A Tale of Two Electric Cars

As Trade and Industry Minister Rob Davies mulls how to foster a domestic electric vehicle (EV) industry,  here’s a tale of two projects in the US.

One will declare bankruptcy any day now, reinforcing the dictum of Larry Summers, President Bill Clinton’s last Treasury Secretary,  that government is a “crappy venture capitalist”.  The other, led by an entrepreneurial prodigy from Pretoria Boy’s High, will tomorrow announce its first profitable quarter, and could conceivably do for battery power what the 1886 Benz Patent Motorwagen did for internal combustion.

The Fisker Karma,  a petrol-electric hybrid sports car with super spiffy styling and a price tag north of $100 000, has become the latest exhibit in the Republican effort to brand President Barack Obama as a crony socialist doling out taxpayer dollars to supporters who think they can do better than Adam Smith’s hidden hand.

The Karma’s karma was terrible from moment cars began rolling off the production line in Finland in 2011. The things caught fire, which, as Boeing recently discovered,  is what happens when lithium-ion batteries short out.  Consumer Reports bought one  at full price to test drive.  It  was dead on arrival. “This is the first time in memory that we have had a car that is undriveable before it has finished our check in process.” There have been endless recalls.

The Karma was made possible by a $529 million low interest credit line extended by the Department of Energy (DOE) under a programme signed into law by President George Bush in 2007. Armed with this and celebrity endorsements from Leonardo diCaprio, Justin Bieber and Colin Powell,  Fisker Automotive was able to raise $1.1 billion in private investment, nearly all of which has now  gone up in smoke.

The largest backer was the Silicon Valley venture capital firm Kleiner Perkins Caulfield Byers, whose partners include former Vice President Al Gore, and which orchestrated $530 000 worth of political donations in the 2012 election cycle. Republicans see this and the DOE credit line as connectable dots, but evidence is wanting.

The department turned off the spigot with only $171million disbursed after Fisker failed to meet agreed milestones. The company’s founders were good at the wrong things. Their brilliance lay in body design not the technology under the hood, all of which had to be outsourced, along with assembly,  in piecemeal fashion.  That led to reliability and supply chain nightmares,  including the bankruptcy of the Karma’s battery maker, A123. The last hope was to find a Chinese buyer. None bit.

Elon Musk and Tesla Motors also received a DOE credit line -- $465 million – and have put all of it to work.  Their current offering, the Model S, a pure plug-in with a range of 500 kilometres in clement conditions which sells for around the same as a BMW 7-series,  is rolling off an assembly line in Fremont California at a rate of well over 1000 a month.  It can be ordered online. The wait is two months.

Notwithstanding a hugely negative review in the New York Times last February – the reviewer was stranded after misjudging his battery use  – Tesla’s share price has been climbing steadily, closing last Friday at $55.44 a few cents shy of its all time high at the end of April.  Its market capitalization stands at $6.25 billion.

Musk is one of the great disrupters in an age of disruption. He cofounded Paypal, revolutionising online commerce. With SpaceX, he has become NASA’s new Wernher von Braun, upending the space launch business. He is chairman of SolarCity which is doing for solar energy what Henry Ford did with the Model T. 

At Tesla, he has developed a line zero emissions cars with decent range which are starting to outsell conventional high-end brands like the Mercedes S class and which could, as production costs fall, soon start to be priced on a par with mid-range BMW’s and General Motor’s electric plug-in hybrid, the Volt. Add to that a growing network of solar powered charging stations that can give the Model S juice for 150  miles in 30 minutes, and you have the makings of a game changer.

Or would, were not the game itself also changing. The biggest downside risks for the Tesla are posed by a combination of the shale oil and gas revolution,  improvements in the efficiency and environmental friendliness of combustion engines and loss of government subsidies.  Barring a major breakthrough in battery technology or  a massive jump in fossil fuel prices – fed, perhaps, by a backlash against fracking --  the electric car looks likely to remain a niche mode of getting from A to B

Shadow Economy

Here is a puzzle. US unemployment remains stubbornly high by pre-recession standards at 7.6%. The overall workforce participation rate continues to fall. Real income growth remains flat. Yet retail sales go from strength to strength. Where is the purchasing power coming from?

