Team Trump’s Tug-of-War

Team Trump’s Tug-of-War

How will the president’s economic advisers alter the global business prospects of U.S. companies?

By Russ Banham

CFO Magazine

No man is an island, not even the leader of the free world. Since taking office, President Trump has been reshaping his campaign pledges. Prodding him to wield the chisel are his advisers: an unusual assortment of liberal-leaning family members, hardened Wall Street veterans, starched-shirt military commanders, and right-wing political strategists.

Out of that eclectic mix has come moderation. The president’s recalibrated position on China’s currency manipulation, his reversal on eliminating the Export-Import Bank, his comments that NATO is actually not obsolete, and his decision to renegotiate the North American Free Trade Agreement — days after saying he would sign an executive order to withdraw from NAFTA — indicate a willingness to listen to others’ more seasoned views. Trump might continue to temper his positions, albeit with a mindfulness toward maintaining his populist constituency.

For CFOs interpreting these changes, the shifting landscape in Washington is, for the most part, encouraging. Still, the president’s sharp turns right and left are also perplexing, making it tough to call his next moves. To get a clearer sense of the administration’s developing economic agenda, we reached out to five economists to posit their views on seven of the president’s top economic advisers. These seven are pulling the strings—but they’re not all pulling in the same direction.

“I think it’s obvious that there is not a detailed blueprint of what the Trump agenda is,” says Jeff Hauser, director of the Revolving Door Project, an initiative of the Center for Economic and Policy Research that scrutinizes executive-branch appointments to ensure they serve the public interest. “The general themes from his campaign are likely to stay consistent, but the specifics could flip-flop. That’s why his choice of economic advisers is instructive—they’re the ones who have his ear.”

Who are these people? What are their backgrounds? And how may their opinions affect global business prospects for U.S. companies? Our analysis follows.

Secretary of the Treasury
A former Goldman Sachs executive, Mnuchin holds some views that differ from Trump’s pronouncements on the campaign trail. For instance, he supports the Volcker Rule, a part of the Dodd-Frank Act that restricts banks from making speculative investments in hedge funds and private equity.

17Jun_Trump_p36Dismantling Dodd-Frank was a centerpiece of Trump’s platform, and in April he signed an executive order to roll back certain provisions of the post–financial-crisis legislation. What’s interesting is that the Volcker Rule was not among them.

“There’s a sense, with some truth behind it, that Mnuchin has awesome influence,” says Hauser. “He’s playing a longer-run game, knowing it’s unlikely that any legislation to completely gut Dodd-Frank will pass.”

Mnuchin and another Trump adviser with roots at Goldman Sachs, Gary Cohn (see his profile below), are perceived as moderates who can shepherd the president’s tax reform plan through Congress, giving him his biggest win to date. The pair stood side by side to announce the plan in late April. Mnuchin called it the “biggest tax cut in history,” a declaration subsequently faulted for bad math.

Still, the tax plan is a gift to business. The big question is how the country will pay for it without adding to the ballooning federal deficit. The plan omitted the border adjustment tax on imports proposed by House Speaker Paul Ryan, which was seen as a way to make up some of the revenue shortfall.

In any case, Mnuchin will certainly be at the center of all economic maneuverings by the Trump administration. “He played a pivotal role with respect to the corporate tax cut and the elimination of the border tax proposal,” says Robert Hartwig, a finance professor at the University of South Carolina with a Ph.D. in economics. “The latter would have entangled fiscal policy with trade policy in ways we’ve not seen in recent U.S history. He seems to have the president’s left ear, while Cohn has his right.”

Director, National Economic Council
Cohn, a lifelong Democrat and former president at Goldman, is reportedly close to Trump’s senior adviser Jared Kushner, who’s also a Democrat. Many see Cohn as the yinto chief strategist Steve Bannon’s yang, his softer stance on regulatory reforms, immigration, and health care balancing Bannon’s more populist positions.

17Jun_Trump_p37aHe has made some surprising remarks, including a reversal of his pledge to dismantle Dodd-Frank. He even raised the possibility of legislation to reinstate the Glass-Steagall Act’s separation of investment and commercial banking activities, to the delight of Democratic Senator Elizabeth Warren. He’s come out strongly for free trade and was an early critic of the Republicans’ first health-care bill, which folded quickly.

Cohn’s star is said to be ascending, to the detriment of Bannon and trade adviser Peter Navarro. The president’s reappraisal of his intention to toughen trade policy may be traced to Cohn’s influence.

One expert thinks his growing prominence is good news for business. “Cohn understands that the thrashing between Wall Street and Main Street is not a case of polar opposites, as it’s typically portrayed,” says Mark Fratrik, senior vice president and chief economist at marketing research and consulting firm BIA/Kelsey. “When Wall Street is growing, it provides the financial foundation for people who have stocks and bonds to be more optimistic,” says Fratrik. “This ties into their willingness to buy cars, fix up their homes, and go out to restaurants, creating capital for myriad businesses to invest in their [own] growth.”

17Jun_Trump_p37bWILBUR ROSS
Secretary of Commerce

An investor and former banker, Ross made billions of dollars in leveraged buyouts, making him the wealthiest member of Trump’s well-heeled economic team. He’s reportedly in charge of establishing the administration’s trade priorities, a role usually assigned to the U.S. Trade Representative. Ross’s initial task is to scrutinize existing trade agreements for evidence of violations and then to determine an appropriate response. He has said that will take time and patience — good news for free-trade advocates.

Then again, Ross used some strong rhetoric in April when the Commerce Department announced duties of 3% to 24% on Canadian softwood exporters. He is also making noise about the necessity of defending the U.S. steel industry, tying the idea to national security concerns. “The whole idea of trade deals,” Ross has said, “is to build a fence around participants inside and give them an advantage over the outside.”

Ross enjoys a long personal relationship with the president and is widely expected to be the most influential Commerce Secretary in modern U.S. history. While some of Trump’s economic advisers are hardliners on trade, he is measured and pragmatic.

“Trump knows very little about the intricacies of trade deals, which he acknowledges are more complex than he had understood them to be,” says Hauser. “He will lean on Ross, who is expected to have a lot of sway.”

Director, National Trade Council

A former professor of economics at the University of California, Irvine, Navarro is a staunch nationalist on trade issues. He has regularly condemned the country’s trade imbalances with China, Japan, and Mexico; suggested imposing a tariff on German automakers BMW and Mercedes-Benz; and raised the idea of making companies repatriate their global supply chains.

Laurence Kotlikoff, a professor of economics at Boston University who ran for president last year as a write-in candidate, is deeply alarmed by Navarro’s views. “He’s got a doctorate in economics, but given the things he’s said I don’t think Congress should view him as a real economist,” he explains. “He apparently has no understanding of international trade or even rudimentary economics.”

17Jun_Trump_p38aAsked to elaborate, Kotlikoff comments that the U.S.’s trade deficit is of its own making and that other countries are not to blame. “The real reason for the deficit is the difference between domestic investment and U.S. saving,” he says. “Our country is saving just 4% of its output, far below the 15% national savings rate recorded in the 1950s. Instead, foreigners are investing here, which shows up in the form of larger trade deficits.”

Other economists express similar concerns about Navarro. “He makes crazy comments that are disturbing, illogical, and inane,” says Fratrik of BIA/Kelsey. “If the president followed what Navarro wanted, it would devalue what the [country’s] founders did and wanted. Fortunately, I have enough faith in the ways of American government that I believe the dastardly things Dr. Navarro suggests won’t come to fruition.”

Echoes William Dickens, distinguished professor and chairman of the economics department at Northeastern University: “Navarro’s clueless about supply-side economics, confuses tariffs with value-added tax, and doesn’t understand that tariffs disadvantage imports.”

Of course, none of that means Navarro won’t wield any influence. “He has a world view he can connect to policy, which Trump could deploy if he seeks a trade war,” notes Hauser.

Director, Office of Management and Budget
Mulvaney was on everyone’s mind when the president’s tax-cut plan was announced, given his reputation as a fiscal hawk. Would he approve of a giant tax cut without much of a plan to recoup the lost income?

17Jun_Trump_p38bHis response: the tax plan’s impact on economic growth, in addition to the closure of unspecified tax loopholes, would make up the difference. Or at least, that’s what he hoped initially. He subsequently told CNBC that there’s no way to know for sure what the effect on the deficit will be.

Clearly, Mulvaney is in a tough spot. The former Republican representative from South Carolina opposes hikes in defense spending that are not accompanied by non-defense spending decreases. That puts him at odds with the president’s plans for vastly increased military spending.

Nonetheless, his fiscal hawkishness is seen as a needed balancer in an administration that’s so zealous about “winning.” Mulvaney was the principal architect of the failed 2011 Cut, Cap, and Balance Act to counter proposed increases in the debt ceiling. At the time, the federal debt was $14.3 trillion; today it’s close to $20 trillion. Small wonder he’s an uneasy defender of the “biggest tax cut in history.”

He also parts company with the president when it comes to Medicare and Social Security, both of which Trump has vowed to keep intact. The budget director wants to increase the eligibility age for Social Security and supports means testing to qualify for Medicare benefits.

U.S. Trade Representative
Lighthizer was a deputy trade representative during the Reagan administration and helped broker bilateral trade agreements. A partner at law firm Skadden Arps, he is considered an expert in trade litigation, policy advice, and legislative initiatives. He espouses a hardline position on trade, particularly with regard to the interests of manufacturing, agricultural, financial services, and technology companies, the sectors he represents in his law practice.

17Jun_Trump_p39aDespite Trump’s recent moderation on trade, Lighthizer is not likely to pull back from his position. “He represents the pre-existing flank in the Republican Party that has a rigid stance on trade, supporting a notion that Navarro is not completely out of the game and Cohn’s influence is not everything,” Hauser says. “His trade experience will be taken seriously by all concerned.”

After being confirmed in May, Lighthizer’s first task was expected to be to negotiate with Mexico and Canada over NAFTA.

Nominee, Undersecretary of International Affairs, Treasury Department
The former Deputy Assistant Treasurer under two presidents (Ronald Reagan and George H.W. Bush) served on Trump’s economic advisory team during the presidential campaign. He has been touted as a possible successor to Janet Yellen at the Federal Reserve, although Trump is now warming to the idea of retaining Yellen.

Malpass is controversial for having once called the housing and debt markets bit players in the U.S. economy. That was in August 2007, with the credit crisis having already begun, and scant weeks before the markets began hammering the economy at the beginning of the Great Recession. At the time Malpass was chief economist at Bear Stearns, which collapsed along with the housing market the next year and was sold to JPMorgan Chase for a pittance.

17Jun_Trump_p39bHis tendency to make wrong calls — he also urged the Fed to sharply hike interest rates in 2011 to counter the threat of inflation — gives pause to many economists. “His forecasting record is abysmal,” says Northeastern University’s Dickens.

Malpass does bring extensive government experience. And his positions are clear. Chief among them: the Federal Reserve’s interventionist policies are misguided; China and Japan have manipulated their currencies and thereby harmed U.S. economic interests; and U.S. tax policy must be overhauled.

Does he have the president’s attention? Possibly yes, given the unveiled laundry list of proposed tax cuts; and possibly no, considering Trump’s revised position that China is not in fact a currency manipulator.

The Upshot
Stirred together in a pot with a pinch of Kushner and a dash of Bannon, the president’s economic team is a strange stew. Hauser boils down the advisers into two groups vying for the president’s attention—Malpass, Cohn, and Mnuchin versus Navarro, Mulvaney, and Lighthizer, with Ross in the role of swing voter.

