674 4,694

2,297 3,499

2,209 1,550

1,316 1,134

926 775

207 523

28 492

167 445

321 445

63 431Source: IHS

Number of attacks by non-state armed groups − 2012, 2013

http://uk.linkedin.com/pub/matthew-henman/57/a17/528

http://www.ihs.com/Q13Insurgencies

http://www.ihs.com/Q13Insurgencies


INSIGHTS

US shale revolution: A boon for European chemical plants?

Among the many follow-on e�ects of the North American boom in unconventional gas production has been the accompanying increase in ethane production—and its subsequent price drop. Ethane constitutes roughly half the liquids content of shale gas produced in the US today and, as shale gas production has surged in recent years, ethane prices have dropped to near five-year lows. Just as important, as ethane’s price has dropped, crude oil prices have risen, increasing ethane’s discount to crude.

The ethane-crude oil price spread is significant as ethane and naphtha from crude can be used as inputs into the production of ethylene—a key building block in the petrochemical value chain. Amid declining North Sea energy production, European ethylene cracker operators, in particular, are looking to tap into vast, inexpensive US ethane supplies to make their steam-cracking plants economical—even some that would require costly retrofits to switch from naphtha petroleum to ethane for feedstock. And while US ethane producers are eager for new markets for the 300,000 barrel per day (bpd), and growing, surplus of ethane beyond domestic needs, until now the infrastructure—dedicated shipping fleet, and loading and receiving facilities—has not been in place to allow for those exports.

That is changing:• Ineos AG has signed a long-term contract for

shipment of ethane from the Marcus Hook facility to Europe to supplement declining supply; six vessels are under construction with shipments to commence in 2015. It is building ethane tanks at plants in Norway and Scotland for on-site storage.

• Enterprise Products Partners plans to build in 2016 the world’s largest ethane export facility in Houston, with a loading rate of 240,000 bpd.

Despite being highly cost-competitive, US ethane is unlikely to be sourced as feedstock for most European steam crackers. Plants inaccessible by seagoing vessel are not candidates, as overland transport of ethane is infeasible. Companies with coastal plants must factor-in the substantial costs associated with building the shipping and storage facilities required to import ethane. And for the vast majority of European steam

crackers currently operating on naphtha, additional retrofit costs would be incurred.

IHS analysis of European steam crackers concludes that the cost and thus likelihood of switching from naphtha to ethane is highly site-specific. The expense broadly ranges between US$300 million and US$1 billion. Larger European crackers—with more than 500 kilotonnes per annum ethylene production—have the most incentive to switch, as their economies of scale reduce the per-ton conversion rate. The UK and Amsterdam-Rotterdam-Antwerp zone o�ers lower shipping costs compared with the Mediterranean and Baltic areas.

Even with new US steam crackers coming online in 2017/18, IHS projects the continuing availability of plentiful and inexpensive US ethane, relative to naphtha, until at least 2030. This scenario could accommodate as much as a 30% switchover of European steam crackers—without a large increase in ethane prices.

By Steve Lewandowski, business director, light olefins, IHS

Chemical; and Walter Hart, senior director, natural gas liquids

research and consulting, IHS Energy

bit.ly/SteveLewandowski

bit.ly/WalterHart

For more on this and related topics, visit ihs.com/Q13Ethane

0.51.01.52.02.53.03.54.0

203020252020201520100

0.51.01.52.02.53.03.54.0

Source: IHS

Ethane in natural gas produced

Ethane actually recovered

A growing proportion of ethane is being recovered from natural gas

Ethane produced and recovered (millions of barrels per day)

http://www.linkedin.com/pub/steve-lewandowski/12/7/94

http://www.linkedin.com/pub/walt-hart/71/264/381

http://www.ihs.com/Q13Ethane

http://www.ihs.com/Q13Ethane


Mobile devices spread to the factory floor

The bring-your-own-device (BYOD) phenomenon reshaping information technology in business o�ces is now spreading to the manufacturing sector, with employee-owned smartphones and tablets playing an increasingly important role in factory settings.

Rising numbers of manufacturing workers are utilizing their own mobile devices to help monitor, maintain, and even control industrial equipment. For employees, smartphones and tablets allow them to manage equipment remotely, observing processes while they are on the move or working in another part of the factory. From the company’s standpoint, use of a personal communications device costs less than a purpose-built hand-held or conventional terminal and requires comparatively little training to use.

Helping enable the rise of BYOD are the growing use of wireless networks and industrial ethernet in factories and the networking of industrial automation equipment using standard wireless networking technologies such as wi-fi or Bluetooth. Wireless network connections in global factories are projected to rise from 2.1 million in 2012 to 3.4 million by 2017.

More than half of all organizations surveyed recently by IHS Technology allow their employees to use a personal wireless communications device on the factory floor (see figure). To support the use of such devices in manufacturing, industrial automation vendors are developing applications that operate on iOS and Android devices. Suppliers such as Rockwell Automation and Pro-face are making software available that helps machine operators visualize data remotely on their mobile devices.

Despite its usefulness in manufacturing, BYOD presents a range of challenges. Unlike industrial PCs, consumer mobile devices are not designed to endure the stresses commonly encountered in manufacturing, such as vibration, heat, water, and electrical interference. Moreover, personal communications devices frequently have limited battery capacity, in which case they could require re-charging mid-shift and be unavailable for use.

Additional challenges include:• Integration of smartphones and tablets into the com-

pany network adds a potential new point of vulner-ability for hackers/malware to exploit.

• Mobile devices that are misplaced or lost and which contain sensitive company data could fall into the wrong hands.

• Employees who resign or retire may retain company information on their devices.

For these reasons, companies are increasingly developing BYOD policies and providing them to employees upfront that specify which devices will be supported, what apps can be downloaded and installed, how users should protect their devices, and what the IT department should do when an employee loses a device or leaves the company.

By Toby Colquhoun, senior analyst, and Tom Moore, analyst

discrete & process automation, IHS Technology

bit.ly/TobyColquhoun

bit.ly/TomMooreIHS

For more information on this and related topics, visit ihs.com/Q13MobileFactory

In use now and will continue to be used for next three years

In use now but will be discontinued in next three years

Not in use but will be adopted in next three years

Not in use and no plans to adopt in next three years

Don’t know

Source: IHS

46%

16%

7%11%

20%

Smartphones and tablets on the rise in the factory

Results of a recent IHS global survey of the manufacturing, process, and energy industries (percentage of responses)

Q. Does your organization allow employees to use commercial smartphones/tablets on the factory floor?

http://uk.linkedin.com/pub/toby-colquhoun/1b/bb6/8b0

http://bit.ly/TomMooreIHS

http://www.ihs.com/Q13MobileFactory

http://www.ihs.com/Q13MobileFactory


INSIGHTS

Modeling the e¡ects of weather on crop price volatility

Global agriculture markets have experienced increased price volatility in recent years. While this volatility has many root causes—the global financial crisis, distorting trade and agricultural policies, and supply chain issues—weather variability and climate change are key influencers.

Many organizations struggle with price volatility and how to plan for its impacts on key crops and livestock in diverse regional markets. With this in mind, the IHS Global Agriculture Team developed a 15-year scenario analysis quantifying the e�ects of weather and climate change on global agriculture markets by major product and region.

The scenario invokes increased global weather volatility in lieu of the conventional assumption of future average weather—the latter representing the baseline forecast—to examine the impact of increased weather variability on global crops and livestock.

The scenario’s four assumptions are that: historical weather events are indicative of the outcomes of future weather events; crops that share a similar agronomic calendar are more likely to be impacted similarly by weather; geographically proximate countries are more likely to be impacted similarly by weather; and “climate change” is manifested as increased frequency of extreme weather events.

There were three key findings from the scenario:• While weather volatility is a driving force behind crop

price variability, for a majority of grains and oilseeds the high price levels of recent years will not be revisit-ed as a result of bad weather alone. Rather, a combina-tion of supply-and-demand shocks would be required to set record highs. For example, a biofuel mandate followed by a drought in corn-growing regions.

• Long-term stability of global oilseeds and grains pro-duction, even during more volatile weather, points to an improved ability of crop growers in major produc-ing countries to absorb weather-driven yield shocks. World wheat production, for example, trended higher as weather variability increased, which supports the idea that as regions or hemispheres experience varying weather conditions, producers in opposite

hemispheres and non-neighboring regions allow for continued growth to satisfy global demand.

• The massive global expansion of oilseeds and grains planting beyond their traditional climatic zones has made their yields, hence their prices, more suscep-tible to changes in weather. This di�ers from crops such as cotton, sugar, and rice that continue to be planted substantially within their traditionally favor-able weather zones.

The major crops most impacted under the scenario (as compared with baseline) were sunflower and rapeseed, whose mean percentage price change from baseline during the forecast period registered 41.2% and 32.2%, respectively. In part, this reflects the fact that these crops are grown in a relative handful of northern countries whose proximity to each other means they are more likely to be impacted by the same weather events. The major crops least impacted under the scenario were generally those such as rice and cotton—9.8% and 6.9% mean change from baseline, respectively—with high yields that continue to be grown largely in their traditional climatic zones.

By Ryland Maltsbarger, principal economist, agriculture services,

IHS Operational Excellence & Risk Management

bit.ly/RylandMaltsbarger

For more information on this topic, visit ihs.com/Q13CropClimate

2005 2007 2009 2011 2013

*US - #2 Yellow corn FOB, Gulf ports

*US - #1 Yellow Chicago soybean spot*US - #1 Hard red winter wheat FOB, Texas Gulf

*A-Index cotton

0100200300400500600700

0

50

100

150

200

250

Major crop prices have become more volatile in recent years

Crop price in US dollars per metric ton (left scale)*** and UScents per pound (right scale)*

Source: IHS

https://www.linkedin.com/in/rylandmaltsbarger

http://www.ihs.com/Q13CropClimate

http://www.ihs.com/Q13CropClimate


Electric surge: EV production charges ever upward

Electric vehicle (EV) production is poised to soar in 2014, driven by tightening European emission standards that take e�ect in the second half of the year and California’s push for zero-emission vehicles (ZEVs). Global production of EVs—both pure electric models (BEVs) and plug-in hybrid-electric vehicles (PHEVs)—is projected to grow 80% to more than 409,000 in 2014. By contrast, global production of all motor vehicles is expected to rise only 3.6%.

The Euro 6 standard targets an EC fleet-wide average of 130g/km of CO2 emissions. That, combined with European automakers’ introduction of a range of new electric models in 2014, is expected to boost both EV manufacturing and demand in Europe. Europe, the Middle East, and Africa will account for the largest share of global production at more than 40%, with the Americas and Asia-Pacific each comprising 30%.

Major new EV models in 2014 include BMW’s i3, Volkswagen’s e-up!, Mercedes-Benz’s B-Class Electric, and Audi’s A3 e-tron plug-in hybrid. EV production is forecast to continue growing rapidly—increasing more than tenfold to 2.4 million annually by 2021. By then, PHEV production, currently 40% of the EV market, is forecast to surpass that of BEVs, achieving 54% of the grid-based market (see figure).

This growth forecast hinges on several assumptions:• In 2014 and beyond, automakers deliver concept

and production BEVs with large batteries having capacities of approximately 40 kilowatt hours, which equates to about a 150-mile range.

• The installed base of EV charging stations continues to expand globally. By year-end 2014, it is expected to reach more than 1.1 million units worldwide. Although most of the installed base is for private charging, 35,000 charging stations are forecast to be installed this year in the public or semipublic domain.

• The public is educated on the real costs of vehicle ownership. While up-front EV costs may continue to exceed those of traditional vehicles, for the majority of the global population EVs o�er cheaper propul-sion and upkeep costs. Depending on the electricity source from which they draw power, EVs may also leave a lower carbon footprint.

Risks to this forecast include: a significant drop in gasoline prices, which is a real possibility given the declining demand associated with aggressive CO2 reductions; public resistance to the long recharge times per mile travelled compared with liquid-fueled cars; resistance to refueling more frequently than with liquid fuel; a decrease in federal and state incentives for EVs and PHEVs in the US and/or lack of support by lawmakers; and reduction of 2025 ZEV mandate targets for the US.

With the release of a number of new EV models in 2014, OEMs are committing in earnest to electric drivetrains. But the long-term growth of the EV market will likely require governments—as they have in Europe and elsewhere—to continue incentivizing automakers and customers to embrace EVs.

By Ben Scott, analyst, hybrid and electric vehicles, IHS Automotive

bit.ly/BenScott

For more on hybrid-EV vehicles, visit ihs.com/Q13EVPortal

Automakers are committing to mass production of electric vehicles

Source: IHS

0.00.51.01.52.02.53.0

202120202019201820172016201520142013

Electric

Plug-in hybrid

Forecast global production in units of EVs by type (millions)

https://www.linkedin.com/pub/ben-scott/33/121/45a

http://www.ihs.com/Q13EVPortal

http://www.ihs.com/Q13EVPortal


INSIGHTS

Shipowners slow steam their way to profitability

Ninety percent of the world’s goods are transported by ship and, lately, much of that tonnage has been arriving late. “Slow steaming”—in which ships’ speeds are purposely reduced to save fuel and related costs—is the maritime shipping industry’s response to the high bunker prices, overcapacity, and reduced freight rates that have chipped away at company profits in recent years.

Shipowners’ problems started in 2007, when fuel prices began rising rapidly. A ship’s single-largest operating expense—between 40% and 60% depending on prevailing bunker prices—fuel costs doubled between 2007 and 2012. As the recession took hold, overcapacity in the shipping market reduced freight rates and compounded carriers’ woes.

Slow steaming is helping to solve some of these problems simultaneously. By reducing engine speeds and increasing transit time between ports, the supply of idled ships has been reduced. More significantly, it has yielded huge fuel savings.

Owing to the design of the two-stroke main engine typically employed in larger merchant ships, reducing speed results in disproportionate fuel savings. As ship speeds slow to near 50% of peak, fuel use can drop by up to 90%. Of course, slower steaming speeds also result in lengthier transit times—and boost fixed operational costs such as seafarers’ wages—which o�set some of the per-mile fuel savings.

Numerous other variables a�ect the actual savings that accrue to shipowners as a result of reducing ship speeds, including wind, weather, current, and load. But Maersk, credited as a pioneer in slow steaming, has reported bunker fuel savings of upwards of 20% in recent years, which has helped return it to profitability. And along with the reduction in fuel use have come significant reductions in CO2, SO2, and NOx emissions—which are of increasing importance as new maritime emission regulations take e�ect in 2020.

On the other hand, slower steaming means longer supply chains for cargo owners and, potentially, higher costs for them where they need to fill ships with extra inventory to compensate for the lengthier transit times

and cover the capital cost of the cargo. At a minimum, it requires that they build in additional time between the manufacture and sale of their products.

For this inconvenience, the carriers’ response is that slow steaming provides cargo owners with added reliability. That is, when slow-steaming ships encounter adverse weather or other potential delays, they can speed up and still reach port on schedule—unlike those that are sailing at top speed and have no built-in contingency.

In any case, many shipowners appear su�ciently convinced of the advantages of slow steaming that they will continue with it once the shipping industry’s economic fundamentals turn around. Maersk, for one, has commenced redesigning its ships to optimize the benefits that can be captured from slow steaming—and other carriers are retrofitting ships to achieve similar gains.

For the foreseeable future in the maritime industry, it appears to be slow steam ahead.

By Alex Gray, senior product manager, IHS Maritime

bit.ly/AlexGray

For more information on this and related topics, visit ihs.com/Q13SlowSteaming

14.0

14.5

15.0

15.5

16.0

16.5

17.0

17.5

18.0

18.5

19.0

20142013201220112010200920082007

Average speed in knots for all container ships

Source: IHS

Shipspeed

Slow steam ahead!

https://www.linkedin.com/pub/alex-gray/41/2b5/277

http://www.ihs.com/Q13SlowSteaming

http://www.ihs.com/Q13SlowSteaming


Turkish soda ash exports threaten European producers

Sustainable sources of competitive advantage are much sought after in the manufacturing industries. The chemical industry is no di�erent. Companies seek low-cost feedstocks, unique technologies, di�erentiated products, and—not least—availability of a competitive natural resource as routes to success. The development of Turkey’s deposits of the soda ash mineral trona is one such natural resource that is proving disruptive to the long-established European chemical industry. It may well prove to be its defining competitive threat over the next 5 to 10 years.

Soda ash (sodium carbonate, Na2CO3) is an important industrial chemical. Global annual consumption is more than 55 million tons, with the glass industry the single largest consumer. There are no economical substitutes for soda ash in flat glass for construction and automotive applications, although container glass has lost market share to bottle-grade polyester. Detergent and chemicals are other major market segments that consume soda ash.

The leading production process, currently accounting for nearly half of the world’s soda ash, is the Solvay, or ammonia soda, method. This process, commercialized by Ernest Solvay in Belgium in the 1860s, is employed almost exclusively in Europe, where it is used to produce 10 million tons of soda ash annually. It is an ingenious process, incorporating simple and widely available raw materials—just salt, limestone, and coal or coke. The biggest threat to this and China’s similar Hou process is natural soda ash. Trona (Na2CO3-NaHCO3-2H2O) is 70% soda ash and can be refined to soda ash at lower cash cost than the Solvay process.

The occurrence of trona, a natural mineral, in commercial quantities is geographically restricted. The Green River Basin trona deposits in Wyoming, first commercially exploited in the late 1940s, are by far the world’s largest, with proven reserves capable of supplying demand for more than 3,500 years. As trona-based production grew, all but one North American Solvay process plant shut down. South America and North Asia, excluding China, both became increasingly important export destinations for US soda ash, with Solvay process plants subsequently closing in Japan, South Korea, and Taiwan.

Turkey has two well-characterized deposits of trona at Beypazari and Kazan, with proven reserves of about 40 years at world-scale production rates. Eti Soda began production in 2009 and has plans to produce 4 million tons annually by 2018. Turkey has excellent logistics for transporting its soda ash to European markets. With a competitive cost base and low transport costs relative to the Green River Basin producers, Eti Soda is entering European markets. Its delivered cash costs are competitive (see figure).

Since Eti Soda’s commencement of production, three Solvay process plants closed in 2009, and four more closed recently—Solvay at Povoa de Santa Iria, Portugal, Brunner Mond at Winnington, UK, Penrice at Port Adelaide, Australia, and a portion of Magadi Soda’s operation in Kenya—for a reduction in capacity from 2009 of 2.4 million tons. Given the history of North American soda ash exports, the European Solvay industry must be looking with apprehension at Eti Soda’s plans.

By Andrew Swanson, managing director, consulting, IHS Chemical

bit.ly/AndrewSwanson

For more information on this and related topics, visit ihs.com/Q13SodaAsh

Turkish soda ash producers can beat European manufacturers on price

0

50

100

150

200

250

Source: IHS

Cost of soda ash delivered to the Mediterranean (US dollars per metric ton)

Cash cost

Western Europe US Turkey

Local freight to port Deep sea freight

Import dutyStorage/handling

https://www.linkedin.com/pub/andrew-swanson/25/526/769

http://www.ihs.com/Q13SodaAsh

http://www.ihs.com/Q13SodaAsh


INSIGHTS

Nigeria emerges as Africa’s largest economy: What next?

