Google and the Internet of Things

Continuing in my series on mobile and internet technology, this month I take a look at Google, the internet and technology juggernaut that generated $75 billion in gross revenue and $16.3 billion in net income in 2015. Net profit margin was 22% and the effective tax rate was 17%. The stock closed 2016 at $793.02 with a market capitalization of $554 billion. Google takes pride in not being a conventional company. Their innovations in search and advertising have made their brand one of the most recognized in the world. Their core products, including Search, YouTube, the Android mobile operating system, the Google Play app store, Maps, the Chrome internet browser, and Gmail each have over one billion monthly active users. Google believes they are just beginning to scratch the surface. In 2015 they created a new public holding company named Alphabet, a collection of businesses, the largest of which is Google, as well as new businesses Verily, Calico, X, Nest, GV, Google Capital, and Access/Google Fiber.

 google-pl

Focusing on 2015 Google Websites revenue of $52.4 billion, at 70.2% of total segment revenue, up from 67.4% in 2013, the firm’s SEC filings describe this segment as advertising revenue on Search, Google Play, YouTube, Gmail, Finance, and Maps. While Google does not publicly report earnings by product line, Search, YouTube, the Android mobile operating system, including the Google Play app store, are the key product lines in this segment. For 2015, researching multiple sources of earnings estimates, including these two by eMarketer and Forbes, I estimate the breakout to be:

google-websites-new

 

I should note that there is considerable debate about how much Android contributes to Google’s bottom line, with annual revenue estimates ranging from $300-$500 million to $1 billion, to as much as $31 billion, as recently claimed by Oracle in their lawsuit against Google.  Oracle is suing Google for copyright infringement, for using its Java software to develop Android, without paying for it. Five years of litigation continues following a January 2016 U.S. Supreme Court ruling where Google lost in their effort to derail the case. Any settlement figure would be a function of this estimate, where it may be appropriate to include “Search” ad revenue. We’ll leave that decision to the copyright finance valuation team assigned to the case.

In the Search space, competition is fierce. Competitor Microsoft’s Bing market share continues to increase, at 22.3 percent in October 2016, compared to Yahoo at 11.7 percent, with Google still leading the pack at 63.6 percent. Considering that Bing was first introduced in May 2009, and that it also largely powers Yahoo Search, Microsoft is certainly gaining ground. Bing finally catching up to Google. U.S. Search Engine market share.

The biggest advantage Bing has over Google right now is their paid advertising platform. Bing is closing the gap by offering more niche advertising, and at lower prices. New functionality in the Ad Preview and Diagnostics tool is starting to turn Bing Ads into a major player in the paid search advertising world. It’s likely that more marketers will start using Bing Ads as an online advertising platform for budgetary reasons alone. If combined with more design, functionality, and visibility changes, Bing could start closing that gap between them and Google faster than ever before. Another increasing threat is in Europe where the European Commission has instituted new personal privacy provisions. Further, many European countries have launched legislative attacks on Google’s ambiguous privacy policy. This presents a significant opportunity for Bing to rise up and force Google out of Europe.

In the smartphone space, Google’s Android operating system is the hands down leader at 86.2% market share, compared to Apple’s iOS at 12.9%, according to the latest Gartner research.  Android, which was launched in 2008, makes money for Google in two ways, advertisements supplied by Google shown on Android phones, and revenue Google takes from its mobile app store, Google Play, which some technology analysts predict will soon overtake the Apple app store. Google Play to overtake Apple App store.

Also, in 2013, Starbucks dropped AT&T to partner with Google to provide an improved WIFI experience to their customers. Google will also work with Starbucks at developing the next iteration of the Starbucks Digital Network to provide increased content. Interestingly, I should note that following a recent flurry of iOS 9.3 updates, the functioning of my Apple iPhone 6 has declined dramatically when connected to Starbucks WiFi. Starbucks Google partnership.

