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Wednesday, 19 May 2010

My iPad fantasy

Sunday was good; in fact it was better than good, it was sensational. I spent the morning in bed with a rather toothsome new friend. Outside it poured with rain. Perfect, we didn’t need to go anywhere because I was having more fun running my hands over her curves.

 She’s slim; even sleek, and she is so damn responsive when I stroke her. When I clasped her I felt a buzz, a thrill. This, I thought, is definitely the one for me. She was so beautiful, like she might have fallen out of an alien space ship. What I mean is, she looked like she came from the future. A celestial future, where everything is perfect. 

Yes, over here in London, I  managed to get its hands on an iPad for the weekend ahead of the official launch. The publishing industry has taken to calling it the Jesus Tablet and if you ever get your hands on one you too will get that surge of faith, you will see, touch and believe. You’re doubtful I can tell, but I have an advantage over you - I’ve already used one.  Over the last few months The Mash has talked often about the iPad and even suggested that it will revolutionise media and the web. Here’s the scoop, that may be an understatement.

The point I am making with the purple prose and fevered day dreams is that the iPad changes your experience of the internet. With an iPad you consume content, rather than surf the net; the experience is sensual and absorbing. One reason for this is that absence of a keyboard means that you can hold it in one hand like a book, or magazine. You are going to find this so much more comfortable than cradling  a PC in your lap. For starters, it reduces those aches and pains you get from staying on a key board too long. With an iPad you can lie in bed; or crash out on the sofa and experience the web in comfort. As more of us spend our leisure time communicating on social networks, adding pleasure and ergonomics to the equation is something of a great leap forward.

In a year or so when the price has dropped by a third, or a half, The Mash suspects  households will buy several. If you think that’s a bit rich, look at the
chart above, which is of US TV ownership. More than half US homes now have three or more TV sets. The iPad’s screen is sensational, so viewing videos is much more fun than on a PC. To tell you the truth, now that I have experienced the iPad I am not so sure there is much of a future for Amazon’s Kindle. As far as most homes go a device like an iPad has many more uses than either a TV or a computer, but most of all it is personal. Just like with mobile phones, the Mash suspects that consumers are going to become wedded to their iPads.

This might seem like hyperbole but just as Avatar has changed people’s expectations of film so the iPad will change our expectations of the internet and digital content. In two or three years, when the price is closer to two hundred dollars, devices like the iPad will take the emerging markets by storm and when they do the consequences will be profound.

Within the next five years the Mash suspects that a whole generation of children will have their first experience of reading on an electronic device such as the iPad. They will grow up imagining books and newspapers as digital. You might disagree and speaking as someone who owns a rather substantial library, it is with some regret that I write these words. Yet, let’s not forgot that once books used to be on lumps of clay, then they moved to papyrus, or where even chiselled into sheets of copper. No doubt there were those who moaned when the first paper back appeared. In each turn of the evolutionary cycle Marshall McLuhan’s famous dictum operates: The medium is the message. In other words, the medium through which content is presented changes the consumer’s experience of that content. The iPad brings the power of digital technology and the breadth of the internet and marries it into a desirable and useful object. The iPad will become a talisman, a treasured object with almost magical power.

What a difference 85 years makes

The chart above plots the concentration of wealth in the US. As you can see, we are back to the levels last seen in the Jazz Age, when F. Scott Fitzgerald was America's most celebrated writer. My goodness, what an innocent time that must have been. Today, Cormac McCarthy harrowing tale the Road is the big hit - Go Figure!

