Friday, December 18, 2009

The Electric Car City

Was just reading the Urbanophile's article on Detroit over at Newgeography. It's a thorough analysis of both the city and The Brookings Institute's recent "Plan for Detroit" project. I particularly liked where he pointed out the absurdity of a rail transit system for Detroit as recommended by some analysts. With neither high population density, nor high job density, the core urban area is about as good a candidate for light rail as downtown Menominee.

There are tons of opinions on Detroit, but what's irritating is that I see a lot of advantages there many cities would kill for, but the state is too inept to really take advantage of them. But don't tell me the city's urban decay has anything to do with Coleman Young or Kwame Kilpatrick. Here in DC, we saw rising home values and the beginning of massive gentrification while we had a mayor who smoked crack.

In terms of economic development, Michigan is already bending over for the battery industry, and will do the same for anyone kind enough to put them on any kind of short list. They gave Boston-based A123 Systems $100 million of tax credits for a new plant just outside Detroit, even though the company would never have gotten a quarter as much from Massachusetts. Plus, as the battery supplier for Chrysler's EV, wasn't like A123 needed a reminder to consider Michigan.

In terms of getting businesses to come to Southeastern Michigan without having to pay them $100 million, Detroit and Michigan must stop with the watered-down marketing gibberish that has plagued the state's econ dev efforts during the Granholm years. Detroit should market itself as "the electric car city". The message is believable and would set it apart from the hundreds of counties and cities buying stock photos of lab coat technicians staring at test tubes, and all going on about the same green tech, biotech, "knowledge workers" nonsense.

Electric cars are already a large industry, with excellent growth prospects. Moreover, they pull in the supply chain of energy storage companies, a sector which VCs have fallen head-over-heels in love with.

Blue Springs, Mississippi, where the U.S. Prius factory will be, could copy "the electric car city" slogan, except it's not a city. I know, if Detroit sticks to saying one thing then they run the risk of not diversifying their economy. But saying they do everything hasn't really worked too well. Additionally, every city has a health care industry because it has people who get sick, has a utility industry because it has people who use electricity, not to mention about five different adjectives to place in front of the word "tech".

Detroit has the chance to do something powerful and distinctive. Let's hope it doesn't trade it in for more lab coat guys, pictures of test tubes, or embarrassing campaigns to sell itself as a "cool city".

Monday, December 14, 2009

Attracting "Knowledge" Workers is a Bad Strategy

One of the most prominent trends among cities over the last 15 years has been the push to recruit educated workers by promoting lifestyle benefits. And it only grew stronger in 2002 when Richard Florida came out with his book “The Rise of the Creative Class”. Often spending taxpayer dollars to do so, cities have been falling all over themselves to attract "knowledge" workers. How successful have they been?

Boring Industries vs. Exciting People

One challenge of promoting educated labor to educated management is that no employer ever asks for workers with skills in “knowledge”, rather they need electrical engineers, mechanical engineers, industrial robotics specialists, etc.. Yet many cities don't have much technical understanding themselves, and get panicky about falling behind in a rapidly emerging area. And somehow they think loft apartments near coffee shops, with the obligatory four letter neighborhood name – NoDo, LoDo, SoMa – will make them popular with top employers by showcasing their ability to entertain the bright people firms want to hire. But these image makeovers are like a girl in high school changing her makeup routine hoping to impress the popular kids.

Hopefully we've already seen the worst after Michigan's horribly embarrassing and ineffective "Cool Cities" campaign. But the fundamental issue persists – economic development must be distinctive, and all the cities with successful records of attracting skilled workers established themselves as centers for a particular industry before they tried to market their live music scenes, artists lofts, or started renaming neighborhoods. In successful economic development stories, from Seattle to San Jose to Texas, “cool” industries all existed before there was any attempt to attract “cool” people, and before 55 year old economic development executives started saying “cool” in business meetings.

Specifically, the problem with marketing yourself to “knowledge workers” is that every city needs web developers, LAN managers, and basic IT staff. Software developers will always be demanded by non-technology companies investing in IT, so these people are present in your city regardless of which types of companies you recruit, or how many clubs you have downtown. As I pointed out last week, Boston, the leading medical science region in the country, currently has four times as many openings for people with SQL skills than it does for those with biotech expertise.