On trade, the first group appears to have gained the upper hand. “The outlook for international trade is much better than it was on the days Trump was elected and inaugurated,” says Hartwig. “We’re beginning to see a move to the center in terms of the president’s positions, pulled there by some of his key advisers.”

Kotlikoff laments that the economic policy team “doesn’t have one real economist on it.” Fratrik, though, is buoyed by the migration toward more mainstream Republican positions, such as a tax cut coupled with more restrained and thoughtful trade actions. “I especially like the idea of having Wall Street people enmeshed on the economic team as a counterbalance to the trade protectionists,” he says. “All in all, it should be good for business.”

As the president’s more experienced economic advisers gain footing, their influence may be tempering his hardline positions and having a tangible impact. “The truth is, he needed this kind of advice,” says Hartwig. “It was pretty inevitable that this would happen.”

Russ Banham is the author of 24 books and a longtime contributor to CFO.

Pressure’s On

HRO Today

By Russ Banham

At the end of the last century, globalization resulted in an extraordinary uptick in the volume of employees on assignment abroad and the length of their stays. The tax, legal, and immigration rules limiting the duration of these assignments were different but difficult to enforce given the mass of assignees and their ebb and flow. Those days are long gone.

Most countries today are stringently policing their rules and harshly penalizing companies for non-compliance. Stay too long in a country and risk a stiff fine or worse—incarceration and the permanent barring of the employee to conduct business in the country.

The constantly shifting landscape of regulations across the world makes compliance even more problematic.”Privacy, visa, and tax regulations are forever in flux, putting the onus on companies to stay on top of these changes,” says John Fernandez, executive vice president at relocations services provider Global Mobility Solutions (GMS). “Failure to do so can be financially painful.”

It’s no wonder that nearly eight in 10 corporate respondents (79 percent) to a 2016 survey by Cartus on global mobility practices said their organizations has increased their focus on compliance in the last two years. Seventy-two percent also stated that they want to get ahead of possible challenges much sooner.

This due diligence is likely to be necessary, as the global regulatory environment reacts to the impact of Brexit on the European Union and the Trump administration’s interest in trade protectionism. If other EU countries follow Britain’s plans to leave the union, the freedom of movement currently enjoyed by business travelers will curtail.

“If the EU fragments, which we don’t see happening, it would result in a need for separate agreements with each country in the union,” says Bill Nemer, president of relocation services, at Graebel Companies, Inc. “The reciprocity that currently exists would likely change, resulting in a patchwork quilt of new treaties affecting global mobility.”

At the same time, potential policies in the U.S. may incite retaliatory actions by foreign trading partners that could have an impact on global mobility. “We’re beginning to hear from clients with a significant factory presence in Mexico that they are having internal strategy sessions to assess the impact on the mobility of their employees from a possible border wall and Mexico’s reaction to it,” says Ivana Gibson, vice president of client development at relocation services provider MSI.

Already an Uphill Climb

The present state is already tough enough from an expatriate compliance standpoint, given the vast array of complicated tax and immigration statutes and codes. As nations look for ways to increase national tax coffers, they’re sharpening their knives to ensure foreign corporations pay their due share.

“Historically, compliance has always existed for companies with employees traveling on assignments abroad. The difference today is that governments are cracking down to make sure the rules are followed precisely,” says Gibson. “When regulators learn a company is non-compliant, the consequences are much stronger.”

Global Mobility Solutions’ insight into penalties and fines on a country-by-country basis gives pause for deep consideration. In Australia, a company found to be noncompliant can be refused permission to sponsor future foreign employees. In Japan, a non-compliant employee can be incarcerated for up to one year and be barred from future entry to the country. In Korea, a two-year incarceration is possible. In Germany, an employer can be fined up to €500,000 for non-compliance. In France, the fine is €75,000 per non-compliant employee.

A particularly disturbing scenario is one in which an employee inadvertently violates a country’s reentry regulations. “We’ve seen situations where an employee is detained for days at a foreign airport before the situation is resolved,” says Fernandez.

Employees working in a country for a specific duration of time may be required to pay income tax and social security tax on wages earned during the assignment period. Not all countries require the latter, however.Many nations have signed bilateral social security tax treaties that exempt the assignee from having to pay social security taxes in the host country to avoid dual taxation. The U.S., for instance, has 25 such agreements in place.

Employees even may be required to pay a tax on the income they derive from dividends on the corporate-provided stock they hold. “If the employer provides equity to an employee who is abroad in certain countries for a longer period that is allowed by law, the dividends may be construed as taxable income by the host country,” Gibson says.

This hodgepodge of different regulations also confronts companies in domestic U.S. employee assignments. States with an income tax typically require out-of-state assignees to pay state taxes on their income if they spend at least 183 days in the state, either consecutively or in total. This can be a rattling surprise for an employee from a state without an income tax. “If you live in a state without a state income tax, but work half the week in another state with the tax, there is a point at which you may be required to pay a significant portion of your income as tax to the second state— something you may never have imagined,” Nemer says.

On the Guard

Governments simply want their fair share of taxable income, and they now have the technological means to obtain it. In this era of digitization and rapid data access and exchange, customs agents can easily discern how many times a business traveler has been in the country and the duration of these visits. “They add up the days and if it exceeds what is permissible by law, they’ll detain the person,” Fernandez says.

Some assignments abroad are easier to manage than others. For instance, a long-term assignment is not as difficult to track as one in which an employee travels to a foreign location on a frequent, repetitive basis. “This type of mobility is perceived as cost-effective, but it is far more difficult to track for tax, visa, and immigration compliance,” Fernandez says.

The various compliance issues compound for global companies with hundreds if not thousands of employees constantly on the move. Unless they have the in-house expertise to know where these individuals are at all times, they’re apt to overlook a non-compliant assignee.What might they do to up their game?

All companies need to be more proactive, constantly checking a host country’s treaties and regulations and the detailed explanations within them. The rules must be compared to assignees’ travel schedules, explicitly tracking how long they are abroad in each region (on business but also on vacation) to ensure full compliance.

As the world of business enters a period of potential trade upheaval, Gibson advises against knee-jerk reactions. “Global mobility compliance must be pursued strategically as a high-level business objective,” she says. “You need to address the entire question of compliance, not just a segment of it.”

This due diligence is never ending, she adds. “The moment you think you’ve got it all figured out, there’s always an unexpected surprise.”

In this era of digitization and rapid data access and exchange, customs agents can easily discern how many times a business traveler has been in the country and the duration of these visits.

Russ Banham is a Pulitzer-nominated journalist and author of more than two dozen books

SIDEBAR: Costly Non-Compliance

Fees and penalties for organizations that don’t maintain compliance when relocating an employee vary by country. But they have one thing in common: They are costly. Here’s a snapshot of what an organization could expect if they aren’t following country protocol.

Australia: Organizations may lose the ability to sponsor future foreign transferee.

France: Organizations can incur a fine up to €75,000 per noncompliant employee plus possible debarment from continuing the business for up to five years.

Germany: Fines for employees can be up to €1,000 and up to €500,000 for organizations for an offense of negligence.

Japan: Non-compliant organizations face a fine up to 3 million yen and/or incarceration for up to three years.

Korea: Organizations can incur fines up to 20 million won or two-year incarceration.

Spain: Fines are up to €60,000 or closure of the company for up to five years.

United Kingdom: Organizations face up to a £10,000 fine per noncompliant employee.

USA: Organizations are subject to fines from $110 to $1,100 per employee for technical paperwork violations. If it’s a first intentional violation, fines climb to $375 to $3,200 per employee and up to $16,000 per employee for repeat offenses.

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Small Wonders In Flat Screens: How Nanoscience Is Shaping The Future Of Television


By Russ Banham

By Russ Banham

Since the dawn of high definition, electronics companies have raced to make ever larger TVs at lower prices while making colors more lifelike and brilliant.

And while consumers have come to expect incremental improvements year after year, the quest to create a TV that can produce all of the colors that the naked eye sees has reached a remarkable turning point.

After a generation of scientific discovery and technical experimentation, a new era of television may be upon us in the form of quantum dot technology.

So small are these dots that they cannot be seen with either the naked eye or a typical microscope. Yet it’s their very stature that makes them able to convert light into any color in the visible spectrum.

Quantum Dots Discovered

Renowned chemical physicist Louis Brus discovered quantum dots at Bell Labs in the 1980s, and it took decades to transform his groundbreaking discovery into commercial products. Much of that work was done at Nanosys, a nanotechnology company co-founded not by Brus, but by one of his graduate students, Paul Alivisatos.

Although the quantum dot technology developed by Nanosys is inextricably linked to 4K displays today, the underlying technology was originally developed for a different application.

“We were investigating the creation of really high-quality semiconductor crystals for use in telecommunications,” Alivisatos said. “We wanted these materials to be very precisely controlled in terms of the number of atoms. It was a fascinating journey, particularly since many people didn’t think what we were hoping to achieve was possible.”

In the 1980s and ’90s, the hypothesis was that making small semiconductor crystals was more prone to defects than making larger ones. It turned out that the opposite was true.

“My research group measured the melting temperature in making the crystals, and as it became lower and lower, it resulted in fewer defects,” said Alivisatos, Samsung professor of chemistry and materials science at the University of California, Berkeley, where he is also vice chancellor for research.

Alivisatos and other researchers eventually determined the reason: Smaller crystals take less time to heat and cool. This reduces the likelihood of contamination and, consequently, defects. The same phenomenon is at play when the Earth’s mantle makes diamonds, explaining why the tinier a diamond, the less chance of faults.

Every Color We Can See

A related discovery involved the quantum effect — the idea that when a crystal becomes very small, it affects the energy levels of electrons inside. In lighting applications, this means higher frequencies of light are emitted as the size of the crystal decreases. A range of different-sized crystals produces a rainbow of colors.

Quantum dots are composed of three parts: core, ligand and shell. The size of the core determines what color a quantum dot emits, and the shell protects the core from exposure to air and moisture.

“The size and the shape of the dots determine their electronic characteristics,” Alivisatos said. “When you change the number of atoms in a crystal, you can change the color at will.”

In other words, by changing the size of a quantum dot, you can control the color of light that it emits. This is similar in effect to the different sounds produced by a guitar string. The shorter the guitar string, the higher the pitch. The longer the string, the lower the pitch. Quantum dots behave in much the same way. But rather than being tuned to emit sound of different pitches, quantum dots are tuned to emit light of different colors. Bigger dots emit longer wavelengths such as red; smaller dots emit shorter wavelengths such as green.

Although red and green are great for Christmas, they’re not ideal for high-quality TVs. But here’s where the technology gets really interesting: The LEDs, or light-emitting diodes, that produce the backlight necessary to illuminate displays in televisions are blue.

And because blue, red and green are the primary colors of white light, a quantum dot can produce every color seen by the naked eye. As Alivisatos put it, “Quantum dots can make colors that match the sensors in our eyes.”

For his work in developing nanocrystals, Alivisatos was awarded the prestigious National Medal of Science for Chemistry in 2014.

What Took So Long?

Soon after the discovery of quantum dot technology, scientists began to look at how they could turn a laboratory curiosity into a commercially viable product. But that took a company dedicated to its commercialization.

The Samsung Advanced Institute of Technology, the company’s research and development hub, began to explore the potential of quantum dots in 2001.