Monday, 10 May 2010

Chinese Property and Tech Demand

Lets begin with what we know: China’s appetite for high tech gadgets is exerting a mighty influence on global demand. The recent results from Samsung Electronics, Asia’s leading technology company, give one reason why. The South Korean giant estimates that China’s flat screen TV market is now as large as America’s, and is doubling. 
Industry wide smartphone shipments were up 50% in the first quarter and as Apple’s astonishing first quarter results demonstrate, China is making its weight felt. iPhone sales in China were up 900%.  China is also having an impact on the PC market. It is likely that close to 350 m PCs will be shipped this year, a 17% gain on 2009. As the recent results from Microsoft and Intel illustrate, consumer demand in both China and other emerging markets has more pull than Western corporate buyers. Yet it will serve investors well to remember an old stock market adage: news follows share prices.
China’s stock markets have been among the worst performing indices this year. On queue over the last few weeks concern has risen about the nation’s property market and slower economic growth during the second half of the year. Some analysts are citing a drop of 40% in property transactions during the second quarter, in some of the largest cities. There is also the realisation that the shockwaves spreading out from Greece might hit China. 
A quarter of China’s exports go to Europe. Yet the Euro has been sliding against the dollar, as the markets worry that growth might falter.  China pegs its currency to the dollar, which has been rising against the Euro and so making its goods more expensive.  
China’s Property Market
Late last year Jim Chanos, one of the world’s leading short sellers, began voicing concern that China’s property market was in a bubble. You do not have to look very far to see that he has a point: last year, according to Morgan Stanley, sales of residential property were up 87%.  There can be no surprise then that residential construction has also taken off, rising some 20% according to CLSA. It is still expected that growth will be of the same level this year. 
With low interest rates and limited opportunities for alternative investments, property speculation is a popular way to make money. Particularly, as buyers of second homes were offered mortgage discounts. Chinese state enterprises have also been encouraged to join the property market. In a report earlier this year CLSA estimated that nearly a fifth of recent properties bought were kept vacant.
However, China’s many bulls will point out that the picture may not be quite as dire as critics, such as Chanos, make out. The four leading cities, Beijing, Shanghai, Guangzhou and Shenzen only represent 9% of the urban population and 8% of property sales by floor space. There are a 150 other cities with  populations of at least a million. When it comes to floor space, China’s second tier cities represented 33% of residential sales last year. Prices in these cities are 60% below the tier one cities. In the third tier of cities prices are 74% below places like Beijing and Shanghai.
Another encouraging feature of the Chinese property market is the high proportion of cash transactions. The ratio of consumer debt to GDP in the country is just 17% compared to 95% in the US. Mortgage loans as a per centage of GDP are also low when compared to that of the Anglo Saxon economies. In China the figure is 14% compared to the US, where it is just below 80%. All the same, the cost of servicing a mortgage for the average family is 43% of income, according to Morgan Stanley estimates. 
A Bear in the China Shop
China’s bulls have many convincing arguments, but so far this year, Chanos’ view has been the more accurate. He pointed out that investors ought to focus their attention on international stocks that were exposed to China’s infrastructure and building markets. In other words, steel and cement. In the month to 7 May, the SLX steel ETF had shed 18%, and Cemex, one of the world’s leading cement companies, lost almost 14% last week.
Falls like these, in combination with the growing nervousness shown by some of the analysts and strategists who follow China, give us reason to be nervous. Yet, for the time being, most of the evidence from the tech sector has been very upbeat. However, if the Chinese property market is weakening as some say, there is still time for the shock waves  to be felt in Silicon Valley. 
Over the medium and longer term China will  become  the biggest consumer of PCs, smart-phones and the like. What worries me is the following few quarters, we need to pay close attention to what is happening to tech demand in China.

