We have concluded that demand matters for productivity growth and that increasing demand is key to restarting growth across advanced economies, write James Manyika, Jaana Remes, and Jan Mischke in Harvard Business Review.
A little over a century ago, Henry Ford doubled the minimum pay of his workers to $5 a day. When other employers followed suit, it became clear that Ford had sparked a chain reaction. Higher pay throughout the industry helped lead to more sales, creating a virtuous cycle of growth and prosperity. Could we be at another Henry Ford moment?
Some major companies have announced plans to boost employee pay. Target raised its minimum wage to $11 this past fall and committed to $15 by 2020. More recently, Walmart announced plans to match that increase to $11. In banking, Wells Fargo and Fifth Third Bancorp also announced pay increases for minimum wage employees.
These pay increases have occurred against a backdrop of weak economic growth and rising income inequality. Economic growth has been stuck in low gear for almost a decade now, averaging around 2% a year since 2010 while productivity growth, the key to increasing living standards, has been languishing near historic lows since the financial crisis. But more recently there has been a glimmer of hope. After stagnating for years, wages have begun picking up slightly, as has productivity growth, while corporate profits remain near record highs.
Are these recent wage increases merely necessary in light of a tightening labor market, or could they start a broader trend that may change our economic growth trajectory?
After a year-long analysis of seven developed countries and six sectors, we have concluded that demand matters for productivity growth and that increasing demand is key to restarting growth across advanced economies.
The impact of demand on productivity growth is often underappreciated. Looking closer at the period following the financial crisis, 2010 to 2014, we find that weak demand played a key role in the recent productivity growth decline to historic lows. In fact, about half of the slowdown in productivity growth — from an average of 2.4% in the United States and Western Europe in 2000 to 2004 to 0.5% a decade later — was due to weak demand and uncertainty.
For example, in the mid-1990s to the mid-2000s, rising consumer purchasing power boosted productivity growth in both the retail and the auto sector, by encouraging a shift to higher-value goods that can be supplied at higher productivity levels. In the auto sector, as customers in the early 2000s purchased higher value-added SUVs and premium vehicles in both the United States and Germany, they spurred incremental productivity growth of 0.4 to 0.5 percentage points. Today, that trend has slowed slightly in both countries, contributing only 0.3 percentage points to productivity growth in the period 2010 to 2014.
Similarly, in retail, we estimate that consumers shifting to higher-value goods, for example higher-value wines or premium yogurts, contributed 45% to the 1995-2000 retail productivity acceleration in the United States. This subsequently waned, dragging down productivity growth.
To put it simply, when consumers have more to spend, they buy more sophisticated things. That’s good not just for consumers and producers, but for the overall economy, because making more sophisticated, higher-value things makes everyone involve more productive, and therefore helps increase overall standards of living.
In addition, we found two other ways weak demand hurt productivity growth in the aftermath of the financial crisis: a reduction in economies of scale and weak investment.
First, the economies of scale effect. In finance, productivity growth declined particularly in the United States, United Kingdom, and Spain due to contractions in lending volumes that banks were unable to fully offset with staff cuts due to the need for fixed labor (for example to support branch networks and IT infrastructure or to deal with existing loans and bad debt). The utilities sector, which has seen flattening demand growth due to both energy efficiency policies as well as a decline in economic activity during the crisis, was similarly not able to downsize labor due to the need for labor to support electricity distribution and the grid infrastructure, and here, too, productivity growth fell.
Second, the effect of weak investment. We have found from our global surveys of businesses that almost half of companies that are increasing their investment budgets are doing so because of an increase in demand. Demand is the single most important factor driving corporate investment decisions. Investment, in turn, is critical for productivity growth, as it equips workers with more – and with more recent and innovative – equipment, software, and structures. But we have seen capital intensity growth fall to the lowest levels in post-WWII history. Weaker demand leads to weaker investment and creates a vicious cycle for productivity and income growth.
Of course, the financial crisis is long since over, and the economy has recovered, at least by some measures. So what’s to worry about? Won’t demand return to pre-recession levels, and thereby increase productivity?
Unfortunately, there is reason to believe that some of the drags on demand for goods and services may be more structural than crises-related. Slowing population growth means less rapid expansion of the pool of consumers. And rising income inequality is shifting purchasing power from those most likely to spend to those more likely to save. This is reflected in slowing growth expectations in many markets. For example, across our sectors and countries studied, in the decade from 1995 to 2004, growth in demand for goods and services averaged 4.6%, slowed to 2.3% in 2010 to 2014, and is forecast to slightly increase to 2.8% in 2014 to 2020.