The final point of analysis, and of course near and dear to my heart, is the subject of music video and Google’s YouTube, which was estimated to gross $5.6 billion in revenue, and net $1.6 billion or 28.6% margin to Google’s bottom line in 2013. Advertising Age on Google’s YouTube.  In the U.S. they were expected to net $1.08 billion, just 6.3% of all of Google’s net U.S. ad revenues for the year, but 20.5% of the $4.15 billion U.S. online video ad market.  Forbes contributor Tim Worstall on Google’s YouTube.  We can only rely on estimates as I noted earlier, in that Google does not publicly disclose financial results by product line. My 2015 gross revenue estimate for YouTube is $7.5 billion.

The P&L success of the YouTube advertising revenue model finds its roots in the Digital Millennium Copyright Act (DMCA) of 1998, the most important amendment to the U.S. Copyright Act of 1976; legislation enacted before user generated content sites like YouTube even existed, and clearly long before the significant transformation in digital technology we enjoy today. Google’s YouTube takes full advantage of the DMCA “Safe Harbor” provision that provides full protection from infringement liability for content flowing through their lines. To qualify, Google must meet certain guidelines, including promptly blocking access to newly discovered infringing material, and terminating repeat infringers. However, the responsibility for surveillance and enforcement lies with the Musical Artist, not with Google. Once a user uploads a video from a concert for example, probably without a license from the Artist, a global marketplace with at least five billion active users monthly, is instantly able to access this creative work for free. While Google’s YouTube is clearly not the only source of music piracy, the sheer global volume of the user base and ease of access to musical content, certainly makes it a major player. In the U.S., music piracy is a serious problem and results in the loss of $12.5 billion in total output annually, another $2.5 billion to downstream industries, the loss of 71,000 jobs, and $422 million less in U.S. tax revenue. The RIAA on the true cost of music piracy.

Further, Google’s YouTube is permitted to operate under an advertising revenue model, markedly different from a royalty based revenue model that has long been the standard in the recorded music industry. Musical Artists are in the fight of their lives! Multiple advocacy groups, including The Grammy Creators Alliance, The Future of Music Coalition, and the Berklee College of Music’s Rethink Music Initiative to name a few, are waging in earnest, a campaign for U.S. Copyright reform that reflects today’s music delivery system, that will protect Artists’ compensation, and that will ensure an enduring legacy of creative expression for years to come.

Looking abroad, in September 2016 the European Commission proposed modernizing copyright rules to help European culture flourish. The EU has adopted the Digital Single Market Strategy to offer better choice and access to content online and across borders, and to promote a fairer and sustainable marketplace for the creative industry. EU Press Release.

The winds are shifting and the message is becoming more clear. As the global recorded music industry is gaining legislative ground, particularly in the EU, and as consumer and music industry awareness and activism are on the rise, and as the Google YouTube development team has begun to respond with technology advances like Audible Magic and ContentID, expect to see transformative change in digital copyright law and protections, that will ultimately put some pressure on the YouTube profit model. Further, here is an interesting point if you’re really paying attention.  Today’s technology graduates are more interested in the altruistic goals that silicon valley offers, like working on products that will change the world, as opposed to Wall Street, where attractive compensation packages apparently don’t carry the same level of gravitas. Talent wars: Silicon Valley vs. Wall Street. Then perhaps it’s not a stretch to say that these young grads will not want to play a role in the continuing erosion of the Artist P&L and musical creativity in our society.

Let me leave you with this thought. What value does music create in your life? Think about that first piano recital where your daughter was so excited to play Beethoven’s “Moonlight Sonata”; or that hard fought comeback to competitive gymnastics performing the floor routine of your life to Bill Conti’s “Theme From Rocky”; or the incredible emotion flowing at the debut reunion performance, twenty three years in the making, of a legendary and iconic Rock & Roll band! What about the pure joy and hope you feel when your very special and brilliant 55 year old brother writes his first set of lyrics to the “Twelve Days of Christmas” and then sings them to his girlfriend! Yes! “…take me down to the Paradise City.. yeah yeahah!” For those of us who cannot possibly imagine a world without music to fill our souls, with pure unbridled emotion and purpose that inspires us every day, our message is simple. We’re on it and we’re in it for the Artist! Count on it.