Sunday, 2 May 2010

A Coca Cola for the 21st Century

The Financial Times has just published a survey of the world’s top global brands. The world’s three most valuable are Google, IBM and Apple. Microsoft made it into fifth spot, behind Coca Cola. Tech companies took seven of the top ten positions and most of the top twenty positions.  We live in a technology dominated world, yet you often come across professional investors who would rather take a bath in battery acid than buy a tech share. 
The problem is that tech is two faced. On one side you find dozens of companies that look, for a moment like winners, then flare out. Others, like Sun, Compaq and Palm do well for years before evaporating Then there is tech’s other face, the totalitarian one. In its day, IBM controlled between 60% to 70% of the mainframe computer market. Intel takes around 90% of the microprocessor market, and there is not much worth fighting over in the PC software market that isn’t owned by Microsoft. Google rules the hill in search and Amazon has cornered the electronic sale of books.  These are businesses with moats around them, the kind of brand names that a young Warren Buffett would buy ahead of Coco Cola, or the Washington Post.
Now, I am going to make a crazed, typically top of the market prediction, within ten years Apple will be the largest consumer brand in the world. Furthermore, some media giants, it could be Disney, News Corp or Time, will ride the same jet stream. The key has to do with understanding where we are in the tech cycle and the rising power of the Asian consumer.  
Over the last week we have seen Corning increase sales by 57%, citing strong demand for flat screen TVs and computer monitors, particularly out of Asia. Likewise, Samsung Electronics, Asia’s largest technology company, has just reported that Chinese consumers are showing a keen interest in higher specified flat screen TVs. A few weeks ago it was Apple’s turn. Analysts had been expected around 7 m iPhones to be shipped, instead the company sold 8.7m and earned nearly 30% of its profit from Asia. In the previous quarter, 20% of the company’s profits came from Asia. 
Asian Demand
The strength of demand in Asia is the thread linking each of these results, but there is a noted change to the pattern of this demand. Chinese consumers, on the eastern seaboard, were the first to ship in container loads of high ticket luxury items and high tech goods. About 300 m live in eastern cities such as  Shenzhen, Shanghai and Beijing.  What has changed is that the 1bn or so Chinese consumers in the more Western provinces have begun spending. CLSA, the specialist Asian broker, estimates that these consumers have, when it comes to tech goods, close to the spending power that those on the eastern seaboard enjoyed in 2005. 
Salaries are rising in China, while at the time the price of tech goods is falling. Since 2004, the price of notebooks, PCs and handsets has been falling at 12% a year. For LCD TVs the rate of decline is more like 20%. If these trends continue then, by 2013, it has been estimated that China will be the largest market in the world for high tech goods. By 2012, when it comes to electronic goods, rural China will have the same buying power as those on the eastern seaboard have today. By 2013, China could account for close to 30% of the world’s LCD TVs and smartphones and one in five of the computers made.
The ability of the average Indian to afford such tech products will reach those that existed in China over the last couple of years, by 2014. Just as Western consumers have driven the purchase of PCs and smartphones during the first decade of the century, Asian consumers will take the lead during this decade. The song, therefore remains the same: consumers buying not corporate expenditure is what drives IT sales. Microsoft’s most recent results are further confirmation of this trend. 
The challenge for investors
One of the challenges facing investors will be to find the stocks that benefit most from this colossal shift in consumer spending. While the American consumer represents about $10.35 trillion dollars, compared to just $2 trillion for both China and India, Asia will dominate the growth in demand. This, of course, is the same pattern we saw in the oil market, as explained in the Energy Anomaly. Emerging markets represent 95% of the growth in demand for oil. Therefore, even as demand for oil dropped in the West the price rose because countries, like China, increased consumption. This shift will gain momentum just as Western consumers and governments enter the Great Contraction and cut spending to reduce debt. 
If you want a sign of the times then here is one. In the UK, the Governor of the Bank of England has just warned that which ever party wins next week’s general election, it is likely to be out of power for a generation after. The reason, because the decisions needed to reduce debt are going to be so harsh and unpopular. 
How to Play This Trend
Asia has a special affinity for technology. After all, tech products and computer games played an influential role in the rise of the Japanese economy. Accenture, the consultancy, has conducted research globally into consumer buying patterns and concluded that Asians are twice as likely as a westerner to have bought a computer, or mobile phone. Asia led the West in the use of the internet for building social communities and in the adoption of massively multi-user role playing games - MMPG. Across Japan, South Korea, Taiwan and now in China too, there is a problem with Asian youths becoming so addicted to the cyber life style that they withdraw from society. In Japan such youths are referred to as Otaku. Otaku culture is spreading rapidly across Asia. 
How best then to play the Asian high tech Tsunami? This is where we need to revisit the secret of those global brand names and reacquaint ourselves with the two faces of tech.
History shows us that it is fiendishly difficult to make money from hardware companies. With a few exceptions hardware shows us the wrong side of tech.  The pace of innovation is destructive and margins are atomized.
The 1980s were decade of the personal computer and it was also the decade that Sun, Microsoft, Compaq and names who would become leading tech companies went public. Yet, if you look at a chart of the market capitalization of US tech shares, as a per-centage of the overall market capitalization of US shares, you will see that as a group tech fell over the course of the decade. How can that be, when Sun, Microsoft, Intel and others were among the best investments of the 20th Century? Part of the answer is that most of the profits that were available in the PC industry were taken by two companies: Intel and Microsoft. The same pattern appears to be  happening today with the PC’s replacement, the smartphone.
Have you noticed that it is becoming harder to find smartphone stocks to make money from? In the first quarter of this year, smartphone sales probably rose by around 50% in unit terms. Yet, at Cykepartners, we estimate that Apple took around 40% of the smartphone sector’s operating profit. 
Apple is rampant while other smartphone makers, such as Nokia and even RIM, are finding it tough to stay with the pace. Don’t therefore be surprised if there are more rescue missions like the one that HP launched for Palm. 
The reason that Apple’s growth has gone up a gear is because of Asia. Sales in China, Taiwan, Japan and South Korea rose several hundred per cent. Nonetheless, skeptics will point out that a competitor might emerge with a cooler device that will topple the iPhone. They might also argue that the new iPad might yet underwhelm. The latter, though unlikely, might be true. As for another device wasting the iPhone, that would be a tall order. Apple only spends 3% of its sales on R&D, and apart from a few cosmetic changes, the iPhone hasn’t been fundamentally altered since it was launched in 2007. Increasingly, the key to its success is the Apps Store. Just as hundreds of thousands of developers were really the key to Microsoft’s dominance, those Apps developers are Apple’s foot soldiers. To beat Apple now someone is going to have to find a way of inducing those foot soldiers away. Google’s Android has the best shot, but I am not convinced it will be able to pull it off. The momentum looks unstoppable and like Intel, Microsoft and Google before it, Apple has a good chance of establishing a hammer lock on what is the fastest area of growth in consumer electronics. 
Therefore, as we saw in the age of the PC, power is being concentrated in a few hands when it comes to the smartphone. By 2012 there could be more than 500m of these devices on sale - which will be well ahead of the combined sales of laptop and desktop PCs. Besides Apple, and a handful of specialist chip and software companies, we still haven’t answered how will investors make money?
One answer is to look at content. We now live in an age of ubiquitous broadband, often it doesn’t feel that fast, but mostly we have access to it. By the end of last year there were 1.7bn internet subscribes and by 2012 there will be around 3 bn, close to half the population of the globe.    Households around the world will increasingly have WiFi and a broadband connection. With these networks in place the desire for electronic devices will multiply. Ericsson, the world’s leading telco equipment maker, believes that by 2020 there might be as many as 50 billion devices. If that sounds incredible, try counting how many digital cameras, music players, games consoles, PCs etc you have in your house; well over 20 would be my guess. 
In a world of devices and widespread networking, the stage is set for the consumption of digital content. Each minute of the day 24 hours of video are uploaded to Youtube. By December of last year mobile data traffic overtook mobile voice traffic despite there only being about 400m mobile broadband accounts world wide, which is a tenth of the number of mobile subscribers worldwide.
We have entered the content centric age and history shows that American content plays well around the world. Check out the performance of content shares over the course of this year. Stocks like News Corp (producer of Avatar), Disney and Time are out performing Google. With advertising rates rising and a revolution in high definition and 3D underway, media stocks are cheap and facing the benign version of a perfect storm. The iPhone and more lately the iPad point the way to future where digital content becomes pervasive and some of the big content names will shine as a result. My guess is that over time Apple itself will mutate more towards content, which is one reason why its recent move into mobile advertising is so interesting. 
Apple’s Xen like coolness, is appealing to aspiring Asian consumers in a way that no other high tech brand appears to be able to rival. It is early days but I think Apple’s first quarter revenues, where Asian sales leapt points the way to the future - this is the Coco Cola of the 21 st Century.