Bernard Baumohl, chief global economist of the Princeton-based Economic Outlook Group, has an intriguing explanation. What we are seeing, he thinks, is a growing underground economy which, if it were possible to include it in the official statistics, would push unemployment down to around 5 per cent. That is where, historically, it ought to be at current levels of personal consumption.

"We're not talking about illicit activity, like selling stolen goods or drugs," Mr Baumohl wrote in a March research note that is attracting a lot of attention. "It's largely work where millions of unemployed have managed to earn cash "off the books" by repairing computers, doing carpentry or handyman work, selling goods at flea markets, tutoring, housecleaning or using their car as a private delivery service."

How much income is not being reported to the Internal Revenue Service? Something on the order of $2 trillion annually, the University of Wisconsin's Prof Edgar Feige, a leading expert on shadow economies, concluded in a 2011 paper.

That would put the gap between what the IRS is owed each year and what it actually receives at $450-500 billion, enough to halve this year's projected budget deficit , and more than the entire GDP of South Africa. The IRS’ own calculations, most recently for 2006, had the gap at $385 billion.

As dire as that sounds, several studies have found American taxpayers more likely to cough up what they owe on time than their European counterparts. The IRS reckons the US tax compliance rate was 83.1% in 2006. The Vienna Institute for International Studies has estimated compliance in the UK, France and Germany at 77.97%, 75.38% and 67.72% respectively.

A cash economy requires physical cash, obviously, and for all the talk of the US becoming a cashless society, the opposite seems true. Until recently, it was received wisdom that around two thirds of greenbacks in circulation were located offshore. Prof Feige, using previously confidential data provided by the New York Federal Reserve, demonstrated in a separate paper last year that fully 77% of US currency remains at home, roughly $750 billion or $2250 per capita.

A lot of that may really be in people’s mattresses. The Federal Deposit Insurance Corporation reported in September last year the 10 million American households – one in 12 – were entirely unbanked. Another 24 million – 20 per cent -- were “underbanked”, meaning members had deposit or saving accounts but relied on “alternative financial services” like non-bank check-cashing services and pawn shops.

If Baumohl is right, and growing numbers of Americans are operating in what Prof Feige prefers to call the “unreported” economy, is this a cyclical product of recession or structural, and if structural, what’s driving it? Are people bailing from the formal economy because they want to or because they have to? Here the debate heats up.

Certainly it has become cheaper for employers to rely on independent contractors responsible for their own pension contributions, Social Security taxes, health insurance and the like. The New Yorker’s James Surowiecki cites a recent survey of 300 000 California construction firms which found that fully two-thirds had no employees even though most clearly gave work to many.

However, there is little incentive for a legitimate company that hires independent contractors to hide what it pays them from the authorities. Such payments, to be deductible from the company’s taxable income, must be reported to the IRS on Form 1099 – which the taxman then uses to make sure contractors also pay what they owe.

John Mauldin, a well-known financial commentator to the right of spectrum, advances a provocative theory in his latest Thoughts from the Frontline newsletter. He sees a connection between the underground economy, the minimum wage and swelling welfare rolls.

Welfare recipients, he argues, have an incentive to work off the books in order to remain eligible for income support and free healthcare.

“If you have a skill that pays you $20-30 an hour (closer to the median family income pay level) you are better off keeping the job and staying off welfare. But if you are minimum-wage labor ( around $10 an hour) or not far above it, the equation works out better if you work off the books for that extra income.”