Make Sure You Can Touch the Product Before Giving the Company a Tax Break

More important than the typical mix of web designers and software developers available in every city are hardware skills, which are far less common. Hardware industries are far more clustered, and require specialized abilities in design and equipment operation, not just Java or C++ skills you can get in any city.

Hardware also forces a target company's suppliers to do business in a region, and not everything can be shipped. Toyota's Tundra plant in San Antonio has 18 suppliers on-site. One reason why San Antonio has fared better than other regions in the recession is manufacturing workers, not knowledge workers.

The ability to rope in a supply chain is another major benefit of hardware, which you don't get with software, biotech, or any “knowledge” industry based purely on people. Moreover, as time passes, most hardware industries diverge into multiple industries, and the remaining suppliers need to stay put because they depend on local talent. Within the semiconductor industry, for example, very few new companies are building their own fabs, or manufacturing plants. But even fabless chip companies, who design chips but don't manufacture them, are mostly based in Silicon Valley, Orange County, and Austin, where there were already predecessor companies. These regions got a new industry simply though evolution, not active recruitment. But in software, there is no manufacturing to outsource, or supply chain that can be broken apart.


Silicon Valley also got the solar design industry simply out of the fact that most solar panels use the same materials as semiconductors. Similarly, unexpected benefits from byproducts can only spring up when there is some kind of raw material being put to use. Corning, NY's expertise with glass led to new product areas like fiber optics, composite materials that are going to new aircraft like the 787, and to materials for wind turbine rotors.

Hard products force your city to adapt or die far more than if you rely on the same health care, software, and showcase biotech projects as everyone else. Many Michigan union leaders have been more focused on whining about foreign competition that's lept ahead of them, than they have been at creating future trends themselves. Seattle, which also also sits in a heavily unionized state, is instead focusing on future products, rather than pointing fingers at politicians or foreigners for the passage of time. When Detroit native Bill Boeing decided to make his jets in Seattle, he might have picked up on its futuristic spirit 80 years ago.

New Products are More Important than New People

Whether its cars, chips, or jets, manufacturing opens up tremendous opportunities for future industries, and brings in a supply chain of additional companies you don't get when you become yet another city with a 300 person biotech lab. Hard goods are still the basis of any sound economic development strategy, because they can't be turned into sophisticated products without people. Recruiting new people, but not new products, will only give your employers a me too selection of web developers and software programmers available in any city.

Saturday, December 12, 2009

2.5 Megawatt Wind Turbines are More Important than Global Climate Conferences

While the press is focused on Copenhagen, bureaucrats, and possible carbon treaties, a far more important development for the future of cities is coming out of GE and UT/Clipper - 2.5 megawatt wind turbines.

No carbon deal can be achieved economically without a technology to deliver it, and if forced to depend on wave energy, solar, or fuel cells, there would be no realistic way to produce clean electricity in high volumes, regardless of what liberals or conservatives thought about the issue. But the shift from 1.5 MW wind turbines to 2.5 MW models will further improve the economics of deploying wind, and allow renewables to take additional market share in electricity generation.

GE has just deployed its first 2.5 MW turbines in France, and U.S. installations will begin next year. One of the first major domestic deployments will be the 845MW Caithness Energy project in Oregon, which will cost a total of $2 billion, with $1.4 billion going to the turbines. It will produce enough power to serve about a quarter million homes in Southern California, where So Cal Edison has already agreed to purchase the electricity created at the wind farm. The total capital cost of $2,367 per KW would have been harder to achieve with smaller 1.5 MW turbines, and is well under the $3,000 per KW (and rising) price tag typical for a new coal-fired plant.

While wind runs below its rated capacity more than coal does, it also has extremely low operating costs. The Caithness project will employ just 35 people post-installation, or about one worker for every 8,000 homes served. This also points to why the economic development benefits of wind are mostly for the landowners. Like data centers, wind farms are not going to bring anywhere near enough permanent jobs to anchor any sort of "smart city" econ development campaign.

Unlike semiconductors, wind has gotten cheaper by getting bigger, the rotors on GE 2.5 MW turbines have a diameter about 25% larger than the 1.5 MW models. But part of the ability to create larger onshore wind turbines without relying on 1,000 foot rotors has come from advancements in the power electronics on which these generators depend.

Minneapolis and Buffalo grew over 100 years ago not just because of transportation advantages, but because of the significant hydropower resources near both cities. Similarly, proximity to wind farms gives western and midwestern cities an edge they should be promoting.