Saturday, 1 May 2010

ARM vs Intel


Apparently, both HP and Microsoft have announced that they are shelving plans to launch tablet computers. HP has been reported as saying that Windows 7 and Intel microprocessors, are too energy intensive for such a device.

This is terrific news for ARM, the London quoted company that supplies about 95% of the microprocessors used in mobile phones. On the basis of its last numbers, on average 2.4 ARM processors can be found in each smartphone. While an ARM device consumes about 3 Watts of power, the comparable Intel device needs 6 Watts.

Make no mistake, this is a problem that Intel will have to get sorted, because the growth in  so called embedded devices, such as smartphones, and now iPad like computers, is astonishing. With networking spreading through the consumer sector, both as WiFi and mobile broadband, the market for devices has gone exponential. Asia is just coming on stream, which adds to the growth. Ericsson estimates that by 2020 there will be 50 billion devices connected to the internet.

That number is astonishing but if you want a clue as to how it might come about, count how many electronic devices you now have in your home. Then, consider that today there are about 1.7bn people on the Internet, but that by 2012 (why does 2012 keep cropping up- ED), this will have risen to around 3bn, close to half the global population.

The chart above, which examines Amazon's latest financial quarter gives us a squint of what is taking place. Amazon is now selling more electronic gadgets than books and CDs.

The way I read this is that the internet is increasingly becoming dominated by 'embedded devices', that are still tethered to their manufacturer.  You or I cannot freely program these devices and the software that we can run is dictated by the manufacturer, or possibly, by the network operator. This is a world that is familiar to ARM and less familiar with Intel. Intel will stay as the dominant force in PCs, but ARM is where the growth is.

Recently, there were rumours that Apple would buy ARM. Personally, I don't believe it. ARM is an intellectual licensing company, most of the world's device makers and chip companies are its clients. If Apple owned the company it would harm Arm's business model.

None of this is good news for Microsoft either. The Wintel duopoly does not play well in the embedded arena. But hey, we knew Windows was in long term decline anyway, didn't we?

Blackberry Crush Time

The dramatic arc that RIM is following is now clear for all to see. It goes like this. In 2008, RIM achieved an average selling price of around $400; by the middle of last year this had fallen to $356, and by the last quarter of 2009 it had fallen again to $311. Next stop will be closer to $305. Yet, as Best Buy has just confirmed, the fourth quarter of last year was an exceptionally strong one for smartphones, Apple’s average selling price rose above $600. If you are a seller of smartphones, life had never been better, so why did ASPs drop for RIM?

RIM is following the same path beaten by Nokia at the beginning of the last decade. Average selling prices will continue dropping because RIM’s product is becoming passe, just as Nokia’s did. The next step will be that RIM’s market share in the US will drop as Apple picks up Verizon and Google’s Android operating system gains momentum. As they say in the pantomime, it’s curtains.

The latest results from Apple and others highlights the problem. On our estimates, Apple has taken about 40% of the smartphone industry's profits. But the REALLY big news, as highlighted by me in a SeekingAlpha piece back in January is that Apple is now sweeping through Asia. For the quarter just reported, Asia represented close to 30% of Apple's profits. Asia had been Nokia's last hiding place and RIM was hoping to move into the same fox hole. Not any more, because Asia is developing a crush for Apple.