That same year, Alivisatos and entrepreneur Larry Bock founded Nanosys with the express mission of commercializing the technology.

Nanosys in its early years achieved modest success at best. No products were developed through 2008, and a planned initial public offering failed to get off the ground.

Then Jason Hartlove took the reins of Nanosys as president and CEO. An electrical engineer with 20 patents to his credit, Hartlove had a track record of turning emerging technologies into successful products and emerging companies into successes. At Hewlett-Packard, Hartlove helped commercialize the first optical mouse. As president of the Imaging Solutions Division at MagnaChip Semiconductor, he transformed the internally focused semiconductor group into a multinational company.

Hartlove was optimistic about the future of quantum dots in television displays, envisioning them collectively as a more affordable alternative to competing technologies.

“LED backlight technology is nothing new, having first come to the market in 2004 with Sony’s Bravia TV,” said Hartlove. “That television used separate and distinct red, blue and green LED lights to create a broad spectrum of colors. Its performance was phenomenal.”

But red, blue and green LEDs were not cheap. And they produced a lot of heat, which had to be dissipated.

“The original Bravia 42-inch display unit cost well over $5,000 and was the size of a battleship to address the heat created by the LED,” Hartlove recalled.

To bring down the price point, TV manufacturers substituted white LEDs for the expensive red, blue and green variety. But white light contains a lot of blue and yellow colors and not much in the way of red and green, which diminished the color quality. The goals of a less expensive, more compact display unit were achieved, but at reduced color performance.

Quantum dots appear to solve this dilemma.

“When a quantum dot is hit with light, it responds with a very specific color that can be precisely controlled,” said Hartlove. “The ability to precisely convert and tune a spectrum of light made them ideal.”

Just Like The Movies

Once the technology was perfected, TV manufacturers lined up to incorporate quantum dots into their displays, which involves a unique process.

Making a quantum dot involves “growing” the core from a liquid at high temperatures. Once it reaches its desired size, the core is then removed from the liquid and coated with the shell.

How quantum dots get inside displays varies from manufacturer to manufacturer. Quantum dots can be combined with organic LED pixels, which emit color when activated by electricity. They’ve also been used in LED displays to produce a better white backlight and more color on screen.

There were 60 companies working with quantum dots in 2015, and the industry expects that number to grow to 97 this year, according to Samsung. They include research companies, materials suppliers and brands invested in the technology.

As a testament to the growing prominence of quantum dot technology, Samsung at CES 2017 unveiled three QLED TVs — a new line of 4K displays based on quantum dots that the company developed in association with Nanosys.

For the past several years, Samsung has been the largest strategic investor in Nanosys and works closely with the California company on research and development.

Now that Samsung has begun selling the QLED TVs, it is emphasizing the capabilities of the underlying technology to consumers.

“Most manufacturers make no mention of the technology,” Hartlove said.

Samsung gets quantum dots into QLED TVs by mixing them with a resin, creating a film — one layer in the flat-screen sandwich.

The TVs use metal quantum dots that do not contain cadmium, a toxic substance that has been used by other manufacturers, according to Samsung.

The Samsung dots enable QLED displays to produce 100 percent color volume, or all of the colors in a given color range at high brightness levels, the company said.

By comparison, in organic LED displays, color-rendering capabilities diminish as brightness levels go up, writer Mark Henninger said in a post for the audiovisual enthusiast site AVS Forum.

“I’ve consistently seen how the OLED stumbles when asked to render bright, vivid colors,” he wrote. “The reason for this is not simply that these LCDs render brighter specular highlights, it’s because they can reproduce a wider color gamut at high brightness levels.”

Samsung announced in February that independent tests conducted by a major technical association in Europe confirmed the color volume capabilities of the QLED TV, making it the first to obtain independent verification.

Televisions produced by Samsung last year were able to cover 84 percent of that range.

“Having a TV in your home that can reproduce all of the colors you’d expect to see in a movie theater with a professional-quality projector is pretty amazing,” Hartlove said.

Russ Banham, a Pulitzer-nominated business journalist and author of 24 books, writes frequently about technology.

Not Enough Care in the World

By Russ Banham

HRO Today

Looking for a career with wide employment availability? On the last day of business in 2016, there were 1.1 million job openings in the healthcare industry: the largest number recorded since the Bureau of Labor Statistics (BLS) started surveying the sector in 2006.The war for talent in the industry stems from several factors, including a fast-aging population that uses the healthcare system more frequently, the retirement of specialized medical professionals, and a growing demand for nurses outside the healthcare sector from businesses that offer highly competitive compensation and benefit packages. The Affordable Care Act—whatever its fate— and the recovery of the U.S. economy have also expanded public access to healthcare.

Doctors and nurses are not the only professionals in short supply. Hospitals are also struggling to attract non-clinical employees such as data scientists/analysts, lab technicians, respiratory therapists, technology imaging personnel, and pharmacists, given that there are greener pastures outside of hospital work. But clinical professionals such as specialized nurses are the toughest hires for many healthcare institutions.

In Florida, for instance, the nursing shortage has reached epic proportions. The Florida Center for Nursing tallied more than 12,400 vacant nursing positions across the state last year—up more than 30 percent from the number in 2013. “There’s been a mass exodus of nurses here leaving for other opportunities elsewhere,” says Mark Marsh, president of Orlando Health Central, which serves 1.8 million central Florida residents.

In Philadelphia, the general nursing shortage is not as acute, but the same pressures are at play to recruit other specialized nurses. “We’re experiencing significant challenges in our intensive care nursing line,” says Rob Croner, senior vice president of HR at Children’s Hospital of Philadelphia (CHOP), a pediatric healthcare facility and primary care provider. “These nurses need to have long experience and seasoning and are harder to find. It takes years to train a nurse just beginning their career.”

CHOP is also experiencing problems hiring physicians who are experts in sub-specialties such as neurology, and the facility endures an uphill climb recruiting non-clinical positions. “Like other institutions, we’re having issues recruiting data scientists to analyze and understand our outcomes-based patient data across multiple disciplines,” says Croner. “Finding quality control and process improvement professionals to enhance our operational efficiency is another recruitment challenge.”

Both healthcare institutions are improving the status quo through recruitment process outsourcing (RPO), transferring parts of their recruitment processes to external service providers specializing in the healthcare sector. CHOP retains Cielo Healthcare, and Orlando Health Central retains Cross Country Healthcare to target quality job candidates with compelling pitches, leverage technology and social media to create sustainable talent pools, and cost-effectively manage recruitment and onboarding workloads on a scalable basis, among other benefits.

“RPO alone is not the `great savior,’ given the broad dimensions of the problem. But having a dedicated person working alongside management to rapidly identify, source, and connect with high quality candidates fitting our culture has helped us be more successful acquiring needed talent in a quicker timeframe,” says Marsh. “A two-week window can make all the difference in recruiting skill sets that are in high demand. Wait three weeks and the talent goes elsewhere.”

Sustainable Recruiting

Boiled down, the critical talent shortage in the healthcare sector is a consequence of increasing demand colliding with decreasing supply. The senior population in the U. S. is predicted to double between 2017 and 2050, from 47.8 million people to 88 million. Many of these individuals are going to spend a portion of their golden years utilizing healthcare services or confined to hospitals for short-term stays. However the number of physicians and other clinical care professionals available to treat this growing volume of people cannot keep pace. For example, BLS projects 1.2 million vacancies for registered nurses through 2022.

The physician workforce is similarly expected to decrease by somewhere between 61,700 and 94,700 people through 2026, with significant shortages in many surgical specialties, according to a 2016 study by the Association of American Medical Colleges (AAMC). As healthcare utilization increases, the patient-doctor ratio will rapidly dwindle. “If currently underserved populations utilized healthcare at the same rate as the rest of the population, an additional 40,100 to 96,200 physicians would be needed (in 2026),” the study stated.

Toss in an expected 8.6 percent growth in the overall U. S. population, from 319 million to 346 million people by 2025 and the lopsided nature of the supply-demand equation becomes painfully evident and extremely concerning. “The physician shortage is real. It’s significant, and the nation must begin to train more doctors now if patients are going to be able to receive the care they need when they need it in the near future,” says AAMC President and CEO Darrell G. Kirch, MD.

The problem isn’t just a dwindling supply of medical professionals colliding with a growing cohort of people needing healthcare. Doctors and nurses can find jobs outside hospitals, often with better terms and conditions. “With the upswing in the economy, nurses can now choose from a variety of career paths that often lead away from providing direct patient care,” explains Buffy Stultz White, senior vice president, recruiting strategy and operations, at Cross Country Healthcare.

Better hours, salaries, and lower stress levels are compelling nurses who’ve previously chosen a hospital setting to careers in telehealth, insurance, and other alternatives, she adds. “With nurses comprising the largest group of healthcare professionals, a lack of qualified nursing staff can have a greater organizational impact than shortages in other fields.”

Another factor adding to the talent shortages is the upswing in the economy. “With the economy improving, more people can afford healthcare, which makes them more apt to go to the doctor,” says Dan White, president of Workforce Solutions, a division of RPO provider AMN Healthcare.

The consequence of the stark and growing imbalance in supply and demand has been intense competition for skill sets in the healthcare sector. “Talent is the key initiative for any healthcare organization, no matter where you are in the country,” says Marsh. “We’re all fighting for the same pools of highly skilled people. But good people always have options.”

RPO alone cannot solve the shortage in nurses, doctors, and non-clinical professionals that are essential in the healthcare industry. But it can help, says Jill Schwieters, president of Cielo Healthcare. “RPO offers healthcare facilities expertise and access to great recruiters, great recruitment processes, and great technology,” she asserts.

Schwieters has personal experience coping with the sector’s talent recruitment challenges—she’s the former regional vice president of human resources at Wheaton Franciscan Healthcare: an integrated healthcare delivery system with nearly 25,000 employees in four states. “Too many hospitals look for a quick fix to a problem that requires a sustained response,” she says. “Instead of throwing money away on external search agencies, RPO is a cost-effective and highly sustainable recruiting strategy, presenting the means to find, attract, and hold onto great talent.”

Cross Country’s Stultz White shares this opinion, noting that RPO providers are specialists in targeted marketing campaigns that find qualified skill sets eager to work for a particular healthcare facility. “RPO solutions increase candidate flow for hospital vacancies, support the employment brand of the healthcare facility, and widen the talent net to fill even the most challenging positions,” she says. “We have experts solely dedicated to the recruitment of clinical professionals.”

These experts rely on research and analytics to develop leads to particular skill sets, which are then nurtured through ongoing communications with this talent pool. “Most often, the first benefit realized through a healthcare-focused RPO provider is [the client’s] speed to access qualified talent pools,” Stultz White says.

AMN’s White distilled the value of RPO as enhanced recruitment marketing. “Recruiting is essentially sales—you’re looking to `sell’ someone to join your organization,” he explained. “You can’t just post a job opening and expect people to be drawn to it. You have to go out and proactively find the right people and then carefully draw them in, selling them on your value proposition. That requires a set of marketing skills that normally does not exist in the typical healthcare setting.”

Casting a Wider Net

Both CHOP and Orlando Health Central have found value in leveraging RPO. Marsh is a longtime proponent, having utilized RPO in the three previous healthcare facilities he led as CEO (Tennessee’s Gateway Medical Center and Marshall Medical Center and Greenview Regional Hospital in Kentucky), prior to helming Orlando Health Central.