 “Ten years ago they sent a machine from the future, “You Could Be Mine”

 

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January 3, 2017 By Cynthia Drew In Music P&L, Rock&Roll, Technology /  

Who Is Leading the Smartphone Market Today?

We can evaluate this a few different ways. If we compare current market share of the major operating systems, Google’s Android is the hands down leader at 86.2%, compared to Apple’s iOS at 12.9%, according to the latest Gartner research. If we’re looking at manufacturer volume sold, the numbers certainly make the case for Samsung with 22.3% market share to Apple’s 12.9%. If we consider TechRadar’s most current ranking of the top 10 smartphones, the iPhone 6S and 6S Plus are ranked 7th and 8th respectively. They are the only smartphones in the top 10 who run on the iOS platform, currently 9.3.5. All the rest run on Android, which continues to evolve with the new Lollipop and Marshmallow updates. Samsung’s Galaxy S7 Edge and S7 lead the rankings. The HTC 10, new 2013 Chinese manufacturer OnePlus 3 model, and the LG G5 round out the top 5. The Sony Xperia Z5 and the Xperia Z5 Compact come in at #6 and #10, and the Nexus 6P is in 9th place. Read more here in TechRadar rankings.  

However, if we look at net profit, Apple dominates. This Forbes article points out that while Google’s Android dominates market share, Apple makes all the money.  A 2013 Forbes article, this one by Tony Bradley, suggests Apple can ignore Android market share all the way to the bank.  But that may be changing, particularly given the recent news that in Q1 2016, Apple has experienced the most significant drop in revenue since 2003. More here on iPhone sales drop.

So why am I telling you all this? I’m trying to figure out if I should stay with my current smartphone manufacturer. Can you live without your mobile device? I can’t. So here’s my take on Apple. There’s an app for everything and I rely on quite a few of them to live my life. Email, calendars, notes, text, maps, music, social media, coffee, news, travel reservations, ticket purchase, transportation, weather, and even a wireless speaker system. I recently purchased a Sonos system for my home and it is controlled by an app on my iPhone. I have speakers in my living room, kitchen, and bedroom that did not require any added installation expense, drilling, or unsightly wires. Yes, Steve Jobs was as equally passionate about aesthetics, as he was about functionality. If you want to regularly learn about new apps, register with the Starbucks app and you’ll get weekly messages highlighting a new free app. You have to be discerning though, as data overload can certainly be a problem. I am a huge advocate of “less is more”.

Given that Apple’s current market capitalization is about $576 billion, more than double the level when I made my first Apple purchase in 2010, I expect nothing short of white glove service. Let’s see how they measure up and what is required for that to happen.

I actually hopped on the current mobile technology bandwagon later than most of my contemporaries, with the purchase of the iPod Touch in 2010 and iPhone 4 in 2012. Both were introduced in 2007. Of course my passion for music led the charge! Enamored with 24 hour on demand music, I quickly fell in love with Apple and got out in front on the purchase of the iPad 2 in 2011. Then I discovered the MacBook Air in 2012. All of my devices are on the iCloud under my Apple ID. I do not have an Apple Watch.

I think it’s important to understand some underlying basics first. The iPhone, iPod Touch, and iPad all operate on the iOS operating system, although the underlying technology of the iPad is different than the iPhone. The iPod Touch is a media player. The Mac operates on the OSX operating system. All Apple devices, whether they run on an iOS or OSX operating system, are intended to sit harmoniously together on the iCloud. Also relevant to the discussion, in 2014 Apple rolled out a new programming language called Swift. Learn more about Swift here.  Building upon their core language Objective-C, Swift offers an “interactive playground” and is viewed by developers as a new simpler language that could make their lives easier, thus lowering the barrier to entry for Apple developers. But it does require a new learning curve and it drives a wedge between iOS & OSX development and the rest of the mobile software world. Swift development is only applicable to Apple devices. In a 2015 Bloomberg article, Joshua Brustein writes, “..There was almost no way Swift wouldn’t lure developers in large numbers. Apple gets to decide which languages can be used to write apps for iOS devices, and legions of coders take heed because the average Apple user generates four times as much revenue for developers than the average Android user. It almost didn’t matter whether Swift was any good…” The article also references assertions made by Kyle Sherman, a software developer with Linked In owned document sharing firm SlideShare, as to the onerous degree of processing power software developers need on their laptops to convert Swift into a computer readable format. Additionally, Colin Eberhart, Technology Director for UK based software development company Scott Logic said, ‘Swift updates regularly break his code. “If you are building production code, right now you just don’t want to be using Swift,” he says. Apple declined to comment for this story.’

