Tuesday, February 26, 2013 5 comments

Higher Education Losing its Value? Or Too Many Scientists?

Writing for The Atlantic, Jordan Weissmann touches on a sad—kind of scary—situation facing PhD graduates:
First, the big picture. Here is the entire market for Ph.D.'s, including those graduating from humanities, science, education, and other programs. The blue line tracks students who have a job waiting for them after graduation. The green line tracks those signed up for a post-doctorate study program. The red line stands for the jobless (though a sliver of them are heading to another academic program).
The pattern reaching back to 2001 is clear -- fewer jobs, more unemployment, and more post-doc work -- especially in the sciences. A post doc essentially translates into toiling as a low-paid lab hand (emphasis on low-paid). Once it was just a one or two year rite of passage where budding scientists honed their research skills. Now it can stretch on for half a decade .
As the article makes clear, the charts aren't perfect and there are a lot of assumptions that went into the chart. Nevertheless, if we assume it paints a picture somewhat close to reality, it illustrates a potentially new trend.

The described situation—PhDs not getting jobs—is kind of sad for those pursuing higher education. Once upon a time, only some soft areas like humanities and arts graduates had difficulties finding jobs but now it looks like science and engineering is facing the same problem.
It's not clear to me if employers are starting to discount higher education (possibly due to too many degree-holders, who are not as skilled as several decades ago)... or if it is due to a skills mismatch (America graduating too many scientists). Leave your thoughts.

Wednesday, February 20, 2013 12 comments

The Disastrous Outsourcing of the 787

source: Boeing

The Boeing 787 Dreamliner is a technological marvel. It’s built largely of carbon-fibre composites rather than aluminum, which makes it significantly lighter than other planes. Its braking, pressurization, and air-conditioning systems are run not by hydraulics but by electricity from lithium-ion batteries. It uses twenty per cent less fuel than its peers, and so is cheaper to run, yet it also manages to have higher ceilings and larger windows. It is, in other words, one of the coolest planes in the air. Or, rather, on the ground: regulators around the world have grounded all fifty Dreamliners... The Dreamliner was supposed to become famous for its revolutionary design. Instead, it’s become an object lesson in how not to build an airplane.
— James Surowiecki, "Requiem for a Dreamliner?"

Don't have much time to comment on this but it appears that the outsourcing trend is probably near its end. Like all management concepts, outsourcing tactics over the last decade generated a lot of wealth and made companies more efficient, but it has resulted in some disastrous outcomes. The textbook example presently is Boeing and its 787 airplane; I am sure there will be even worse examples to come.

The following diagram illustrates the various suppliers of the 787:

It's still not clear if outsourcing may be the entire cause of the 787's problems but one can't deny that it played a major role.

The Economist once touched on the reasons for outsourcing:
But the business logic behind outsourcing remains compelling, so long as it is done right. Many tasks are peripheral to a firm's core business and can be done better and more cheaply by specialists. Cleaning is an obvious example; many back-office jobs also fit the bill. Outsourcing firms offer labour arbitrage, using cheap Indians to enter data rather than expensive Swedes. They can offer economies of scale, too.
Having said that, as is often the case for those trying to implement something well past its shelf life—Six Sigma approach in the early 2000s comes to mind—the incremental benefit of outsourcing appears to be declining significantly. It's difficult to say what went wrong with Boeing but James Surowiecki appears to suggest that Boeing outsourced itself out of its core business:
Boeing didn’t outsource just the manufacturing of parts; it turned over the design, the engineering, and the manufacture of entire sections of the plane to some fifty “strategic partners.” Boeing itself ended up building less than forty per cent of the plane.

This strategy was trumpeted as a reinvention of manufacturing. But while the finance guys loved it—since it meant that Boeing had to put up less money—it was a huge headache for the engineers. In a fascinating study of the process, two U.C.L.A. researchers, Christopher Tang and Joshua Zimmerman, show how challenging it was for Boeing to work with fifty different partners. The more complex a supply chain, the more chances there are for something to go wrong, and Boeing had far less control than it would have if more of the operation had been in-house. Delays became endemic, and, instead of costing less, the project went billions over budget. In 2011, Jim Albaugh, who took over the program in 2009, said, “We spent a lot more money in trying to recover than we ever would have spent if we’d tried to keep the key technologies closer to home.” And the missed deadlines created other issues. Determined to get the Dreamliners to customers quickly, Boeing built many of them while still waiting for the F.A.A. to certify the plane to fly; then it had to go back and retrofit the planes in line with the F.A.A.’s requirements. “If the saying is check twice and build once, this was more like build twice and check once,” Aboulafia said to me.
The situation at Boeing isn't as bad as it could be. It is essentially an oligopoly, along with Airbus, in the large passenger aircraft market (as well as in some military aerospace markets) and hence will survive through turbulence. But I suspect it will be a different organization after all this is said and done: it may actually may end up building more than 50% of a plane by itself!

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Friday, February 15, 2013 2 comments

Warren Buffett's Heinz Acquisition

Sorry about the lack of posts but have been busy the last few months—in fact, more like the last 2 years—but hope to be more involved in the future. Another reason I have been sort of out of the market is because I find it expensive and don't really see any great opportunities.

Anyway, just saw that Warren Buffett participated with private equity group, 3G, in the acquisition of Heinz (HNZ), and thought I would post my quick thought. As most of you may know, Heinz is famous for ketchup and various food products.

Similar to the railroad, Burlington Northern Santa Fe, that Warren Buffett acquired a few years ago, this deal to participate in the Heinz buyout looks expensive (the verdict is still out on the Burlington Northern Santa Fe investment). This Fortune opinion piece sort of has similar feelings. My opinion is that Buffett is running out of good opportunities and is willing to seek out slightly-above-average opportunities given the super-low interest-rate environment.

The deal is valuing Heinz at around 20x P/E for a low-growth, albeit very stable, business. However, Buffett is only putting up a portion of the funding in return for preferred shares yielding 9%, and a sizeable chunk that is owned by the 3G private equity group is going to be funded via debt. So, leverage is going to boost the returns for the buyout group, with all the debt risk being held by the 3G private equity group while Buffett only owns preferred and common shares.
From a risk point of view, this is a great deal for Buffett. Overall, this will produce above-average return but nowhere near superinvestor returns he had in his younger days. The investment likely yield 1% to 2% above S&P 500 in the long run and that is kind of Buffett's goal (he has alluded to this in his shareholder letters). Obviously, newbie and amateur investors trying to earn returns like 'Buffett Prime' won't learn much from this deal.