“We want to be sure we always recruit the best people by offering a ‘best-place-to-work’ environment, but to retain them you have to constantly make good on that pledge,” says Marsh. “If we don’t create and cultivate the right culture, we’re at risk of them heading out the door.”

Croner at CHOP has relied on RPO the past five years to address the healthcare facility’s skill set shortages. “The reason is pretty simple, really—you’re engaging a firm whose specialty is recruitment in your industry,” he says. “The people Cielo hires are, by design and choice, healthcare recruiters—individuals well-versed in the sector’s talent problems and needs.”

This expertise assists RPO recruiters in identifying and tracking passive job candidates—skilled people who are currently employed and not looking for a job, but may be open to the right opportunity in future. “We’ve had several success stories where Cielo leveraged social media and our mission branding to reach out to people we were otherwise not getting,” Croner says.

AMN has achieved similar success for its clients. White cited the example of a healthcare facility in Springfield, Illinois, that had difficulty attracting skilled people to the region. In this case, the institution was looking to fill a position for a clinical care nurse. “We used very sophisticated sourcing tools to figure out how to find the right person with the right pitch,” he says.

Ultimately, AMN’s recruiters learned on Facebook that a highly skilled clinical care nurse had family in Springfield. “Upon further digging, we realized she actually came from the area,” he says. “The pitch we made to her was to `Come back home to join the ranks of the best healthcare system in the area,’ which was true. She hired on.”

An additional benefit of RPO is the scalability of the process. “We do about 2,500 hires per year, but the number can go up or down significantly,” says Croner. “When it does, we’re paying a rate [to the provider] that is hinged with this up-and-down movement.”

Providers also offer a way for hospital staff to focus on their strategic mission: the care of patients. “Cielo takes care of things like background checking, compliance, prescreening, and onboarding, allowing us to make better use of our internal resources,” says Croner. “This liberates us to deliver a quality employment experience improving our talent retention.”

Tougher Road Ahead

The supply-demand imbalance for both clinical and non-clinical skill sets in the healthcare sector is likely to worsen in the years ahead, intensifying the competition among hospitals for the best of the best. RPO is just one tool that healthcare facilities can use to improve their odds of attracting the candidates they need and want. Other tools include a strong brand, competitive salaries and benefits, and meaningful and satisfying job experiences.

Russ Banham is a veteran financial journalist and author of more than two-dozen books.

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Gearing Up for a Manufacturing Revival

Technology, political will, and a focus on the customer could lead to a rebirth of manufacturing in the United States.

By Russ Banham


Ten years ago, American manufacturing was an oxymoron, as so much of what was sold by domestic manufacturers was produced outside the nation’s borders. This paradigm may now be altering, promising a new age for U.S. businesses that make things. How could manufacturing, a sector that has lost more than 35% of its jobs since 1979, return to its former glory?

A key factor in the change is President Donald Trump, who has pledged to return domestic factory jobs lost to foreign sources of cheap labor. The White House also seeks a reduction in the corporate income tax rate, wants to allow companies to be able to immediately deduct capital spending for tax purposes, and vows to peel back an assortment of regulations that Trump says put U.S. companies at a competitive disadvantage—all good news for American manufacturers.

At the same time, the U.S. economy is relatively strong. The stock market has posted more than $3 trillion in paper gains since the Presidential election, jobless claims are at a four-decade low, and business and consumer optimism are sunnier than Yuma, Arizona. Moreover, the much-watched ISM Manufacturing Report’s Purchasing Managers’ Index, which tracks movements in production, new orders, inventories, and employment, hit 57.7 in February, its highest level since October 2014.

Last, but far from least, are the extraordinary efficiency and productivity enhancements offered to manufacturers by such remarkable technologies as robotics, 3-D printing, and smart factory equipment embedded with semiconductors and sensors.

Those various developments herald what analysts optimistically call the Fourth Industrial Revolution, following the three previous ones—the introductions of the power loom in 1784 and the automobile assembly line in 1913, and the move from analog electronic and mechanical devices to digital technology in the 1990s. “We’re much closer to the ability for manufacturers to create products nearer to the source and nearly on demand,” says Mark Patel, a partner in McKinsey & Co.’s advanced industries practice.


Political pressure from the Trump administration is forcing companies to contemplate whether to manufacture on the home front. Several companies are bringing at least part of their production back to American shores—some in expectation that President Trump’s proposed tax and regulatory policies get implemented. Intel, for instance, announced a $7 billion investment in a new factory in Arizona that will create 3,000 jobs. GM is ponying up $1 billion to increase vehicle production domestically, and also plans to shift production elements from Mexico to Michigan, generating about 2,000 jobs. Competitor Fiat will invest $1 billion in plants in Michigan and Ohio, producing 2,000 jobs.

Foreign manufacturers are also planting stakes in the U.S. Foxconn, the large Taiwan-based contract manufacturing concern, plans to build a $7 billion plant making television displays on American shores. And German chemical company Bayer AG has promised the president that, if it gets the green light to merge with Monsanto, it will invest $8 billion in R&D domestically, maintain Monsanto’s 9,000-strong U.S. workforce, and create 3,000 new jobs.

Not every manufacturer is eager to relinquish overseas production, however. Milwaukee-based Rexnord recently finalized plans to close a ball bearings factory in Indianapolis and move the operation to Mexico, at a loss of some 350 U.S. jobs. Rexnord reportedly will pay Mexican machinists $3 per hour compared to the $25-per-hour rate paid to U.S. machinists.

But the resurgence of U.S. manufacturing is not just about the location of plants. For manufacturing CFOs entrusted with profitably allocating their organization’s capital, there may be better areas in which to spend money, such as mergers and acquisitions, new equipment, smart technologies, worker training, and research and development. Leveraging automated production processes like 3-D additive and subtractive manufacturing allows for rapid prototyping. And smart factory equipment embedded with sensors that report on how machines are performing—their stresses and failures—maximizes maintenance and minimizes downtime.

Obviously, such capital allocation decisions are not for the faint of heart. Feasting on today’s state-of-the-art plants, equipment, and software may end up looking foolhardy if the global economy stagnates. “Many of the decisions to be made right now in manufacturing are financial in nature, making the role of the CFO more critical than ever,” says Bob McCutcheon, PwC’s industrial products leader. “This will require finance to have a deep understanding of all the moving parts.”

To learn where some U.S. manufacturers are placing their bets, we interviewed the CFOs of Armstrong Flooring, Polaris Industries, and Marvin Windows and Doors. Each CFO laid out a different array of capital priorities, but they also spoke of a common goal: less focus on cost cutting, more attention to customers’ needs. And that manufacturing renaissance? It may look different than what the president and other politicians envision.


Jim Macaulay, CFO of Marvin Windows and Doors, agrees that domestic manufacturing is at the threshold of a revival. “Certainly U.S. manufacturing is making a recovery, thanks to leaner manufacturing techniques and the wide deployment of productivity-enhancing technologies,” he says.

Among the investments that Marvin has made are Computer Numerical Control (CNC) machines that are directed by computers to produce components on demand, reducing setup and inventory costs. For example, at a plant in Oregon that manufactures different-sized wood pieces, the company recently installed new laser visualization CNC machines that give operators a good look at a board before cutting it, to ensure “maximum yield”—the largest piece of wood possible from a single block of lumber.

The new CNC machines leverage X-ray technology to “see” inside the wood before it is cut, to visualize the knot and grain structure and the presence of defects. Previously, Marvin relied on the eyes of shop foremen to identify anomalies. “The computer inside the machine instantly analyzes the visual image to decide the best places to cut, increasing yield while reducing human intervention,” Macaulay says.

Marvin also has invested in embedding semiconductors and sensors inside factory equipment to calculate temperature, vibration, moisture, and other conditions. If a piece of equipment exceeds a particular temperature, the machine signals a possible problem for corrective actions. Information from the various sensing technologies flows to a central location where the measurements are displayed and monitored. “We’re better able to anticipate [equipment] failures and preventively assign repairs at off-times to maintain production efficiencies,” Macaulay says.

Since the machines are connected to each other in the Internet of Things, a problem often can be self-corrected—one machine automatically speeding up to allow another to slow down and cool off, obviating the possibility of one machine’s failure bringing all production to a halt, he adds.

How does the CFO approach the many internal requests for funding that clutter his desk? “The question I always ask is, Will this project enhance the customer’s experience?” says Macaulay. “Innovation is crucial, as long as it provides for a better customer experience. That’s equally as important as a project’s cost-reduction opportunities.”


Like many cost-conscious domestic manufacturers, Polaris Industries, maker of snowmobiles, Indian Motorcycles, and all-terrain vehicles, has a significant volume of its off-road vehicle production in Mexico. Aside from the cheaper cost of labor, the company maintains that vehicles made south of the border also are closer to those states that make up a sizable portion of the market for the company’s products.

But Polaris is also investing heavily in U.S. manufacturing. Last year the company christened a 600,000-square-foot, state-of-the art manufacturing facility in Huntsville, Alabama, where it builds its Ranger utility vehicle and the Slingshot three-wheel motorcycle. Once the factory is operating at capacity, the company expects to have 2,000 workers humming away. The multifunctional plant comprises vehicle assembly, chassis and body painting, welding, fabrication, and injection molding.

“Ten years ago, we tended to look for low-cost labor solutions, which the factory in Huntsville runs counter to,” says Mike Speetzen, Polaris’s executive vice president and CFO. “But we’ve more than made up the difference with lean manufacturing, highly skilled labor, and enhanced automation across the production lines.”

The new plant features state-of-the-art robotics that use precise calibrations to improve engineering tolerances and manufacturing efficiency. “The mindset here has changed from cost reductions to investing money for a payoff down the road,” Speetzen says.

In addition to spending $142 million on the Huntsville plant, Speetzen dug into the corporate wallet last year to acquire Transamerican Auto Parts, a manufacturer of Jeep and truck accessories with 170-plus retail stores, for $665 million. Speetzen also plans to increase the company’s R&D investments this year by 15%: “Innovation is critical to our business. Seventy to eighty percent of our revenue has come from products introduced in the last three years,” he says.

Polaris’s capital allocation plans have also changed. “It used to be all about cost-cutting, but now we realize that you have to spend money to save money,” he says. “The easy way out is to cut jobs or take costs out. We now look down the road at whether or not a particular [expenditure] will further our market position or the experiences of the riders of our vehicles,” Speetzen says.


Fast-changing consumer preferences have compelled Armstrong Flooring, a maker of wood, vinyl, engineered stone, linoleum, and other flooring products, to continually invest in innovation. One example is the company’s decision to expand its production capacity for making newer types of flooring like its LVT (luxury vinyl tile) line, a durable floor material composed of polymers, plasticizer, limestone, and cultured diamonds. The one-of-a-kind flooring can realistically simulate hardwood, ceramic tile, slate, or natural stone.

“The high-end segment of the flooring market is the highest growth market,” says Jay Thompson, Armstrong Flooring’s senior vice president and CFO. “It’s such a fast growing category that it’s cannibalizing a lot of traditional flooring products like carpets and wood.”

To manufacture the new product, a second production line was built on an industrial brownfield site at Armstrong’s Lancaster, Pa.–based plant. “We’re very scrupulous [about] where we invest our capital,” says Thompson. “But the current climate for manufacturing, given the president’s assurances of tax and regulatory relief, is guiding us to lean forward to leverage more of our capital in profitable projects, of which the LVT plant is one.”