Friday, December 11, 2009

Is Austin Light Rail Just an Overcooked Student Bus Service?

Austin just approved $1 million to study a possible light rail line that would run between a redeveloped neighborhood where its old airport sat to its new airport southeast of town. This would be in addition to the planned commuter rail line that was supposed to open this year, and is now planned to launch next March, although they just fired the contractor who was supposed to operate it.

At just 8 million square feet, Austin's CBD accounts for only 20% of the region's office space, and is not much larger than an off-ramp office submarket like Fair Oaks near DC, or Burlington near Boston. Therefore, office workers will not be enough to sustain a light rail line as they would be in a larger city. Moreover, many of the western submarkets that dominate Austin's class A inventory sit on hills that make constructing new tracks cost prohibitive without far greater densities than are likely to exist over the next 30 years.

The light rail line would therefore be a high-end university bus system, allowing UT students access to South Congress and the airport. Its projected cost of $30 million per track mile is relatively low because it will run as a streetcar through much of downtown, and because unlike Seattle, there are no tunnels going into the project. Nonetheless, the cost would likely increase if the project were delayed.

The city is trying to get a rail line referendum on the ballot for November 2010. While the estimated 32,000 riders is probably engineered a bit in order to meet Fed Transit Admin. ridership/dollar projections, this is a unique project because it would be an expensive toy if forced to depend on transporting city residents to their jobs.

Thursday, December 10, 2009

Providence - Another Madison or Boulder?

Desperate to do something about some of the worst unemployment in the country, Rhode Island plans to shell out $250k for a new econ dev director. The lucky recipient of this Hail Mary attempt to juice up the state's economy is Ioanna Morfessis, who in this editorial, claims that developing a technology sector requires public investment in the same industries every other state is chasing after.

Morfessis has been working as a consultant for Phoenix, and before that her last major job was with the Economic Alliance of Greater Baltimore in the early 2000s, where she ensured that region continued its stagnation, in spite of educational and transportation advantages that are the envy of most cities.

Reacting to a Boom Right Before a Bust
Perhaps unable to calculate a stock's P/E ratio, Metro Baltimore's economic leaders, supported by a standard cast of follow-the-herd venture capitalists, placed their bets on turning the route 32 corridor into an optical networking hub because it had two overvalued companies in this sector (Ciena and Corvis). When this destined-to-fail strategy collapsed, the region was forced to play up its proximity to the Capital, and develop a Washington-lite strategy of chasing after defense contracts and promoting Fort Meade. And Baltimore, once the 2nd largest city in the country, now has less commercial office space than Tyson's Corner.

Before Baltimore, Morfessis led Montgomery County, MD's econ dev efforts as it continued to lose its share of DC area jobs to Northern Virginia.

More People Staring at Test Tubes

The genius behind some of Maryland's past failures still has to get approved by the Rhode Island state senate. The current RI econ dev website features the same indistinguishable blather about alt energy and workforce development as everyone else's, and comes with the obligatory pictures of test tubes.

Morfessis' strategy of having government invest millions for a few thousand jobs in overhyped technology sectors makes little sense for a state whose largest city has already made large and worthy investments in urban planning. For all the me too nonsense Morfessis would likely have the state invest in, Rhode Island has done little to promote the fact that it has one of the most densely populated mid-size cities in the country.

Michigan Had the Right Idea, Providence Had the Right Implementation

While some states have been misguided in their attempts to recruit educated labor , there is no denying the importance of attracting young workers by promoting your lifestyle benefits. And no city in Michigan, Ohio or any other high unemployment state can begin to come close to matching Providence in this regard.

At 3,700 per square mile, Providence has a higher household density than Seattle, Denver, Portland, or any other "hot" city for young people. At 9,400 per square mile, its population density is higher than Washington's. And not only does it have an Ivy League school, it's got one of the top art schools in the country, and as I've pointed out, creativity is far more important for sustainable economic development than innovation. On top of all this, it's got a commuter rail link to Boston and an NFL team 20 miles away.

Why Don't We Ever Hear About Providence?

Providence could have more lifestyle advantages for a young worker than than any 100,000-250,000 city in the country. And being in the smallest state in the country, its commutable from just about anywhere in Rhode Island. But instead of highlighting clear and obvious advantages of its largest city and capital, the state is desperately bringing in a brand name director with a questionable track record.