Or maybe we should call that Blackberry Crush. On the one side you have Apple rampant, on the other you have the Android. In the middle there is the Blackberry. Let's face it, Google’s Android is really aimed more at the Blackberry than the iPhone. The Android is a device that offers businesses the secure email that the Blackberry offered them. Secure email has, so far, been the Achilles heal for iPhone, which is a product that is largely focused at consumers.

 A recently published survey by Crowd Science, a US based market researcher, found that 40% of Blackberry users would make the iPhone their next smartphone. However, coming up quickly on the inside, Google’s Android operating system appealed to a third of Blackberry users.

Another recent survey, this time from ChangeWave, specifically looked at US corporate IT budgets. A total of 1,702 respondents involved in IT spending replied. Importantly, the Apple iPhone saw a five per centage point rise in share, while Google’s Android device saw a 4 per centage point rise. The Android is at an earlier stage of development, so as hardware vendors and Google continue to enhance the design it will become more competitive. In particular, there are more than 20 companies supporting the Android, so we can expect prices to fall rapidly, which will bring further pressure on RIM.There will come a day when even Apple has to drop prices.

Smartphone Ecosystem
 Smartphones are computers first and phones second, which means that applications and content are more important than the quality of voice calls. This is where RIM comes unstuck. There are now seven smartphone operating systems out there: iPhone, Symbian, RIM, Google, Windows, Palm and Meego(Nokia and Intel). This presents a headache for the hoards of developers who are, in reality, the people who decide which smartphones become successful. The developer has limited resources so they have to make a carefully considered decision over which operating system to commit resources to. The phone that gets the developers’ attention becomes the phone that has most to offer subscribers; more subscribers then buy the phone; result: a virtuous circle. The release of Apple’s iPad will make this even more apparent.  At present there are 75 million users of the iTouch and iPhone users, within a year another 6m or so million iPads will be sold. These three devices all share the same operating system, which in turn is supported by Apple’s wildly successful Apps Store. From the point of view of developers, Apple offers you a great environment to write for, a tremendous storefront from which to sell your software and a large and fast growing user base.

Like Nokia before, RIM has been slow to recognise that the market has changed. The Blackberry’s operating system is old, the web browser primitive and the device itself is still largely keyboard based.  Meanwhile, the market and even Nokia, has moved to touch sensitive screens. Eventually, RIM will launch a proper touch sensitive Blackberry and will improve its operating system, but by the time it does the market will have moved on. RIM is in catch up mode, it is not a leader.

What Blackberry does have going for it is market share. It has about 20% of the global smartphone market compared to Nokia’s 39% and Apple’s 20%. Mobile operators like the Blackberry device because it uses less bandwidth than either the iPhone or Android and, as we have seen, corporate like the email function. Kids like the Blackberry messaging function and, for the time being at least, the device is popular in emerging markets.

RIM is not yet in a dire state. However, from the point of view of investors, the stock has a half life, despite the recent share buy back.  Before feeling more confident about this stock I think we need to wait  until there is evidence that ASPs have become stable.  That is unlike to happen anytime soon because it looks ominously as though RIM’s market share in the US is poised to implode.   