Today, there is concern about where the next wave of growth will come from. Some prominent economists worry that we may be stuck in a vicious cycle of economic underperformance for some time. Our analyses strongly suggest that supporting sustained demand growth needs to be part of the answer. Demand may deserve attention to help boost productivity growth not only during the recovery from the financial crisis but also in terms of longer-term structural leakages and their impact on productivity. Suitable tools for this longer-term situation include: focusing on productive investment as a fiscal priority, growing the purchasing power of low-income consumers with the highest propensity to consume, unlocking private business and residential investment, and supporting worker training and transition programs to ensure that periods of transition do not disrupt incomes.
Companies play a key role in promoting growth through investment and innovation as well as supporting their workforce through training programs. Yet companies may also want to consider the words of Ford when he said: “The owner, the employees, and the buying public are all one and the same, and unless an industry can so manage itself as to keep wages high and prices low it destroys itself, for otherwise it limits the number of its customers. One’s own employees ought to be one’s own best customers.” While this is certainly not true for individual companies, it is true for the broader economy, and we might be at a rare point where the representatives of employees and employers alike share a common interest in healthy wage growth.
Source: Harvard Business Review.
Facebook acquired a brain-computing startup for more than $500 million
Facebook announced the acquisition of CTRL-labs on Monday, for an undisclosed sum. A report in Bloomberg said Facebook paid somewhere between $500 million and $1 billion for the company, citing anonymous sources.
“The vision for this work is a wristband that lets people control their devices as a natural extension of movement,” Facebook executive Andrew Bosworth wrote in a blog post announcing the deal.
This story is developing…
Samsung to invest $115 billion in its foundry business by 2030
Samsung is earmarking $9.5 billion a year for Samsung LSI and Samsung Foundry.
Samsung Electronics is one of the largest semiconductor players around, and the manufacturer is investing $115 billion (133 trillion won) over the next 12 years to take on Qualcomm and Intel. Samsung says its goal is to become the world leader in semiconductors and logic chips, and the company will invest $9.5 billion a year from now through 2030.
Samsung will invest $63.4 billion (73 trillion won) toward domestic R&D — where it is looking to add 15,000 jobs to “bolster its technological prowess” — and spend $52 billion (60 trillion won) toward production facilities that will make the logic chips. Samsung has long been the dominant player in the memory business, but with that market shrinking the South Korean manufacturer will be looking to diversify.
While the $115 billion seems like a staggering amount at first, it’s in line with what Samsung has been spending in recent years. Just last year alone Samsung invested over $15 billion in R&D, and Intel also spent over $10 billion toward developing new products.
Apple will start selling AirPods 3 by the end of 2019
Apple is expected to start selling third-generation AirPods by the end of 2019. One big difference is that the new wireless headphones will have a noise canceling feature. At the level of the companies that will be involved in this project, we have Inventec, from Taiwan, that will be responsible for the production of the AirPods 3, while Luxshare Precision, also from China, will also receive part of the orders.
AirPods 3 arrive until the end of 2019 with new functionalities
Apple has dominated the wireless headphone market and will continue to do so. Statistics show that this company sold 35 million AirPods in 2018, which translates into a 75% global market share. As we said, the AirPod sales boom is expected to continue, with annual shipments for distribution rising to 50 million devices by 2019.
Of course, when a market becomes profitable, competition arises. Inspired by rising sales of AirPods, many brands like Huawei, Xiaomi and even companies like Microsoft, Amazon, and Google are betting on wireless headphones to meet strong demand.
To meet the challenges of rivals, Apple and its partners want to raise the bar.
That said they will add new features to AirPods 3, including the noise canceling function. However, do not think this is an easy task.
Noise canceling technology consumes a significant amount of battery. Since AirPods are not the king in this field, the runtime may be even more affected.
It is not known now what Apple could do and if it is even going to consider a change in design. Because considering the integration of new features, it may be necessary to increase the size of the battery. This requires more space. However, the solution may also involve shrinking the other components to accommodate the larger battery.
However, in addition to the design change, Apple may also be considering adding new colors to AirPods 3.
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