Thursday, November 8, 2012

City Building and the Outsourcer

 After spending some time with folks from Iskandar Region, Malaysia’s effort to create a booming and global Southern region through planned city development; my thoughts ruminate around how exactly one catalyses a parcel of land into a great city. More importantly, what role does the outsourcer play in realizing this vision?

Rummaging through the annals of history, city states seem to arrive rather serendipitously, and once created perpetuates almost indefinitely unless there’s a cataclysmic natural event which decimates the entire population.  Even war couldn’t smite the likes of London and Paris. So why the allusion to serendipity; primarily because it all began rather logically but then magically takes a life of its own within a short course of 20 to 50 years after several hundred years of relative organic growth.

To begin, the primordial city was chosen due to the wealth of the land. Usually where the river meets the ocean and massive alluvial lands for farming and domesticating animals exists or to some extent mining towns. Population grew and they develop ever refined niches of value throughout the chain of raw materials from production to consumption; continuously turning natural resources into goods and secondary supplementary/augmentative activities that allow the producers and consumers to exist in relative comfort.
If one would zoom out and see the big picture, we are nothing more but ants attracted to sugar; sugar being available natural resources for sustenance. I call this the Genesis period. Life was simple and the dots which connect the value chain of respective land dwellers are close together. A tanner lives beside an animal farm and he’s a stone throw away from the market because logistics and infrastructure were rudimentary.

The second evolution of the city is the trading ports; a natural extension considering as the city grows, goods need to be sourced from farther away as local resources and land slowly depletes, as well as the benefits of comparative advantage mooted by David Ricardo in 1817. Interestingly, trading ports have a notorious nature of flourishing as an outcome of black markets and crime; goods were seized en-route or simply went missing during offloading. So it becomes a natural order for businesses to setup shops that ply these goods and factories as close as possible to the ports as black market items sold many fold more expensive than legalize goods.

Within the 20th century, we see governments across many nations attempt city building on steroids; artificially sprouting mushrooms of steel and concrete with words like “hubs” plied, typically surrounding manufacturing, financial services, education and entertainment. These “artificial” cities have a certain set pattern of growth and stagnation. More importantly, it attempts to attract the “ant” in us with monetary wealth; the sugar of today.

I ask myself, can a city generate wealth without natural resources? So here’s what I’ve observed from these city building endeavours

a) Manufacturing
The hallmark of the industrial age and humbly, one of the most crucial pillar of nation building for any country; is the ability to harness natural resources and refine them into goods that fulfils needs and desires.  Policies like tax breaks for more advanced foreign companies can catalyse initial growth, but it does not necessarily create value for the populace other than salaries and services to support factory workers, managers and the factory itself. The flow of money is obvious but are mere droplets compared to the torrents of wealth should one owns the intellectual property of the product. Primarily because foreign companies repatriates the bulk of profits back home. Every nation hits a manufacturing ceiling once natural resources runs out and salaries increased to the point where it is no longer economical for the manufacturing centre to function.

b) Gambling and Entertainment
Names like Monaca, Macau and Las Vegas comes to mind, and recently we could also add Singapore into the category.  A certain level of romanticism is latched onto these cities, and we all love the back story of how it came to be. Ultimately though; despite its seedy origins, people arrive time and again because of the lure of gambling pay outs.  With a country like Malaysia, where the image of an Islamic state is crucial for political survival, it has little choice but to focus towards the family spectrum with the likes of Legoland and other theme parks in the works. Quaint, but does it directly tug at your soul’s yearning for money generating potential – likely not. Would it be the primary wealth generator for the city – likely not again.