Spun off as an independent public company last year from Armstrong World Industries, Armstrong Flooring is looking to turn around several years of sluggish growth. Capital spending of $37.6 million last year is pegged to increase to about $50 million this year, with roughly $20 million earmarked for productivity and innovation projects.

“We’re investing in R&D, new product development, and marketing concepts to quickly move new products to market,” says Thompson. “We also have 17 plants worldwide, 14 of them in the U.S., needing a fair amount of repair and maintenance spending to remain viable. On top of that, we’re looking to drive greater efficiency, investing in automation to reduce waste and [increase] throughput.”

Armstrong Flooring is another company that has returned to manufacturing in the U.S. from foreign locales. In 2015, the company closed its scraped engineered hardwood flooring facility in Kunshan, China, onshoring the manufacture in Somerset, Kentucky. The decision was driven by the increasing cost of freight and labor in China and the growing demand for the flooring type domestically. “It just makes sense to move production closer to where we actually sell a product,” Thompson says.

Onshoring also eliminates several months in product lead time and improves Armstrong’s response to those fast-changing consumer preferences. “Manufacturing domestically made this a smart move for the business, helping us to restore our wood business to an acceptable return on capital,” Thompson says.

Like other manufacturers, innovation is the fuel igniting Armstrong’s capital allocation decisions. “We broadly lay out what we think our capital needs are going to be across three areas—the need to maintain current equipment, to drive efficiency in the business, and to accelerate new product development to be first to market with a new flooring,” says Thompson. “That gives us a target level of spending in the strategic plan. We then build this out project by project.”


The three CFOs interviewed all expressed a degree of optimism that has been absent in manufacturing, recalling the excitement surrounding lean manufacturing, Six Sigma, and just-in-time production concepts that consumed manufacturing attention at the end of the last century. Shortly thereafter, though, the focus switched to conserving capital through labor cost arbitrage. Will this resurgence prove longer lasting?

The confluence of time-saving, efficiency-gaining, and information-rich technologies has definitely put the manufacturing sector back on track, leading to greater productivity and higher profit margins. But the investment choices by manufacturing companies are not necessarily going to boost the total number of jobs for minimally skilled U.S. workers. Indeed, the skilled worker that can operate highly automated equipment on the shop floor is the one that will be in demand. And those workers have proven tough to find in the U.S. in the last few years.

Manufacturers, perhaps helped by the government, will have to find a way to solve that problem. And policymakers will have to refrain from protectionist measures that could make U.S.–made products less appealing in international markets. If both of those conditions are satisfied, the future looks pretty darn good for Made in America.

Russ Banham is the author of 24 books and a longtime contributor to CFO.

Manufacturing’s New Golden Age: Are you Ready?

By Russ Banham

Chief Executive 

Who says manufacturing in the United States is dead, shriveled up and blown away toward distant lands where manual labor is plentiful and cheap? Far from it. The country is at the threshold of a new golden age of manufacturing, one in which the physical and virtual words of production are integrated.

This connected ecosystem is called Industry 4.0, although other terms like SMART Manufacturing, Manufacturing 4.0 and The Fourth Industrial Revolution have been used to describe it. By embedding sensors and semiconductors in factory equipment and integrating this data with similar information coming from other activities and sub-systems across the value chain, manufacturers are making more functional products closer to customer demands, resulting in greater productivity, shorter times to market and higher profit margins.

“By capturing and analyzing the large data sets produced by intelligent machines across the supply chain, manufacturing capacity can be deployed more efficiently and cost effectively,” says Gaurav Dhillon, cofounder of data integration powerhouse Informatica, and currently the CEO of SnapLogic, a data integration platform-as-a-service provider. “Sophisticated algorithms can be applied to this wealth of data to glean insights into new production concepts and persistent problems like bottlenecks or product defects, pinpointing areas of improvement.”

Dhillon dubs this modern system of manufacturing “Turbo-Six Sigma,” borrowing the well-known set of management techniques intended to improve business processes. Now with
Internet-enabled sensors and algorithms, manufacturing processes can be improved at light speed, he says.

General Mills: An Early Mover
Large companies in the aerospace, automotive, chemicals, mining, consumer products, pharmaceutical and electronics industries, among others, imagined this future first, making the necessary investments in talent and research to bring it to fruition. A strong case in point is General Mills. “We’ve been on a journey for 25 years to achieve the goals of a connected enterprise,” says Jim Wetzel, director of global reliability at the $16.6 billion consumer foods manufacturer. “It’s not like we flipped a switch and here we are.”

It’s been an expensive trek, given the cost of technology a generation ago. “In 1993, the large TV you can buy today at Costco for $300 cost $4,000,” Wetzel says. “This order of magnitude exists across the spectrum of other technologies. Something that cost $100,000 now costs $10,000. And what used to take a year to develop now takes a month.”

Consequently, “midsize and smaller manufacturers can achieve much of the connectedness, visibility and optimization of the ‘big boys,’ but at less price and greater deployment speed,” he adds. By deploying and connecting smart technologies across its value chain, General Mills reaps value at different points along this spectrum.

As an example, Wetzel cites the impact on the company’s top consumer foods brand, Cheerios. Made from oats, the well-known cereal should have been naturally gluten-free—a plus for many consumers. However, at various points “from field to fork,” Wetzel says, the oats came in contact with grains like wheat and barley that contain gluten.

Where this contact occurred was difficult to pinpoint. Farm fields may have a rogue barley plant growing amid rows of oats because of strong winds blowing seeds from another
field. Farm equipment like trucks, grain siloes and railcars may have residue of non-gluten grains that adulterate shipments of oats. “Even though the oat crop started off pure and gluten-free, by the time the grain comes to the factory to turn into Cheerios, it may not meet the FDA gluten-free requirements,” Wetzel says.

The importance of the Cheerios brand to General Mills, insofar as its naturally gluten-free composition, elevated the need to solve the foreign grain problem. Filtering out the
non-gluten grains at the factory was too expensive, as barley looks a lot like oats. Much of the oat grains were lost through this procedure. The answer was to improve this process by combining today’s information technology and grain separation methodologies.

By connecting the grain supply chain to achieve visibility, every step of the grain conversion process can be controlled and optimized to ensure the integrity of gluten-free. “We’ve connected the farming co-ops and the grain elevators and all the other supply networks to track the genealogy of the oats as they traverse through the system,” says Wetzel.

Leveraging cloud-based information technology and a Smart Manufacturing platform, General Mills gained visibility from the field through the point of the product becoming Cheerios. “We have procedures in place to measure the amount of gluten and remove the source to ensure gluten-free perfection,” Wetzel says. Gluten-free Cheerios are now sold across the world.

Pfizer: Tackling Transparency
Like General Mills, Pfizer has long been engaged in increasing its productivity by enhancing visibility into its supply network. Five years ago the $48.9 billion pharma company
developed a master plan to shift from isolated operations and plants to an integrated, end-to-end, transparent value chain leveraging Smart Manufacturing processes across the product lifecycle.

This “audacious plan,” says Alton Johnson, vice president, global technology services, is reaping an increasing harvest of innovative and efficient production concepts at reduced cost.

Among these bold initiatives is a novel medicine factory Pfizer calls PCMM (Portable Continuous Modular Miniature). “While we have long pursued advanced manufacturing and
continuous processing capabilities, we had relied solely on fixed brick-and-mortar assets to make our products,” explains Johnson.

That was fine until the need arose to produce medicines for patients in a geographic region proximate to where they are located, such as gene-sequencing medicines derived from a patient’s cells. “To serve these patients, many with rare diseases and cancers, manufacturing facilities need to be closer to the point of use,” Johnson says.

That’s where the modular plants come in. Unlike a traditional brick-and-mortar factory, the small, portable, manufacturing units can be deployed anywhere in the world and quickly assembled to meet local patient or business needs. Encased within each mobile manufacturing unit is real-time process monitoring. Other advanced manufacturing innovations in the PCMMs include process analytical technology (PAT), a mechanism to design, analyze and control pharmaceutical manufacturing processes to ensure critical quality attributes, and predictive closed-loop controls integrated across the manufacturing process to decrease the time it takes to make a tablet from days or weeks to minutes.

At the same time, by developing both clinical and commercial processes in the same PCMM unit, Pfizer cut the time normally required to scale-up processes, while eliminating many process, quality and compliance risks.

Aside from the business benefits, the PCMMs present enormous societal value. “If we have an early signal that a new cancer medicine may be effective and can move the product through clinical trials quickly, we need the infrastructure and quality systems to manufacture the medicine just as fast,” Johnson says.

The first products developed using PCMM technologies are expected to be available commercially within the next year and one-half.

Arconic: Pinpointing Problems
Another company connecting machines and people across its manufacturing value chain is Arconic, a global manufacturing, technology and engineering business formed when Alcoa split into two publicly traded companies last year. Key customers include the aerospace industry, which has increased its use of aluminum in airplane construction. Boeing’s new 777x aircraft, for instance, has an aluminum fuselage and a ladder-like internal structure of aluminum ribs that connect the front and rear spars. Such advanced products require delivering on extraordinarily precise dimensions, tolerances, durability and other desired properties, while also meeting the industry’s exacting timetables.

Arconic is leveraging Big Data and advanced control and predictive modeling techniques to improve its processes. It achieves this by embedding Internet-enabled sensors in the production centers across its downstream operations, which then connect and communicate with each other. The effort is already paying off.

“We had a production center in one of our facilities that was the main bottleneck to meet increasing demands,” says Haresh Malkani, senior manager, manufacturing intelligence
and automation technologies at the company. “Thanks to our manufacturing intelligence system, we were able to access and visualize information from this production center in real time to discern the problem and fix it.”

A key contributor to the problem was an undesirable dimensional attribute that constrained manufacturing throughput. “We used a vision-based system to quantify the dimensional attributes, combined with a physics-based predictive model to develop optimized operating [instructions],” explains Malkani. “We then deploy the solution in an adaptive control loop to improve the dimensional performance and ultimate throughput.”

In the past, identifying the cause would have entailed manual investigations and experiments taking weeks to conclude. “Now this information is available to us live, in real time, to do the troubleshooting immediately,” says Malkani. “We’re getting the right data, at the right time, in the right form to the right people, resulting in enormous
productivity improvements.”

Broadening the 4.0 Boost
While these large manufacturers have become smart factories, many small and mid-size manufacturers (SMEs) are still in elementary school. “Midsize manufacturers tend to be laggards in terms of productivity and are struggling with where to make the right investments in Industry 4.0,” says Sree Ramaswamy, a partner at the McKinsey Global Institute, where he leads the manufacturing research practice.

However, SMEs can realize tremendous benefits from investing in Industry 4.0, says Peter Guarraia, a partner at Bain & Company and senior leader of the firm’s manufacturing and global supply chain practices. “What used to be solely the provenance of big industrial concerns is now at advantageous price points for much smaller manufacturers.”

With the costs of these different technologies rapidly falling, manufacturers of any size can optimize their production processes. By turning dumb factory equipment into smart
machines, midsize manufacturers can also access and analyze the flow of digital information coursing up and down the value chain. This is not an entirely new concept. Information has always driven the process of manufacturing—the physical object created from a design drawing. By digitizing the design, the drawing can be communicated to intelligent machines across the supply chain to execute it. Meanwhile, these sources of data are connected and integrated for analytical purposes, generating more insightful manufacturing decisions.

