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Statutory Vehicle Inspection: Puget Sound smoke signals

March 4, 2019

Statutory Vehicle Inspection is one of TIC’s most profitable and also most idiosyncratic segments. TIC companies act on behalf of public authorities in a “quasi-official” role in a highly regulated business, in which governments set the rules and prices. Competition is often limited, as contracts are assigned exclusively to a sole provider or to a selected small group of providers. Some of these contracts are subject to tendering, expiry and subsequent renewal, whereas others are assigned in perpetuity.

For those TIC providers who made it into that game, this provides a pleasant field of activity with stable revenues, limited competition and low risk – and with limited need for marketing, as customers are forced to come to them anyway. It is not surprising that this allowed the TIC SVI specialists to optimize operations and to achieve attractive profit margins.

For the TIC industry, things could stay that way, but the disruptive changes in the Automotive industry prompt the question whether these might impact SVI as well. Electric vehicles may not require emissions testing at all, or a significant part of technical supervision and condition monitoring could be performed remotely in the near future (thanks to connected cars). Or, if people choose to not buy and own cars anymore, because ridesharing services such as Uber or Lyft are so much more convenient, there might be a lack of vehicles to be tested in the first place.

In this context, it is worthwhile to take a look at the upcoming discontinuation of the mandatory emissions testing scheme in the U.S. state of Washington. The scheme will be discontinued from Dec 31, 2019, onwards. Until then, vehicles older than nine years will have to undergo a mandatory emissions testing upon tab renewal – about 900,000 vehicles per year, at an inspection fee of USD 15.

The reasons for the discontinuation are revealing. It is both the perceived ineffectiveness of the scheme and the decreasing validity of the fundamental logic behind it:

  • “Washington state style” emissions testing turned out to be ineffective, given the lenient vehicle age threshold and generous waiver conditions. Even with multiple failed tests, vehicle owners could still renew their tabs by proving that repairs (of whatever kind, not necessarily the exhaust or engine) of at least USD 150 had been performed.
  • More importantly though, at least in the eyes of the Washington Department of Ecology, technical progress has eliminated the underlying need for emissions testing. The DOE stated that “newer vehicles are much cleaner and air quality from vehicle emissions has improved across the state”

One could argue that a surprising ruling in a rather remote and rainy part of the United States does not have a lot of relevance in the bigger scheme of things. However, nor is the state of Washington rural backcountry; with the rapidly growing Seattle metropolitan area, it is home to the 15th largest urban area of the United States, where air quality is a topic. And neither is this the result of a fanatic “tea party” anti-bureaucracy crusade, but was enacted by a moderate Democrat government. In fact, no U.S. state has gone longer without a Republican governor than this, with Democrats in control of the Washington Governor's Mansion for more than 32 years.

If not the result of backwardness or madness, alternatively this decision could be based on a logical rationale. Indeed, depending on regulator's goals and expectations, technical progress may have rendered, or soon might render, SVI and emissions testing less necessary or even pointless. The key question then is how quickly regulators react to that. Maybe, emissions czars at the Washington state DOE found inspiration in the disruptive "move-fast" strategies of the local high-tech giants such as Amazon, Microsoft or Intel, and simply acted earlier and more decisively.

Is this a reason to panic? No, because the Washington state decision is unique and caught most other state representatives by surprise – and thus is unlikely to be replicated in the short term.

TIC companies will have to watch this carefully though, and maybe should re-consider their planned investments or intended participations in SVI tenders. Change is likely to be slow and gradual, but it could soon become painful for those TIC players with significant SVI exposure, considering the business’ role as a profit engine and cash cow. And most importantly, it may have started already.

TÜV SÜD/Vale: Risky business

Feb 11, 2019

More than three weeks have passed since the Vale-owned waste dam burst in Brumadinho on Jan 25, with more than 150 confirmed deaths and another 180 people missing probably the worst incident of this type in the last 50 years in Brazil. While consensus is growing (or reached) reg. the technical causes of the catastrophe, we are far from this concerning liability and responsibility.