Nigeria—for a long time Africa’s most populous country and largest oil exporter—has emerged as the continent’s biggest economy, courtesy of a statistical rebasing that raised its estimated GDP roughly 75% to half a trillion dollars. The rebasing, the first since 1990, vaults Nigeria past South Africa, with a GDP of US$400 billion.

Several factors explain the jump. First, both Nigeria’s economy and its method for measuring its output have changed tremendously. The old framework had no way to account for sectors that had little presence 24 years ago but are now quite significant. Second, by any accounting, Nigeria has expanded briskly—the combined result of demographics, the emergence of dynamic new sectors, and high oil export prices.

The new calculations measure 46 sectors, up from 36. They show oil’s share of the economy dropping from roughly one-third to 16% and, more generally, that primary commodities are less important—though in development terms, still too important—than in 1990. Nominal agricultural value has risen from US$94 billion to US$112 billion, while agriculture’s share of output has slipped from 36% to 22%. Notably, services now comprise half the economy. Telecommunications, with 8.7% of GDP, is a star performer. Manufacturing has risen from 1.9% of GDP to 6.8%, but the sector falls far short of potential, largely due to poor infrastructure.

Nigeria should see reduced risk premium on its bonds, as the rebasing lowered its debt-to-GDP ratio from about 20% to 11–12%. Still, political uncertainty could keep this risk premium significant, at least through national elections in February 2015. The rebasing also greatly lowered the e�ective tax rate. Upcoming fiscal policy is di�cult to predict. Given a much bigger GDP figure, the government might adopt an expansionary stance and worry less about deficits. Alternatively, it could view the tax-to-GDP ratio as too low and seize on the rebasing as a revenue-raising opportunity. For now, businesses face greater uncertainty in their calculations of expected profit and tax rates. Even so, the economy’s larger revealed size should undergird higher projected gross receipts.

Nigeria has well-known infrastructure and governance deficiencies: its educational, health, and electrification systems are substandard, and its political leadership has been ine�ective in combating piracy, theft, and insurgents. The rebasing solves none of these problems. It does provide financial leeway that should make addressing physical development needs more feasible, but this opportunity also highlights the risk of ine�ective leadership on various fronts, including security breakdowns, unaddressed corruption, and weak fiscal management.

Nigeria’s GDP upgrade will doubtless attract renewed investor attention, and while sectors such as retail, telecom, and entertainment have already provided investors and entrepreneurs with lucrative opportunities, these have been in a geographically spotty pattern aligned with areas of better infrastructure, governance, and security. Nigeria’s future as an investment destination depends on how well it can generalize these conditions across regions and sectors; not just pacify, but develop the politically troubled north; and generate improved results from key underperforming sectors, such as manufacturing and agriculture.

By Karanta Kalley, director, Global Economics Sub-Saharan

Africa Group, IHS Economics

bit.ly/KarantaKalley

For more on this and related topics, visit ihs.com/Q13Nigeria

Nigeria's economy nearly doubles in size 'overnight'

Source: Nigerian Bureau of Statistics

0

100

200

300

400

500

2013 (new estimate)2013 (old estimate)

TotalServicesIndustryAgriculture

Nominal GDP before and after rebasing (US dollars in billions)

https://www.linkedin.com/pub/karanta-kalley/11/782/88b

http://www.ihs.com/Q13Nigeria

http://www.ihs.com/Q13Nigeria


Chip-enabled payment cards: The gold standard for security?

While the US accounts for only one-quarter of global credit- and debit-card transactions, almost half of all fraud is perpetrated against US-issued cards. This is commonly attributed to the fact that the US lags behind much of the rest of the world in adopting chip-based technology such as EMV (Europay, MasterCard and Visa) that uses integrated circuit (IC) cards, and IC card-capable point-of-sale (POS) terminals.

The issue is in the spotlight once again following recent card security breaches at several major US retailers that resulted in the theft of payment information from tens of millions of cardholders. One of the merchants, Target, has since expedited plans to issue chip-and-PIN-enabled store credit cards to replace the magnetic-stripe cards involved in the breach.

In theory, chip-and-PIN-enabled credit and debit cards o�er greater protection to consumers than traditional magnetic-stripe cards by generating dynamic or unique data for each purchase, making it more di�cult to steal data and create counterfeit cards. In fact, EMV technology would not have prevented the Target breach—which involved the installation of malware inside POS terminals’ memories, where data is unencrypted regardless of the type of card from which it originated. However, criminals’ ability to reuse that payment information—specifically to create and sell counterfeit cards—would have been greatly reduced.

For that extra, but limited, layer of security, Target will spend an estimated US$100 million to install chip-enabled technology in all its stores. With millions of POS terminals at retail outlets nationwide similarly requiring replacement at a price of up to US$1,000 per device—and the additional expense of issuing tens of millions of EMV cards—US card issuers, merchants and, ultimately, consumers will bear billions of dollars in transition costs.

Retailers have little choice. Visa, MasterCard, and American Express are requiring merchants to install EMV-readable terminals by October 2015 or face liability for the costs of any fraud.

One area in which the card issuers concede that EMV technology would fail to prevent fraud is when stolen

information is used to make purchases online or over the phone—so-called “card-not-present” (CNP) transactions, where no chip transaction is involved. In fact, evidence exists that CNP fraud has increased in some countries that have adopted EMV cards. Britain, for one, saw losses from CNP fraud triple between 2000 and 2010.

For this reason, many of the world’s largest banks are urging adoption of a tokenization standard, which would help protect card data by substituting the account number with a unique, randomly generated sequence of numbers and alphanumeric characters that would make it di�cult to use the same card repeatedly.

In any case, as consumers and criminals alike increasingly abandon the physical point of sale to make their purchases online, a layered approach to security that includes tokenization, end-to-end encryption, and EMV cards will have to follow.

By Don Tait, senior analyst, digital ID & IT security, IHS Technology

bit.ly/DonTait

For more information on this and related topics, visit ihs.com/Q13CreditCards

EMV card use in the US will soar in the coming years

Source: IHS

EMV cards shipped

2016 2017 2018 20192015201420130

50100150200250300350

Market for contact and dual-interface chip cards (millions of cards shipped)

https://www.linkedin.com/pub/don-tait/0/240/14b

http://www.ihs.com/Q13CreditCards

http://www.ihs.com/Q13CreditCards


INSIGHTS

Global defense trade up in 2013 as India, East Asia boost imports

Global defense trade expanded by US$2 billion to US$67 billion in 2013, buoyed in large part by strong import growth from India and Saudi Arabia and a surge in orders from East Asia.

India continued as the top defense importer globally, with US$5.9 billion in purchases. Major US export deliveries, including Boeing’s P-8 Poseidon maritime surveillance aircraft, contributed to India’s 42% increase in import expenditures over 2012.

Middle East markets comprised roughly US$18 billion, or more than one-quarter, of the total global defense trade market, with US defense companies accounting for half of all deliveries to the region. Notable among Middle Eastern importing countries was Saudi Arabia, whose purchases of Black Hawk helicopters and multirole tanker transport aircraft helped boost its import expenditures 46% year-over-year to US$5.4 billion, second only to India globally.

East Asian imports surged by more than 25% in 2013 to US$12.2 billion. Defense imports for China increased more than 50%, from US$1.5 billion in 2012 to US$2.3 billion in 2013, as it supplanted South Korea as the region’s largest importer of defense equipment. Other major regional importers included Taiwan, Indonesia, and Thailand, which collectively accounted for a US$2.3 billion increase in import purchases year-over-year, largely for aerospace deliveries.

While the US remained the primary defense exporter to East Asia, Russia increased its exports to the region from roughly US$2.5 billion in 2012 to US$3.4 billion in 2013, mostly on increased engine and fighter jet trade with China. The big movers in this growing and highly competitive region, however, were China and South Korea, which overtook the United Kingdom, Italy, and Israel by doubling their exports to the region from 2012 to 2013.

South Korea increased its defense exports, not only regionally but also at the global level to states such as Iraq, Turkey, and the United Kingdom. Its global exports doubled to US$0.6 billion in 2013 and by 2015 are forecast to surpass US$1.5 billion a year.

China’s global defense sales increased from US$1.8 billion in 2012 to US$1.9 billion in 2013. However, as a defense exporter, it is almost wholly reliant on several economically challenged clients—primarily Pakistan, Bangladesh, and Venezuela. As its economic growth rate slows, China faces increasing internal reform challenges and may soon be unable to subsidize military export deals to these countries.

The US, meanwhile, continued as the world’s largest overall defense exporter in 2013, with US$25.2 billion in sales, up 2.4% over 2012, but with growth rates falling. The US remained the largest supplier of defense equipment to Western Europe and is projected to widen its lead in exports to the region after the middle of the decade as European requirements for next-generation fighter aircraft—specifically F-35s—overshadow trans-European trade in naval, land, and air platforms. The total regional value of the F-35 trade could exceed US$29 billion during the coming decade.

By Ben Moores, senior analyst, IHS Aerospace &

Defense Forecasting

bit.ly/BenMoores

For more information on this topic, visit ihs.com/Q13DefenseTrade

Growing Middle Eastern and Asian demand for arms

Source: IHS

20122013

Chi

na

Eg

ypt

Taiw

an

Ind

ones

ia

Sout

h K

orea

UA

E

Saud

iA

rab

ia

Ind

ia

0

1

2

3

4

5

6Defense equipment purchases (US$ billions)

https://www.linkedin.com/pub/ben-moores/5/9b/673

http://www.ihs.com/Q13DefenseTrade

http://www.ihs.com/Q13DefenseTrade


The drive for industrial energy efficiency gathers steam

Electric motors consume almost half of the world’s electricity. Used in a wide variety of applications—including fans, pumps, compressors, mixers, and blowers—they account for more than two-thirds of the electricity used in industrial settings.

As the source of such a large proportion of industrial energy expenditures, electric motors should logically be scrutinized by factory operators to ensure their optimal operating e�ciency. In fact, the significance of using high-e�ciency motors—to save energy, reduce emissions, and improve companies’ bottom lines—has, to date, largely escaped the attention of industrial operators across the globe. Instead, procurement managers have routinely opted for the up-front cost savings a�orded by lower-e�ciency motors.

This points to a significant disconnect between those who make decisions regarding industrial capital expenditures and those tasked with managing manufacturing operational costs. This is particularly true in small- and medium-sized enterprises with fewer than 500 employees, which comprise 90% of the global manufacturing base. Individuals making capital-expenditure decisions when building industrial facilities rarely consider the long-term costs associated with projects. As a result, they consistently place initial purchase price concerns ahead of total-cost-of-ownership (TCO). This means energy e�ciency is frequently not a factor in the decision-making process, and operators who take over facilities after their completion often face much higher energy bills than if the most e�cient equipment had been specified during the facility’s construction phase.

Beyond that, there is also a degree of ignorance, among engineers and accountants alike, regarding the most e�ective ways to control industrial energy costs. A 2009 survey conducted by industrial automation equipment maker ABB of British manufacturing firms on this issue is illustrative. Those surveyed—both engineers and financial managers—ranked the replacement of lower-e�ciency motors and drives as among the least-e�ective methods for reducing energy costs, behind actions such as installing energy-e�cient lighting and renegotiating utility contracts.

In fact, installing e�cient electric motors is much more e�ective in improving industrial energy e�ciency. In a typical electric motor used in a factory, the purchase price represents only 2% of its lifetime costs. Fully 96% of its TCO is accounted for by its lifetime electricity usage (with the remaining 2% going toward repair and maintenance). Capital investment in energy-e�cient motors—which may have a lifetime of 15–20 years—can often be recouped in 1–2 years.

In 2012, only 28% of global low-voltage motor shipments were high e�ciency. Boosted by minimum- e�ciency performance standards now being enacted by governments around the world, higher-e�ciency motors are projected to grow to 62% of global shipments by 2017.

That represents dramatic e�ciency gains for the vast and growing industrial electric motor segment—revenues of which are set to rise from US$14.6 billion in 2012 to US$23.4 billion by 2017. And it is welcome news for the competitive position of industries worldwide—commercial HVAC, food and beverage, packaging, mining, and utilities, among them—that collectively install 50 million low-voltage electric motors annually.

By Alex Chausovsky, associate director, motors and mechanical

power transmission, IHS Technology

bit.ly/AlexChausovsky

For more information on this and related topics, visit ihs.com/Q13ElectricMotors

Source: International Energy Agency and A+B International

Motors

Light

Electronics

Electrolysis

Heat

Standby

46%

19%

3%

19%

10%3%

Motors use more kilowatts than any application

Percentage of total world electricity consumption by end use

https://www.linkedin.com/pub/alex-chausovsky/4/442/121

http://www.ihs.com/Q13ElectricMotors

http://www.ihs.com/Q13ElectricMotors


INSIGHTS


Meeting the healthcare needs of an aging population

By 2050, the US population aged 65 and older is projected to double to 89 million. The proportion of older Americans with one or more chronic diseases, 92.2% in 2008, is projected to trend higher if, as expected, longevity and obesity rates continue to rise.

While primary care physicians will continue to play an important role in providing preventive services for this growing elderly population, the expansion of treatment options for su�erers of chronic and other diseases highlights the growing significance of specialty physicians. More than one-third of patients are already referred annually to one or more specialists, who play an essential role in diagnosis, monitoring, and treatment.

Understanding the specific healthcare needs and projected demand for services of the aging population can help inform decisions about the number and mix of providers that the US should train to improve access to high-quality, a�ordable care. To that end, IHS has employed a Healthcare Demand Micro-simulation Model to simulate future disease prevalence and use of healthcare services, by medical specialty and care delivery setting, for each person in a representative sample of the current and projected future population. The model predicts the resulting e�ect on provider demand, analyzes the impact of expanded health insurance coverage under the A�ordable Care Act (ACA), and explores the potential impact of paradigm shifts in use and delivery of care.

The model, from which findings were published in the journal Health A�airs, projects substantial growth between 2013 and 2025 in specialty service demand.

Key findings include:• Twelve of the medical specialties modeled project de-

mand growth rates for full-time-equivalent providers equal to or greater than the 14% increase projected for adult primary care services.

• Vascular surgery has the highest projected demand growth, at 31%, followed by cardiology (20%), and neurological surgery, radiology, and general surgery (each 18%).

• Patient visits to urology and neurology o�ces are both projected to increase 17% and dermatology visits by 16%.

Expanded medical coverage under the ACA is projected to increase demand for most medical specialties by only a few percentage points, with the largest increases in o�ce visits forecast for otolaryngology (5.2%), urology and dermatology (both 5%), and gastroenterology (4.7%). Although relatively small at the national level, the impact of these increases on access to physician services could be substantial for those living in already underserved communities. Demand growth in some regions could also drain physician supply from underserved areas.

While the number of specialists required to provide appropriate care for the aging US population continues to be debated, indicators such as long waiting times for appointments suggest that the supply of many specialists nationwide is already inadequate to meet demand. Looking ahead, failure to train su�cient numbers and achieve the correct mix of specialists could exacerbate the situation, reducing access to care for some of the nation’s most vulnerable patients and reducing patients’ quality of life.

By Tim Dall, managing director, life sciences consulting,

IHS Economics

bit.ly/TimDall

For more information on this topic, visit ihs.com/Q13HealthCare

Demand for many specialty services will outstrip that for primary care

Source: IHS

Vascular surgeryCardiology

Neurological surgeryRadiology

General surgeryNephrology

NeurologyPulmonologyDermatology

UrologyEndocrinology

Allergy and infectious diseasesAdult primary care

0 5 10 15 20 25 30 35

Percentage growth in demand for specialty healthcare services, 2013–25

https://www.linkedin.com/pub/tim-dall/4/531/488

http://www.ihs.com/Q13HealthCare

http://www.ihs.com/Q13HealthCare


Small-business job growth as a gauge of US economic health

Small businesses with fewer than 50 employees comprise 95% of all companies in the US and play a central role in driving the economy. Tracking the employment trends of these businesses is a valuable way to gauge both the small-business employment picture and trends within the larger economy.

The Paychex/IHS Small Business Jobs Index, launched earlier this year, analyzes year-over-year worker count changes, trending the results to reveal movement in small-business employment conditions—with an upward trend representing a strengthening job market and a downward trend signifying a slowdown. Each month, the index provides two numbers—the absolute level of the index (using 100 as a base), and the growth or decline of the index from month to month expressed as a percentage—for the US as a whole; for each of the nine US Census regions; for the country’s 20 most populous states; and for the 20 most populous metropolitan regions (see figure).

Published on the Tuesday prior to the first Friday of each month, the index is derived from a comparison of the change in employment in about 350,000 small businesses during the previous year. The index released at the beginning of July 2014, for example, is based on the change in small-business employment from June 2013 to June 2014. The growth of the index compares this change with the change in employment from May 2013 to May 2014. In this way, normal seasonal variation is filtered out to provide as accurate a picture as possible of underlying employment and economic growth.

The index relies on actual payroll information from a large subset of Paychex clients, rather than surveys, to generate the data each month. As such, the index is not intended as a predictor of future trends. By the same token, since the index is based on actual payroll data, rather than estimates, monthly revisions are not needed.

The methodology uses a “same-store” approach that incorporates in the data analysis only those small businesses that were open a year earlier—just as large retailers do to compare sales over a certain period with

the same time period from the past. Retailers use this method to understand revenue gains or losses from existing stores, eliminating the distortion generated by the opening of new stores during the period being analyzed. In the case of the index, this apples-to-apples comparison allows for analysis of worker-count changes during a 12-month period.

Index data tracking back to 2005 is available on the Paychex/IHS Small Business Jobs Index website to allow for comparison of current economic performance against past periods—making the index potentially valuable to business leaders, policymakers, analysts, and economists.

By Jim Di¢ley, senior director, US Regional Economics,

IHS Economics

bit.ly/JimDi¢ley

For more information on the Paychex/ IHS Small Business Jobs Index, visit paychex.com/jobs-index

+0.22(101.92)

-1.25% 0.25% 1.45%

-0.49(101.86)

+0.59(102)

+0.23(99.83)

-0.69(100.61)

+0.26(100.95)

-0.57(100.79)

Continued hot in the Rockies, cooling trend in theMid-Atlantic and South

Source: IHS and Paychex

May 2014 Paychex/IHS Small Business Jobs Index by regionPercentages based on 12-month change, absolute index levels in parentheses

+1.41(101.98)

+0.37(101.44)

https://www.linkedin.com/pub/james-diffley/12/1aa/695

http://www.paychex.com/jobs-index/




EXPERTISE


What if China’s economy tanks?The Chinese housing bubble is at risk of bursting due to economic imbalances.

If it bursts, a shockwave will reverberate through its economy, causing a dramatic

slowdown that will spread around the world. Utilizing a powerful new simulation tool,

we forecast how a “hard landing” for China would impact the global economy.