To smarten up, Craig Dissy, who leads the Manufacturing Competitive Initiative at Deloitte, says that midsize manufacturers must recruit and hire workers with the specialized
technology and engineering skill sets required to plan, build and manage these new systems. “Today’s golden age of manufacturing requires a different set of capabilities,” says Dissy. “Midsize companies must go head-to-head with much larger competitors to successfully recruit software engineers in Silicon Valley and elsewhere that have Smart Manufacturing knowledge and expertise. If they don’t do this, their competitors will, giving their customers new product capabilities at lower costs.”

Talent recruitment isn’t the only challenge. The proprietary nature of the standards supporting many Industry 4.0 applications presents data integration issues. Manufacturing consortiums like the Smart Manufacturing Leadership Coalition are working to even the playing field. The coalition has developed an open smart manufacturing platform enabling manufacturers of all sizes to easily and cost-effectively access open source Industry 4.0 technologies.

Fortunately, time is on the side of midsize manufacturers. “If Industry 4.0 is a nine inning game, we’re in the second inning,” Guarraia says. “Digitization is and should be an evolutionary process.” He advises CEOs of midsize manufacturers to steer their companies toward a point on the horizon three to five years away. “Expect to experience a non-linear journey with mistakes and slipups along the way,” says Dissy. “The goal is to hold tight to that vision of the horizon.”

The bottom line is that manufacturing is alive and well in the U.S. “Manufacturing used to be viewed as dirty, dumb, dangerous and disappearing,” says Deborah L. Wince-Smith,
CEO of U.S. Council on Competitiveness. “Now, it’s smart, safe, sustainable and surging.”

When Egos Get in the Way: A Guide for New CEOs

By Russ Banham

Carrier Management

Yesterday’s chief executive officers achieved success overseeing an organization in a fairly predictable environment. On well-understood business platforms, they had clear sight into market challenges and operational problems, guiding the right decisions to solve them. Time was on the CEO’s side to make these determinations.

This is no longer the case today. The blazing pace of change ignited by the technological revolution has muddied the waters. Many CEOs cut from the old cloth feel ill-equipped to make quick and insightful decisions. The incoming crop of CEOs who are new to their companies are not immune to the challenges.

Some new insurance carrier leaders climbed the corporate ladder the traditional way; others were recruited from another carrier. In some cases, they were brought in from outside the insurance business. In an industry long resistant to change, all are being tasked as change agents.

One reason is clear. Property/casualty insurance carriers confront growing competition today from nimble insurance technology startups armed with sophisticated concepts and tools, lower operating expenses, no legacy technology, and a consumer populace eager for alternatives.

Last year alone, according to CB Insights, an eye-popping 173 InsurTech startups raised over $1.7 billion (Jan. 4, 2017 Insurance Tech Insights blog). They were funded largely by Silicon Valley venture capital firms and global reinsurers eager to get closer to the customer and compete directly with primary insurers. In the startups’ quivers are arrows aimed at traditional ways of underwriting, marketing and selling homeowners, renters, automobile, small commercial and cyber risk insurance—to begin with. More esoteric lines of insurance also are vulnerable.

This well-armed and growing competition is injecting needed innovations across the insurance value chain, making boards of directors across the industry think twice about the current leadership’s ability to fight back.

As new CEOs enter insurer boardrooms, the task before these individuals is sizable. “A new CEO is a sitting duck,” said Katharine Halpin, CEO of The Halpin Companies, a strategic alignment consulting firm. “Landmines are always simmering underneath the surface. If they blow up, it will always be in a moment where the CEO is unprepared.”

Adaptation and Change

Tough decisions are required of the industry’s new leaders. They must adapt to a new economic agenda as the political engine veers right, recruit people with specialized skillsets in a cutthroat competitive talent market, invest in expensive technologies in an environment where last year’s brightest invention may quickly dim and date, and establish an agenda of shared values to ensure cultural alignment as their changes take root.

And they must do all of this in record time.

“As the pace of change accelerates, CEOs have less time to deliver successful results,” said Andrew Schwedel, a partner at Bain & Company, where he is a senior member of the firm’s financial services practice.

On the bright side, a new CEO has a fresh perspective to assess the industry’s challenges and opportunities—a different set of eyes to effect strategic and operational changes. Still, these breaks with custom must be accomplished in a calm and methodical manner to appease customers, employees and shareholders. A delicate balance must be struck between what the new CEO sees as needed and how much change these stakeholders can handle.

We reached out to several management consultancies, business authors and academics for advice on how to strike this balance. Should the new CEO bust through the front doors armed with bold strategic and operational initiatives or be more deliberative and first take the pulse of the business? Are there tried and true methods for the new leader to gain traction quickly at reduced costs? What are the early stumbling blocks they should heed and avoid? And why do so many CEOs derail—where did they go off the tracks so others can avoid the same fate?

Substance and Character

Almost all of the interviewees when asked the last question had the same response. “One of the biggest mistakes a CEO makes is to think he or she must put their stamp immediately on the organization they now lead,” said Joel Peterson, chairman of JetBlue Airways and a consulting professor of finance at Stanford University’s Graduate School of Business, where he has taught for the past 25 years.

Peterson maintains that many new CEOs take the reins at a company consumed with their image and legacy. While all leaders need a healthy ego to do what they do, a high self-regard can deeply affect the teamwork needed to achieve business success. “The world doesn’t revolve around the CEO, much to their surprise,” Peterson said. “The CEO is the coach, who only succeeds if the [executive] team succeeds. The job is to take these individuals to a place they wouldn’t get to without the CEO’s guidance. Leave your ego at the door.”

This is particularly difficult for an outsider coming in to lead a business. A sense that all eyes are looking at them can be overwhelming. In reaction, they develop feelings of entitlement that distances the very people whose support they need to attain success. “They start to believe that their strengths and capacity alone got them to this level of success, without remembering all the teams that worked hard to drive their successes,” said Halpin, author of the new book “Alignment for Success: Bringing out the Best in Yourself, Your Teams and Your Company.”

Humility gives way to hubris. “They have the title, but they don’t know anyone, have no internal credibility and no power base,” said Jeffrey Pfeffer, Thomas D. Dee II Professor of Organizational Behavior at Stanford’s Graduate School of Business. “Their first and biggest mistake is their erroneous belief that the title gives them much.”

Another common mistake is the failure to conduct in-depth research into the organization’s history, value proposition, past strategy, challenges and opportunities prior to Day 1 on the job. “They’re in such a hurry to get to the races, they come in with little knowledge of the company’s track record—its strengths and weaknesses,” said Greg Galeaz, insurance practice leader at PwC. “You need to know the problems before you can attack them.”

He advises new CEOs to undertake this research both before and after assuming power to craft a 100-day plan that will not become an agenda of priorities until Day 101. During this period, the CEO should reach out to senior executives and department and functional managers to understand the company’s nuances—the products, processes and systems that are in working order or broken.

Cultural Aspirations

Above all other considerations, a damaged culture must be repaired or changed. Every company has its own unique culture, one that formed when the entity was conceived. The founder’s ideas and aspirations inspired others who believed in the intrinsic value of the business. These individuals subsequently hired people who shared their beliefs and attitudes. Gradually, a workforce culture coalesced to characterize the company and guide its practices.

Over time, however, a wrong turn by the company may impair its culture. “If the company isn’t growing, there may be toxic elements in its culture, where the best idea no longer wins, only the most powerful people,” said Peterson. “In such cases, the culture needs to be fixed.”

In other cases, the culture may actually be quite robust, “but the new CEO rushes in acting like the patient is in danger, monkeying with a culture that is working just fine,” he added.

This outcome is often the case when the corporate culture of the business doesn’t jibe with the culture of the new CEO. “The CEO introduces fresh ideas of what it will take to be successful that result in [workforce] inertia when he or she tries to execute them,” Galeaz said.

Understanding where the cultures diverge will inform how to bridge the differences. “Culture is the glue holding together an organization,” said Peterson. “A new CEO must take pains to understand the culture of the organization to determine how best to execute change with the full support of the management team.”

Inside Out

A CEO nurtured within company ranks typically understands the condition of the business and how to improve its prospects. A CEO from outside the industry has a steeper learning curve to flatten. They also lack credibility in the organization. “Trust takes time to build. There are no shortcuts,” Halpin said.

Outside leaders tend to recklessly rush in with ideas carved in stone. There’s a reason for this tendency. “When the board sets up a CEO as a change agent, the person has a predisposition to move too quickly, hearing the ‘tick tock’ of the clock to deliver the changes that will turn the company around,” said Kimberly Whitler, assistant professor of business administration at the University of Virginia’s Darden School of Business.

Their impatience comes with a cost. “You need to know what’s not working before you can fix it,” Pfeffer said. “Otherwise you may change the things that actually are working.”

Trying to do too much too fast is a common mistake with all new CEOs, Schwedel said. “A CEO can only accomplish a few big things over their term at the top,” he explained. “This requires that they be really disciplined insofar as their priorities. Not every problem can be fixed tomorrow.”

To determine these priorities requires an honest assessment of the organization—the stability of its business model, its competitive position and the strength of its financial condition. “In some cases, the company may face an urgent crisis—plummeting earnings, a cash crunch or an imminent regulatory change wiping out a big chunk of revenue,” Schwedel said. “In others, there may be near-term issues that threaten the ongoing viability of the current competitive advantage, but there’s no burning platform.

“In both cases,” he recommended, “it’s far better to move too quickly than too slowly—but not without the facts.”

“Collect as much information as possible about the company,” said Peterson, author of the new book “The 10 Laws of Trust.” In this activity, he advised new CEOs to “put their ear to the ground and listen without an agenda.”

Human Capital Is the Most Important Capital

Trust is everything in business, particularly when it involves the executives and other employees charged with bringing to fruition a new CEO’s strategic objectives. Fear is the enemy of trust, however.

“If executives and other employees experience fast-paced changes after decades of stability, they may make assumptions about the company’s future and their own job security,” Halpin said. Once fear permeates a work culture, people become “reactive,” she maintains. “They clam up and become distrustful of management.”

The outcome in this case is that senior executives may have an agenda for the new CEO to fail. “The solution is to win over the key people who want you to succeed,” Peterson said. “Fortunately, many CEOs have the ability to pick the right team.”

Patience is required in this senior management selection process. “If the old guard doesn’t buy in immediately with your new strategy, give them time,” Galeaz said. “Be prepared for resistance. Maybe some executives had expected to be the CEO and are still hurting. People who are not like-minded at first may eventually fall in line. Changing the culture takes an evolutionary process.”

At some point the CEO may accept the need to hire executives from outside the organization. “Typically, these are individuals they’ve gone to war with in the past,” Galeaz said. “That’s fine, as long as the new CEO takes the time needed to get current executives and other employees on board with the strategy first.”

To capture the hearts and minds of these individuals, Pfeffer recommended that a new CEO ask what he or she can do for them, as opposed to what they can do for the CEO. “Find out the little irritants that make everyone’s jobs miserable,” he explained. “Maybe the place needs to be painted or the food stinks or they need new PCs. What will make their work lives better? Once that’s taken care of, then get to the meatier things, asking questions like, ‘What might take us out of business in the next five years?’”

The goal is to get the right people in the right roles focused on the right projects—right away, Halpin said. “This requires assessing each key executive’s strengths and matching their role with those strengths,” she added.

In these evaluations, an open mind is needed. “Make it safe for people to give feedback,” Peterson said. “And reward the negative feedback, as it may be the most honest information you get.”