You may be arguing that Disney generates USD11 billion in their parks globally (2011); but the fact of the matter is, Malaysia does not own the Disney brand so we’re back at repatriating profits.

c) Purpose built Government Centres
Grandiosity comes to mind, huge swaths of lands and artificial lakes carved out with the hope that beauty shall make bureaucracy more palatable – I digress. Herein lies the rub with government centres, they only grow as fast as the country’s ability to collect taxes. The city will largely be manned by government workers and the ministries are also fuelled by government budgets so we will not see explosive growth, but rather half empty government buildings waiting to be “repurposed” once the budget hits a deficit too large to politicize away.

d) Financial Centres
Financial centres are strange creatures to me, especially the whole idea of plunking a bunch of bankers in one location and voila you have a financial centre. Global financial centres like Amsterdam began as an offshoot of trading. You need bank guarantees, loans, trading notes and insurance i.e. means to “facilitate” monetary and business transaction for traders - simple.
So sans the organic way of supplying services for traders (which must exist first), you’re left with exchanges that trade financial products and centres with the objective of “generating capital” for local and foreign businesses as well as profit for investors. For example, countries with trade surpluses tend to have low cost of funds for international financing (Although today, it’s more likely monetary policies that artificially lowers the cost of funds e.g. Japan). 

Financial centres require strong legal systems to solemnize contracts, reduced or zero government taxation to move money in and out of country as well as a bonus, an exchange to allow trading of financial products with hopefully low rates and easy means of transaction. Sadly, the way governments outbid each other in this regard is not unique; once you get rid of taxes, governments are left with relaxing regulatory controls as well as allowing for some level of transactional opacity.

This in turn creates room for “financial innovation”; i.e. financial products that can be illegal in one country but clearly acceptable at the location of trade. Post Global Depression 2008, it’s an approach that most regulators will cringe at. 

Having said that, not all forms of financial innovation are bad, Malaysia for example has one of the largest placement of Sukuk or Islamic bonds; and offer services for generating capital that are permissible through Syariah (Islamic law), appealing to investors from the Middle East. Alas, the question arises again, is this enough to catalyse a great city? You tell me. Is there a great Islamic financial district in existence today?

To summarize and break down the thought process, a great city is a series of cascading outcomes; you cannot proverbially place the cart in front of the horse.
1)       A city lives off consistent sources of massive wealth that not only sustains its denizens but compounds growth. It is only as strong and vibrant as its largest income generator.
2)       Once that is established, people will come, more importantly; entrepreneurs -> business owners that create and catalyses even more value through the initial source of wealth must exist.
3)       To assist no. 2; there needs to be proven and consistent rule of law, easy means of funding and establishing the business as well as the ability to connect business owners with customers -> Productivity from Day 0
4)       Abundance of economically viable “people resources” with the skills to execute the business
5)       Cheap if not free telecommunications to rapidly accelerate the flow of business
6)       To a smaller extent, some might say negligible, a low cost base for establishing the business foot print -> logistics, electricity and rental costs etc.

Element no. 1 is humbly the hardest to envision, create and nurture. The same old strategic thinking cap applies; what’s the differentiator of one city hub versus the next? What’s the barrier to entry? Etc.

You may be wondering about the Outsourcer by now, well; outsourcing at its core augments one or more pieces of a business. Simply, the outsourcer’s value is derived from being cheaper and better or enhances business value (brings better ROI) compared to having the entrepreneur build the function from scratch.
We’ve also established that each city needs to have the means to generate sustained wealth, be it new or old. So by extension the outsourcer’s best bet at being successful, is the ability to augment the business that feeds off as well as generate the main arterial sources of income.

I’d like to think of it as being the cybernetic implant augmenting the “arm” of the business.
In developing cities overnight, ala Iskandar Malaysia, Dubai, Pudong in China, the plan often begins with extensive capital investment on office space and public infrastructure. That is all well and good but the point that is missing is the secret sauce -> the miracle making cities great are entrepreneurs!

The individual who saw the opportunity to open a tannery beside the cattle farm; and the banker who discovers the populace’s latent innovative potential and unleash it through venture capitalism.

The entrepreneur connects the dots of value within the city, the entrepreneur then innovates to produce products and services that not only make these connections stronger but uncovers arbitrage to profit from. Every instance where business value is generated, it gets ploughed back into the city and the city grows!
The outsourcer must become a business cybernetic scientist that makes the entrepreneur better; hence, the outsourcer’s destiny is intertwined with that of the entrepreneur.

In order for a plot of land to leap the chasm of backwater subsistence and transform itself into great city therefore requires great entrepreneurs and great entrepreneurs require even better outsourcers. 

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