China’s business climate is uncertain and growing more so by the day. Cheap credit and a ballooning shadow banking sector in the past few years drove a massive increase in new lending, which fueled a red-hot real estate market and excess construction. As the economy cooled, the massive housing supply ramp-up resulted in high vacancy rates in some Chinese cities, which led to steep price discounts on new properties and rising default rates among smaller property developers.

Global corporations are watching China closely, wondering what will happen next. If the situation were to spiral out of control, they must be able to evaluate the impact on their business quickly and make appropriate course corrections. For instance, what does a hard landing in China mean for interest rates, trade, capital investment, commodity prices, and consumer demand, not only in China but in Europe, India, the US, and elsewhere? The more variables they can control to simulate possible scenarios, the better prepared they will be to respond to the one that actually unfolds.

Using a new econometric simulation tool called the Global Link Model, IHS is able to quantify the impact of economic shocks and regulatory changes to test a wide

range of scenarios on the global economy. The model includes 68 countries and is linked to sector-specific econometric models, enabling users to see how changes in the macro-economy impact sectors and companies, as well as how changes at the micro level influence overall economic developments.

This article examines the consequences of just one scenario: a hard landing in China and the impact it would have on both the Chinese economy and the global economy. We define a hard landing as annual GDP growth for China of less than 5%.

What a hard landing would mean for ChinaThe scenario starts with a severe tightening of credit in the formal banking system and the country’s sizable shadow banking sector, accompanied by a downturn in the residential real estate market. The credit crunch significantly drags down investment growth, and the real estate recession severely reduces Chinese household wealth and consumption. The credit contraction also limits trade financing and, hence, exports. This widespread demand downturn hampers industrial production. As China’s domestic demand slows, the yuan

By Elisabeth Waelbroeck-Rocha


EXPERTISE

depreciates and imports decline, which directly impacts China’s trading partners. One bright spot in this scenario is that global commodity prices would decline in response to reduced demand, slightly attenuating the negative e�ects of China’s slowdown on the global economy.

The timing of the bursting of the bubble in our scenario is set for the third quarter of this year. While the e�ects would start to be felt immediately, the most dramatic impact wouldn’t occur until 2015. The six figures below left capture the devastating consequences of the hard-landing scenario on China’s domestic economy.

How China’s hard landing will a¡ect China

Annual percentage change in China’s industrial production

0

2

4

6

8

10

Industrial production growth drops 3.6% in 2015

Source: IHS

Hard landingBaseline

2016 2017 201820152014

GDP growth dips below 5% in 2015

Source: IHS


2016 2017 201820152014

Annual percentage change in real GDP

0

2

4

6

8

Consumer spending growth drops by 3% in 2015, 2016

Source: IHS


2016 2017 201820152014

Annual percentage change in real private consumption

0

2.5

5.0

7.5

10

Annual percentage change in real exports and imports

0

2

4

6

8

Export growth rebounds in 2016 as import growth continues to slide

Source: IHS

ExportsHard landingBaseline

ImportsHard landingBaseline

2016 2017 201820152014


Annual percentage change in real government spending

Source: IHS

2016 2017 201820152014

Government spending increases slightly in 2015 and 2016

7

6

5

Annual percentage change in real fixed investment

0

2

4

6

8

Fixed investment growth plummets 4.7% in 2015

Source: IHS


2016 2017 201820152014

Annual GDP growth is forecast to decline to 4.8% in 2015, which is nearly three percentage points below the baseline scenario. China’s GDP growth wouldn’t recover fully to the baseline projection until 2018.

Likewise, fixed-investment growth is forecast to drop by 4.7% in 2015 to just 3%, compared with the baseline scenario; industrial production would drop by 3.6% from the baseline scenario. Both imports and exports would see sharp declines in growth rates, with imports experiencing their worst performance in 2016 and 2017.

Widespread global implicationsLooking beyond China’s borders, there are three primary channels through which China’s economic downturn would be transmitted around the world: exchange rates, energy and commodity prices—both agricultural commodities and non-agricultural commodities—and international trade. Under our hard-landing scenario, the combination of these three transmission mechanisms is projected to shave a full 1% o� the world’s real GDP in 2016.

1. Exchange ratesThe yuan is forecast to depreciate by 5% as China’s real GDP growth falls. This makes China’s goods less expensive to other nations, but foreign goods become more expensive in China. So China’s exports benefit but imports su�er. At the same time, slower growth in China causes international financial investors to shun emerging-markets risk, which puts pressure on the exchange rates of countries highly dependent on foreign capital inflows, such as India, Indonesia, and Turkey. This causes the depreciation of their currencies, making their exports cheaper and imports more expensive. This in turn contributes to both inflationary pressures and a slowing of their economies.

IHS estimates that at least nine nations would su�er currency depreciation if the yuan were to depreciate by 5%: Argentina, Australia, Brazil, Chile, Colombia, India, Indonesia, Mexico, and Turkey. In Indonesia, for example, the e�ect would be a dramatic rise in interest rates as the government tries to stem capital flight, negatively impacting investment. This would lead to a jump in consumer prices of close to 3% in 2016 as imports become more expensive due to the exchange rate depreciation.


Top 10 by country

Agricultural commodity exporters

1 Hong Kong 72.9%

2 Russia 34.3%

3 Vietnam 25.0%

4 Thailand 23.8%

5 Australia 23.4%

6 New Zealand 22.7%

7 Brazil 22.4%

8 Argentina 19.6%

9 Malaysia 17.9%

10 US 17.0%

Energy exporters

1 Angola 42.3%

2 Vietnam 24.9%

3 Iran 21.5%

4 Brazil 14.4%

5 Thailand 13.3%

6 South Korea 13.3%

7 Kuwait 11.2%

8 Saudi Arabia 10.9%

9 Indonesia 10.7%

10 Argentina 9.5%

Manufactured goods exporters

1 Hong Kong 61.1%

2 Taiwan 29.4%

3 Chile 23.9%

4 South Korea 22.7%

5 Venezuela 19.0%

6 Japan 16.4%

7 Thailand 15.9%

8 Malaysia 11.3%

9 Philippines 11.3%

10 Singapore 10.9%

Non-agricultural commodity exporters

1 India 77.9%

2 Iran 68.7%

3 Qatar 59.0%

4 Japan 52.3%

5 Hong Kong 48.6%

6 Australia 47.2%

7 South Africa 43.6%

8 Vietnam 41.7%

9 Turkey 41.4%

10 Saudi Arabia 40.2%

Source: IHS

Countries most reliant on China, ranked by average percentage of the country’s exports destined for China, 2009 to 2011


EXPERTISE

2. Commodity pricesChina’s hard-landing scenario would result in a slump in commodity prices worldwide as domestic demand slows. Key commodities impacted include aluminum, copper, iron ore, and zinc. This would be good news for countries that are net importers of these commodities and bad news for exporters. Potentially hardest hit would be the mineral-producing nations of Australia, Chile, and Indonesia.

3. International tradeWhile commodity prices and exchange rates are important, it’s the consequences for international trade that would have the most immediate and severe impact on the global economy as a result of China’s hard landing. China’s economy accounts for approximately 12.5% of the world’s total nominal GDP, so the trade impact would touch virtually every product type and country.

Countries with perhaps the broadest trade exposure to the risk are China’s closest neighbors. For instance, Thailand is a key exporter to China in three of the four major categories of goods. It exports nearly 24% of its agricultural products, 16% of its manufactured goods, and 13% of its energy products (see table on page 23).

In the manufactured goods sector, eight of the top 10 exporting countries are in China’s neighborhood, including Japan and South Korea. More than 20% of Japan’s exports are shipped to China, including both commodities and manufactured goods. As a consequence, Japan would su�er a decline in overall export growth in 2016 of about 5%, compared to the country’s baseline forecast. It would also su�er a drop in imports, a consequence of integrated supply chains within Asia.

Australia, Indonesia, and Malaysia would su�er similar consequences. Australia, for example, exports 48% of its non-agricultural commodity exports to China. The hard-landing scenario forecasts that Australia’s real GDP would be significantly lower than the baseline forecasts in 2016 and 2017, respectively.

Of course, nations farther afield are vulnerable too. Chile is a major commodity-exporting nation and is vulnerable to a China hard-landing scenario. India

The US Federal Reserve would likely keep the rate lower for longer if China su�ers a hard landing

US Fed Funds interest rate

0.0

1.5

3.0

4.5

Source: IHS

China hard landingBaseline

2012 2013 2014 2015 2016 2017 2018 2019 2020

Implications of China’s hard landing on the US economyAnnual percentage growth rates

The rate of growth in the US will slow but less than rates in Asia or Europe

US real GDP growth rate

0

2

4

Source: IHS

2012 2013 2014 2015 2016 2017 2018 2019 2020


US exports will start to slip in 2014 and hit a low point in Q4 2016 before the recovery begins

US exports of manufactured products

Source: IHS

0

2

4

6

8


2012 2013 2014 2015 2016 2017 2018 2019 2020


The impact of China’s hard landing around the world

The fallout of the bursting of China’s housing bubble will reach around the globe. This table captures the extent of the impact on 15 of the largest economies in the world. The impact varies according to a number of factors, including the strength of its economic relationship with China, the size and diversity of the economy, and the current health of the economy. The figures represent the percentage di¢erence in real GDP between the hard-landing scenario and the baseline forecast. A negative number means the hard-landing scenario is negatively impacting GDP growth

15 economies 2014 2015 2016 2017 2018 2019 2020

US 0.0% 0.0% -0.2% -0.4% -0.6% -0.6% -0.6%

China -0.7% -3.3% -4.7% -4.9% -4.6% -4.9% -5.5%

Japan -0.1% -0.5% -0.8% -1.0% -1.1% -1.1% -1.1%

Germany 0.0% -0.1% -0.5% -0.8% -0.9% -0.9% -0.7%

France 0.0% 0.1% -0.1% -0.2% -0.3% -0.3% -0.3%

United Kingdom 0.0% -0.1% -0.3% -0.5% -0.6% -0.6% -0.6%

Brazil 0.1% 0.2% 0.0% -0.3% -0.6% -0.7% -0.7%

Russia 0.0% -0.1% 0.0% -0.2% -0.3% -0.4% -0.4%

India -0.2% -0.4% -0.7% -0.5% -0.4% -0.3% -0.3%

Australia -0.2% -0.6% -1.4% -2.0% -2.2% -2.3% -2.4%

Mexico 0.2% 0.4% 0.0% -0.6% -0.9% -0.9% -0.9%

South Korea 0.0% -0.6% -1.8% -2.8% -3.5% -3.5% -3.1%

Indonesia 0.1% 0.0% -1.2% -1.8% -1.8% -1.4% -1.2%

Turkey 0.0% -0.2% -0.3% -0.5% -0.5% -0.4% -0.2%

Saudi Arabia 0.0% -0.2% -0.6% -0.8% -0.9% -1.0% -1.2%

Source: IHS

exports nearly 80% of its non-agricultural goods to China. While not a significant component of India’s total exports, it is projected to contribute to a 0.7% decline in India’s real GDP in 2016. Similarly, Russia and the US export agricultural products to China, and Kuwait and Saudi Arabia export oil. All of these countries would see slower domestic economic growth in the next four years if the hard-landing scenario were to materialize.

In the US, the fall in exports would be expected to lead to slower employment and income growth. In response, the US Federal Reserve would likely keep interest rates low for longer than currently anticipated. The Global Link Model projects that US real GDP growth would diverge from the baseline projection by a half percentage point a year through 2018 (see figures on page 24).

While this would slow the US recovery, it is a modest hit compared to many of the largest economies in the world. Specifically, Asia-Pacific economies such as Australia, Indonesia, Japan, Malaysia, and South Korea look to take the brunt of China’s hard landing. Of

course, China itself, where the shock wave originated, would be the hardest hit of all.

Elisabeth Waelbroeck-Rocha is international chief economist,

IHS Economics & Country Risk

Rajiv Biswas, chief Asia economist, and Todd Lee, senior director,

Global Economics, IHS Economics & Country Risk, contributed to

this article

bit.ly/ElisabethWaelbroeckRocha

For more information on the Global Link Model, visit ihs.com/Q13GlobalLinkModel

http://bit.ly/ElisabethWaelbroeckRocha

http://ihs.com/Q13GlobalLinkModel

http://ihs.com/Q13GlobalLinkModel


BIGGER SHIPS WILL RULE THE WAVES

Almost 30% of all container ships on order worldwide are massive 10,000teu or larger (20 ft equivalent unit), the size of a standard intermodal container. The largest container ships afloat today are 18,270teu, but giant 24,000teu vessels are coming. While they provide economies of scale, they also mean higher risk: the insured value of the cargo aboard a 24,000teu ship could top US$2 billion.

Size (teu)

10,000+On order

146Growth rate

74%

<999 1,011 17 2%

% of total orders

29%

3%

In service

197

FUELING THE WORLD’S INSATIABLE APPETITE FOR ENERGY

While just one of seven major categories of cargo, transporting crude oil around the world has been a mainstay of the shipping industry for decades and is forecast to increase 36% by 2030.

Percentage of the 2 billion metric tons of crude oil shipped in 2020

that East Asia will importCrude oil shipped in 2013 (metric tons) Crude oil shipped in 2030 (metric tons)

47% 1.8bn 2.45bn

CLEANER SHIPS

High-sulfur maritime fuel will be phased out by 2025. Total fuel in millions of tonnes per annum (TPA).

Scrubbed high-sulfur fuel oil, 3.5% sulfur

Marine diesel oil/Marine gas oil, 0.1% sulfur

Liquid natural gas, 0% sulfur

Low-sulfur bunker fuel, 0.5% sulfur

Emission controlled area fuel, 0.1% sulfur

High-sulfur fuel oil, 3.5% sulfur

2025

64%

5%

25%

(378 TPA)

2014(300 TPA)

6%

22%

42%

25%

3%

8%

HOW RISKY IS SHIPPING?

A sample of some of the riskiest and safest ports around the world. The risk ratings are on a scale of 0 to 10, with 10 being the most risky. A rating above 4 should be of concern to shipping companies and the owners of the goods they are carrying. The ratings are based on the combined risk of political violence, civil unrest, terrorism and war.

Risk ratings are on a scale of 0-10 (10 being most risky)

6.0 SYRIA, Tartus

5.8 LIBYA, Benghazi PAKISTAN, Karachi 5.2

KENYA, Mombasa 5.1

5.1 NIGERIA, Port Harcourt INDIA, Nhava Sheva, Mumbai 4.8

UKRAINE, Mariupol 4.7

EGYPT, Suez Canal 4.5

4.1 COLOMBIA, Buenaventura INDONESIA, Tanjung Priok 3.9

3.6 PERU, Callao

CHINA, Shanghai 2.9

PHILIPPINES, Cebu 2.52.6 PANAMA, Panama Canal

2.1 NEW YORK, Newark

2.4 BRAZIL, Santos

0-3 3-5 5-10

CHINA DOMINATES SHIPBUILDING

2,402 38%

China’s ships on order (all sizes) as of March 31, 2014 by number and percentage of world total

TRADE FLOWS: 1997–2017

Total seaborne trade

Container trade (number of containers)

Motor vehicles (nominal value in US$ billions)

No matter how you slice it, maritime trade is growing

METRIC TONS

1997 2017

4.7

45million

102million

150million

10.3121%

billion billion

growth

1997 2007 2017

236% growth

1997 2007 2017

369%growth

592

325

126

More trade, bigger ships ANALYTICS

As trade continues to expand, the shipping industry is poised for growth. To meet the demand, it is transitioning to much larger vessels, with the majority of them being built in China. Complicating matters is increased political violence at ports around the world and stricter environmental standards.

Source: IHS. For more on clean ships visit ihs.com/Q13BunkerFuelStudy


Emerging markets at the crossroads: Long-term decay or return to growth?

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Having enjoyed a multi-decade economic boom with only brief interruptions in

most cases, emerging markets (EM) have recently run into significant headwinds. The weakening of EM economies has generated growing concerns among foreign investors, reflected in the poor relative performance of EM equities during the past few years. In comparison, US stocks have sustained an impressive bull market.

To be sure, the global financial markets’ recent sell-o�s of EM assets also reflect a tactical reallocation of investment portfolios in response to the US Federal Reserve’s winding down of quantitative easing, commonly known as “tapering.” Other factors that have recently been pulling capital out of EM economies include the European economies’ ongoing cyclical recovery and

Japan’s more aggressive reflationary policy under Prime Minister Abe. However, many investors have been looking beyond these short-term cyclical adjustments and are becoming concerned about the sustainability of the high growth rates that developing countries have enjoyed for the past 20 years, especially the four BRIC economies: Brazil, Russia, India, and China.

In cases where the EMs’ problems are cyclical or temporary, such as in Hong Kong and Singapore, economic growth should resume after appropriate corrective policy measures by the authorities and/or propitious changes in external conditions, such as improvements in terms of trade. But clearly there are long-term structural constraints that have weakened EM growth drivers, eroded their productivity growth, and caused a gradual decay in their long-term growth potential. However, past experience suggests that long-term structural problems are di�cult to resolve. Theoretical political-economy models and numerous case studies suggest that dealing with structural economic and political problems usually requires forming a broad-based political coalition for reform and then using it as leverage to overcome the inevitable backlash from powerful, well-entrenched groups that benefit from the status quo. In practice, most pro-reform groups fail to achieve their goals and need extraordinary circumstances to succeed.

Avoiding the middle-income trapWhere pro-reform groups fail or do not emerge at all, the economy is almost certainly condemned to weak economic growth and/or instability and periodic financial turmoil, such as in many Latin American, African, and Middle Eastern countries. In cases where an economy has enjoyed the first

Dharavi, a 240-hectare shanty town in

the heart of Mumbai, India, one of the

world’s most populous cities. A decade-

old redevelopment plan calls for new

housing, schools, parks, and roads but

has stalled amid India’s financial crisis

and local protests.

By Farid Abolfathi

The biggest challenge emerging markets face is the ability to maintain steady, long-term growth. Success will come to those that are able to implement the necessary structural changes.


stages of economic development and established a low-value-added manufacturing base, the failure to carry out additional reforms can mire the economy in what is sometimes called the “middle-income trap,” which describes situations in which an emerging economy stops converging with more advanced economies. More precisely, the middle-income trap is the failure to carry out reforms needed to help the transition to higher-value production after the country’s lower-value-added sectors start losing market share to countries with cheaper labor costs.

Structural reforms have a better chance of succeeding when a country has su�ered from a major economic crisis, especially a prolonged one. In such circumstances the solidarity of vested interests can crack and the beleaguered population becomes more motivated to support a reform coalition. To put it in other terms, after su�ering badly in a severe crisis, people become fed up with the status quo and are more willing to take the risk of trying a new approach to their common problems. Hence, they are more likely to give new leaders the opportunity to achieve structural changes.