The Oil Anomaly

Anomalies, like some difficult people and risky jokes are where you find information, this is why we like them. The biggest anomaly out there can probably found in the global energy markets. The economic crisis that began in the second half of 2008, triggered a sharp decline in energy prices and consumption.  By the end of that year the price of oil had fallen by 75%, traded coal was down by 62% and the price of natural gas sold in the US, had fallen by 58%. The economic slowdown continued into 2009, and then something strange happened.
While prices for coal and gas continued to fall, the oil price stabilised and then staged a sharp recovery. From a low of $34 in December 2008, the price of oil rose to $71 in June 2009. In the wake of economic recovery the oil price has continued rising and is now over $80. Week in week out pundits attempt to call the oil price and most of the time they seem to call it wrong. The reason it is so difficult is that the energy markets are going through a change and change is always difficult to forecast.
Demand for oil in the OECD countries had started to fall in late 2005, long before the economic crisis broke. It continued dropping through 2006 and into 2007. Since 2007, oil consumption in OECD countries was down by 8%. Yet, in the five years to 2008, the price of oil rose by 370%, traded coal was up 460% and natural gas rose by 120%. For the answer to this anomaly we can largely ignore the machinations of hedge funds and other speculators, instead we should look at what is happening in emerging markets.
The only other time since World War II that prices rose by as much as they have during this decade was in the 1970s. Then demand for oil was driven by growth in the developed world. This time round 90% of the growth in demand for oil is coming from the developing economies.  
Emerging inefficiency
Emerging economies, like China and India, are not efficient consumers of energy.  Therefore, demand for energy exceeds the growth in GDP. At market exchange rates it takes 3.4 barrels of oil equivalent to produce $1000 of GDP in the non-OECD countries, compared to 1.1 barrels of oil equivalent in the OECD. One reason for this inefficiency is that many emerging markets subsidise the price of energy. There is a direct correlation between energy efficiency and energy prices so subsidies are not a helpful distortion if you are worried about carbon emissions. Besides green house gases distortions have other  implications for global economic growth. 
The American consumer represents about $11 trillion of global GDP, compared to about $2 trillion for both China and India. In the US, fuel taxes are low and as a result the price of oil has a more direct impact on the prices that consumers pay at the pump. With demand rocketing in the non OECD, both because of stronger growth and inefficiencies, American consumers are likely to suffer, even as growth in their own country stagnates. Fuel subsidies, therefore, are a distortion that are being felt all around the world. 
Fuel subsidies make the world a more unpredictable place. The other reason that unpredictability is rising is due to the different nature of growth in mature and developing markets. As Christof Ruhl, the chief economist of BP, from whom much of this article is derived, explains: in developed markets economic growth only gradually reshapes the sectoral composition of the GDP and employment; its principal affect is to expand the service sector, which is less energy intensive. In emerging market, growth is radically reshaping economies, making predictions about energy consumption harder to nail down successfully. Hundreds of millions of people have left low-energy-intensive activities, such as agriculture, for energy-intensive activities, such as construction and industry.  In the West, industry is becoming less energy intensive, whereas in emerging markets the drift is the other way.
As discretionary incomes rise in the developing world, due to urbanisation, lifestyles change. Mobility and the need for transportation increases, as we can see by the explosion of car sales into countries, such as China. These changes have shifted the growth in demand outside of the OECD.  Ruhl says that the entire net increase in global oil consumption since 1999, has come from outside of the OECD countries.
This rebalancing of consumption in favour of the emerging economies carries a heavy environmental cost. In the 1990s the growth in carbon emissions slowed, but since the turn of the century it has picked up on the back of emerging market demand.  The carbon intensity of energy itself has increased. From 1970 until the late 1990s, global emissions per unit of energy consumed fell steadily. But then, in 1999, reflecting the increasing share o coal in energy portfolios of the non-OECD countries, carbon emissions per unit of energy began to rise. Since the turn of the century they have increased by two per cent globally and by 3 per cent in the emerging world.
The Role of Opec
As we have just seen, the rise of the emerging markets is making it more difficult to predict energy consumption. However, as we saw above, the price of oil rose sharply while other energy sources, such as gas and coal were more directly correlated to the overall economic growth. The rise for the divergence is due to Opec. The oil price is supported by a cartel, whereas coal and gas are not. 
By 2008, the average annual price of crude had increased for 7 consecutive years, this had never happened before. One reason for this rally can be laid at the door of price fall, when the price for crude began to retreat from $80  a barrel, which was then a record high. To stop the decline, OPEC stepped in and cut production twice, in late 2006 and early 2007, by almost one million barrels a day. Crude oil then rallied from $50 to $147 in July 2008, their highest level ever, in both real and nominal terms.
What is extraordinary about this rise is that production was only cut by 1m barrels a day, where as daily consumption is 81m a day! Ruhl explains that like any complex system, the global oil market needs a degree of redundancy to operate smoothly. In the short term, inventories can provide this safety cushion; in the longer term, it is provided by spare production capacity. Following strong demand growth in 2003 and 2004, spare capacityin the global oil market was hovering around record lows, at little more than two percent of global production. Even after the OPEC cuts of 2006 and 2007, the global oil market was running at above 97 percent of capacity. At such a high level it is impossible to guarantee any meaningful stability in prices.