 

Posted with Blogsy

View from my window

The good folks at the New Yorker hotel upgraded me to a room with a balcony on the 38th floor when I checked in on Friday for the South African consulate's Freedom Day celebration up the road at the Marriot Marquis on Times Square. This was the view to the east. Below is the view to the south that night. I always take the train to New York from Washington and if I am overnighting will try to stay near Penn Station. I like the New Yorker or the Affinia, both old but recently renovated. The Hotel Pennsylvania is an option faute de mieux, but the sheets are thin, the plumbing dodgy and the bed bugs legion.

 

Posted with Blogsy

A stake through the heart of the Alien Tort Statute

In 1821, the captain of a US warship off West Africa ordered his crew to seize a schooner, La Jeune Eugenie, for transgressing Congress' ban on the international transport of slaves.

The French owners demanded their boat back protesting they were not subject to American law. US Supreme Court Justice Joseph Story, an ardent foe of slavery, ruled against them, but not without misgivings. What gave him pause was the idea of the US assuming the role of global policeman.

"No nation has ever yet pretended to be the custos morum (guardian of the morals) of the whole world," he wrote.

Chief Justice John Roberts quoted these words approvingly last week as he drove a stake through the heart of the US Alien Tort Statute (ATS), or, more precisely, the interpretation of it that has encouraged lawyers for victims of injustice everywhere -- from Latin America to Africa to East Asia -- to treat American courts at the ultimate custodes morum.

While split 5-4 in their reasoning, Justice Roberts and his eight colleagues ruled unanimously that a federal court in New York had no business hearing Kiobel vs. Royal Dutch Petroleum, a case brought by members of Nigeria's Ogoni community alleging Shell's complicity with government atrocities in Nigeria's oil patch.

This was good news for MTN. Turkcell is relying heavily on the ATS in its vendetta against the South African telcoms giant for winning Iranian business to which Turkcell feels more entitled. Less pleased is the Khulumani Support Group whose quest for apartheid reparations from Ford, IBM, Daimler and others may now be at an end.

Its origins mysterious, the ATS has been called the Lohengrin of American law. Adopted by the first Congress as part of the Judiciary Act of 1789, it states that federal courts "shall have original jurisdiction of any civil action by an alien for a tort only, committed in violation of the law of nations or a treaty of the United States".

For the next 191 years, the ATS was largely forgotten. Then, in 1980, a federal appeals court in New York agreed that it conferred on a Paraguayan torture victim the right to sue his torturer in the US.

That opened the door to a slew of litigation, including, from 2002 on, efforts to obtain billions of dollars from companies all over the world for abetting apartheid. These suits were opposed by President Mbeki as an assault on South African sovereignty, but encouraged under his successor.

What Congress seemed to have had in mind in 1789, Justice Roberts wrote, were a couple of embarrassing incidents -- one in 1784, the other in 1787 -- in which French and Dutch envoys were subjected to indignities in the US from which the "law of nations" was supposed to protect them.

So, on its face, the ATS exists simply to clarify the legal procedure to be followed in such cases: you're a foreign ambassador covered by treaty and international law, someone does you a harm, federal court is where you go to be made whole. Nothing in the statute says it applies in equal measure to torts committed on and off US soil.

Relying on the Supreme Court’s own precedents that no law can be enforced extraterritorially unless Congress specifically says so, Justice Roberts found that the ATS does not give federal courts jurisdiction over violations of international law committed outside the US.

"There is no indication that the ATS was passed to make the United States a uniquely hospitable forum for the enforcement of international norms," the Chief Justice held. It was implausible, he continued, that the fledgling American republic, in desperate need of allies, would have recklessly declared itself the world's first "custos morum".

Debate continues on how hard the Supreme Court has shut the door on ATS cases like the apartheid reparations and MTN matters. In both the judges suspended proceedings until the Supremes ruled on Kiobel. It will be interesting to see whether they now dismiss or agree to test whatever wriggle room the decision has left.

At minimum Turkcell and Khulumani would have to persuade the courts that a substantial portion of the criminal acts they allege occurred in the US. That could be hard.