A good example is provided by Argentina during the presidency of Carlos Menem, who came to power in 1991 at a time when the country was mired in a relentless economic crisis. President Menem was an astute and nimble politician who was able to patch together a reform coalition and use it as a leverage to implement major fiscal and structural reforms in a remarkably short time. He was greatly aided by the divisions that had recently emerged within Argentina’s normally powerful anti-reform interest groups—thanks, to a large extent, to strains created by the country’s endless economic crises. Menem’s reforms included stabilization of the local currency by means of a currency board and the privatization of a wide variety of state-owned enterprises, including the post o�ce, petroleum company YPF, and utilities for water, electricity, telephone, and gas.

In the wake of these reforms, Argentina’s financial system stabilized rapidly, GDP growth picked up, and there was a large influx of foreign investment that further boosted the economy, sustaining a seven-year boom. Unfortunately the good times came to an abrupt end with another severe economic crisis in early 2002, caused by imprudent economic policies during the late 1990s and early 2000s. The missing ingredient in Argentina’s reforms in the 1990s was the failure to

Structural reforms have a better chance of succeeding when a country has su¢ered from a major economic crisis, especially a prolonged one

South American economic reforms historically have been insufficient to sustain long-term expansionObstacles to enduring regional growth

Problem Consequences

Populist economic policies

Interventionist policies, weak public finances and capital flight

Excessive red tape and costly licenses

Expansion of informal economy and weak tax collection

Unrealistic minimum wage laws

High unemployment among the most disadvantaged segment of the population

Politicized labor movements

Rigid labor markets, frequent strikes, and capital flight

Narrow tax base Over-dependence on fees and taxes harmful to businesses

Import substitution policies

Weak international competitiveness and capital flight

Dependence on natural resource exports

Price volatility and boom-bust economic performance

Poor infrastructure High business costs and regional economic inequality

Low household savings Dependence on external savings and frequent debt crises

State-directed credit allocation

Misallocation of capital and periodic banking crises

Over-regulation of utilities

Supply bottlenecks and discouragement of private investment

State control of natural resources

Under-utilization of natural resource endowments

Misallocation of educational resources

Supply-demand mismatch for skilled workers

Emigration of skilled talent (“brain drain”)

Loss of economic dynamism and weak economic growth

Inefficient legal institutions

Weak contract enforcement

High corruption Discouragement of foreign investment from Western countries

High crime and violence rates

High business costs and low foreign capital investment

Political instability Capital flight and “brain drain”

High population growth Expansion of urban ghettos and pressure on services

Source: IHS


continue the reforms. If Argentina had maintained the momentum of its reforms by deepening them with additional measures, the earlier gains could have been consolidated. The reform process needs to be a continuous process that goes on, even when an EM economy converges with advanced ones.

Like Argentina, many other South American countries have, from time to time, carried out economic reforms, usually after a prolonged and/or severe crisis—often involving record-breaking hyper-inflation and/or prolonged growth stagnation. In most cases, the reforms have not been su�ciently deep to sustain steady, long-term economic

‘Dynamic Asian economies’ o�er the best business climates among emerging markets

Rankings based on ease of doing business, 2006 and 2014

Country 2006 2014 Net change

Singapore 1 1 0

Hong Kong 4 2 2

Malaysia 17 6 11

South Korea 20 7 13

Taiwan 44 16 28

Thailand 23 18 5

Chile 29 34 -5

Peru 55 42 13

Colombia 63 43 20

Mexico 58 53 5

Panama 57 55 2

Mongolia 52 76 -24

China 89 86 3

Vietnam 75 99 -24

Philippines 113 108 5

Pakistan 61 110 -49

Brazil 99 116 -17

Indonesia 114 120 -6

Argentina 85 126 -41

Bangladesh 82 130 -48

India 116 134 -18

Bolivia 118 162 -44

Haiti 131 177 -46

Venezuela 130 181 -51

Source: World Bank

expansion. As a result, the region’s major economies face numerous obstacles that make them vulnerable to external shocks and have a tendency to develop imbalances that accumulate over time.

When it comes to economic reform, the EM countries that have achieved the greatest progress are all either in central Europe (such as Poland, the Czech Republic, Slovakia, and Estonia) or the Far East (including Hong Kong, Taiwan, South Korea, Singapore, Malaysia, China, Thailand, Indonesia, and the Philippines). The OECD and World Bank have appropriately labeled these Asian reformers “dynamic Asian economies,” with the first four on the list considered to be the most advanced reformers. These countries have established world-leading business climates and have been at the forefront of Asia’s economic reform movement during the past 60 years. Furthermore, some of them have already achieved advanced-economy status by most measures. For example, South Korea’s per-capita GDP is roughly the same as those of Italy and Spain (at purchasing power parity rate). Nevertheless, these economies still have room for implementing further growth-enhancing reforms (see table at the top of page 32).

Economic booms and bustsBefore the Industrial Revolution, the high economic growth rates associated with boom times were infrequent because of political turmoil, wars, and economic and financial “repression.” The repression included high taxes, trade restrictions, and limited availability of credit as a result of religious prohibition of interest. The discovery and conquest of new lands—in the case of the

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Americas and Australia—did generate economic booms for some of the European conquerors, but the benefits did not last long. Growth surges that result from such windfalls usually create economic imbalances that end badly. The legacy of such booms often consists of long periods of financial turmoil and economic stagnation. It was the Industrial Revolution that made economic booms more sustainable by fostering rapid urbanization and capital accumulation. The economic booms during most of the Industrial Revolution were relatively tame, though, compared with those

following the Second World War (see table on page 33).

The early post-Second World War economic booms were nearly all driven by high investment spending to rebuild war-damaged infrastructure and industries. But as the post-war reconstruction approached completion during the 1950s, the powerful impetus from investment spending eased and overall economic growth decelerated in most previously war-damaged countries. In the case of Western European countries, the growth decay was inevitable

Taiwan provides a good example of the successful phases of a long-lasting, super-charged economic expansion. It also represents a useful case study of how the country’s progressive development policies and reforms helped to sustain the vigor of its expansion decade after decade until the economy approached convergence about 10 years ago:

• Phase 1, 1940s: Economic development during this period involved post-Second World War reconstruction and absorption of large numbers of Chinese from the mainland who came to Taiwan to escape war and Communist rule. This phase was aided by resource transfer brought by the refugees, as well as generous amounts of US foreign aid.

• Phase 2, 1950s: Growth was driven by import substitution focusing on light industries using relatively simple technology (for example, textiles and food processing), limited privatization of some

state enterprises, and US-supported land reform.

• Phase 3, 1960s: Involved establishment of Export Processing Zones and the launch of Taiwan’s incredibly successful export-led development strategy.

• Phase 4, 1970s: Included public financing of mega-construction projects to improve infrastructure, establishment of science and technology hubs to support industrial development, and state fostering of capital-intensive basic industries, such as iron and steel, machinery and automobile manufacturing, and

Taiwan: Evolution of a successful economic development strategy

Asia’s top emerging markets still have economic hurdles to overcome

Remaining obstacles to improved industrial performance

Problem Consequences

Service sector market rigidity Lack of competitiveness and weak sectoral growth

Aging population Declining labor-force participation

Over-reliance on exports Vulnerability to external demand

Excessive household savings Export dependence and misallocation of resources

Government-directed credit allocation Misallocation of capital

Over-regulation of utilities Discouragement of private investment

Over-restrictive immigration policy Wage inflation and loss of competitiveness

Source: IHS

because of their rapid convergence with the US economy—the only advanced economy that was both at the frontier of technology and had su�ered little infrastructure damage during the war.


petrochemicals, as well as continued encouragement of light manufacturing (for example, textiles, shoes, food processing, and umbrella production).

• Phase 5, 1980s: State fostering of private-sector industries focusing on more advanced and higher-value-added technologies, such as electronics.

• Phase 6, 1990s–present: During this period, Taiwan’s economy and businesses have matured and its high-tech manufacturing leads the world, thanks to lavish investment in research and development, design innovation, and brand development.

With a per-capita GDP that now equals those of Italy and Spain at purchasing power parity exchange rate, Taiwan’s economy has e¦ectively converged with those of advanced economies and can no longer generate

the super-charged expansion of earlier decades. To be sure, the country can still implement growth-enhancing policies by better aiding technical training of youths, fostering advanced research and development, boosting competitiveness of the service sector, and further loosening its restrictions on economic ties with China. But the potential boost from implementing such policies will be marginal. Having already dramatically closed its economy’s distance to the technological frontier, Taiwan, like South Korea and Singapore, has converged with most advanced economies and cannot boost its growth significantly. We expect its potential growth to drop to 2–3% annually during the course of the next few decades, provided it continues to follow prudent macroeconomic policies and carries out the remaining growth-enhancing measures, such as those listed above.

Farid Abolfathi

Economic booms following the Second World War were all primarily driven by investment

Extent and duration of post-war surges in Europe and Asia

Country Average GDP growth (% y/y)

Duration Reasons for the decline in growth

Germany 10.3 13 years: 1947-60

Gradual slowdown in post-Second World War reconstruction

Austria 10.1 11 years: 1946-57


France 14.8 6 years: 1945-51

Political instability at home and the Indochina War

Netherlands 13.5 10 years: 1946-56


Soviet Union 7.9 9 years: 1947-56


Hungary 9.0 9 years: 1946-55

The Hungarian anti-Communist uprising

Romania 10.7 8 years: 1947-55


Bulgaria 8.2 9 years: 1946-55


Japan 9.3 27 years: 1946-73

The First Global Oil Crisis

China 8.0 9 years: 1949-58

The fiasco caused by Mao’s Great Leap Forward

Taiwan 10.7 34 years: 1946-80

The Second Global Oil Crisis

South Korea 7.8 4 years: 1946-50

The Korean War

South Korea 8.6 6 years: 1952-58

The end of post-Korean War reconstruction boom

Source: IHS

The subsequent super-charged economic expansions, like those of China, South Korea, and Taiwan, represent a rather modern phenomenon—made possible via the establishment of a new post-war international system of agreements fostering economic globalization and cross-border technology

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transfers. Post-war technology transfer has played a key role in the rapid expansion of industries in Japan, Taiwan, South Korea, and many others—including those in China since the opening of its economy to the outside world. But the primary impetus for the vigor and sustainability of emerging economies’ expansions has come from deepening economic reforms, which have progressively enhanced the flexibility, e�ciency, and competitiveness of the economies (see table on page 35).

Ultimately, any economy with a super-charged expansion rate is bound to eventually experience progressive decay in its pace as its population becomes more a¶uent and its GDP growth approaches convergence with those of advanced economies. The underlying reason for this is the convergence of the economy’s technological base and management techniques with those of the advanced economies that are at the frontiers of knowledge. Such convergence has been relatively rare,

South Korea: History of a super-charged economic boom

The 60-year history of South Korea’s dizzyingly rapid climb from a war-ravaged, poverty-stricken economy to an a¦luent, advanced economy provides an excellent case study of how a country can quickly develop its economy through judicious use of limited resources and prudent economic policies.

Like Japan and Taiwan, South Korea’s natural resources endowment is relatively poor. The country did receive a substantial boost from US foreign aid and military spending during its early economic development in the 1950s, 1960s, and 1970s, but the heavy lifting that has catapulted the country to the status of an industrial giant since then has been driven by the government’s nimble macroeconomic

management, structural reforms, and development of e¦ective domestic institutions.

To be sure, key ingredients of South Korea’s success have been its people’s discipline and industriousness, and the business sector’s dynamism. South Koreans built up their manufacturing during the early post-war decades by focusing on “imitation”—i.e., adopting available foreign technologies and using them highly efficiently. But the country’s progressive shift from light manufacturing to ever higher-value-added products has increasingly involved “innovation” (i.e., development of new technology) and best-of-class product design. This transition has been made possible by a remarkably e¦ective educational system

however, and since the Second World War has occurred only in Europe and a handful of Asian economies. The reason for its rarity is that most EM countries have failed to advance their economic reform agendas very far, and either fall into the middle-income trap or never progress beyond the initial import substitution stage. Import substitution and fostering of “infant industries” were popularized by the late Argentine economist Raúl Prebisch.

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Trade and technology transfer have fueled “super-charged” economic expansions

Extent and duration of the most enduring booms of the post-war period

Country Average GDP growth (% y/y)

Duration Reasons for growth decay

Japan 8.3 33 years:1946–1979

Failure to continue economic reforms

Hong Kong

11.0 39 years:1945–1984

Convergence with advanced economies

Taiwan 8.7 61 years:1946–2007


South Korea

7.7 50 years:1946–1996


Singapore 9.0 54 years:1946–2000


China 9.1 43 years:1969–2012

Limited growth decay from delays in reforms

Thailand 7.4 47 years:1949–1996

Asia Crisis; growth likely to weaken further due to recent political crisis

Indonesia 7.3 28 years:1968–1996

Asia Crisis; post-crisis growth constrained by messy politics

Malaysia 7.1 38 years:1959–1997

Asia Crisis; post-crisis growth constrained by lack of deeper reforms

India 7.1 16 years:1994–2010

Delayed reforms, protectionism, corruption, and poor policy co-ordination

Source: IHS

that produces some of the world’s best engineers, scientists, and managers, and provides ample supplies of less-skilled workers for both the business and government sectors as well.

However, as in the case of Taiwan, super-charged economic growth cannot go on forever. The chart at left illustrates how rapid growth has decayed in South Korea as its economy has converged with more advanced ones. There is still room for South Korea to boost its economic growth through structural reforms, but the days of double-digit expansion are over. To avoid stagnation, South Korea needs to carry out “second generation” economic reforms, including measures to reduce households’ precautionary savings to strengthen domestic demand and cut export dependency; provide better access to vocational training and day care; institute market-based pricing for utilities; and eliminate service market rigidities to make the sector more competitive and attractive to investors.

Farid Abolfathi

To be sure, in the early stages of an economy’s take-o� path, it could certainly receive a major initial boost from import substitution and protection of its infant industries, which are protected behind trade barriers. But such a growth strategy has limited durability and is never viable in the long term. Within a decade, the economic expansion runs out of steam and growth stagnates. The manufacturing sectors of some South American countries, such as Argentina and Brazil, have remained uncompetitive since the 1950s because their economic policies have not evolved significantly beyond the import substitution/infant industry model.

The sustainability of a super-charged expansion requires structural reforms to foster economic e�ciency and international competitiveness. This means that sooner or later trade barriers have to be brought down and domestic businesses must become more e�cient and learn to compete internationally to survive. The removal of barriers to competition does not need to be carried out all at once—it can happen selectively and gradually—but it has to be progressive and thorough to achieve full convergence with advanced economies.

Farid Abolfathi is senior director, IHS Economics and Country Risk

To view Farid’s bio, visit bit.ly/abolfathi

For more information on emerging markets, visit ihs.com/Q13EmergingMarkets

Real GDP and investment have been decelerating since the 1970s. Five-year moving average of annual growth (% y/y)

Source: IHS

Second-generation economic reforms are required for South Korea to boost growth

-505

101520253035

Real investmentReal GDP

1954 1964 1974 1984 1994 2004 2014

http://bit.ly/abolfathi

http://ihs.com/Q13EmergingMarkets

http://ihs.com/Q13EmergingMarkets


In search of blue oceansMegatrends and globalization are changing the landscape for product companies across many industries. Their future competitiveness will be determined by an ability to produce innovative products, which requires an update in design methodologies.

By Jim Belfiore


When it comes to product design, all companies embrace innovative practices to one degree or another. Yet many are clinging to a view of the world that enabled them to compete e�ectively in the late

20th century. Fourteen years into the 21st century, a new global competitive landscape requires new approaches to product innovation.

For years, a majority of breakthrough product designs were created and developed in the US and Europe, then farmed out to contract manufacturers in Asia, a lot of them in China. The iPod and, later, the iPhone are two iconic examples. That trend is being turned on its head as companies in China, Japan, South Korea, and elsewhere step up their game in product design and leverage their manufacturing prowess to come up with highly innovative products for export to the West.

Top-quality Chinese car companies—such as Qoros, which received Europe’s highest crash-safety rating for its Qoros 3 late last year—will be coming to the US soon. Samsung smartphones and televisions already abound in the US, while the Sony PlayStation 4 games console is outselling Microsoft’s Xbox One worldwide.

China is poised to become the world’s largest economy in 2024, surpassing the US in terms of nominal GDP, according to IHS. Western companies are not sitting still, craving success in exporting products to growing numbers of a¶uent Chinese consumers. This year, Apple finally concluded a deal with China Mobile to get the iPhone into the hands of subscribers of China’s largest mobile carrier. While designed in the US, the iPhone is still manufactured mostly in China.

Meanwhile, sweeping changes are occurring around the globe. The US has become the world’s largest producer of natural gas. Population, labor, and market demographics are shifting. The politics of climate change and the inexorable strain on global resources are having an impact globally. Changing times call for changing practices in product design, sustainable innovation, and global competitive strategies.

A diversity of design methodologiesGreat design methodology will be crucial to winning in this emerging world. Apple, Hewlett-Packard, and other companies that were started in a garage are commonly lauded for their humble beginnings and sterling ideas for new products—the Apple I personal computer, the HP200A audio oscillator, to

name just two. But garage startups, for all the romance of their appeal, are the exception and not the rule in corporate product design. The typical modern product design process is made up of teams of engineers devoted to product innovation and manufacturing. Modern product makers have teams competing and collaborating around the world and around the clock. Design work moves from Asia to Europe to North America in the course of any given working day.

There are insights to be gained by looking at these types of product designers that have consistently influenced people and markets for the past 30–50 years. Chrysler, Ford, and General Motors were lauded for decades in the mid-20th century for consistent design innovation and advances in technologies that transformed the globe. Boston Scientific was another example of design excellence, renowned for pioneering medical products consistently and repeatedly. Similar product design excellence can be found in Europe at companies such as Siemens, Unilever, and Volkswagen, and in Asia at the likes of Gree and Huawei in China, and Hyundai and Samsung in South Korea.

What are the common traits of great product innovators? Many e�orts to codify and standardize design methodologies have

Shutterstock


emerged over the decades: One class is methodologies that improve product quality and reduce defects in the manufacturing process, such as Gemba, Kaizen, and Value Stream Mapping. Another class of design methodology focuses on product innovation and quality. Rigorous methods such as quality function deployment (QFD) placed priority on increasing quality and alignment to customer requirements, leading more often to di�erentiated and disruptive products (historically in consumer electronics and automotive products). QFD came out of Japan in the early 1970s (predominantly through Toyota) to deal with the complexities of large-scale manufacturing. To this day, QFD is used in transforming subjective needs of customers into qualitative specifications for design excellence.

In recent years, however, shortcomings are being observed in QFD (notably in Japan) as global competition becomes tougher and

A menu of design methodologies

When selecting an innovation and design methodology, or combination of methodologies, there are many disciplines to choose from. Each has its strengths and weaknesses. Here is a select handful to consider:

Axiomatic design—This system’s design methodology transforms customer needs into design parameters, functional requirements, and process variables via matrix analyses. The two axioms at the center of the methodology are to maintain the independence of the functional requirements and minimize the information content of the design. Dr Suh Nam Pyo, of the Department of Mechanical Engineering, Massachusetts Institute of Technology, developed the methodology in the 1990s.