As an analyst who partners with Capital Markets business heads to drive P&L growth, the past 10 years in trading technology, and as an avid mobile technology user, I have many thoughts on this evolving landscape. As for me personally, currently with an iPhone, iPod Touch, iPad, and MacBook Air, I really only need the iPhone and MacBook Air, or a competitor equivalent.

My Apple device world worked very well until 2014 when I purchased the iPhone 6; previously I was very happy with the iPhone 4. I often wonder if my iPhone 6 experience would have been better, had I upgraded from the iPhone 5. In the beginning I had very poor cellular service. Apparently I wasn’t alone. In 2014, IOS 8 updates caused Apple to pull 8.01 release due to dropped calls issue. More on this in Forbes magazine. Thankfully, that problem resolved pretty quickly with subsequent updates.

The main issue that continues to frustrate users in 2016, is the wireless network problem. In 2014, I used AOL for my personal email, and had terrible difficulty sending email on my iPhone 6. Apple genius bar specialists repeatedly blamed AOL. At one genius bar visit, the specialist suggested restoring network settings to factory settings. The effort was futile. I finally figured out that if I turned off Wi-Fi, then the email would fly successfully, otherwise it would sit pending in the outbox until I deleted it. So my solution worked well for about two years, but with a recent flurry of iOS 9.3 updates, once again I can no longer send AOL email from my iPhone, even if I turn off Wi-Fi.  Thankfully I now have a new email account on my business website server that works just fine. Interestingly, when I send from my AOL mail folder on my MacBook Air, I have no issues with the transmission, but I do notice that it generates multiple copies of that sent email to my junk folder.

An ongoing problem, I have difficulty with several social media apps and maps when not connected to strong WiFi, or where the WiFi setting is on, but none are available. The search function works terribly, and often new links will not load.  I regularly close all the apps multiple times a day, and frequently reboot my phone.  The maps function has been particularly frustrating as the GPS does not always work correctly.  One time I was driving in upstate New York, and the app thought I was in Illinois.

Most recently, with a spate of iOS 9.3 updates mainly designed to address security issues, now running 9.3.5, it is clear that many settings have changed on this latest update. In addition to deleting some very important Notes, I lost the ability to search in my Notes, which was a huge problem as I have many passwords and important information I use regularly. The Apple genius bar staffer told me my Notes were no longer backing up on the iCloud and therefore lost the ability to search. She adjusted the setting and recommended that going forward, I should check all my settings after each iOS update. To be clear, I don’t consider that white glove service. Another setting change that stood out, was to my Weather Channel app, which changed location to Las Vegas, Nevada since this latest iOS update. I clicked on “Add Current Location” and a new window popped up called “My Profile”. I was instructed to turn on “Weather Follow Me”. Are you aware that you have a Profile on your iPhone? I had never seen that before. Do you know how to access it? Since making that update, I am unable to find My Profile and the screen where I turned on “Weather Follow Me”. I checked my iCloud account, accessibility, privacy, location services, and the Weather app. I can’t find it anywhere. I believe it is hidden to make it more difficult for hackers, which I heartily endorse, but if you’re going to change settings to protect me, that also affect functionality I rely on, you either have to get the settings right, or you have to make it reasonably easy for me to find and update them. I rely on my mobile device to make my life easier, not more difficult. That standard must change, or I will no longer purchase Apple products.