As growth picked up, an already tight market became tighter and prices exploded. As crude prices cruised through $120, Saudi Arabia unilaterally decided to increase production in an effort to help out the US, its largest customer. Curiously,  oil prices jumped on heels of both announcements; the market believed  that Saudi could not deliver the increase. The market was wrong. Not only was production increased in the Kingdom, it was rose from other Persian Gulf producers too. The timing could not have been worse because it coincided with the Great Recession. Prices fell from $147 a barrel in the summer to $34 by late December.
Production was cut by 4.2m barrels and by the first quarter of 2009, OPEC’s cuts finally met the fall in global demand. 
Where are we today?
Ruhl estimates that the oil market now has 6 m barrels a day spare capacity. He calculates that it would take three years to burn through this capacity and wind markets up as tight as they were last year. Now hear this: prices are not expected to spike over the next two or three years.
Stability may be a dream because it assumes that the deep structural changes that affect the oil market comply. Three factors are worth keeping in mind. The first is that OPEC retains inordinate power over the oil market, even though it only controls 40% of crude output. The main reason for this is that there has been barely increase in supply from non OPEC regions, despite the strong rise in the price between 2002 and 2008.
The second reason, as we have discussed, is that emerging economies now drive the price of oil. The last structural change in the oil market is energy efficiency. The entire increase in global oil consumption this century has come from outside of the OECD in countries where its price is subsidised. Estimates of future shifts in demand will therefore have to determine how subsidies are likely to affect demand outside the OECD countries, for example, in China or the Middle East.
Coal and Gas
Global coal consumption is led by China, which consumes 43% of global supply and represents 85% of the growth in coal consumption.  The market for coal is a lot less concentrated that that for oil. Coal trades internationally in smaller but highly competitive markets. During 2008, the price of coal rose and then collapsed as the Great Recession hit demand. It fell longer and further than oil because there is no cartel supporting the price.  The market has also become more competitive: in response to higher transport costs, Europe substituted coal from the Indian Ocean with imports from the US.
Another factor is that fact that coal can be substituted by cheaper natural gas, which is what happened in the European Union. Electricity production from gas rose by 8 percent, compared to a 9 percent drop in electricity production from coal. 
Natural gas got hit by the same one two punch that hit oil. Production increased just as economic growth went into a tailspin. The increase in gas production was partly due to technological advances in the US. Chief among these is horizontal drilling and hydraulic fracturing, which uses water pressure to release gas from hard rocks. Improvements in technology have led to an increase in the production of non-conventional gases.  Production of non-conventional gases, such as coal bed methane, tight gas and shale gas has doubled over the last decade. The share of these gas deposits in total US gas production has reached about 50 percent.  Like unconventional opinions unconventional gas is becoming the new normal.
As the technology that was pioneered in the US spreads the production of unconventional gases will increase. This is important because deposits of gas are less concentrated than those of oil.
Another change has been the development of an integrated market for LNG. About 8% of all internationally traded gas today is LNG. Traditionally, the relationship between LNG producers and consumers has mirrored that between piped-gas producers and consumers, which are connected by pipelines.  This system is now changing. Spot markets have been emerging, thanks to buyers who have tried to secure additional LNG by purchasing single cargoes. 
The emergence of a competitive market for LNG has the obvious effect of  linking prices between regional gas markets in Asia, Europe, and North America, which have historically been segmented. The second consequence is that with long-term contract pricing under pressure, competition will increase and efficiency will improve. Consumers will benefit if the price of natural gas is increasingly delinked from the pice of crude. Finally, the advent of a globally integrated LNG market will improve energy security by fostering diversification. 
We can already see the consequences of this: Russian and Central Asian gas deliveries to Europe are being affected by LNG prices. Whether the changes in the natural gas markets will have strategic significance will depend on two factors. The fist is whether more unconventional gas resources can be developed and where this occurs. The reason that coal is so popular is that it is available where it is needed - primarily, in China and India. By contrast, natural gas is, like oil, geologically concentrated: 60 percent of natural gas is consumed in regions that only control 14 percent of the reserves. Now if unconventional gases can be produced in places such as China, which currently are heavy users of coal, it could become the local fuel of choice, which would benefit carbon emissions. One kilowatt-hour of electricity with natural gas emits a little more than half the amount of carbon that producing the same amount of energy with coal does. 
What we have learned is that no matter how severe the current recession, its effects on global energy markets are likely to be dwarfed by the long-term impact of the industrialisation of the emerging-market economies. The pressure on energy and commodity markets may have been relieved for the short term, but over the medium and long terms, the need for greater energy efficiency is paramount.  Today, oil accounts for 35% of global primary energy consumption, coal for 29% and gas for 24%. Renewable energies, other than hydro and nuclear, are less than one percent.  It’s time to wake up and smell the methane, it will be decades before alternative energies ever have a meaningful impact on global energy consumption and carbon emissions. Where we can make an impact is through improved efficiencies. 
In the West industry has led the way in becoming more efficient.  As consumers in both the developed and developing world show an increased desire for electronic goods, such as flat screen TVs, lighting, computers, music players, video cameras and digital still cameras, the ability to deliver greater energy efficiency becomes more prized. This is one reason the share prices of companies involved in such technologies as LEDs will continue to outperform solar, wind or any other alternative energy in future. 