De Bono—This one is named after Edward de Bono, author of the 1985 book Six Thinking Hats, which espoused the idea of parallel thinking. De Bono’s

methodology has proven popular in the past decade in the United Kingdom. The six hats have di¦erent colors, each representing di¦erent considerations: managing, information, emotions, discernment (or logic), optimistic response, and creativity.

Kansei—Also known as a¦ective or emotional engineering. It was developed in the 1970s by Dr Mitsuo Nagamachi, of Hiroshima University. The methodology studies a customer’s emotional responses to a product or service, with the aim of producing the intended feeling in other customers.

Neuro-linguistic programming (NLP)—This methodology has its roots in the human potential movement of the 1970s and assumes that behavior based on experiences (the “programming”) can be identified and changed. In product design, it is thought that NLP techniques can help engineers enter

customer requirements become more fragmented across geographies. Of recent note is a growing concern to accurately account for key macroeconomic factors and their impact on global market demand. QFD depends on the exhaustive enumeration and definition of users’ requirements and quality criteria. However, when designing for a global market, it is becoming increasingly challenging to know if users represent the actual market, or if there are larger interests that a�ect product growth and adoption at global scales. QFD practitioners are beginning to seek alternative insights

Toyota

Nintendo’s Wii is an example of a ‘blue ocean’ product. Introducing motion control, it opened up the gaming market to a new, and much larger audience.


Few Western companies have embraced TRIZ, yet it has long attracted many corporate adherents in China, Japan, and South Korea, including Denso, Huawei, Hyundai/KIA, LG, Olympus, Pioneer, Samsung, and Sony. Advances in technological innovation have been driven by teams of master-level TRIZ practitioners in nearly every industry and product manufacturing sector for decades. Yet, in just the past 12–18 months, companies in Asia—especially in South Korea—have hewn less to pure TRIZ disciplines, opening up instead to adapting Western ideation methodologies as the need to rapidly craft products for global markets rises sharply.

A third class of design methodology focuses on identifying new markets and conceiving new products for these markets. One example of this methodology is described in the 2005 book Blue Ocean Strategy, by W Chan Kim and Renée Mauborgne, both professors at INSEAD. The authors identify existing markets as “red oceans” and advocate the pursuit of “blue oceans,” or new markets, products, and technologies that did not previously exist or face little, if any, competition. In the blue ocean strategy, companies are encouraged to move from competing for market share and fine-tuning their products to ideation of new products that would satisfy consumers in the “blue ocean” market.

Nintendo’s Wii has been held up as an example of a “blue ocean” product that redefined and expanded the definition of the gaming market. Distinct from Sony’s PlayStation and Microsoft’s Xbox, the Wii introduced motion control, which opened up the gaming market to a larger, non-traditional gaming audience.

Di¡erent cultures, di¡erent questionsProduct design and innovation processes almost always begin with asking

into states of excellence where they will overcome their own psychological inertia.

Quality function deployment (QFD)—Developed by Dr Yoji Akao in 1966, QFD emphasizes incorporating customer needs—“the voice of the customer”—into engineering characteristics (and the resulting test methods) for a product or service. QFD has some relation to management by objectives—also known as management by results—which has been used by Hewlett-Packard and other companies with some revisions.

Six sigma—This methodology for process improvement was originally developed at Motorola in 1986 and strongly embraced by General Electric under chief executive Jack Welch. The name comes from the goal of manufacturing products that are statistically 99.99966% defect-free. It incorporates quality management and statistical methods.

Theory of constraints (TOC)—In 1984, Eliyahu Goldratt theorized that all systems have constraints, the reduction

of which will improve the productivity of an organization. TOC features five focusing steps for increasing throughput and identifies typical constraints for an organization, such as equipment, personnel, and policies.

TRIZ—TRIZ is an abbreviation for “Teoriya Resheniya Izobretatelskikh Zadatch” and translates from Russian as “the theory of inventive problem solving.” Created by Genrich Altschuller in 1946, TRIZ is a systematic approach for analyzing product challenges and o¦ers an algorithmic approach to discovering inventive solutions that maximize “ideality.”

Value engineering—A systematic method for determining the value of a product or service, expressing value as a ratio of function, problems, and cost. General Electric initiated the method during the Second World War, when producing aircraft, tanks, and weaponry was constrained by available components, raw materials, and skilled personnel.

Jim Belfiore

into potential new markets to supplement their strategic planning.

Before the emergence of QFD, another product design—or, more accurately, problem-solving—methodology was known to a few design and innovation masters, which shaped some of the most influential products of the 20th century. In 1946, Genrich Altschuller developed a problem-solving, analysis, and forecasting method for product design derived from the study of patterns of invention across technology markets. The “theory of inventive problem solving” (which, in the original Russian, abbreviates to the letters TRIZ) is based on a foundation of extensive research spanning millions of patented inventions taken from many fields of practice. The TRIZ theory and practice defines generalized patterns in the nature of problem solving for inventive solutions. TRIZ is a means of distinguishing characteristics of problems such innovation would need to overcome.


questions. The challenge, and key to creating winning designs, is to ask the right questions. Where those questions begin in the innovation process often depends on cultural di�erences. In the Western world, the dominant question in product design methods starts with some variation of the question, “Why is something (a goal, a problem) important?” In the East, a key starting question (if not outright design theme) is, “How does something (a system, a solution to a known problem) work?”

In comparison, and in observation over the years, Eastern companies are more disciplined in following customary methodologies and using more tangible metrics than their Western counterparts. Western companies are traditionally better at being “fast followers” when it comes to adopting—and adapting—an innovative product or solution in the early phases of discovery. (However, this is rapidly changing as the East is applying discipline to the art of “fast following.”) Eastern companies are more adept at launching products rapidly when it is clear that su�cient understanding of how a new solution works is achieved. Both approaches demand a chain of reasoning and research to arrive at informed decisions for moving forward.

The Western innovator will be certain that the root cause of an issue is thoroughly researched and understood before embarking on solution experimentation and implementation. The Eastern innovator will spend a substantial amount of resources researching and building the chain of evidence that a proposed solution to a known problem (or need) is completely understood. The

Eastern innovator will demand to know all the potential risks for failure, so that the right solution is more likely to be developed the first time. The di�erences in design methodologies between East and West are subtle, yet understanding them can help uncover critical insights when crafting a globally competitive product strategy.

Megatrends and design innovation Design innovation is being a�ected more and more by global megatrends—those unavoidable forces that will shape the world economy for years to come. Accelerating changes in global resource availability and cost, demographics, and sovereign dependencies are altering competitive landscapes across all industries.

Many developed countries are facing aging populations, with significant implications for healthcare resources. The impact on industries both within and outside the healthcare industry will continue to grow. In emerging geographies population growth is proceeding apace, challenging economic development planners to provide environments for employment to increasing numbers of young people who can ill-a�ord being idled.

Sustainability is a global issue, as natural resource demand outpaces accessible reserves. Broader resource trends are tied to energy—how it is produced, harvested, stored, and distributed. Advances in materials management (and new applications) are taking on greater importance. Raw materials prices are trending higher for base products, including copper, gold, aluminum, and rare-earth elements. Meanwhile, Asian

Design innovation is being a¢ected more and more by global megatrends—those unavoidable forces that will shape the world economy for years to come


Pay attention to the S-curveEven the most incredible success stories in product design follow a predictable lifecycle, captured in the well-known, yet simple, S-curve. The curve defines the growth path from innovation through growth to maturity. Companies ignore the S-curve at their peril.

Consider the cautionary tale of a technology giant from another era: Digital Equipment Corporation (DEC). The Maynard, Massachusetts-based company pioneered a segment of the nascent computing and information systems market in 1960, with the introduction of the “Programmable Data Processor.” The innovative design and capabilities of the PDP-1 o¦ered a solution that wasn’t available from IBM or any other computer manufacturer at the time to an emerging information technology market that was poised for dramatic growth.

The success of the PDP-1 led DEC to develop improved models, most notably the PDP-8, which was recognized as the first minicomputer. The arrival of the PDP-8 came at a time when IBM was focusing on mainframe computers and posed a serious threat to IBM’s dominance in computing systems. DEC continued to evolve its minicomputer line and succeeded the PDP series with the VAX family of minicomputers, continuing and extending its dominance of that market segment for years. At one point, DEC seemed unstoppable.

Where DEC stumbled was in failing to recognize the rise of the microcomputer (later to become known as the personal computer, or PC) and refusing to recognize the threat of the minicomputer’s obsolescence. DEC Chairman and President Kenneth Olsen, a co-founder of the company, famously said in 1977: “There is no reason for any individual to have a computer in his home.”

When IBM—and, soon after, Apple—demonstrated that PCs could be valuable productivity tools at home and in the office, DEC had to scramble to catch up in a market that posed a clear disruption to the mature minicomputer segment. While the company continually innovated and invented many technologies that are used in information technology to this day, DEC failed to see the “next big thing” and ultimately failed as a business. The company was acquired in 1998 by Compaq Computer, a PC manufacturer now owned by Hewlett-Packard.

DEC’s demise is not a unique story. It is one that has played out many times in other industries and has toppled taller giants—notably, Kodak—and others that did not continually assess and manage the value of their maturing product or service lines.

Jim Belfiore

Where DEC went wrong

Source: IHS and public sources

The classic S-curve traces the evolution of a product from the birth of an idea through the early stage of product introduction and adoption, to market maturation and saturation, obsolescence and, finally, to end of life. Somewhere between saturation and obsolescence, DEC took its eye o� the S-curve.

Evolution life cycle (time)

1st critical point: pure innovation

Idea

lity

3rd critical point: saturation

Infancy Rapid growth Maturity

5th critical point: obsolescence

4th critical point: retirement

2nd critical point: early adoption & validation


How to eat soup with a fork

I’ve been helping customers solve difficult problems for almost 30 years and I’ll let you in on a little secret I’ve learned along the way: All innovation happens in five minutes or less.

Successful and sustainable innovation requires both good research and creative-thinking skills. The time it takes for a subject-matter expert to move from blank stares at a seemingly

impossible problem to a “eureka!” moment that marks the beginning of a critical path to success is measurable in seconds or minutes. As Albert Einstein famously said: “If I had an hour to solve a problem, I’d spend 55 minutes thinking about the problem and 5 minutes thinking about solutions.”

Here’s a five-minute innovation challenge to try: How can you eat soup with a fork?

It seems a silly question, but following this exercise to its logical conclusion provides a good example of how to move from blank stares to new product ideas in five minutes. No, a “spork” isn’t the answer. There are other ways to eat soup with a fork, if you let your imagination play with the possibilities. Problem-solving methodologies such as TRIZ can help. For example, one TRIZ-based analysis suggests looking at solving the systemic problems (trade-o¦s between the soup and fork) by:

countries are increasing their dominance in the world economy; China and India will represent 35% of the world’s population and one-quarter of the global gross domestic product by 2030.

Megatrends not only transform entire landscapes over many years, they influence product and service innovation. Take, for example, a less obvious, yet critical, trend associated with global population, projected by the United Nations to grow by 2 billion and approach 9.6 billion by 2050.

The Pew Research Center has flagged several megatrends in the world’s population during the next few decades, taken from UN data. Consider just one of them: the number of people 65 years or older will nearly triple by 2050, from 531 million to 1.5 billion. This market is of keen interest to a broad spectrum of product companies, specifically in the healthcare sector.

One promising area of focus is oats. The oat groat, or hulled kernel, contains avenanthramide, cysteine, hydrophilic colloids, and proteins. Avenanthramide is good

at fighting allergens and asthma, as well as inhibiting colon cancer and preventing atherosclerosis. It is a source of antioxidants that are part of a heart-healthy diet. All of these features are aligned to maintaining health, which aligns with the shift in healthcare spending to preventative care.

In addition, avenanthramide is a form of antranilic acid, which is a base component in pesticides that are particularly e�ective in protecting transgenic crops. The soil management market, much of which is pest and disease control, is anticipated to be a US$28.9 billion market by 2017.

Becoming the Next Big ThingIn product design, companies around the world are always looking for the “Next Big Thing.” The ideal scenario is to satisfy consumer desires or corporate requirements that no competitor is addressing—back to swimming in the blue ocean. Technology products in particular are subject to the S-curve, a mathematical model also known as a logistics curve, which can be used to predict the success or failure of a product (see sidebar on page 41).

Ap

ple

Ground-breaking products, such as Apple’s iPod followed by the iPhone, emerge from obscurity to enjoy a period of incredible growth and success that blazes a meteoric trail across markets. Eventually, all meteors fall, their glow diminished and ultimately ending with either a whimper or a cratering impact. That later-period part of the product cycle is now a concern in the once unstoppable smartphone market, where high-end handsets are undergoing changing purchasing habits.

Consumers are indicating that they are putting o� upgrades and in some cases gravitating toward less-expensive models amongst a glut of choices that are becoming harder to di�erentiate. While Apple’s most recent (Q2) numbers on iPhone sales were record-setting, real concerns exist that diminishing growth is possible for the iPhone and the iPad tablet computer, even with a product lifecycle that is refreshed every 12 months. There may soon be a little more red in the smartphone waters.

What steps does the product or service company take to maintain the competitive and innovative edge of its lines? Reinvention of existing products is a popular value proposition for many companies, o�ering tactical decisions with a promise of strategic benefits. While reinvention can help reinvigorate profits, in many cases execution is di�cult and the level of (re)invention is often low, and not distinctive compared with the competition, especially in a crowded market.

Strategically, product design and sustainable innovation require sound, e�cient research and validation tools with skills that are leveraged across the product design lifecycle. Product designers need to stay tightly aligned with the manufacturing sides of their business, as shifting material or resource constraints provide both challenges and opportunities for disruptive innovation.

Competitive insights must be constantly watched and updated, not just by a handful of product planners, but by everyone responsible for the success and growth of a product/service line. Above all else, successful innovators


• Changing a parameter of the system, including its phase, flexibility, consistency, or temperature.

• Introducing a porous element or intermediary into the system.

• Doing something in advance to increase the system’s efficiency.

Given these approaches, how about:

• Freezing the soup.

• Using the fork to pick up a piece of bread which can then be used

to soak up the soup.

• Bending the fork tines to create a pair of pincer grips for grabbing the edge of the soup bowl, and bending the fork handle around to look like a cup handle. You’ve just turned the bowl and fork system into a gigantic mug.

Now that we have some ideas, we can research their feasibility as well as market factors if we want to consider developing them into new products. The point is to generate

multiple ideas without fear of failure. Not all will be practical or useful, but there may be some winners in the batch.

There are many creative thought methodologies available. It’s not important which one you choose or whether you create your own methodology. What is important is implementing the discipline of a problem-solving and design methodology on a regular basis to achieve sustainable innovation.

Jim Belfiore

must not only anticipate the “next big thing,” they need to become it, or risk obsolescence.

In the 21st century, all product manufacturers (and service providers) are global in scope. The growing dominance of the Asia-Pacific region will continue to transform competitive and market landscapes around the world. Megatrends and demographic shifts will play a role too. Global innovators (of any size) that can align such changes with sound innovation methodologies and tools will become the standard bearers of design excellence and growth that rival the accomplishments of any 20th century titan.

Jim Belfiore is a certified innovation

master and managing director, Client

Innovation Services, IHS

bit.ly/JimBelfiore

For more information on product design, visit ihs.com/Q13ProductDesign

http://bit.ly/JimBelfiore

http://ihs.com/Q13ProductDesign




Connecting tomorrow’s citiesAs urban centers grow, so do pressures on municipal infrastructure. Cities’

economic and social viability may well hinge on the adoption of smart technologies

that reduce congestion, pollution, and energy consumption.

By Lisa Arrowsmith

iSto

ck


In terms of sheer numbers, our future lies in our cities. Unless current trends shift dramatically, the world’s population will hit 8 billion by 2024 and 9 billion just 18

years later, in 2042, according to the Population Institute. Most of that growth will be in cities. The United Nations recently reported that 3.5 billion people live in cities today, a number that will nearly double during the next 30 to 40 years, by which time urban dwellers will comprise more than 70% of the world population.

More important from a business point of view is that “mega cities” will, to a large degree, determine our economic future. Cities already generate more than 80% of global GDP, according to the World Bank. But the massive influx into cities will strain water, energy, communications, and transportation infrastructures. Urban centers, already struggling with congestion and pollution, will need e�cient infrastructure and services, o�ering a high quality of life that attracts young, educated, high-income workers. Without that, they won’t draw the business and investment to support their tax base.

Countries, moreover, have little hope of attaining their environmental goals unless they improve energy e�ciency and stem the tide of pollution in urban areas. City dwellers consume roughly 70% of the European Union’s (EU) energy, according to the European Commission (EC). Under its 20-20-20 plan, the EU is attempting to improve energy e�ciency by 20%, increase renewable energy’s share of overall energy consumption to 20%, and reduce greenhouse gas emissions by 20% (from a 1990-level base). Some cities are even more aggressive. London, which has the highest concentrations of electricity demand and CO2 emissions in Great Britain, is targeting a 60% reduction in carbon emissions by 2025.


Cities won’t be able to meet these challenges by tackling them haphazardly. Rather, to continue as thriving communities with strong economies, they will need to apply technology to automate and orchestrate the operation and maintenance of their infrastructure and services—from picking up trash on time to turning o� unnecessary street lighting to easing tra�c congestion to keeping the flowers blooming in the parks—in the most e�cient manner possible. That is the promise of the “smart city.”

There are many characteristics that contribute to making a city “smart.” Governments must plan thoughtfully for expansion, formulate intelligent tax and regulatory policies that attract and retain business and culture, and provide adequate funding of the educational system. But the term “smart city” usually refers to the use of information and communications technologies (ICT) to monitor and automate a city’s infrastructure and operations. Specifically, it often involves using wireless sensors throughout a city to monitor status and collect data that can be used to improve planning, increase e�ciency, lower costs, or even o�er new services. That could mean ambient light sensors that turn on street lights at sundown, for example, or sensors embedded in streets that monitor tra�c and suggest alternative routes to commuters. Such systems incorporate sensor nodes, repeaters, gateways, aggregators, and wired and wireless networks to collect and transmit the data, server farms to process it, and software—both in the form of mobile apps and large-scale analytics—to make use of it (see

sidebar on page 49 for a list of key technologies of a smart city).

Beyond that, there are as many definitions of a smart city as there are smart cities. According to data compiled by IHS, there are currently 24 such cities throughout the world. IHS applies a relatively narrow definition, qualifying a city as smart by assessing whether it displays best-practice performance by incorporating ICT in at least three functional areas (including mobility and transport, energy and sustainability, physical infrastructure, safety and security, and governance) in order to improve the e�ciency of municipal operations, manage complexity, and enhance citizens’ quality of life (see top figure above).

Using this definition, IHS estimates a total annual investment of US$1.4 billion in smart cities worldwide this year. That is projected to double to US$2.8 billion in 39 cities by 2017. By 2025, total annual investment is projected to be US$12.2 billion—representing a compound annual growth rate of 23% from 2013 to 2025 (see figure above).