Not meant in an impious and disrespectful way, rather well aware of the human tragedy, we would like to comment that this is not first time that disaster strikes even though a TIC company was somehow involved with some kind of service or after it had performed some sort of “inspection”. Just recall:

  • The PiP breast implants scandal (TÜV Rheinland)
  • The collapse of Rana Plaza in Bangladesh (Bureau Veritas, among others)
  • The VW diesel emissions scandal (TÜV Nord)

In each of these cases, TIC companies could not be held responsible, legally. So far, so good? Not really, in our opinion – because something sticks.

For an industry dependent on its reputation of untouchable impartiality and superior technical competence, for an industry conveying the image that it is worthwhile to pay the price for its services because these safeguard and enhance safety, such events occur far too often and have far too dire consequences.

TIC companies should finally scrutinize their service portfolios and begin to discontinue those services with an unreasonably high reputation risk (in relation to the often miniscule revenue and profit generated by them) or substantial survival risk (killing the company if something goes wrong) – or install functioning, much tighter control mechanisms for the risky businesses, if deliberately deciding to perform/offer these. In other words: Either don't do it at all, or exercise extra care when doing it.

The more negative news somehow associated with or connected to TIC, the less will customers and consumers believe in the viability and value of it. The TIC industry should not stretch the limits of its business model too far in search for the quick dollar – or it might wake up one day without a business model at all.

It must be read as a warning sign that several commentators have begun to draw analogies between Auditing/Accounting and TIC, indicating that the latter could be caught in the same massive conflict of interest as the former, and that stricter regulation in a similar vein is necessary. This would mean to strictly separate Audits and Consulting work, by law. And that would be the end of any “Assurance”-type TIC concept of integrated support along the value/supply chain some industry participants actively promote.

With the TIC Council formed, now an association exists that covers almost all of the industry. In the interest of all participants, it should not just send out fancy press statements on ethics and compliance, but maybe start enforcing these and put its own rules to the test.

China-US trade tensions: Tariffs, Decoupling, Containment?

Feb 4, 2019

The world sighed with relief when, at the G20 summit in Argentina in November 2018, President Trump and Xi Jinping agreed to start negotiations on the trade dispute and postponed the next round of tariff hikes until March 1st this year. Many were hoping that this would buy enough time for the difficult negotiations and allow coming to a resolution. Unfortunately, little progress has been achieved so far.

Which probably is not that surprising after all. In the last months, several experts have pointed out that the underlying cause of the conflict is distinctly political-military in nature, and that the trade dispute is only a proxy-fight or one arena of a much more fundamental conflict. In that view, it is not about current account deficits or unfair benefits from trade, but about power, national security and wrestling for global political dominance. Technology plays a key role in this game, both as an economic enabler and as a military means.

Will the U.S. be able to retain the comfortable position as the global apex predator, or will China be able to successfully challenge that and reach super-power status as well? That seems to be the question, and the stoic hyper-rational logic of the homo oeconomicus simply appears to be insufficient, too narrow and a bit naive to fully grasp the consequences.

Political considerations can, and frequently do, override economic considerations. History books are full of examples. The last conflict between two global superpowers, commonly referred to as the (First) Cold War in the 20th century, is one.

Most of us tend to only recall the agony and decay of the Soviet Union from 1980 onwards. It is often forgotten that the country managed to achieve spectacular GDP growth rates in the 1950s and 1960s, of 5.8% resp. 3.0% on average per year. The bold claim of overtaking the West economically did have a real foundation then.

Only the economic resources generated by that strong growth allowed the Soviet Union to establish as a global superpower and fund all its well-remembered military and space programs – just think of Sputnik or Yuri Gagarin. However, due to a complex set of factors, the Soviet economic model slowed down and essentially stopped working in the 1970s. Much of this was caused by internal problems, not a result of U.S. or NATO policy. And it was this, at the time largely unobserved, crash of the Soviet economy that initiated its downfall in the end. Soviet leaders made the great mistake of keeping military spending high and engaging in costly wars, significantly re-directing more and more increasingly scarce resources to military purposes – and so overstraining their economy without external influence.

When the West decided to intensify its own defense spending in the 1980s, this was only the straw that broke the camel’s back – it only pushed an already mortally weakened economy finally over the edge. The USSR did not lose the (First) Cold War because of military inferiority, but because of economic collapse.