Khulumani's Marjorie Jobson does not sound hopeful, writing on the organisation's website: "One last hope...seems doomed to be extinguished through the triumph of corporations in asserting their power to influence the courts".

Turkcell didn't sound quite so ready to admit defeat, noting enigmatically that it had "already provided the US district court with a detailed description of MTN's extensive business dealings in the US supporting personal jurisdiction."

Posted with Blogsy

A quick first take on the Boston bombs

Business Day called the morning after asking for a quick  600 word oped. Here's the not terribly wonderful result:

Beyond the lives and limbs shattered in Monday's Boston Marathon bomb blasts it was far easier to see what didn't happen than to know what did.

A little boy's life cut short because he was there at to hug his father at the the end of the race; his sister left an amputee; his mother's brain damaged by flying debris or deliberate shrapnel. To think on these things is to stifle a sob.

That said, with three dead, total casualties edging slowly towards 200 and the city's physical fabric relatively unscathed, this was not what happened 300 kms to south in New York on September 11, 2001.  That day Islamic jihadis left 3 000 dead and triggered what was as much of a turning point in American history as December 6th, 1941, Pearl Harbor.

Nor was this April 19, 1995, in Oklahoma City, when Timothy McVeigh, a creature from America's strange paranoid fringe, detonated 2 200 kgs of ammonium nitrate -- fertiliser -- outside the Murrah Federal Building, killing 162.

Nor was this what happens almost daily on the streets of Baghdad, Damascus and Kabul, leaving mutilated bodies to be counted in double and triple digits.

If April 15, 2013, found an immediate echo anywhere, it was July 27, 1996, the day another homegrown extremist, Eric Robert Rudolph, tried to disrupt the Atlanta Olympics with a pipe bomb that left one dead -- a mother who had brought her daughter to the games as a birthday present -- and 100 wounded.

Rudolph, when he was finally caught in the Appalachian mountains in 2003, said he had meant to bring the Olympics to a halt to protest the legalisation of abortion.

The Games went on. So, next year, will the Boston Marathon as much of an international institution in it own way as the Olympics -- to which the flags that that fluttered on the endlessly replayed blast footage bore eloquent testimony.

The tragedy will be marked, the victims remembered, at least for a few years, but memories will fade as they did in the Atlanta case.

Which is as it should be, in many ways. The perpetrators of such acts do not deserve the satisfaction of thinking they have earned an indelible spot in the public's consciousness.

In that respect, President Obama's measured statement on Monday  afternoon was apt. Presidents are expected to hold the nation's hand at moments like this,  to comfort the grieving and assure them that justice will be done, but this president clearly did not want whoever was responsible to get a kick out of interrupting his day.

Obama avoided calling the bomber(s) terrorist(s). To do so would have been to allow that they had inspired terror and thus succeeded, however briefly, in achieving some sort of mastery.

The Boston bombs went off just as I was boarding Jet Blue flight 197 from New York to Chicago. The Embraer 190 came equipped with tv screens on the back of every seat. Throughout the flight, passengers were able to watch continuously looped blast footage and listen to the breathless commentary that accompanied it on the news channel of their choice.

You might have expected the sight of bombs going off and reports of heightened security in cities and airports to create a bit of a buzz aboard a packed aircraft. But no one seemed very exercised. Most found reruns of Friends or whatever they had on on their Kindles more to their taste.

As of yesterday morning on the US east coast, the identity and purpose of whoever placed the bombs remained a matter of conjecture, but there was one intriguing coincidence to conjure with: April 15 was not only Patriot's Day in Boston -- the public holiday on which the marathon is always run -- it is also the federal tax filing deadline, an infamous day for the paranoid American fringe who think government is coming in black helicopters to take away their guns.

Too Diverse

South Africa is Mandela and Marikana, miracle and mayhem, ubuntu and femicide,  Square Kilometre Array and Limpopo textbook scandal, King III and corruption, a member of BRICS but not, in the Goldman Sachs sense, a BRIC. It has an identity problem.