There’s smart, then there’s intelligentBut will all this “smart” investment make cities truly intelligent? Intelligence is typically evidenced by the ability to integrate information from a variety of sources and make decisions. So far, smart cities are monitoring and automating discrete functions, but none has yet reached the level of

Source: IHS

0

20

40

60

80

100

GovernanceSafety and security

Physical infrastructureEnergy and sustainabilityMobility and transport

20252020201820172016201520142013

Number of cities worldwide with smart technologies in three or more functional areas; segmented by sector containing smart operations

Mobility and transport sector will continue as the top market for smart technologies

Source: IHS

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000 Asia-PacificEurope, Middle East & AfricaAmericas

20252020201820172016201520142013

Annual smart city investment worldwide (US$ millions)

The Asia-Pacific region will lead global smart city expenditures by 2020


integrating these disparate sources of information to such a degree. There are several reasons for this. First is the organizational structure of city governments. Municipalities traditionally operate in silos, with departments overseeing such areas as transportation and public safety that typically don’t communicate with each other. Second, private companies involved with smart city projects are often focused on only one piece of technology or service—the one that will produce commercial profits.

As the burgeoning Internet of Things increases the capacity to make cities smart, the challenge will be to bridge those gaps and form a single platform across all services and departments. Without it, smart cities may see improvements in individual sectors but will struggle to attain the overall e�ciency, cost reductions, and other benefits they seek. For example, reducing energy consumption and improving overall sustainability requires data from many sectors. The system needs to collect and integrate data from utilities, physical infrastructure (both public and private), and transportation (such as buses and subways as well as privately owned cars and bicycles).

Some projects are aiming for such integration. Working with IBM, Rio de Janeiro has launched an operations center that integrates the data and monitoring functions of approximately 30 governmental agencies and utilities. The center is designed to optimize the functioning of this city of 6.4 million people in the face of large-scale events and to respond proactively to emergency situations on a real-

time basis. Through the center, the city can monitor weather, tra�c, trash collection, electricity, water, and gas—as well as track disease outbreaks and co-ordinate responses to emergency situations.

Another example is Valencia, Spain, which recently announced a smart city project with broadband and telecommunications provider Telefónica that is designed to enable the management of public resources through a single system. Through just 350 connected sensors, Telefónica’s platform is expected to be able to monitor tra�c, street lighting, gardens, local police, pollution, cleaning and waste collection, and weather.

One step at a timeSuch integration doesn’t necessarily happen immediately, however. Many smart city planners start in just one sector, with plans to expand into other areas, integrating them along the way. For example, in 2011 the EC launched the Smart Cities and Communities Initiative. In its first year (2012), it spent US$110.2 million on only two sectors: transportation and energy. In 2013, the budget was increased to US$496.4 million and broadened to include a third area, ICT. At that stage, the EC stipulated that each demonstration project financed under the scheme had to combine all three sectors.

As the burgeoning Internet of Things increases the capacity to make cities smart, the challenge will be to form a single platform across all services and departments


Energy consumption and transportation are common starting points for smart cities, since both contribute to helping achieve environmental and energy conservation goals. For example, street lighting is one of the most costly energy expenditures by municipalities, said to account for as much as 40% of a city’s total energy budget. Deployments of smart lighting solutions can help to reduce costs by 60%, according to the US Department of Energy. Central London has launched a project by which more than 14,000 smart street lights can be dimmed to conserve power, cut energy bills, and lower carbon emissions. The city council has targeted savings of US$14.1 million during the projected 20-year lifespan of the lights.

London is also employing smart technologies to reduce pollution. The Low-Carbon London project, led by UK Power Networks with partners the Institute of Sustainability, Siemens, Imperial College, and the Greater London Authority, is developing a smart electricity network with the goal of delivering zero-carbon electricity to businesses, residents, and communities. The project, started in 2011 with US$47.5 million in funds, involves the rollout of 6,000 smart meters by 2019 and is projected to reduce carbon dioxide emissions by 600 million tons between 2011

and 2050. The city also charges a congestion fee to drivers entering central London (using cameras to photograph and identify license plates) and employs a universal smart ticket, called an Oyster Card, to improve the ease and e�ciency of public transportation.

Figuring out the business modelA challenge smart city planners face is determining the long-term business model. Most projects are public-private collaborations involving hardware and software vendors, telecommunications carriers, and local, regional, and national governments. While integration is key, it’s not likely to happen unless business models are clarified. Who will own the data? How will it be monetized?

IHS divides the business models for smart cities into three categories: build-operate-transfer (BOT), build-operate-comply (BOC), and municipal-owned-deployment (MOD). The most common is BOT, in which the city works with an external private partner. The partner develops the services, deploys the infrastructure, and handles all operations, at least until such time that they are transferred back to the city. This model suits municipalities without a large, sophisticated IT workforce and enables cities to benefit from the private company’s expertise and investment. However, smart cities encompass so many di�erent products and technologies that municipalities typically must work with multiple third parties, which raises thorny questions about ownership, maintenance, and profits. As a result, BOT contracts can be extremely complex, although allocating a commercial project lead can move some of this complexity away from the municipality itself.

Smart cities encompass so many di¢erent products and technologies that municipalities typically must work with multiple third parties, which raises thorny questions about ownership, maintenance, and profits


Hardware:• Sensors • Microprocessors• Biometrics• Video cameras• Smartphones• Servers

Smart technologies can automate and orchestrate the operation and maintenance of city infrastructure and services

Less energy use, pollution, and congestion—and more efficient service delivery—are among the goals of the smart city

Source: IHS

Sensors deployed in parks monitor moisture, temperature, and humidity to automate/regulate irrigation.

Sensors on garbage cans alert collectors when full; sensors on street lamps activate when a person approaches.

PARKS AND GARDENS

Smartphone users/subscribers receive alerts of events occurring in the city and can retransmit information to others.

SMARTPHONE USERSDevices positioned on roads and at intersections measure/report traffic volumes and road speeds.

Sensors buried beneath parking areas detect available spaces.

Panels at main intersections relay data from parking sensors to guide drivers to available spots.

ROADS

Servers use inputs from static and mobile sensors to compile profile of city.

Smartphone app delivers contextually useful data to users, e.g., point phone at a bus stop to learn when the next bus will arrive.

Citizens use phones to capture and report infrastructure problems, e.g., potholes, to the city for repair.

Smart meters communicate with utilities autonomously, eliminating the need/expense of a meter reader.

IoT devices on street lights and buildings monitor/report environmental conditions—such as temperature and pollution—to data servers.

BUILDINGS

Key technologies of a smart cityTelecommunications:• Wired networks (ethernet)• Wireless networks (including wi-fi,

Bluetooth, RF, Zigbee, and cellular)• Repeaters• Gateways• Satellites (GPS)• Cloud computing (for storage)

Software:• Mobile applications• Databases• Big data/data analytics


Santander is perhaps best known by the European bank of the same name (founded in this Spanish city more than 150 years ago), but today it is becoming known for its smart city pilot. As cities around the world try to become smarter, this port city of 190,000 people has become a testbed for smart city technologies.

Three years ago, Santander launched the deployment of 12,000 sensors, actuators, and tags across the city—on street lamps, in the asphalt of parking lots, on trash cans, and on buses. People themselves are walking sensors, agreeing to share some of the information collected from their smartphones when they download the new “Pulse of the City” application. The app provides augmented reality technology to deliver contextually useful information to citizens. Point a phone toward a bus stop and the app advises when the next bus will arrive. Point at the concert hall and it shows a program of upcoming events.

Among the applications deployed to date:

Environmental monitoring: About 2,000 sensors on street lights and buildings monitor di¦erent environmental parameters, including temperature, carbon dioxide levels, noise, light, and the presence of cars. Sensors have also been installed on 150 public

vehicles, such as buses and police cars.

Outdoor parking management: Almost 400 ferromagnetic sensors buried under the asphalt of parking lots detect when parking spaces are available. Using information from these sensors, 10 panels located at major intersections guide drivers to available spots.

Traffic monitoring: Sixty sensors at the main entrances of the city measure the volume, speed, and congestion of traffic routes.

Parks and gardens irrigation: Fifty sensors deployed in two green zones monitor soil moisture, air and soil humidity, atmospheric pressure, temperature, sunlight, wind speed, rainfall, and water consumption.

Augmented reality: Approximately 2,000 RFID tag/QR code labels have been deployed, o¦ering the possibility of “tagging” points of interest such as shops, parks, and squares.

Participatory sensing: By using the SmartSantander application, citizens’ smartphones become mobile sensors, delivering GPS co-ordinates and other data that feed into the SmartSantander system. In return, the app enables citizens to receive real-time information

on events, and they can use their phones to report problems with city infrastructure or services. For example, they can notify the city government of a pothole by taking a photo of it and sending it to the city via their phones.

The US$11.8 million project is being funded primarily by the EU and the regional government. Luis Muñoz, an IT professor at the University of Cantabria, is technical director of the SmartSantander project and was interviewed by IHS for this article.

Q: What are the goals of the SmartSantander project?A: They are twofold. The first is to provide a testbed for research centers, universities, and companies to conduct research and develop new technologies and services, including new ways of using the data from the sensors. The second is to better support existing and future city services, making them more efficient and less costly.

Q: How is the project funded? A: It is a public-private partnership. The European Commission is contributing a grant of US$8.2 million, the regional government is contributing US$680,000, and the project partners are contributing US$2.95 million. There are 15 partners, including Telefónica as

Santander: Spain’s smart city pilot


main contractor and the University of Cantabria as technical co-ordinator.

Q: What challenges have you encountered?A: The first challenge was to convince people that this was a unique opportunity—for the city to take leadership in the smart city trend and to educate citizens, the government, and service providers on its benefits. It’s important that you don’t just make the city smarter, but also make the citizens much more efficient in using the services. It is senseless to provide this information if it’s not processed by the user. We had to get the citizens involved from the very beginning. The second challenge was to adapt the city’s infrastructure to incorporate the technology to support these services. I’m not talking about just physical infrastructure, but rather how the city departments operate. For example, with participatory sensing, a citizen might send a photo of a pothole with their smartphone. But we needed to put in place the operations behind the scene to react to that report, to make sure the information went to the right people and was acted upon, and that the citizen was then notified.

Q: Were citizens concerned about data security and privacy? A: No. We had a good answer for anybody who asked about

that. First of all, the kinds of information we are collecting around the infrastructure—related to irrigation, traffic, noise, air pollution—are not personal data, but the kinds of information that will help citizens. Second, citizens consent to share some data with us when they download our app to their smartphone, but again we stress that this data—which is not personally identifiable—is being used to help solve their problems and help them to make better decisions. From the very beginning, that was well explained. I think we were successful because more than 18,000 people are using our apps now.

Q: You said it’s important to educate city government and service providers, too. Can you explain what you mean?A: Yes, and this is very important. You need to demonstrate to the city and to the companies the power of the data. For example, we have installed sensors in the asphalt of parking lots, and they transmit to various signs on the streets, guiding people to open spaces. The company that is doing this collects the information, which can be analyzed to show usage patterns, indicating where the city may need more or fewer parking spaces. Once they start to use it, they realize how valuable this data can be. Then, after a year or so, the city may decide to build more parking lots and put it out for companies to bid. But now they

are convinced of the usefulness of the sensors, and so in the procurement they will require that companies are capable of installing and using this sensor capability. That means any contractor or service provider who doesn’t have this technology is at a severe disadvantage.

Q: Do you have any ROI data?A: In street lighting, we are already seeing a 35–40% reduction in the amount of electricity consumed. In other applications, such as waste management, it is too early to say. But, overall, we are expecting a 25–40% reduction in the cost of operating city services. With the sensors that are monitoring CO2 levels, we expect to be able to reduce emissions by 30% during the next five to seven years.

Q: Who owns the data collected by the various sensors?A: The data will belong to the city. However, in most cases we make that data public to allow citizens and companies to create new services and applications using them.

Q: Who maintains the sensor and network infrastructure?A: The municipality and university manage the network. The municipality handles the maintenance. The cost of the maintenance is shared among the service providers at a rate proportional to the budget of the service they bid.

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An example of BOT in action is the SmartSantander project on Spain’s north coast (see sidebar on pages 50-51). Telefónica is the lead on the project, which includes 15 organizations deploying services across a range of applications, including smart parking, waste management, and environmental sensing. When the project is complete, control and maintenance will revert to the municipality.

In the BOC model, the city provides a more open environment, creating a platform for development and allowing private entities to build services atop it as long as they agree to certain regulations and funding levels. The third parties are entirely responsible for deploying infrastructure and operating the services. This model allows for a higher number of partners than the BOT model. While this approach encourages innovation, it ultimately results in smaller-scale, more limited projects because the budget is spread more thinly among a greater number of projects.

An example of the BOC model is Amsterdam Smart City, in which more than 70 partners are involved in a variety of projects focusing on energy transition and open connectivity. All acquired knowledge and experience is shared via the Amsterdam Smart City platform.

Under MOD, which is rarely used, the city takes responsibility for the entire project, deploying infrastructure and developing and operating services. This avoids having to manage a large number of partners and the concomitant challenges over ongoing maintenance, ownership of data, and share of any profits. On the other hand, the city doesn’t benefit from the innovation and investment that BOT and BOC models encourage, raising overall costs to the public.

Regardless of which model is used, privacy and security are potential concerns. At a minimum, cities and their project partners must comply with data privacy regulations in their region. However, it may be prudent to exceed local standards where required to ensure protection of sensitive information and ease citizen concerns, as public distrust can impede the progress and usefulness of these projects.

As such, education is a critical element in ensuring the successful deployment of a smart city project. Municipalities need to explain to citizens exactly which data will be gathered, how, and what will be done with it. They must also help citizens understand the benefits

that they are receiving in return. In Santander, for example, citizens can download a mobile application that tells them when the next bus will arrive. In accepting the terms of service, however, users are agreeing to give the city access to data collected from their smartphones.

Education applies equally to city governments, which can and should learn about smart technologies from vendors and systems integrators. In particular, while governments know that data is useful to collect, they may not understand which data is most important and how best they can use it.

The path forwardGiven the challenges involved in the development of smart cities, several key areas demand the attention of government and vendors alike:

1. Integration. For cities to benefit from smart technologies, participants need to move away from a siloed approach and toward the creation and use of a central repository of data. Smart city infrastructure,


services, and departments should feed data into, and draw data from, the repository. This requires changes in how city governments are structured and resourced.

2. Education. Citizens must be informed on what data are collected and assured that appropriate safeguards are in place to protect their privacy and security. Systems should be in place to encourage citizen feedback and the exchange of information among partners in the project. Learning can and should occur on all sides and from many directions.

3. Documentation of results. Many smart city pilots can’t yet measure, or don’t widely publicize, their return on

investment. Municipalities should make it a priority to document and publicize their results. With many developed nations facing the prospect of reducing government expenditure, securing funds for the deployment of smart city initiatives could become more di�cult. Quantifying how these projects can reduce costs and increase e�ciencies will improve the chance for more deployments.

Conceived and executed correctly, smart city deployments will improve the overall quality of municipal life, drawing highly skilled workers and technology companies seeking a thriving urban environment which, in turn, will increase municipal tax revenues. In the long run, that

may be the most significant impact on the economic future of cities—and the world.

Lisa Arrowsmith is associate director,

connectivity, smart homes and

smart cities, IHS Technology

bit.ly/LisaArrowsmith

For more information on smart cities, visit www.ihs.com/Q13SmartCities

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Conceived and executed correctly, smart city deployments will improve the overall

quality of municipal life, drawing highly skilled workers and technology companies

seeking a thriving urban environment

http://bit.ly/LisaArrowsmith

http://www.ihs.com/Q13SmartCities


Not so long ago, social license to operate was relegated to the corporate social responsibility team. Case studies of social investments were

profiled on a page of the annual report to show the good work the company was doing around the world. No more. Social license has become serious business for companies engaged in business development that impacts both the environment and economy of communities, particularly in areas where there is civil or political instability. Indeed, the number of those areas has been increasing during the past decade. Whether called sustainable development, ethical investment, or social license to operate, the function is now recognized as an essential strategic and tactical investment that drives financial performance and shareholder value.

From Guatemala to Mozambique, Peru to Senegal, recent activism against mining, energy, and agribusiness operations has disrupted production, damaged capital equipment and, in some cases, shut down operations. Regardless of the extent of the disruption, these incidents generate negative press, damage the company’s global reputation, and undermine shareholder confidence.

Unfortunately for companies in these industries, most of the new development opportunities are in areas that face ongoing civil unrest, as well as terrorist activity, and even out-and-out war. Indeed, most of the world’s mineral resources are located in areas that are either already su�ering civil strife or are very likely to in the coming year (see map on facing page). Even if local

For agribusiness, energy, mining, and many other capital-

intensive corporations, gaining the support of stakeholder

communities at the local, national, and global levels is as

important as winning contracts. The future of the company

may depend on it.

By Nathalie Wlodarczyk

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All business is social


antagonism is not targeted directly at the company, chances are the local corporate development team will be a�ected. They often become a catalyst for brewing unrest and a focal point for dissent that local communities are not able to express directly to the government. As a consequence, the foreign investor has to deal with the spillover, which could impact the success of the investment project.

So what is social license and how can a comprehensive strategy help prevent, or at least minimize, local, national, or even global opposition to the company and project? Unfortunately, there is no piece of software or reference manual that can guarantee a successful social license initiative. That is because the approach deals with people and their opinions, beliefs, and agendas. The initiative must be tailored to deal with all these factors—and they will be di�erent in each context. The company must be willing to change its focus as circumstances on the ground can shift quickly. Speed of response is critical to head o� a confrontation that could damage the company’s reputation or, worse, shut down operations.

To be e�ective, the social license strategy must be part of the evaluation and planning phase of the

country-entry plan before any digging or construction takes place. If it’s an afterthought, the damage is already likely to have been done, and the cost of the response will be high and often hard to recover from. So the first step is to do your homework. This starts with understanding the political and social power structure at all levels of the government and within the local communities. A sound understanding of the

history of the communities impacted and the cultural norms of engagement is essential. There is some basic information companies need to know before entering a new market or operating environment. This includes understanding local history, both social and economic, formal and informal power structures, the rights and protection of foreign investors, the strength of the rule of law in disputes, and any legislation or elections that may impact the company’s operation. Most of these touch directly on social license.

Doing your homework and mapping out who’s who, what drives them, and what they have the power to do is the first step of any stakeholder strategy (see sidebar on page 56). The initial objective is to gain an understanding of the agendas of the various stakeholders and the pressures they face from their constituents in order to

Where there’s risk, there’s opportunity

Colors indicate level of risk: red is high risk and green is low risk. Dots indicate sites of existing mining operations excluding the US.

Source: IHS and U.S. Geological Survey

LOW

0 – 0.7

MODERATE

0.8 – 1.5

ELEVATED

1.6 – 2.3

HIGH

2.4 – 3.1

SEVERE

3.2 – 9.9


Building a sustainable social license strategy

There is no simple formula to guarantee a local community will support a new capital investment in its midst, or that a national or international activist community will either. However, there are specific steps a company can take to ensure there is a high probability that it will develop a strategy for engaging with stakeholders at all levels to earn a social license to operate. The strategy needs to be nuanced to meet the approval of all the stakeholders who will pass judgment. And it is likely to be di�erent for each investment project.