Providence should be in the same discussion with Madison and Boulder as a top mid-size city for young professionals. But instead of promoting this city's incredible advantages, the state has caught the alt energy - biotech flu making its way through econ development professionals. And it has the unemployment rate to show for it.

Wednesday, December 9, 2009

You Shouldn't Call Your City Innovative

Hard to find a city that doesn't call itself innovative. Economic development authority presidents seem to be paid based on the number of times they can say the word. And their claims are probably right, most cities have a number of innovative companies, which means these places are not setting themselves apart from their competitors in any meaningful way.

Innovation in and of itself is fairly common in any scientific industry. New drugs, new chemicals, and new semiconductors are brought to market every week. Creativity, on the other hand, is remarkably scarce. New business methods, new distribution ideas, new companies that make you think "how did they get that idea?" come around far less frequently than new product launches. For example, 45nm semiconductors with more transistors than previous gen 65nm ones, and 10% less total power consumption are innovative. But developing the light bulb, the graphic user interface, or starting the first major company to sell products on the Internet were all creative.

Some cities are great at innovation, but weak on creativity, while others are the reverse. Boston, for example, is probably the most innovative city on the east coast. It continues to produce new kinds of new medical devices, drugs, and data storage products. While useful, these aren't necessarily creative, they're mostly developed as extensions of existing technologies.

Seattle, on the other hand, is remarkably creative, but isn't any more innovative than most coastal cities. Its advances in distributing consumer goods, from Starbucks to Costco to Amazon, required more than taking an existing product and making it faster, cheaper, or more efficient. But it has done remarkably little in the computer hardware industry. Even its leading network equipment company, F5 Networks, has a strategy of wrapping commodity hardware around proprietary software, which itself was a creative business idea, but not particularly innovative. Microsoft too has been very creative on the business side, but hard to find anyone who thinks its products are all that innovative.

Creativity is worth far more than innovation. Innovative tech companies come and go, but of all the major Seattle brands mentioned above, how many have gone under? F5 competes against much larger companies like Cisco and Juniper, yet not only has it survived the last decade banging heads against bigger vendors, its got higher profit margins. Its gross margins of 79% last quarter were 14 points higher than Cisco's.

If Seattle, or King County, were to go out and market itself as innovative, it would be making a huge mistake, because there's at least 10 to 12 regions that can prove similar or greater claims. But on creativity, it's got few peers.

Tuesday, December 8, 2009

Where the Biotech Jobs Are

The image of a lab technician staring at a test tube has become economic development porn. The first time you see one of these pictures it's interesting, but after awhile they all start to look the same. Nonetheless, from Michigan to Mississippi, states, counties, and cities are falling all over themselves to attract companies who make their employees wear safety goggles. But unlike failed attempts to win Internet companies from Silicon Valley in 1999, current efforts to recruit biotech companies aren't linked to fads or an overheated stock market, and are likely to continue for years. But is it really worth it?

The current craze to recruit companies in the sophisticated science sector has led to at least 10 states being in the top 5 for biotech jobs, if you believe all you hear about the industry. It's kind of like how there are 15 cities in the country with the most bars & restaurants per capita, at least according to people I used to visit when I was in college.

The reason economic development propaganda has outdone simple mathematics is that econ dev officials like to choose from any one of a number of metrics that put them in the best light, so we often hear about VC dollars raised, PhDs per capita, patents filed by local companies, but none of these has proven to correlate closely with commercial success. As we learned in the late 90s, raising money from a follow-the-herd venture capitalist is quite different than earning revenue from a paying customer.

The best measure of economic development is not an academic degree or a me too investment in a hot industry, but economic activity. And the best way to measure that is jobs. For example, here in the DC area, we have more satellite jobs than metro San Francisco, NY, and Boston combined, according to We're the leader in this industry that shuns publicity and doesn't attract much VC, mostly because government's its #1 client. But that doesn't mean it's "multipler effect" is any lower, in spite of its limited ability to generate test tube photo ops. I've also heard that we're #1 in biotech due to Montgomery County's "science hubs", although I've never met anyone who drives to a "hub" everyday for work.

According to indeed, there are over 800 biotech openings within 25 miles of Fenway Park, but fewer than 300 within 25 miles of the White House. The numbers don't change if you center your search on Bethesda's Medical Center metro stop. MIT and the Boston medical industry have done far more to create biotech jobs than Johns Hopkins and NIH, in spite of the latter being a leader in research grants. University of Washington has also been a leader in winning research grants, but there are only around 100 biotech jobs within 25 miles of the South Lake Union biotech center Microsoft co-founder Paul Allen has been developing in Seattle.