So does South African wine, certainly in the US where not only is the stuff still relatively hard to find, it comes in so many varieties and permutations  that even knowledgeable imbibers are perplexed by it.

And that, says Wines of South Africa’s dynamic new US representative, Annette Badenhorst,  is a big part of why it has struggled to gain a foothold here since sanctions were lifted in 1991. “There is not something you can distill out of our offering and say “Voila! This is South Africa!” We are so diverse, and that is what the trade finds confusing.”

South Africa’s share of US imports reached a high of 1.2 per cent by customs value in 2012 with help from big US brands like Kendall Jackson buying bladder-loads to blend into generic plonk. 

In bottled form, the US (by its own count)  imported 990 000 cases of South African last year, down from a high of 1.1 million in 2007, but well up on 150 000 in 1996. Contrast that with imports from Argentina, which went from 215 000 cases in 1996  to 6.8 million in 2012, and New Zealand -- 27 000 to 2.8 million over the same period.

What magic did Argentina and New Zealand possess that South Africa does not?  A simple selling proposition based on two grapes is one quick answer. 

Though their popularity may be peaking, Argentine Malbecs  and Kiwi Sauvignon Blancs have become hugely popular here. Non-expert consumers trust they will get value when the cork is drawn, whatever the winery.

 Sheetz, a chain of petrol stations, is selling a line of six South African wines, including a pinotage rose, as Wildlife, with the slogan: “Track down your inner party animal!” This critic would add: “And when you’ve found it,  you can poison it with the cabernet.”

More enticing  is the Seven Sisters line created by Vivian Kleynhans and her Paternoster siblings which Wal-Mart is starting to stock in 300 US stores. The initial choices include a pinotage-shiraz called Dawn, a bukettraube called Odelia, and Carol, a cabernet sauvignon.

KWV has introduced African Passion,  a seven-wine range  for African-Americans,  and has promised TransAfrica Forum, the old anti-apartheid lobby, 10 per cent of the profits.  Makaziwe and Tukwini Mandela  are extending the  brand with the Royal Reserve and Thembu Collections from the House of Mandela.

Then there are the wines – the majority --  that sell more strictly on the basis of what’s in the bottle, without a story or a tagline. An estimated 18 importers,  each representing different wineries,  and some little more than mom-and-pop operations, are involved.

Getting  wine from importers to market is a challenge.  Under rules hanging over from Prohibition, importers can only sell to distributors. The latter are loath to take on inventory unless  confident they can turn it over quickly either in volume or at a respectable mark up.

Such confidence has been hard to build. Stonebridge, a market research group, recently interviewed 55 key US distributors, wine store owners, hotel and restaurant managers. What they said about  South African wine is sobering.

Only three were more or less positive. “Nearly every other account said they could not sell it”. Comments included: “has a cheap image”, “has no traction”, “have had some good wines, but there are too many bad wines”, “wish they would give up on Pinotage”, “too many cute labels”, “expensive to ship.”

Master sommelier Fran Kysela , a well-known US importer based outside Washington, begs to differ.  A native of Cleveland, Ohio, he  is a new and passionate  convert to the South African category. He holds braais – with skilpadjies and bobotie, nogal – to promote it though it accounts for only a fraction of his business.  He takes wholesalers and retailers to South Africa at his own expense.

In 30 years he has sold over $300 million worth of wine.  He added South Africa to his line-up in 2010. Last year he sold 14 329 cases. He would like do 50 000 annually and thinks that all told the US market could take 5 million, about where Spain is now.

South Africa, he says, needs a Len Evans. Evans, an Englishman revered in Australia as a founding father of its modern wine industry,  persuaded Australian winemakers to  play nicely together.  Australia today trails only Italy as a source of US imports.

Can the US and China complement each other in Africa?

While China’s  president Xi Jinping was non-interferingly  inking deals in Africa last week on his first overseas foray as head of state, his American counterpart, Barack Obama, had four African leaders around to the White House for a pat on the back and a quiet chat about democracy, governance and how, in the US view,  they lay the foundations for economic success.