At one point in the history of my iPhone 6 difficulties, I was told by an Apple genius bar staffer that my iCloud account had become corrupted and suggested recreating it. Again, I wasn’t alone in this. In 2013, my research shows that Apple began having problems with the iCloud. Apple iCloud service issues.  In general, I think Apple’s iCloud has difficulty when you have multiple devices of varying age and operating system on the same Apple ID. I also think that when a new iPhone comes out, the updated operating system works best when you have migrated from the previous iPhone model. I have since taught myself the steps to create a new Apple ID to see if that will help. 

As to my MacBook Air, recent OSX El Capitan updates have also created problems and strange software functionality, including issues with the Facebook event calendar. The chief difficulty I currently have is opening new windows in the Safari browser, when multiple windows are open. Recently I have had the same issue with apps on my iPhone, if I am using several at once. Once again I am not alone. iOS 9.3 had a bad week.  While this article speaks to a fix, I can tell you this is the single largest ongoing problem I have with my iPhone and Mac.  Many iPhone users complain about battery life, which I have never done.  I believe carrying an auxiliary battery is a very reasonable solution.  However, I have noticed that since the latest iOS update a few weeks ago, the battery life has noticeably worsened.  I assume this is because a setting has changed.  I have gone through all the menus and adjusted settings to preserve battery life, yet this problem persists.  The final point this music lover will make, is the quality and volume of sound when listening to music.  If my phone is connected to a power outlet, the sound is better.  It also seems to me there is a problem with the actual port where I connect my headphones to the phone. Interestingly, I have a friend who purchased the iPhone 6S a year ago, and he has a similar problem with the power cord port, frequently having difficulty plugging in and having the phone charge.  I believe that falls into the category of problem where some iPhones were bending.  I am happy to hear today that the iPhone 7 now has wireless headphones, so I am interested to hear more about that!

As Apple rolls out the new iPhone 7, I am considering buying one, as perhaps this will end my current iPhone 6 suffering, but I will certainly wait until all the reviews are in, and will specifically look for improvement on the issues I detail in this post.  I certainly want to learn more about the wireless headphones and two-camera system, but those added features alone, assuming they work well, are not enough to entice me.  I’m really interested in learning the nuts and bolts of iOS 10.0.    I am also considering the the Samsung Galaxy S7 Edge, at a current sticker price of $792, but I need to do my research first.  Apple is offering $649 for  the regular size iPhone 7 if you pre-order now.

One final point I will make, that I will develop in greater detail in a future blog post, has to do with mobile software performance on different wireless networks. I have Verizon FiOS 150/150, which is considered very good, although I should note that my wireless function works better when I am in the subway. Transit Wireless, a bai communications company that boasts a highly experienced global technology management team, has produced an impressive level of service in my opinion. Perhaps we can encourage them to enter the residential space. Also, since the latest iOS update, I have noticed a substantial decline in service on my iPhone while at Starbucks. Apps are very slow to update and media often fails to load. Previously I found wireless capability at Starbucks to be quite robust.  Interestingly, Starbucks WiFi is powered by Google, whose Android operating system is a major competitor to Apple iOS.

Overall, I believe the software hacking issues that have historically plagued Windows applications, are finally becoming an issue for Apple. I wonder if the “simpler” Swift programming language Apple rolled out in 2014 is a contributing factor. Also, if one of the goals of rolling out a simpler language, is to facilitate more cost effective programming, then there needs to be a standard as to level of functionality and service. In my September 2015 Blog post on long term capital appreciation, read more here, I spoke about the intense pressure CEO’s face as to quarterly earnings reports, yet most believe a long term growth strategy is better. Simply finding the least expensive path in the short run, may ultimately cost more in the long run. There is a simple saying, you get what you pay for. There’s a cost to service delivery failure.  Firms can model different P&L forecast scenarios based on these different strategies.  Apple states that they don’t compete with consumers who buy other smartphones.  I assume then, that they have a very good handle on the category of consumer who buys their phones.  For their “highly discerning technology user” clientele, I would evaluate sales and genius bar records to determine this population.  If this group comprises a small %, and it is better for the overall P&L to risk losing them on service performance, as opposed to making development and service delivery changes that will probably increase expense, then I will have my answer.  An industry colleague and friend I admire, recently told me he gave an estimate to a prospective client for some software development work. The prospective client advised that he had received a lower price estimate from another provider. My friend pointed out that when his team finishes delivering the product, it will stand firmly on two legs and deliver the type of service the client demands. In the case of the lower bid, the client will probably be at risk for service failure, and ultimately will need repeated follow up work, which will cost more in the long run. What is your client’s service level threshold?