There are over 800 biotech jobs within 25 miles of Genentech's South San Francisco headquarters, but fewer than 200 near Amgen's Thousand Oaks HQ near Los Angeles. San Diego actually beats out LA for biotech jobs, although all the PhDs at UCSD and Scripps aren't enough to put that region in the same league as Boston or the I-78 pharma corridor in New Jersey. Once you get outside these coastal areas, the numbers fall off substantially, with many of the available jobs limited to sales & BD.

But even in Boston, just 2% of all indeed listings contain the keyword "biotech", fewer than the number mentioning C++ or Java, and nearly four times less than the number asking for SQL skills. But in spite of these figures, don't expect a disheveled programmer to replace the lab coat guy on your state's economic development website.

Sunday, December 6, 2009

Global Warming is about Economics, not Scientists

In a recent editorial, George Will dismissed global warming as academic nonsense.

There is some truth to what he says regarding tactics of those trying to scare everyone about global temperature increases. Particularly the forced "consensus" and the constantly shifting story. But there is little debate, even among Republicans, that SOx and NOx (sulfur dioxide and nitrogen oxide) emissions are harmful to your health. Sort of like how few people will argue that smoking won't harm your lungs. Clean coal technology and the natural gas building spree of the 90s have helped reduce the levels of these harmful pollutants in the atmosphere over the last 20 years. Moreover, the consensus that these gases are bad for the air has not changed over time, they were known to be harmful in the 80s, just as they are today. But the same is not true about global warming.

In the 70s, there was a panic about global cooling, with the conventional academic wisdom claiming that pollutants were blocking the sun's rays. In 20 short years, the academics did a 180 and started warning about global warming. After mixed data and steady temperatures for 10 years, the story was changed yet again to the fuzzy catch all "climate change".

So I don't have any argument with Will regarding the tactics used by global warming/climate change zealots. Nonetheless concerns about climate are still resonating with many people, even when the story been inconsistent and relied heavily on forceful opinions and outrageous claims. I think the global warming/climate change/call it something else in 2015 issue will stick around for awhile, but not because of European bureaucrats or in-your-face liberals. Rather, the economics of alternative energy are improving, which is giving more companies an incentive to invest in new electricity production technologies, regardless of whether the scientific data that justifies them is pure or complete junk.

Like many Republicans, Will has mocked the limited contribution wind energy makes toward U.S. electrical generation. This year, it will produce about 1.3% the roughly 4 trillion kilowatt hours fed into the grid. Not much, that's true. Except four years ago it was just .3%. Wind is growing rapidly, not because of liberal do gooders, but because the costs to deploy it have dropped, and its capital construction cost per kilowatt is lower than clean coal's.

Clean coal, whether you think it's really clean or not, is an expensive technology comprised of advanced materials and chemicals. It is helping to push the construction cost of new coal plant up to about $2,700 per kilowatt. Wind, due to larger turbines and longer manufacturing runs, is down to about $2,000 per kilowatt, about a third of what it cost 20 years ago. And while its drawbacks (intermittent power, dead birds, obstructing the view of Martha's Vineyard from the Kennedy compound) are well-known, it's cheap enough (although still subsidized by a production tax credit) to account for nearly a third of all new electrical power generation in the U.S.

Wind accounts for about 20 times the U.S. electrical output as solar. Solar is about 2.5 times more expensive, and as a DC power source, is not an ideal technology for a centralized power plant. Some Silicon Valley startups have claimed they could get solar down to $1 per watt through the use of thin film materials, but in practice their products have hovered at $4-$5 per watt due to very high manufacturing overhead and labor costs. Wind, an AC source like hydro, coal, and nat gas, is better-suited for larger power stations, although the lack of wind in some parts of the country, most notably the Southeast, limit the locations where it can be reasonably deployed.

As I wrote a few months ago, access to a scarce renewable energy source (a midwestern waterfall) led to Minneapolis overtaking St. Paul as Minnesota's economic center in the late 19th century. But wind turbines are no longer a scarce technology, and require very little labor post-installation, so there is not another Minneapolis about to sprout up because of them. However, their importance will grow over time as they are deployed further, which in turn will give more corporations and consumers a greater interest in the technology, which will help keep climate change in the news, regardless of what it's called in 10 years.