This story is reflected by the numbers. Interestingly, with 8 to 13%, U.S. military expenditure (as share of GDP) was as high or maybe even higher than the Soviet Union’s in the 1950s and 1960s, with the burden decreasing significantly from 1970 onwards (Korea war, Vietnam). Conversely, Soviet military expenditure picked up from an est. 9% in the 1950s to 11 to 15% from 1970 on – with some estimating it as high as 20% in the early 1980s (Afghanistan war). For the U.S., even with SDI etc., defense spending never went above 6.6% in the 1980s – the economy could easily handle even these ambitious military projects and investments.

The pattern and strategy that can be derived from that is obvious: Thwart the adversaries’ growth model, ideally crash his economy – limit his resources. Keep up military pressure. Impose additional external burdens, such as excessive military spending. That way, either limit his military ability or send him into an economic downward spiral. All in all, an elegant way to get rid of an opponent.

China has begun to challenge the U.S. in the military sphere; its spending is minor in terms of GDP, but already perceived to be dangerous by some. Advanced technical capabilities and technology hikes might exacerbate this. In that situation, why not revert to a very successful strategy of non-conventional warfare that won the (First) Cold War without major bloodshed?

Even though China may appear invincible today, it might be not, with its rapidly ageing population, property market bubble and bloated shadow-banking system. Intensified confrontation could deliver a painful blow in a critical phase.

This leads back to the trade dispute: Considering the analysis above, we most likely haven’t even seen the beginning of a potential escalation of this conflict. There are many more torture instruments in the cabinet, such as:

  • Prohibitive tariffs
  • Strict export rules – cp. the (First) Cold War’s rules on high-tech exports
  • Rules of origin (products, assemblies, parts)
  • Import bans
  • Sanctions for Chinese companies or Western companies doing business in China
  • Outright embargos
  • Mutual exclusion clauses

When carefully reading Vice President Pence’s Oct. 4 speech on the subject, in essence a comprehensive list of Chinese wrongdoings and American complaints, “Decoupling” the two economies seems to be the logical consequence. Such removing of China and Chinese companies from Western supply chains and products would fit perfectly well into the strategy described above. On from there, it’s only a small step to “Containment”, trying to limit the other’s influence in the world by forcing all others into an unwelcome choice: “you’re either with China or with America”.

Even President Trump’s seemingly accommodating statements that he sees “good chances for a deal” and that “it will be the best deal” should be read with care, in our opinion. Most probably negotiation tactics, they also fit all too well into what Satoru Mori of Hosei University (Japan) calls a “zig-zag upward trajectory” of short relief and intensifying tension. A pattern observed in U.S.-U.S.S.R. relationship in the (First) Cold War as well.

It does not take a lot of visionary thinking to see that such a development would be disastrous for global trade, a major driver of TIC growth in the recent past. And the much hoped-for opening of the Chinese domestic TIC market might not happen at all, in such a world of intensified hostility between the “West” and “China”.

We are not too optimistic that this trade dispute can be resolved and rather believe that things will get much worse. We would thus recommend TIC players and investors to accept the new political reality, finally factor this in and provide new guidance – instead of pretending that it’ll all be good.

Of course, you’re free to believe otherwise – at least for the time being in this part of the world.

 

Sources:

https://www.forbes.com/sites/yuwahedrickwong/2018/09/11/the-u-s-china-trade-war-and-global-economic-dominance/#132846df256a

Easterly, William and Stanley Fisher, "The Soviet Economic Decline: Historical and Republican Data" World Bank Policy Research Working Paper Number 1284, April 2001. Also published in the World Bank Economic Review 9(3): 341-371, 1995. https://datacatalog.worldbank.org/dataset/wps1284-soviet-economic-decline

https://nintil.com/2016/05/31/the-soviet-union-military-spending/

https://sipri.org/databases/milex

https://www.whitehouse.gov/briefings-statements/remarks-vice-president-pence-administrations-policy-toward-china/

https://thediplomat.com/2019/01/us-china-a-new-consensus-for-strategic-competition-in-washington/

https://www.ft.com/content/019b1856-03c0-11e9-99df-6183d3002ee1

https://www.washingtonexaminer.com/opinion/op-eds/pences-little-noticed-speech-marked-a-new-us-realism-toward-china

https://www.ft.com/content/2fec1b60-fefc-11e8-ac00-57a2a826423e

https://www.ft.com/content/d188cb1e-02b0-11e9-99df-6183d3002ee1

 

Photo © David Pacey (cc-by-sa/2.0)