Next month, I’ll take on Samsung and Android.

To wrap up in signature Rock&Roll style, hungry for a first class service level, and still riding the Guns N’ Roses #NotInThisLifetime reunion tour high, I’ll leave you with this epic live performance from the early 1990’s. “..When everybody’s fightin’ for their promised land. I don’t need your Civil War.”

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September 5, 2016 By Cynthia Drew In Technology /  

China Trade Dilemma

As the 2016 campaign races on, Presidential candidates are determined to sell, how they will solve American household pain points. Donald Trump has certainly tapped into one of those, the outsourcing of manufacturing jobs to Asia, “We’re going to get things coming. We’re gonna get Apple to start building their damn computers and things in this country instead of in other countries.” It’s a loaded statement that requires considerable clarification. Trump on Apple.

While Apple does manufacture iPhones, iPads, and Macs in China, a practice that began in the late 1990’s, Apple research and design programming continues to grow at its headquarters in Cupertino, California. In October 2013, building on the original Apple Campus I, 6 buildings on 32 acres, on private U-shaped street “Infinite Loop”, the Cupertino City Council unanimously approved plans for Apple Campus II, at a projected $5 billion construction cost, with worldwide acclaimed architect Lord Norman Foster in charge of the design. Apple has had a presence in Cupertino since 1977, which is why they chose to expand there, rather than move to a cheaper distant location. Apple Campus II update.

In 2013, Apple employed 16,000 on Campus I, the second largest technology employer in Silicon Valley, and is projected to add 7,400 more jobs with the addition of the $5 billion Campus II in 2016, despite a $44 decline in stock price from $100 in September 2012 to $56 in April 2013. Today it closed at $109.81. In total, Apple is projected to employ 41,000 in Santa Clara County in 2016. Cupertino employees earned an average $125,000 salary in 2012, with most living in San Jose, the 7th most expensive city in America. In 2012, Apple generated $103 million in gross sales to the local economy, and $25 million in local property tax. Interesting Apple facts.

In 2015, Apple become the first Silicon Valley tech firm to top $200 billion in revenue, on net sales of $233.7 billion resulting in $53.4 billion net income, 23% net margin, and earnings per share of $9.28, a masterful performance compared to 2014, up 35% to net income of $39.5 billion, and up 43% to earnings per share of $6.49. Compared to 2011, net income has more than doubled, earnings per share is up 62%, and Apple has been able to maintain consistent net margin at 22- 24%.  Apple 2015 Financials.  I wonder if Donad Trump has stock in Apple.

Back to the issue at hand, manufacturing jobs in Asia. CEO Tim Cook has tried to bring manufacturing jobs back home, but a widening skills gap in the U.S. makes that very difficult. While our economy continues to improve, U.S. manufacturers face significant challenges as a sizeable gap exists between the need to grow their business, and the talent available. The challenge will only increase. As nearly 3.5 million manufacturing jobs will likely need to be filled in the next 10 years, 2.7 million on baby boomer retirement and 0.7 million on natural business growth, the skills gaps is projected to result in 2 million unfilled jobs. Other factors include movement of experienced workers, a negative image of the manufacturing industry among younger generations, lack of STEM skills among workers, and a gradual decline of technical education in public high schools. U.S. manufacturing has shifted to more streamlined and automated processes. While some roles will require less technical aptitude, these trends in innovation actually demand more skilled workers. Manufacturing Skills Gap.