The Smart Paradigm comes to Asia

After the great moderation comes the great rebalancing. If OECD economies are to reduce the amount of debt in both the public sector and within households, then saving has to increase. Just as falling interest rates and the decline in economic volatility, combined with a rise in credit, defined the world since 1982, the need to pay off debt in the OECD will define the coming decades.
Co-ordinated government stimulus and low interest rates have postponed the dreaded day that this will happen but investors can hear the clock ticking. One of the key elements of this great rebalancing will be that Asian consumers will have pick up the slack as consumers in the West consume less. Today, the US consumer represents $10.35 trillion in spending, compared to roughly $2 trillion for both India and China. However, Asia will represent an ever greater proportion of the growth in demand. This has long been the case for computers and, as Apple’s numbers demonstrate, it is now beginning to drive smartphone sales.  
Asia is becoming the greatest markets for tech goods but how should an investor play it? First off, ignore analysts who continue to focus on the corporate PC market. Better still,  sack them because they are in gross dereliction of their duty. Second, be suspicious of analysts who focus on networking equipment.
As Microsoft again affirmed, in its latest results, consumers continue to power sales, not corporates. As we have argued before, the super cycle that we are in the midst of is the networking of the private and public space. The mainframe and PC cycles of IT expenditure were about the networking of the corporate space. The life that is lived by ordinary people is of movement, in geographic and temporal terms it takes place in 360 degrees and not at a desk top within a corporate building. 

The blue line represents PC sales, the purple  line is mobile, the red lap tops and the green smartphone. All in hundreds of billions of dollars. Source:

The arrow of time in tech points to mobility becoming increasingly dominant. Mobile phone revenues overtook fixed line revenues around the mid point of the last decade, and lap top PC sales have been the fastest point of growth in the PC market for about 10 years. Tablet computers will accelerate the trend, particularly in Asia and emerging markets. Soon there will be a generation of young people. in emerging economies whose first experience of text has either come from a mobile phone or a small computer. In the first quarter of this year smartphone sales increased at 50%, if that rate were to continue there would be close to five hundred million on sale by 2011, by which point it will probably be outselling PCs.
Unlike the PC, smartphones are something of a fashion item, they are badges that we use to signal something of our selfhood. There appearance confirms what could be described as a super cycle. The first waves of technology were all about networking the corporate space. Smartphones, like tablets, netbooks, and notebooks play to networking of private and public spaces, in other words, society in 360 degrees.

A few years ago it was estimated that the average western home had twenty-six electronic devices. One trend, that is at an early stage, is that more of these devices will be linked to the internet. With this in mind, Ericsson estimates that by 2020 there will be 50 billion devices connected to the internet. Within the home there will computers, lap tops, netbooks, tablet computers, numerous phones, digital music systems and a TV. There may be something called a home media gate way, a server computer that stores digital media that can then be streamed around the home.
The simplistic way to play this trend is to buy Taiwanese companies, such as Gemtek, Realtek and Zyxel. The problem is that these companies have little pricing power. Networks are built using international standards, so it is difficult to add any value. Cisco might be a networking equipment company but its market position is built upon a proprietary operating system,.Like Apple, Cisco is not primarily a hard ware company. Some of the Taiwanese networking names might enjoy a moment in the sun, as sales take off but it will not last long.
The rise of the Asian consumer will, in many ways, be a reprise of the world that was dominated by the personal computer. Therefore, the Asian hardware companies that mainly win will be the ones who dominate the PC world now: Hon Hai, Samsung, TSMC, with the addition of newer names, such as Mediatek, would be a good place to start  

A Media Centric Age
In an age when billions of devices are linked to the internet, and when most of them are mobile, what we have is the mother of all networks. Increasingly, these devices and the internet will be used for communication and the creation of communities. This pattern has been under way for some years and is already affecting which brands consumers value. Yet it may be have its profoundest impact upon the consumption of media. Look at the following chart, which comes from the Silicon Alley Insider website. It analyses Amazon’s sales, which for the first time are now dominated, not by books or CDs, but by digital products.

The network is being built, rapidly it is being populated by devices, as our various charts illustrate. The next step is that networks and devices have to do something. Increasingly, what they will be used for is the consumption of content. This is one of the articles of faith behind our theme of the Smart Paradigm.
The future just happened. In 2009 mobile data, for the first time, outstripped mobile voice. Yet there are only 400m mobile broadband connections, compared to 4.3 billion mobile phone subscribers. By 2013, more than 90% of global consumer data traffic will be video on demand and TV. Today, Youtube traffic is greater than that of the entire internet during much of last decade. Each minute 24 hours of video are uploaded to Youtube.
Asia’s influence is rising, and as the power of the region’s consumers increases, then Asian   media companies and internet names, such as NC Soft, NHN, CTrip, Tencent, Baidu will continue to prosper. Over the coming weeks we will examine this theme further because there are obviously opportunities to be had within the Indian media scene. 
However, let us not forget the West. American culture shaped the 20th Century, there is something about the American sense of fantasy that is seductive. This may have something to do with the fact that capitalism is making us more infantile. Therefore, American and some other Western media giants, such as Disney, Time Warner and News Corp, will among the winners from the digitalisation of Asia. Apple would be the other name we would focus on. Our hunch is that Apple may be the Western company that benefits most from the rise of Asia. By contrast, Microsoft, like Nokia, is likely to be among the Western losers.