Asked if an offsite meeting of top executives is the rightful way to acquire this knowledge, Peterson demurred. “Offsites tend to be superficial, people looking around at their colleagues wondering who’s going to make the cut and who isn’t,” he said. “I would wander the halls instead, dropping by each person’s office for a chat. Don’t ask them to come to your office like you’re the school principal. Be on their turf.”

The importance of earning the trust and support of the executive team cannot be overstated. “Most strategic failures happen right at the implementation of strategy,” said Vilmos Visangyi, a professor of strategic management at Penn State University. “The reason is the new CEO was unable to get people to buy into their priorities for change.”

A case in point is Ron Johnson, the successful head of retail operations at Apple, who was brought in as a change agent CEO by the board of J.C. Penney. “Ron came in and didn’t really understand the Penney work culture or its customers,” Whitler said. “He hired a new president, laid off lots of people, and got rid of couponing and discounting, which longtime Penney consumers loved. He had bold plans for change but had failed to test his ideas in advance. It’s a textbook example of what not to do as a new CEO.”

Johnson’s failure as an outsider CEO is writ large across industry. Too many CEOs come into a company thinking what worked for them in the past can be easily replicated. “CEOs tend to see the world through the repertoire of the skills they’ve already developed,” Visangyi said. “A product development guy sees a company’s problems in terms of product development. If the CEO is a marketing guy or an operations person, it’s the same thing. One’s past experiences make it difficult to adapt to the new business and its singular challenges.”

The solution echoes the same refrain—a patient and diligent approach to change. “It really does take 100 days to take in what’s really going on,” Visangyi said. “If you’re coming into a company as a change agent, understand that you need to understand its culture, cultivate relationships with the employees, and figure out what’s working and not working before you implement change.”

Successful CEOs know this because they have the ability to be empathic and introspective as well as hard charging. They leave their egos at the door, “humble enough,” as Whitler put it, “to know what they don’t know.”

Peer Pressure: Is Peer-to-Peer Insurance a Fad or the Future?

By Russ Banham

Risk Management

Among the hundreds of startups in the burgeoning field of insurtech—technology innovations designed to improve the insurance industry—are close to a dozen peer-to-peer (P2P) companies looking to compete directly with traditional insurance markets. While only one such company, Lemonade, is currently licensed to do business in the United States—and only in New York state—other P2P insurance companies have sprung up around the world.

Analysts have mixed opinions about the potential for the P2P companies to make market inroads. Some predict the startups will take significant market share from insurers, while others remain dubious. Most believe the P2P model appears to have a lot going for it, though, insofar as it could improve risk management, decrease the incidence of insurance fraud, and lower the cost of insurance.

So what is a P2P insurer? In many ways, it is a throwback to when groups of people came together to insure each other’s risks. This sounds a lot like mutual insurance, but one key distinction is that the policyholders in a P2P group do not own the company absorbing their exposures. The model also borrows from traditional captive insurance mechanisms in that the insurer bears either very little or no insured risk, ceding the losses to reinsurers.

Lemonade is a case in point. The personal lines insurance company underwrites renters and homeowners insurance. Premiums collected from group members are pooled to pay first-dollar losses. Beyond this threshold, losses are absorbed by its global reinsurance partners, which include Lloyd’s of London, Everest Re and Berkshire Hathaway’s National Indemnity.

Other than its unusual name, Lemonade is especially unique in how groups of policyholders are formed. When signing up to buy insurance, the applicant selects a particular charity. Others who choose the same charity are assembled as a group of policyholders for insurance purposes. When losses during the policy period are low enough to result in unspent premiums, this capital is donated to the charity.

Other P2P companies like Germany’s Friendsurance, which is a broker and not an insurer, have a slightly different model. Groups of policyholders are still formed, but they comprise people and their selected friends who join together to insure each other’s personal liability, legal expenses, automobile and household risks. After claims are paid out, any unspent premiums are returned to group participants.

Both cases depend on a form of peer pressure. Lemonade’s policyholders theoretically will try to be vigilant about their risks to preserve capital for a charity they believe in. Friendsurance’s policyholders will be equally alert to keeping losses down for the group, as their friends’ premiums may otherwise increase the following year. Participants in both companies are also theoretically less likely to commit insurance fraud for the same reasons.

For now, these companies have concentrated their focus primarily on personal lines and some small commercial uses. All are expected to broaden their offerings if the P2P concept catches on, possibly selling more specialized lines of commercial property and casualty insurance like workers compensation and employment practices liability.

“I believe the model has legs,” said Steve Kauderer, a partner in the financial services and insurance practice of management consultancy Bain & Company. “Right now they’re in the spectrum between personal lines and small commercial, but we expect them to move up in complexity.”

If he is right, corporate risk managers eventually may have another risk transfer option—one that may be more risk-sensitive and cost-effective than traditional insurance, thanks to the aforementioned peer pressure and the digital cloud-based solutions these startups use to underwrite, market and process claims more efficiently.

“If you are able to create a tight-knit group [of companies] in a community that is set up like a captive but is managed by a P2P entity that handles all the underwriting and claims administration baked into a competitive premium, I can easily see the model working for smaller businesses,” said Anand Rao, principal in the insurance advisory services practice in PwC’s Analytics Group. “I’m a bit more skeptical as you get to larger companies with more nuanced risks.”

Slow, Steady Growth

Analysts are not exactly calling P2P models the insurance equivalent of Uber, aimed at displacing the traditional market, although some P2P companies might like buyers to believe this.

In numerous articles and blogs, Lemonade’s Chief Behavioral Scientist Dan Ariely routinely criticizes the insurance industry for not returning unspent premium dollars to policyholders. He and other Lemonade leaders (who were unavailable for comment) insist this money belongs to policyholders and not to insurers as underwriting profit. Not that Lemonade gives the unspent premiums back to policyholders either—it deducts 20% of policyholder premiums as its fee and the rest flows instead to charities.

Ariely is the James B. Duke Professor of Psychology and Behavioral Economics at Duke University and the founder of the Center for Advanced Hindsight. His appointment by Lemonade emphasizes the behavioral underpinnings of its P2P model. The traditional insurance industry, in his view, has little to no appreciation for human behavior.

“We’ve spent recent years deepening our understanding of honesty and trust, and our conclusion is that insurance is crying out for a makeover,” Ariely said in a statement. “Lemonade aims to reverse the adversarial dynamics that plague the industry, transforming both the economics and experience of insurance.”

Lemonade began with renters and homeowners insurance products in New York when its license to sell insurance was approved by state regulators in September. The company has filed for licenses in 46 states and the District of Columbia and hopes to become available to 97% of the U.S. population in 2017. It also reportedly plans to underwrite commercial lines insurance at some point in the future. “Staffing Lemonade with bots instead of brokers allows for rapid expansion,” Shai Wininger, president and cofounder, said in a statement.

As the first P2P insurance company in the United States, Lemonade’s progress is being closely watched by the array of similar entities that have formed around the world. This long (and growing) list includes Guevara, a P2P brokerage model in the United Kingdom with a structure and value proposition analogous to Friendsurance’s; P2P Protect Co., Ltd. in Hong Kong; PeerCover in New Zealand; Riovic in South Africa; insPeer in France; První Klubová pojišťovna in the Czech Republic; TongJuBao in China; Huddle Money in Australia; and Besure in Canada.

It is difficult to provide an accurate prognosis for these startups. Fred Eslami, a senior financial analyst at A.M. Best, said that the rating agency has had difficulty communicating with the companies. “They’re pretty reticent when it comes to offering information,” he explained. “They don’t share too much with the outside world, so we don’t really know what their market share or premium levels are.”

Lemonade did reveal that it had sold $14,302 in gross written premiums in its first 48 hours and a total of $179,855 in gross written premiums in 2016. While not earth-shattering numbers, the company has nevertheless attracted substantial venture capital interest, announcing in December 2016 the closure of a $34 million Series B funding round. The additional capital augments the company’s total funding for full-year 2016 to $60 million. The money will go toward “rapid expansion in the coming months,” Lemonade said.

How rapidly will Lemonade and other P2P companies grow? In terms of writing large commercial lines, Eslami said he would be surprised if that occurred in the next five years. Kauderer predicted the pace will be “slow and steady.”

Kaenan Hertz, head of insurance innovation and fintech at EY, likened the current status of P2P companies to the internet in the late-1980, where what began as niche applications evolved into the sprawling network of today. He believes P2P could have a similar trajectory. “Conceptually, if you are bringing together people with a common cause—people who know each other or have similar opinions and feelings—this will compel them to maintain discipline when it comes to their respective risks, ultimately reducing the exposure to loss,” he said.

Are Companies People Too?

This argument makes sense when it comes to people who are friends or share an interest in a particular philanthropic organization, but what about companies and their risk managers—can peer pressure do the same for them?

“P2P may work well for commoditized personal lines business, but I’m a skeptic when it comes to its value in commercial lines—even small commercial,” said Joe Calandro, managing director of PwC’s insurance practice. “It’s one thing for a policyholder who has picked your charity to defraud the group; it’s quite another for an employee in a large company to embezzle money. I don’t see how the P2P relationship-oriented model will have any bearing on this risk.”

Indeed, if the threat of arrest and confinement is not dire enough to keep someone from defrauding his or her employer, what effect, if any, will peer pressure have? And without peer pressure, the prospect of risk containment fades. “If the group experiences greater claims frequency and severity, companies will drop out of the community,” Rao said. “Since insurance is all about spreading risk and not concentrating it in a small group, there may actually be a greater risk of loss.”

With regard to Lemonade specifically, Rao questioned whether people sharing an interest in the same charity have the same behavioral characteristics as, for example, people living and working in a small community. “People really know each other in a small town—that’s peer pressure,” he explained. “Social and physical values define the community. I don’t see this in Lemonade. And I have trouble seeing it in a digital medium, where there are no real face-to-face human interactions.” In general, he believes any community connected solely online is going to be desensitized to mutuality.

Hertz raised another concern—the possibility that policyholders can collectively perpetrate a large-scale insurance fraud. “You could conceivably end up with a pretty tight group of people in a P2P group who are corrupt and able to game the system,” he said. “A P2P group of risk managers from different companies could decide to adjudicate the group’s claims in such a way that more losses are passed on to the reinsurers, forcing them to carry the load.”

He added, “The behavioral economics could backfire.”

Taxing Matters

One factor that will test the mettle of P2P companies like Lemonade is the tax code in New York. Right now, group policyholders whose premiums are donated to a charity do not receive the usual tax deduction they would for a more standard charitable contribution. Rather, Lemonade gets the tax deduction. That is because the state may perceive the deduction by a policyholder as a rebate in disguise.

Assuming Lemonade underwrites commercial lines insurance using the same charity concept, companies may similarly lose out on the tax deductibility of the donation. This also presumes that businesses will want to make a donation to a charity in the first place, given the reputational consequences of choosing a philanthropic organization that may upset customers across the political spectrum.

The premiums paid to Lemonade are fully deductible as a business expense, which is not the case for captives that do not underwrite third-party insurance. This is just one factor that makes P2P groups a competitive alternative to traditional single-parent captives.

“Instead of managing a captive from an insurance administrative standpoint, the P2P entity effectively handles this, liberating risk managers to focus on risk mitigation, putting in place better processes and technologies to minimize loss, and becoming better business partners to the rest of the organization,” Hertz said.

Tax deductibility is less of an issue with captives that underwrite third-party business, such as many industry-owned captives and risk-pooling arrangements like broker Marsh’s Green Island Reinsurance Treaty, in which single-parent captives share their loss experience by transferring a portion of their risk in exchange for a percentage share of the risks of other pool members.

