Let us take Toyota as the best example of efficiency. The "pull model" (also known as Toyota Production System) is in essence a lean system that focuses on efficiency as it responds to natural demand. The books I have read focus primarily on cost effectiveness, producing what the market demands, and establishing a rapport with various suppliers to ensure just in time (JIT) delivery. They have been marketing their process through academics like Deming who both studied and taught the Japanese how to do this beginning in 1959 and then tried to teach the US for decades. The logic of their methodology has gained a lot of ground since the days of World War II. One might simply look at the NYSE to see all the Asian companies trading alongside blue chip American companies. Despite their recent success, it seems that they are hungry as ever. We are witnessing dynamic changes in 2011 with smartphones, tablets, iPads and super thin laptops.
Another interesting story is the alternative "push model", which is the creation and supply of technology without market demand. It usually leads to an inefficient production process and an inventory glut, such as in the solar industry. The story began in certain European government subsidy programs like in Germany. They created the artificial demand that spurred companies in both the US and Asia to build a huge quantity of solar panels. The American version was laced with cancer causing cadmium in their photovoltaic thin film technology, while the Asians produced the traditional solar cells. The target market for the manufacturers were various European subsidy programs that were growing in popularity prior to the scandals of the fiscal fiascos. Later, the rating agencies announced their respective downgrades of Greece and Ireland, and the rest of the dominos began to fall across the continent. Suddenly, the IMF and the World Bank decreed that fiscal austerity would lead to cutbacks of solar subsidies. It was amazing watching the industry lobbyists scramble for alternative sources of artificial demand. Suddenly, a senior manager of an American solar company wins a seat in the Department of Commerce in President Barack Obama's administration. At first they tried to get finance from the federal government, after that failed miserably they tried to lobby individual states. Of course, this was prior to the announced bankruptcies of the municipal bond insurers MBIA & AMBAC.
It is actually quite an amazing tale of corruption and a lack of foresight. Imagine you are a state in America that derives its revenue from a variety of taxes. Let's assume you have municipal revenue bonds that were sold based on the assumption that revenue from electricity bills would cover the bonds; thus making it a safe bet. On the other side of the story, the solar industry continued to innovate its technology with the funding of the artificial demand by the various government subsidies. The innovation was a "plug & play residential solar panel." This new innovation can literally cannibalize the utilities sector with free electricity. It can literally wipe out the forecasted revenue on the municipal bond, and lead to its subsequent default. Keep in mind that the municipal bond was insured by the now bankrupt insurance company MBIA and AMBAC. The end result is that the artificial demand for the solar products that were subsidized by the States literally bankrupted the States and their respective insurance companies.
The huge inventory of solar panels in both the US and Asian manufacturers merely represents a bad investment on the balance sheets of those respective companies. Let's span the globe and check the other markets for the viability of these products. In the GCC we can take a look at infrastructural initiatives being undertaken by the Saudi utility companies. They just issued a series of Islamic bonds called sukuk that are all forecast to collect their revenues off of the consumer's electricity bills. Another example is in Dubai with the nuclear energy agenda, which is also heavily capitalized by debt and equities. Much like the problem in the USA with the municipal bond defaults, both are vulnerable to innovations in the solar industry. From our perspective at The KIN Consortium we see the prices of solar panels dropping dramatically, as soon as the inventory glut gets close to bankrupting solar companies. On the other hand, once the "plug & play residential solar panel" solution arrives in the Middle East with the euphoria of cheaply installed free energy, we anticipate some dramatic impacts on the outstanding sukuk debts of related GCC projects.
Whether we are dealing with natural demand and the pull model, or artificial demand and the push model, our research at The KIN Consortium sees manipulation in the free markets at the highest levels. It is amazing how the sheer implication of a government subsidy can open the doors to the financial markets. The solar industry literally raised trillions of dollars from the financial markets, even though a huge percentage of the government subsidies failed to materialize. We are living in interesting times.
(Khalid I. Natto ([email protected]) is chairman & CEO of The KIN Consortium)