Of course the dramatic growth in trade between China and the US, since the 2001 entry of China to the World Trade Organization, has had a profound effect on the U.S. worker economy. The initial vision of China’s WTO entry predicted U.S. job creation and trade deficit improvement with China; and was rooted in history growing out of the 1944 Bretton Woods agreements, negotiated by the Allied nations, that created the IMF and World Bank. The 1947 General Agreement on Tariffs and Trade (GATT) followed, establishing the international trading system that refined the rules to lower tariffs and non-tariff barriers. This finally led to the creation of the World Trade Organization in 1994, whose mission was to settle disagreements arising from GATT treaty rules. The WTO was authorized to take action if decisions were ignored or rejected by member governments. It broadly expanded coverage on points never before included in trade agreements, including food safety, environmental laws, social service policies, intellectual property standards, and government procurement rules. Over time, this attracted countries who were never a part of GATT, to gain improved market access for their goods at lower tariff levels. China’s entry was supposed to bring the country into compliance. The U.S. also negotiated measures to limit surging imports from China on domestic U.S. producers. In the end though, China’s currency manipulation, wage and labor rights suppression, and foreign country direct investment in Chinese enterprise, has created a huge trade deficit problem for the U.S., which in turn has disrupted 2.1 million U.S. manufacturing jobs between 2001 and 2011, with 1 million in the computer and electronic products industry.

The major cause of the growing U.S. trade deficit with China is currency manipulation. Unlike most major currencies, the Chinese yuan does not float freely against the dollar. As Chinese productivity has soared, its currency should have too, to maintain balanced trade. It has instead remained artificially low on aggressive acquisition of foreign exchange reserves to increasingly depress the value of the yuan. In 2012, noted economist H.W. Brock estimated the Chinese currency to be “arguably one-sixth of what it should be”. 2012 research by Economist Joseph E. Gagnon, estimated that massive currency manipulation, especially in countries in Asia, had raised “the current account of the developing economies by roughly $700 billion per year, relative to what it would have been.” He also notes this “amount is roughly equivalent to the large output gaps in the United States and Euro area. In other words, millions more Americans and Europeans would be employed if other countries did not manipulate their currencies…” For more of his thoughts on a broader view of global currency manipulation, please refer here.

The US trade deficit with China was ($365.7) billion in 2015, more than tripling since 2000 at ($83.8) billion, increasing nearly 11% annually on average over this 15 year period. The annual trade deficit growth has slowed since the global financial crisis in 2008, averaging 16% pre crisis, to 5% in the period since. To access the source data I used to create this graph, please refer here.

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As an analyst with 25 years experience helping global business heads drive P&L growth, I must confess it’s a sobering picture. I suppose you can say Donald Trump is technically correct when he says we negotiated bad trade deals with China. The pain point to solve though, will require diligent and carefully crafted strategy among WTO members, to punish currency manipulators in a meaningful way that packs a punch. The U.S. and Euro area countries, as main targets of currency manipulation, will have to play tough. The WTO has the ability to impose tariffs on imports from currency manipulators, with such practices consistent with international law. This ideally could lead to full revaluation of the yuan, which a 2011 report showed would improve the current U.S. account deficit by $190.5 billion, add 2 million jobs, and reduce the federal deficit by up to $857 billion over 10 years.

Clearly this is a complex global issue. The purpose here is to highlight and frame the key issues, with a particular focus on currency manipulation only. For a more thorough read on this complex broad topic, please refer to this publication produced by the labor movement affiliated Economic Policy Institute, plus any other sources you deem appropriate to get an accurate and representative understanding.  

To wrap up, as I become nostalgic thinking back to my undergraduate Economics classes in the early 80’s, my Rock&Roll tee shirts manufactured in the good old USA, that I still wear today; and to Steve Jobs who began his mission with Apple in 1977 to transform our world with passionate innovation, I leave you with this classic performance, “.. and it makes me wonder.  She does..” Enjoy!

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April 5, 2016 By Cynthia Drew In Forecasting /