1.STAKEHOLDERS. It is essential to identify both formal and informal power structures and the people associated with them. Companies must understand not only who is important but why they are important and how their influence was earned or assigned.

2.AGENDAS. Within each community, there will be competing agendas and priorities as well as economic and social pressures that will impact opinions, behavior, and decisions. These agendas and pressures can lead to people making decisions that can seem counter-intuitive from the outside. For example, it can seem reasonable to assume that increasing access to electricity will be viewed positively and therefore be supported—especially if leaders have expressed this as a priority—but there may be other factors that come into play and derail this support.

3.SCENARIO PLANNING. Companies need to understand how social and political change in the wider context of the country and region may impact stakeholders and their agendas. Scenario analysis can help by testing how things might change in the case of both low- and high-probability events. An example of a failure in scenario planning was the election of a dark-horse candidate in Peru that ended up derailing a mining operation. The company had conducted extremely detailed research for steps 1 and 2 but failed to anticipate the impact of the change the election brought.

4.WARNING FLAGS. Based on the scenario analysis, we can identify pathways and early warning signs that suggest a scenario is becoming more likely. Careful monitoring of these signs can help companies stay ahead of the curve and proactively tackle change—for example, by engaging with new stakeholders early.

5.STRATEGY. The four steps above will prepare a company to identify the leaders to talk to, how to plan for change, and what to monitor to determine if that change is becoming imminent. They form the basis for the proactive management of the company’s reputation and its investments into the things that matter at local and national levels.

Nathalie Wlodarczyk

Stakeholders Agendas &pressures

Scenariosfor change

Stakeholder engagement Reputation management Social investment

Early warning &stakeholder flags Strategy

How do you prepare?

Source: IHS


understand what decisions they might make that will impact your company or project.

Of course, people’s ideas and agendas can change for a variety of reasons, which means an e�ective stakeholder strategy has to be responsive. Identifying the scenarios that are likely to play out in the country and project locality can help you spot both the stakeholders who will wax and wane in influence, as well as new agendas that may emerge. Having an understanding of how things are likely to change is what allows your company to be proactive and maintain social license beyond the initial country-entry stage. It becomes the basis for a successful stakeholder engagement and—where appropriate—social investment strategy. It also informs how the company manages its reputation, both locally and globally.

Who’s got the power?Identifying who holds the real power is one area that frequently presents problems. Often, the formal and o�cial channels of power are not the only ones that need to be managed. Parallel channels of power can be as—or even more—important to earning social license. Not identifying or acknowledging these channels can be disastrous.

Consider the case of an agribusiness company that wanted to set up operations in Sierra Leone. The company did everything by the book: it received the necessary licenses and permits from the national government; it got to know the local tribal leader—the Paramount Chief (PC), who in Sierra Leone is traditionally the custodian of community land; and it negotiated a lease for the community land with the PC.

However, the company didn’t realize that the PC was not the only important local decision-maker. His counterpart was the local member of parliament (MP). They were from opposing political parties and the MP was much younger, which in the eyes of the PC meant he was subordinate. So the PC excluded the MP from conversations and negotiations with the investor.

In the MP’s view, the PC was a turncoat as he had switched his allegiances from the old ruling party to the new one, so the two were already at odds. The MP suspected the PC was out to replace him with a candidate from the ruling party in the next election and saw the agricultural project as an opportunity to undermine the PC. He rallied his constituents—many

of whom were also young men—and set up blockades on the leased land to protest at the development. This escalated to confrontations with the police. The conflict escalated further when the protesters reached out to an international non-governmental organization and accused the investor of a land grab, which made the events in this small corner of Sierra Leone global news. As a result, the project stalled for more than two years—in large part because the investor made the mistake of not identifying all local influencers at the outset.

Another case in Peru had more severe ramifications, when a mining company had to deal with the unexpected result of a 2010 election. After three years of laying the groundwork with the national and local governments—which involved extensive local engagement, including the company funding four community projects to improve health, education, farming, and infrastructure—the company’s investment was scuttled as a result of the election of a dark-horse candidate as president of a district (locally known as a department), who was opposed to mining.

While the company had managed to successfully map the stakeholder universe in great detail—in contrast to the Sierra Leone example—it did not anticipate how this landscape might change. In particular, the company did not expect this candidate to win the local election, so they had not invested time in building a relationship with him. In fact, the candidate had campaigned on an anti-mining platform and, true to his word, supported protests against the project once he was elected. Opposition to the mining investment spiraled out of control rapidly, and within 12 months local protesters had destroyed equipment worth US$2 million at one of the company’s other mines in the region, which triggered the imposition of martial law in the area. Little more than a year after the election, the project was suspended, and remains so.

The lesson from this, and countless other examples like it, is that to earn and maintain social license requires an ongoing e�ort to keep abreast of local developments (see sidebar on page 58 on the principles for maintaining social license). Companies must be vigilant in monitoring local conditions, attitudes, and social and political shifts. They must learn to anticipate and accommodate change into their operational plans to deal with these changes. And they must keep

Six mistakes to avoid

1. Lack of, or poor, communication doesn’t just mean people don’t know, it means they draw their own conclusions. A failure to proactively provide comprehensive and honest answers can easily derail community support. In fact, it often means the community comes up with its own incorrect answers or relies on less credible, sometimes antagonistic sources for their information. In southeastern Sierra Leone, where oil exploration has begun in earnest in the past couple of years, local coastal communities connected cholera outbreaks with o¦shore drilling, in part because of an absence of local-level communication about the impacts of drilling activity.

2. Just because some people in a community know something doesn’t mean they communicate it to others. Individuals have their own agendas, which do not always align with others in the community. As often as not, engagement with a foreign investor or operator is an opportunity to forward personal agendas in an attempt to shift the balance of power. This also means communication with one set of actors doesn’t necessarily indicate the message will be accurately passed on and shared with others.

3. Influence and power are not always official. In addition to formal political structures of authority and representation, influence is often wielded by individual groups that can sway the community against official authority. It takes time for companies to identify and connect with these unofficial influencers. Taking short cuts through actors who claim to represent the wider community can be tempting, but is often problematic.

4. Not everyone speaks up in public, but this doesn’t mean they don’t have clout. Not all actors communicate in the same way. Some will be well versed in the forms and style of public consultation and appear to represent more than they, in fact, do. Others will wield real influence but never share their views in a public forum or even bother to turn up. Companies must do their homework to learn where the power resides and connect with the real influencers, so they don’t unwittingly create resentment.

5. Most people prefer to be asked their opinion directly than be represented by someone else even if, in the end, they take the same view. While time-consuming, it is worth the investment to engage widely within the community to build support and encourage stakeholder buy-in. This is not difficult work but it is time-consuming. Often it is as simple as going to see someone and having a cup of tea. Other times, it may require a formal presentation.

6. Competition between stakeholders increases the risk that commercial agreements will be challenged. Local-level stakeholders often fear they will be bypassed in the consultation process on large-scale investments, especially in countries where politics operate along patronage lines and relationships with foreign investors are handled centrally by the government. This fear of being excluded can generate a culture of suspicion that, in itself, increases the risk that operations and operators will be challenged by groups that feel their concerns have not been addressed.

Nathalie Wlodarczyk


against official authority. It takes time for companies to identify and connect with these unofficial influencers. Taking short cuts through actors who claim to represent the wider community can be tempting, but is often problematic.

excluded can generate a culture of suspicion that, in itself, increases the risk that operations and operators will be challenged by groups that feel their concerns have not been addressed.

Nathalie Wlodarczyk

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their ears to the ground—not just for the most likely scenarios and changes, but for the unlikely, yet high-impact, ones that have the potential to derail activities.

However, this is not a straightforward formula. It is hard work. Even when things have been going well for years, changes in people and agendas can scuttle progress. Therefore, the other side of a successful social license strategy is to have an honest recognition of the company’s risk tolerance. Specifically, what level of risk or challenge is a company willing to accept? The risk-reward ratio and degree of tolerance will di�er from company to company, but knowing where that line is can be important for a successful strategy—not least when managing the fallout of an incident such as a protest or strike.

One set of stakeholders that is becoming increasingly important for companies to monitor is the global community of activists and commentators who operate largely on the web and through social media. While often geographically far removed, they can have a real impact on projects in places where the internet is hardly used. This means that even though a local strategy may be extremely successful and help the company secure buy-in from stakeholders directly a�ected by a project, this other constituency may feel—and act—very di�erently.

We have seen this to a degree with the Pebble Mine in Bristol Bay, Alaska, where some of the most vocal opposition came from activists in urban centers far away from the site itself. A major concern was that the mine would adversely impact the spawning grounds in the watershed that is downstream from the proposed mine. A number of gold buyers and retailers, including Walmart, have signed a pledge to boycott gold from the Pebble Mine.

The online-activist stakeholders can be crucial for a company’s social license, primarily from a reputational risk perspective. Their voices carry far and they have access to media outlets and opinion shapers. These networks can also easily amplify the social discontent of a local community. Indeed, local activists are increasingly recognizing the power of these global activists and are incorporating social media tactics into their own activities.

While the web-based global community is larger, and therefore harder, to manage, there are tools that can be

applied to identify them and track how online debates about specific companies and projects are evolving. IHS uses advanced network analytics of social media to identify those with genuine influence and clout. Once identified, they can be engaged just like any other stakeholder community. IHS can also track changes in overall sentiment on an issue with wider groups and demographics, beyond individual activists. (For more on social media analytics, see the Sentiment Intelligence feature on page 60.)

There is much that corporations need to do to develop and maintain their social license to operate. In many cases, an equitable balance can be achieved between development and local community interests. Building and keeping social license is the responsibility of all employees—from the CEO supporting the contract negotiation to the engineer on the ground evaluating a construction site. As relationships and power structures shift, the company cannot a�ord to lose its connection with the local community. Social license is not rocket science, but it is time-consuming—very time-consuming—and it is hard to get right, as even small developments can trigger significant losses.

At the end of the day, the level of commitment to an investment comes down to the company’s appetite for risk. There may be occasions when the company is pitted against the local community and will be unable to mitigate the situation. Companies need to know their threshold for risk—as well as that of their shareholders—from the outset. They also need to know what level of risk they will face for a specific project. Where these two line up, strategies can be put in place that maximize the business opportunity and minimize the impact on the company’s reputation.

Nathalie Wlodarczyk is managing director, Global Risk

Consulting, IHS Economics and Country Risk

bit.ly/NathalieWlodarczyk

For more information on social license to operate, visit ihs.com/Q13SocialLicense

http://bit.ly/NathalieWlodarczyk

http://ihs.com/Q13SocialLicense

http://ihs.com/Q13SocialLicense


On May 28, 2013, 500 environmentalists gathered to protest the development of a shopping mall in Taksim Gezi Park, in

Istanbul’s Beyoğlu district. During the next several weeks, nearly 2,000 people were arrested as Molotov cocktails were flung into political o�ces. Property damages amounted to US$10 million and the protest expanded into a nationwide uprising that continues to reverberate across Turkey.

The speed with which the protests emerged and spread caught many people o� guard, including government leaders, the traditional media, and police. Yet social media, in the form of the Twitter micro-blogging platform, provided advance notice of the gathering storm to those capable of reading the signals. Interpreting the mass of messages exchanged in tweets of 140 characters or fewer required the right combination of dedicated Big Data tools,

Analysis of social media is an important tool for spotting trends and forecasting markets. But deriving actionable intelligence from social media data requires a sophisticated framework that includes a host of capabilities.

By Chris Hansen

Converting social media babble into business advantage

Sentiment Intelligence:


specially developed analytical methods, and fundamental subject matter expertise.

Never before has there been such a direct way to gather intelligence on public sentiment and networks of influence for virtually any topic. Gleaning insight and even predicting behavior from the 500 million tweets that are sent each day through the practice of sentiment and network analysis

are among the most tantalizing potential uses of Big Data. Indeed, sentiment and network analysis, while still in its relative infancy, is becoming an important tool to help companies, governments, and other institutions read the mood of a group of people, predict their actions, and influence behavior.

To this end, IHS last year introduced the US Sentiment Index, a unique method for

evaluating the sentiment/mood of tweets posted on Twitter. The index provides a dashboard of sentiment in real time for the US that o�ers insight into markets, consumer behavior, events, and geopolitical activity (see sidebar below).

Sentiment and network analysis“Sentiment,” in its simplest form, is the measure of a message’s use of positive or negative language,

Is the US happy or sad today?Twitter, the micro-blogging platform, might be the best focus group ever assembled. It produces 500 million tweets a day on every topic imaginable. Properly marshaled, the intelligence from Twitter can provide insight into economic activity, social trends, even protests and civil unrest.

A case in point is the IHS US Sentiment Index (USSI), which is a real-time indicator of the mood of the nation, as expressed by a representative sample of Twitter data. Users have applied the USSI in a variety of ways, from predicting state-level changes in unemployment to financial-market volatility. The index can be used to help gauge public opinion on many issues, allowing companies and governments to accurately measure the sentiment of large numbers of carefully qualified people.

The unique configuration of the USSI reflects state-of-the-art thinking in the field of Sentiment Intelligence. Today, most Sentiment Intelligence applications search online messages for specific keywords associated with opinion, or “sentiment.” Those keywords form the basis of a message’s sentiment “score.” This approach is problematic because Twitter’s idiosyncrasies—its 140-character limit; use of abbreviations, neologisms, and acronyms; and Twitter-specific syntax (hashtags like #fail)—greatly complicate the task of interpretation.

Rather than take this traditional approach, the USSI applies proprietary sentiment- and community-

detection algorithms against 10% of all tweets. The index measures sentiment associated with words based on the frequency with which they occur in messages with four di¦erent types of emoticons that convey sentiment.

This methodology results in a scoring word list that, unlike other methods, is automated from the Twitter data alone, without human intervention. Consequently, the USSI uses significantly longer word lists than other sentiment-measuring methods, allowing it to score more words in a message. Moreover, the index’s word list is specific to the Twitter lexicon (including abbreviations and neologisms) and can easily be applied in a consistent manner across languages.

The ways in which the USSI gathers information about Twitter users also reflect the state of the art of the technology. For analysis, Twitter users are assigned a gender based on an examination of their self-created username and comparison against a large list of male and female first names. In addition, many Twitter users self-report location in their user profile or embed geographic information in their tweet, and the USSI uses this information to sort tweets geographically. Further enriching the dataset, this geo-location tracking enables the index to pinpoint precisely where the users are when they publish their messages.

Trends can be visualized during the course of a day, a week, or longer and can incorporate geographical data. That enables analysts to weight messages in


which is associated with positive or negative emotions, or sentiments. In the 24 hours before demonstrators converged on Taksim Gezi Park, “eylem,” the Turkish word for “protest,” appeared 10,000 times on Twitter. The high frequency of the word’s usage provided a strong early warning that dissatisfaction was building and strife was imminent. Network analysis—an examination of the pattern of tweeting and connections between users—revealed that the number of tweets from people with influence within the protest movement was increasing. Taken together, these signals added up to a clear indication that the unrest would deepen.

proportion to the senders’ state populations relative to the total US population. Messages can also be weighted by gender and ethnicity.

This macro-mood approach can be applied in many countries, reflecting the growing use of Twitter around the world, and by measuring Twitter sentiment in a large number of languages in addition to English—including Arabic, French, German, Hindi, Italian, Portuguese, Russian, Spanish, and Turkish. As

connectivity continues to shrink the world, it is more important than ever to keep track of trends in every corner of the globe.

Chris Hansen

To view the USSI, visit www.ihs.com/Q13Sentiment

The IHS US Sentiment Index measures the sentiment of large numbers of carefully qualified people in real time

Measuring America’s mood

Source: IHS

http://www.ihs.com/Q13Sentiment

http://www.ihs.com/Q13Sentiment


A key benefit of sentiment and network analysis is that it provides actionable information in real time. In the case of the Istanbul demonstrations, the tweets portended the uprising a full 48 hours before the Western press picked up on the situation. In other contexts, such advance notice could, for example, enable a company to divert shipments or arrange for alternative sourcing before an outbreak of civil unrest disrupts a key link in its supply chain. That capability could minimize the impact of an interruption and potentially give the company an edge in the market.

That is just one of the competitive advantages conferred by accurate sentiment and network analysis. It can also predict acts of social unrest or foresee changes in attitude that will a�ect the popularity of a particular product—for instance, a model of car or brand of mobile phone—in a specific region. As a result, a company can hone its marketing messages; ensure that factories are prepared for a surge in demand for a particular product; or respond to a crisis that might shut o� a key market.

From analysis to intelligenceSentiment and network analysis, while powerful, must be combined with a deep understanding of markets to generate reliable and actionable intelligence. It is most e�ective when combined with other information, such as econometric forecasts, satellite imagery, and insight from subject matter experts in the field. Indeed, a handful of forward-looking organizations have begun to integrate sentiment analytics with traditional market intelligence to build the foundation for decision-making models of the future. This hybrid approach of combining data, analytics, expertise, and insight from a variety of complementary sources to create a robust picture of the future is what IHS defines as Sentiment Intelligence (see the figure below).

As the above formulation suggests, Sentiment Intelligence involves far more than brute-force crunching of massive amounts of data. It is just as important to marshal industry or regional expertise to ask the right questions up front and to put the information gleaned from social media in a meaningful context. For example, does a stream of

There are three capabilities necessary to extract intelligence from social media data

What is Sentiment Intelligence?

Source: IHS

Industry expertise

Big dataexpertise

Sentimentanalytics

SentimentIntelligence


Twitter messages about growing public unrest in a distant part of the world mean a company should prepare for an uprising that can disrupt markets and supply chains? Or is the unrest a cyclical phenomenon, perhaps linked to a holiday or historical anniversary that flares up every year and then fades without consequence? What are the proper words or phrases to look for in Twitter feeds to provide that crucial contextual information?

Such questions are at the heart of Sentiment Intelligence. Tweets or other social media messages alone can never tell the entire story and are open to misinterpretation if context is lacking. That is why sentiment analysis should be regarded as just one tool for predicting outcomes, rather than the entire toolbox.

The sheer volume of social media messages is both a blessing and a curse. Every day, half a billion tweets are sent into cyberspace—gossip about pop stars, complaints about auto mechanics, raves about new

products. That equates to more than 20 million messages every hour, 330,000 every minute, and 5,600 every second. The tsunami of opinions can make it di�cult to determine which messages resonate with the public and which are ignored. Only an understanding of the dynamics of social networks can enable companies and governments to interpret the constant stream of information.

Consider one popular way to measure influence online—the Klout score, which counts messages and tweets, retweets (messages that readers forward to their contacts), and followers. Although there is value in these numbers, a company that knows nothing but the raw counts can easily be led astray in its analysis. For example, in measuring the impact of a particular tweet, an analyst might well assume that a Twitter user with 1,000 followers is 10 times more influential than a user with only 100 followers.