Down the Line

Assuming the P2P model takes root, there is no reason for traditional insurers not to form their own P2P groups for buyers of personal and commercial lines products. They also may invest in or even buy P2P startups. Many insurers have an enormous volume of capital sitting on the sidelines and several have formed venture capital funds to invest in novel insurance concepts.

“Undoubtedly many traditional carriers are looking at these guys and figuring out whether to buy them wholly, invest in them, start their own P2P groups, or just wait and see how the dust settles,” Kauderer said.

The bottom line is that P2P insurance is just another way to transfer risk. While it might excite younger, first-time buyers, it is ultimately a new combination of old concepts—captives and mutual insurance. This may also offer buyers more choices in how to transfer their risks, and greater market power in turn. “Some P2P entities will survive and flourish, putting pressure on traditional carriers to compete,” Kauderer said. “Competition is always a good thing.”

The Cost of Long Term Care: Tipping Point Approaching?

By Russ Banham

People are living longer; fewer caregivers are living at home; the cost of care is rising; government financial assistance for individuals who don’t qualify for Medicaid is uncertain. Does this portend a potential long term care crisis?

Some organizations and experts say “yes.” And they worry many, particularly baby boomers moving into retirement, won’t be prepared for it.

“By 2030, many retirees will not have enough income and assets to cover basic expenditures or any expenses related to a nursing home stay or services from a home health provider,” the Family Caregiver Alliance, a non-profit caregiver advocacy group, stated in a 2015 analysis.1

When Is Care Needed?

People need a caregiver when a chronic condition, illness or trauma of some sort limits their ability to carry out basic self-care tasks like preparing meals, eating, bathing, and getting dressed.

More than 8.3 million people currently receive support from the five forms of long-term care services—home health agencies, nursing homes, hospices, residential care communities, and adult day services centers, according to statistics from the Centers for Disease Control.2 A majority of these individuals are 65 and older. And that segment is likely to grow.

And as this segment grows the lifetime probability of being unable to handle the activities of daily living or becoming cognitively impaired increases. Caregiving for their needs by someone at home is rare, with the prevalence of caring for an adult estimated at 16.6 percent, according to the National Alliance for Caregiving.3

Altogether, long-term care expenditures are expected to triple from $115 billion in 1997 to $346 billion by 2040, when many baby boomers will be in their late-eighties and nineties, the Alliance noted. In recent years as many as one in four people age 45 and older is not prepared financially for the possibility of suddenly needing long-term care, according to the most recent AARP research on the topic.4

The Funding Picture

If this projection pans out, those without financial recourse to affording long-term care will rely on government programs like Medicare and Medicaid to shoulder the financial burden. A growing concern is the future ability of the government to do just that.

Medicare only covers a limited amount of long-term care needs, such as for short stays in a skilled nursing facility (a maximum of 100 days), for hospice care, and for some home health care. That’s because the program is designed primarily for post-surgery recuperation and rehabilitation, illnesses and accidents. While Medicaid, a joint federal and state government program, generally offers more expansive long-term benefits, recipients must have limited income and assets to be eligible.

“Today, the U.S. government pays the lion’s share of all long-term care costs through Medicaid primarily and to a lesser degree through Medicare,” says Steven A. Moses, the president of the Seattle-based Center for Long-Term Care Reform, founded to promote public policy that directs public resources toward those most in need of long-term care. “Medicare long-term services are very limited—some say non-existent—and Medicaid suffers from problems of access, quality, low reimbursement, institutional bias, and loss of independence.”

Moses is concerned that current federal and state government programs funding long-term care costs for eligible participants are a ticking financial time bomb. Citing statistics on Medicaid enrollees compiled by the Kaiser Foundation, Moses points out that only about 10 percent of Medicaid distributions, on average, go to aged individuals, many of whom may need long-term care at some point. As baby boomers enter their sunset years, they are likely to increase the volume of Medicaid distributions going toward aged individuals.

“The risk and cost of long-term care explodes at age 85,” says Moses. That means the country’s long term care infrastructure could be greatly challenged in 2031, Moses added, as the first baby boomers turn 85.

The solution would be for the government to substantially increase funding to both Medicare and Medicaid. If this turns out to not be the case, the most viable alternative, Moses says, is for the government to target increasingly scarce social welfare dollars to the “genuinely needy.”

If the government moves in this direction and does restrict funding, this means that many people who today qualify to receive government-funded long-term care will not receive it in future, “creating a greater sense of urgency and personal responsibility among those financially able to save, invest or insure for long-term care,” he adds.

This is just another in the many complicating factors involving the future need for, and the cost of, long-term care. No one is predicting, for instance, that the costs will come down.

“The hourly cost of hiring a caregiver is sure to go up, since there will be more people needing long-term care in future and fewer caregivers to provide it,” says Claude Thau, a long-term care consultant and insurance wholesaler.

Fewer caregivers to serve everyone’s potential care needs affect both the quality of care and its cost, he explains. “For many people, caregiving does not come naturally to them; it is not considered a pleasant job,” says Thau. “At a time when more people will need care, the supply of caregivers will remain stagnant, unless the fees paid for the services rise appreciably. In addition to current minimum wage and unionization pressures, this will have a dire impact on the overall cost of long-term care.”

Another factor—big business—is playing a role in expectations for rising care costs at custodial facilities like a nursing home. “Many small, `mom and pop’-type caregiving facilities operated by people who are passionate about providing care are being acquired by larger organizations,” says Thau. “As these businesses grow and consolidate, they tend to apply more financial discipline to improve the margins, charging higher prices over time.”

There’s another factor enlarging aggregate long-term care costs—the care often prolongs the life of those requiring it. “The longer people live increases the overall expense of care,” Thau explains. “A case in point is my mother-in-law. When she went into a long-term care facility because of alcohol-induced dementia, her family and friends expected she wouldn’t live long. But the care was so remarkable that she looked healthier than she had in years—and was. She died in her 16th year in the nursing home. The costs added up.”

According to the Genworth 2016 Cost of Care Study, the cost of a semi-private room in a nursing home is $225 per day or $6,844 per month, whereas a home health aide charges approximately $127 per 8 ½ -hour day.5 Family caregiving, of course, is the least expensive, since the care is provided free of charge. Approximately 65.7 million Americans are involved in such informal care to family members and close friends.

But family caregiving has its drawbacks, chief among them is the time and effort this consumes for those providing care. Care quality is another concern. A study by the United Hospital Fund and AARP Public Policy Institute found that most family caregivers are unprepared for needed tasks, which may include cleaning the wounds of those needing care, dispensing the right medications at the right dosage at the proper time, and coping with individuals who refuse to take their pills.

The Need to Prepare

As the populace ages, the cost of long-term care rises, and the government acts on the ticking time bomb that Moses hears in the distance, there will be fewer dollars from Uncle Sam to absorb long-term care expenses, if he is correct in his assumptions. This puts the onus increasingly on the public to financially prepare for the possibility.

That may lead to more people considering their options, such as setting aside money for future long-term care needs or purchasing long-term care insurance. (Related: Long Term Care Insurance)

But, for some Medicaid, at least in its current form, will remain a better answer. A study from the Center for Retirement Research at Boston College argued that it’s “optimal for only about 20-30 percent of single individuals to buy insurance.”6

Still if the tipping point is approaching, more people will likely need to look at their own circumstances and options.

Russ Banham is a veteran consumer journalist and author of 24 books 

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1 Family Caregiver Alliance, “What Is Long Term Care?”, Jan. 31, 2015.

2 Center for Disease Control and Prevention , “Long- Term Care Services,” December, 2013.

3 National Alliance for Caregiving, “Caregiving in the U.S.,” 2015 report.

4 AARP, “Perceptions of Long-Term Care and the Economic Recession,” 2009.

5 Genworth, “2016 Cost of Care Survey,” April 2016.

6 Center for Retirement Research at Boston College, “Long-Term Care: How Big a Risk,” November 2014.

Drones For Farmers Makes Midwest Startup A Flying Success

By Russ Banham


There was a time when the idea of spraying insecticide and fertilizer on crops from the air seemed farfetched. Today airplanes do exactly that. Now the agricultural industry is considering another type of airborne vehicle — drones.

More farmers are using the unmanned aircraft systems to maximize the efficiency of agriculture, increasing crop yields at reduced cost, effort and impact on the environment.

Drones equipped with specialized cameras wirelessly linked to location software and mapping tools can survey fields from above to detect and diagnose crop stresses. Armed with this data, farmers can take corrective actions.

Although the use of drones in farming is in its formative stages, the Association for Unmanned Vehicle Systems International anticipates that farms will eventually account for an 80 percent share of the commercial drone market globally.

In Indiana, drones are poised to become as ubiquitous as crop dusters. With nearly 15 million acres of farmland producing corn, soybeans, wheat, hay, and tomatoes, the state is a prime market for startup agricultural drone companies, like Precision Drone.

Founded by Matt Minnes in 2012, Precision Drone manufactures unmanned aerial vehicles, or UAVs, that replace the time-consuming method of scouting fields by walking through rows of crops. Minnes formerly worked for a seed company in Indiana when inspiration struck.

“I realized that walking hundreds of acres to monitor corn and soybean fields was no way to spot a problem unless you stumbled upon it,” he said.

Minnes was determined to alter the status quo. The entrepreneur confined himself to his garage in search of a solution. He bought an infrared video camera and a simple graphical indicator called an NDVI, or normalized difference vegetation index, that senses the presence of live vegetation on the ground. He then affixed both devices to a handmade aerial platform built from the parts of several store-bought drones.

Next, Minnes collaborated on the development of software that integrates data from the video camera with additional feeds coming in from the NDVI and GPS monitor. These data sets are then automatically plotted on GIS (Geographical Information System) maps of the field being examined.

Minines’ last step was to obtain a pilot’s license, a requirement at the time to fly an unmanned aerial vehicle. This requirement is gone now, thanks to new Federal Aviation Administration drone operator licensing rules that came into effect in August 2016. No longer must one be able to fly a plane in the sky to operate a drone from the ground.

The Whirring Sound Of Money

Minnes grew up around agriculture — his grandparents owned a farm — and double-majored in agribusiness and agricultural economics at the University of Illinois, where he worked on the school’s prestigious research farm.

“There’s a lot of farmer ingenuity that goes into Precision Drone,” he said.

The name comes in part from precision farming, a revolutionary farm management concept based on observing, measuring and responding to field variability in crops. The objective is to produce greater yields and profits at less cost and environmental impact. The use of remote crop-health data is a key element of precision farming. Minnes beta tested his drones at the fields of a few young farming friends and seed-buying customers.

“I tried a lot of different things before I found what worked best,” he said. “For instance, I went from a quad copter with four rotors to a hex copter with six, which withstood wind gusts better. And I learned that intermittent pictures from two point-and-click cameras was a better means of capturing data than video.”

In 2014, Precision Drone opened its doors for business. The company sells drones for use by farmers trained to operate the aerial systems. It also operates the drones for a fee. In the past four years, Minnes alone has operated drones for farmers over more than 400,000 acres. The company has dealers in 26 states, Canada and Mexico, he said.

“The demand for drones continues to rise across the country, as more and more growers migrate toward precision agriculture,” he said. “With more of the country’s farmland giving way to real estate development, the need for productivity solutions has to increase.”

Russ Banham is a Pulitzer-nominated business journalist and author of 24 books.