The four were Senegal’s Macky Sall, Malawi’s Joyce Banda, Sierra Leone’s Ernest Bai Koroma and Cape Verde’s Jose Maria Pereira Neves.  “The reason that I’m meeting with these four,” Mr Obama said, “is they exemplify the progress we’re seeing in Africa.”

The president did not have to give a reason.  He could simply have said the four were exemplary, but he made the implicit explicit, in counterpoint to Mr Xi’s line upon his arrival in Tanzania: “China will continue to offer the necessary assistance to Africa with no political strings attached.”

“The African lion is galloping faster and faster,” said Mr Xi.  Mr Obama chose his words more carefully.  “Although Africa has actually been growing faster than almost every other region, it started from a low baseline and it still has a lot of work to do.”

That meant “building human capacity and improving  education and job skills for rapidly growing and young populations”.  It also meant “improving access to energy and transportation sectors”.  How, the president wanted to know, could the US “continue to partner effectively with his guests on such issues”.

Mr Sall later told French radio he had suggested that Mr Obama “take a major initiative…as the Chinese are doing, as the BRICS are doing.” In his own public remarks, Mr Obama mentioned neither Mr Xi’s visit nor  the BRICS summit in Durban.

A reporter raised them at one of State Department’s daily noon briefings, evidently hoping to advance the narrative of Sino-US rivalry in Africa. Did Mr Xi’s itinerary “raise your concern in terms of a closer Chinese and Africa tie.”

The Chinese, replied spokesmen Patrick Ventrell, “will continue to work with a wide number of different countries on their own interests, but we’ve got a positive agenda of our own.”

Reporter: “What is your agenda?”

Spokesman:  “We want partnerships with all of these countries and we’re looking to promote democracy and sustainable development and really a new way forward for some of these countries to lift themselves out of poverty and to treat disease, and these are sort of our main priority.”

Reporter: “Is the United States in competition with China in Africa?”

Spokesman: “I don’t know if I’d phrase it that way.”

Senator James Inhofe, then the senior Republican on the Foreign Relations Committee’s subcommittee on East Asian and Pacific Affairs, last year asked the Government Accountability Office, a non-partisan watchdog agency,  to compare US and Chinese economic engagement south of the Sahara.

Deborah Brautigam, author The Dragon’s Gift: The Real Story of China in Africa, hailed the GAO’s report when it was released in February as “by far the best single analysis I have seen”.  So it is worth downloading from the web.

It is not prescriptive, but what it does make clear is that Chinese and US objectives in Africa are not intrinsically in conflict. Both share an interest in seeing Africa grow as a market for their goods and services and in this respect their differing approaches may complement each other. If anything, the relationship is increasingly symbiotic.

 Allowing that Mr Obama is right about the links between governance, education, peace,  public health and prosperity, Chinese business essentially gets a free ride from the emphasis  the US and other “colonial” donors place on such matters. But it can also be argued that the infrastructure China is financing and building is creating opportunities for everyone else.

The report focuses on three countries, Angola, Kenya and Ghana, where it finds that direct competition between US and Chinese firms has been limited.  China may be heavily invested in Angolan oil concessions, but US firms are the primary operators.

One sector where competition is stiff  is information technology in Kenya, especially.   Also, there is “anecdotal evidence” that US companies  have simply ceded the field to China on major infrastructure projects. But there is also collaboration in this area. Chinese companies have won construction contracts in Ghana financed by the US Millennium Challenge Corporation.  The US and Chinese Export-Import Banks last year agreed to partner in financing a water supply and road deal in Ghana.

And to the extent that African countries make use of African Growth and Opportunity Act’s third country fabric rule – under which clothing sewn in Africa from cloth sourced anywhere – Chinese firms benefit as suppliers of fabric and owners of the plants that turn it into polo shirts for US consumers.