Sheer numbers alone, though, cannot measure

Every day, half a billion tweets are sent into cyberspace. That’s 20 million every hour, 330,000 every minute, and 5,600 every second

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the strength of a Twitter user’s network—that is, the bonds and relationships among the people who read and share tweets. In fact, a Twitter user with only 100 followers might have a stronger bond with the people in his social media network than the user with 1,000 followers, and therefore his communications might be more likely to spur action. Another common analytical error is to assume that the size of a user’s following reflects the user’s influence, rather than the influence or “network centrality” of his followers. Some followers are more influential than others, and the quality of the follower network is a key determinant of how widely a particular message spreads. These are just two examples of how accurate sentiment and network analysis hinges on understanding the complex web of relationships in the online world.

Consider again the Turkish protests mentioned earlier. After-the-fact analysis revealed that some individuals were using specific Twitter accounts to spread the word about protests and demonstrations, meaning that those accounts were key indicators of how the protests would develop. Further analysis showed that there were two main categories of users mentioning the demonstrations in the Beyoğlu neighborhood—“one-o�” users who tweeted a few times about the protests and others who provided a steady stream of information and updates. This distinction provided further insight into the predictive weight assigned di�erent Twitter users.

The importance of understanding social networks to improve Sentiment Intelligence has been proven time and again. Al-Shabaab, a terrorist organization based in Somalia, has been notable among Islamist extremist groups for its frequent use of Twitter since late 2011. The group has used multiple Twitter accounts to issue press releases, engage in dialogue with journalists and researchers, and respond to its critics both inside and particularly outside Somalia. In an analysis of the September 2013 Westgate mall attack in Nairobi, Kenya, IHS researchers found that 80% of the users of the Al-Shabaab Twitter network belonged to one of seven clusters that had a particularly keen interest in messages coming from the organization’s Twitter accounts. One cluster, not surprisingly, was made up of journalists. The largest cluster consisted of Kenyans, whose sentiment about the attacks was overwhelmingly negative. In this network, no one who retweeted the Al-Shabaab messages was subsequently retweeted by anyone else in the dataset. The lack of retweets suggested that there was not an active community that came together to interact on the topic of Al-Shabaab—a key indication of the extremists’ lack of influence in the country where the attack occurred.

By identifying such networks, and the connections between people who retweet over a given period, governments and companies can draw valuable inferences. However, the influence that someone has on social media can be a�ected by many things that may not be intuitive—such as the time of day they tweet or even the season of the year in which they send out their message.

Going viralCompanies need a nuanced

A Twitter user with only 100 followers might have a stronger bond with the people in his social media network than the user with 1,000 followers


CENTRALITYA set of measures that quantify how central some-one is in a given network. Highly central individuals are quite important for passing messages along the network, even if they don’t have a lot of social contacts.

EGO-CENTRICNetworks that are created by identi-fying a set of individuals. For exam-ple, individuals known by analysts to be important thought leaders on a given topic, such as energy. Ego-centric networks are built out from those individuals using a “bottom-up” approach, by identifying these individuals’ followers, their follow-ers’ followers, and so on.

SOCIO-CENTRICNetworks that are created by study-ing all individuals and understanding what traits and/or interests clustered individuals share. This “top-down” approach studies the items that are common to all clustered individu-als, with given communities having common traits. For example, a socio-centric cluster might have a shared interest in gaming, politics, or an issue such as energy policy.

CLUSTERINGThe formation of com-munities of people, due to transitivity and homophily, based on ethnicity, religion, political views, and other factors. It also refers to a measure of how closely in-dividuals within a community are linked with each other.

TRANSITIVITYThe tendency that if A knows B and B knows C, A is likely to know C. If people have a high transitiv-ity number, it means that, gener-ally, their friends and contacts are friends with each other.

Social networking terms to know

HOMOPHILYThe tendency of indi-viduals to associate and bond with others who share similar characteristics as them, such as beliefs, values, and education.

Source:IHS

understanding of an industry or a region of the world, as well as expertise in handling Big Data, to make sense of the welter of unstructured inputs—including Twitter messages—that do not fit neatly into the rows and columns of conventional databases. The deeper that understanding, the better the chance a company can proactively manage social media sentiment about itself so that messages that reflect positively on the company will “go viral”—that is, capture the imagination of users and induce them to share the messages spontaneously with their followers.

While viral messages can seem to emerge without warning, Sentiment Intelligence tools can provide an early indication of a message’s potential to go viral. Analysis of the information that is being tweeted and retweeted, weighted by the influence of the user networks that are spreading the message, can produce strong signals that a message, meme, video, or photograph is about to be retweeted widely. Accurate weighting requires an understanding of a number of technical concepts, including clustering (how tightly groups of people are connected); transitivity (how


closely someone’s followers are connected with one another); and centrality (how embedded a person is within social networks). See the sidebar on page 67.

These concepts help analysts interpret the strength of relationships within social networks. That information has many uses. For example, a company can adjust its marketing to piggyback on the popularity of a video that is on the brink of going viral. The company that anticipates most quickly can launch its campaign when the viral video is top of users’ minds, leaving competitors to react only after interest in the video is waning.

Sentiment Intelligence may not be useful for every potential application, however. For example, its value is limited if a particular topic does not elicit a significant volume of discussion over social networks.

Still, Sentiment Intelligence’s interpretive capabilities are quickly becoming more robust. The rapidly expanding reach of Twitter to more countries and more demographic groups is increasing its value for all types of analysis. Twitter has reached saturation in many markets. From Brazil to India to South Africa, the surge in Twitter data from many areas of the world and across widening social, economic, and age strata is

How social networks influence hydraulic fracturing opinionsIn January 2013, oil and gas drillers were understandably interested in the reaction to The Promised Land, a film that took a critical view of hydraulic fracturing—the injection of high-pressure fluid into wells to improve production yields.

An analysis of 20,000 Twitter messages posted between December 2012 and February 2013 revealed that the film had little measurable e¦ect on public sentiment about hydraulic fracturing. That insight was not only good news for drillers, it served as a launch pad to explore what tweets about hydraulic fracturing revealed about the operation of social networks.

Following up on that study, IHS analyzed one million tweets between January and July 2013 to determine the words most commonly associated with hydraulic fracturing. The top three words were “gas,” “water,” and “new.” Seventeen other words appeared at a lower level of association, including “anti,” “ban,” “shale,” and “study.”

The analysis made it possible to categorize Twitter messages by their position on hydraulic fracturing—favorable, neutral, or opposed. The intensity of those sentiments could be measured by their volume: the more numerous the tweets, the stronger the opinion.

To further define the social networks, messages were identified by location. Roughly 750,000 of the one million messages originated in the US; an additional 112,000 originated in the United Kingdom. The

messages could further be pinpointed by state. The greatest numbers came from New York, California, and Pennsylvania.

“Community detection algorithms,” which determine how Twitter users interact with one another, revealed the underlying structure of the social networks that communicated on this topic. In this case, analysis revealed a rich web of connections among environmentalists and environmental organizations, politicians across the US, media, and energy companies (see the network map on the facing page). The research provided intriguing insight into how a small but influential group of people a¦ected opinion through their comments on social media. Most significantly, the analysis showed that sheer numbers of followers alone did not accurately measure a user’s influence. A much stronger indicator was whether followers retweeted messages to people who did not interact with the originators of the posts.

This finding indicated that the content of the messages is only one factor, albeit an important one, that must be considered when performing Social Intelligence analysis. Equally important in understanding which messages will have weight, and go viral, is to measure the strength of the linkages or relationships among the people sharing the messages.

Such enhanced understanding of the way Twitter shapes opinion—and the key role played by user


providing a rich and nuanced picture of global trends and opinions.

At the same time, new Sentiment Intelligence tools are emerging that can gather information from social media sources such as Facebook and LinkedIn to produce insights that Twitter analysis alone cannot provide. And there is now early work on companies combining Sentiment Intelligence with other types of data, such as satellite imagery of crowds, to enable more accurate foresight than any one type alone can reveal.

Sentiment Intelligence is still in its infancy, but even

in these early stages the technology can yield huge benefits for organizations and companies—provided they develop the expertise and contextual skills to use it correctly.

Chris Hansen is director, IHS Energy

bit.ly/ChrisJHansen

For more information on this topic, visit ihs.com/Q13Sentiment

networks—is providing the means to make Sentiment Intelligence more precise and more useful for a wide range of applications.

Chris Hansen

Environmentalactivists Politicians

Environmental NGOs

Politicians

Politicians

Media Energy industry

Environmental NGOs

Analysis of Twitter traffic about hydraulic fracturing using community detection algorithms identifies how di�erent groups interact with one another

Network connections reveal who influences opinion

Source: IHS

http://bit.ly/ChrisJHansen

http://ihs.com/Q13Sentiment

http://ihs.com/Q13Sentiment


Global economic snapshotDuring the next four years, IHS expects world real GDP growth to accelerate from 2.8% into the low 3% range, despite slower growth in China and persistent sluggishness in Europe. Picking up the slack will be sub-Saharan Africa, Mexico, Russia, and Japan. Capital investment is forecast to rebound in a number of countries as the global economy regains strength, including in the US, Europe, Russia, and a number of Asian countries. IHS expects the oil and gas sector to see stronger growth globally, through 2018. All figures are in real USD.

OUTLOOK

4

2

5

11

5

16

1 14

1

17 18

7

8

9

19

20

10

13

126

15

3

4.03.53.02.52.01.51.00.50.0-0.5-1.0-1.5-2.0-2.5

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Annual percentage growth rate, 2008–17

Global GDP is rebounding


6

4

2

0

-2

-4

-6

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Investment growth regains momentum

3.1 5.1 3.7USA

7.5 7.5 4.2China

1.9 2.3 0.5Other Europe *3

1.3 1.0 1.7Japan

1.7 2.2 -1.4Germany

4.8 6.2 2.9Other Asia-Pacific *6

1.6 2.4 -0.3France

2.5 4.6 1.7United Kingdom

4.1 4.1 1.9Middle East *9

3.6 4.5 4.0Brazil

1

2

3

4

5

6

7

8

9

10

3.3 4.9 2.3Russia

3.7 4.8 2.8Other Latin America *12

6.8 8.1 6.2India

11

12

13

2.6 2.6 5.0Canada14

2.8 2.9 1.9Australia – New Zealand15

5.2 6.3 3.2Africa *1919

3.9 5.0 2.8Poland20

2.0 2.9 1.5Nordic region *16

4.0 3.9 -1.3Mexico

3.5 2.6 2.6South Korea

16

17

18

*3: Austria, Belgium, Bulgaria, Czech Republic, Greece, Hungary, Ireland, Italy, Netherlands, Portugal, Romania, Slovak Republic, Spain, Switzerland, Turkey, Ukraine

*6: Bangladesh, Hong Kong, Indonesia, Malaysia , Pakistan, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam

*9: Bahrain, Egypt, Iran, Israel, Jordan, Kuwait, Qatar, Saudi Arabia, United Arab Emirates

*12: Argentina, Bolivia, Chile, Colombia, Costa Rica, Ecuador, Honduras, Jamaica, Panama, Peru, Uruguay, Venezuela

*16: Denmark, Finland, Iceland, Norway, Sweden

*19: Cameroon, Kenya, Morocco, Nigeria, Senegal, South Africa, Tunisia, Zimbabwe

3.0

2.5

2.0

1.5

1.0

0.5

0-0.5

-1.0

-1.52008 2009 2010 2011 2012 2013 2014 2015 2016 2017


Oil & gas rising even as growth slows in China

Source: IHS

2014

$55.51 $61.28 $13.08 $15.08 $1.63 $1.75

2017 2014 2017

GDPUSD trillions

Capital investmentUSD trillions

Oil & GasUSD trillions

2014 20172014

$5.77 $0.12$2.00

Real GDP, capital investment and oil & gas output compounded average annual growth rates, 2014-2018, of the 20 largest countries and regions ranked by contribution to world growth.

WHERE’S THE GROWTH?GDP

Capital investment

Oil and gas output

Regions


Global economic snapshotDuring the next four years, IHS expects world real GDP growth to accelerate from 2.8% into the low 3% range, despite slower growth in China and persistent sluggishness in Europe. Picking up the slack will be sub-Saharan Africa, Mexico, Russia, and Japan. Capital investment is forecast to rebound in a number of countries as the global economy regains strength, including in the US, Europe, Russia, and a number of Asian countries. IHS expects the oil and gas sector to see stronger growth globally, through 2018. All figures are in real USD.

OUTLOOK

4

2

5

11

5

16

1 14

1

17 18

7

8

9

19

20

10

13

126

15

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4.03.53.02.52.01.51.00.50.0-0.5-1.0-1.5-2.0-2.5

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017


Global GDP is rebounding


6

4

2

0

-2

-4

-6

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

Investment growth regains momentum

3.1 5.1 3.7USA

7.5 7.5 4.2China

1.9 2.3 0.5Other Europe *3

1.3 1.0 1.7Japan

1.7 2.2 -1.4Germany

4.8 6.2 2.9Other Asia-Pacific *6

1.6 2.4 -0.3France

2.5 4.6 1.7United Kingdom

4.1 4.1 1.9Middle East *9

3.6 4.5 4.0Brazil

1

2

3

4

5

6

7

8

9

10

3.3 4.9 2.3Russia

3.7 4.8 2.8Other Latin America *12

6.8 8.1 6.2India

11

12

13

2.6 2.6 5.0Canada14

2.8 2.9 1.9Australia – New Zealand15

5.2 6.3 3.2Africa *1919

3.9 5.0 2.8Poland20

2.0 2.9 1.5Nordic region *16

4.0 3.9 -1.3Mexico

3.5 2.6 2.6South Korea

16

17

18

*3: Austria, Belgium, Bulgaria, Czech Republic, Greece, Hungary, Ireland, Italy, Netherlands, Portugal, Romania, Slovak Republic, Spain, Switzerland, Turkey, Ukraine

*6: Bangladesh, Hong Kong, Indonesia, Malaysia , Pakistan, Philippines, Singapore, Sri Lanka, Taiwan, Thailand, Vietnam

*9: Bahrain, Egypt, Iran, Israel, Jordan, Kuwait, Qatar, Saudi Arabia, United Arab Emirates

*12: Argentina, Bolivia, Chile, Colombia, Costa Rica, Ecuador, Honduras, Jamaica, Panama, Peru, Uruguay, Venezuela

*16: Denmark, Finland, Iceland, Norway, Sweden

*19: Cameroon, Kenya, Morocco, Nigeria, Senegal, South Africa, Tunisia, Zimbabwe

3.0

2.5

2.0

1.5

1.0

0.5

0-0.5

-1.0

-1.52008 2009 2010 2011 2012 2013 2014 2015 2016 2017


Oil & gas rising even as growth slows in China

Source: IHS

2014

$55.51 $61.28 $13.08 $15.08 $1.63 $1.75

2017 2014 2017

GDPUSD trillions

Capital investmentUSD trillions

Oil & GasUSD trillions

2014 20172014

$5.77 $0.12$2.00

Real GDP, capital investment and oil & gas output compounded average annual growth rates, 2014-2018, of the 20 largest countries and regions ranked by contribution to world growth.

WHERE’S THE GROWTH?GDP

Capital investment

Oil and gas output

Regions


NUMBERS

39,044Number of non-militant fatalities worldwide in 2013 attributed to non-state armed groups

Global defense trade in 2013

US$

67billion

80%

15.47Average speed (in knots) of container ships in 2014, down 16% from 2007

Estimate of global GDP generated by cities, according to the World Bank


Number of barrels of ethane produced in the US per day in excess of domestic needs

1/8Proportion of global nominal GDP represented by China’s economy

10xAmount by which annual global unit production of EVs will grow by 2021

300, 000

61Global annual smart city investments expected by 2025

Duration, in years, of Taiwan’s post-Second World War economic boom, during which it averaged 8.7% annual GDP growth

68Countries included in the IHS Global Link Model econometric simulation tool

US$

12.2billion

So

urc

e: IH

S

10,301,911,786Projected metric tons of seaborne trade globally by 2017

96%Energy’s share of a factory electric motor’s lifetime operating costs


SPOTLIGHT

Atul AryaSenior Vice President, IHS Energy

Energy competitiveness: The dawn of a new era?Competitiveness is a perennial hot topic in corner o�ces and boardrooms around the world. Countless volumes have been written to analyze its source and o�er advice on how to achieve it. Recently, the topic of “energy competitiveness” has received a flood of attention, in large part because of the “Shale Gale” that has swept Canada and the US. This unconventional oil and gas revolution has revived US oil production and led to a decline in domestic energy prices.

What are the reasons the US is now on a path to becoming an energy superpower? What are the wider implications? And can this be replicated around the world? IHS is at the forefront of analyzing this revolution—and its economic, environmental, and geopolitical implications—to answer these questions. We do this through the collaboration of hundreds of IHS experts across a wide spectrum of industries and disciplines, including automotive, chemical, country risk and security, economics, energy, and supply chain.

Abundant, cheap domestic energy has been a major engine for US economic growth since the Great Recession. Today, the US exports natural gas, coal, and refined products and we expect liquefied natural gas and crude oil to follow before the end of the decade. The country’s dependence on energy imports is decreasing rapidly. Energy-intensive industries such as petrochemicals are undergoing a major revival in the US, with significant manufacturing capacity additions in the pipeline. Upstream unconventional oil and natural gas activity will support 2.5 million jobs in 2015, 3 million jobs in 2020, and 3.5 million jobs in 2035. We expect that unconventional oil and natural gas activity will generate more than US$2.5 trillion in cumulative tax revenues between 2012 and 2035.

A recent IHS study concluded that lower energy prices from unconventional oil and gas have raised US international competitiveness because of lower energy costs. For example, US power prices are half those in Germany. There is increasing pressure on governments in Europe and elsewhere to close this gap by creating the political and regulatory environment to replicate the experience in North America.

How quickly other countries catch up depends on whether they can address both above- and below-ground challenges to create an ecosystem similar to that of the US. IHS will continue to analyze the trends and data to provide insight to our clients as this “energy competitiveness” story unfolds.

bit.ly/AtulArya

http://bit.ly/AtulArya

CONGRATULATIONS TO THE EUROPEAN IHS SPECTRUM EXCELLENCE AWARD WINNERSThese seven winners are honored for achieving critical business objectives

through outstanding use of information, analytics, and expertise.

Since 2006, the IHS SPECTRUM Excellence Award program has

spotlighted hundreds of companies and public agencies for their use of

innovative information and insight solutions to achieve business goals.

Nominations are now open for the second round of awards.

For information about the European award winners’ accomplishments

and how other companies around the world – including yours – can enter,

visit: www.IHS.com/SPECTRUM-Awards

or email: [email protected]

Industry information and expertise…

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Every decision matters.

That’s why leaders rely on IHS to help them make the best choices.

As the premier provider of global market, industry, and technical expertise, we understand the rigor that goes into decisions of great importance, guiding them with thinking that matches the scope of their needs.

IHS… when decisions matter

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