EU Response to Brexit
Brexit and Populism: The Future of the “European Project” from a German Perspective
Dr. Celine-Agathe Caro, Senior Policy Analyst at the Konrad Adenauer Foundation, a German political foundation affiliated with the Christian Democratic Union (CDU), addressed a gathering in the fall of 2016 sponsored by the Eric M. Warburg Chapter of the American Council on Germany, to discuss the “European project” from a German perspective following the Brexit vote and the movement toward greater populism.
The European Union currently includes 28 member states with over 500 million people delivering almost 25 percent of the global domestic product. Dr. Caro’s remarks included the following, edited for brevity:
The outcome of the British referendum has created increasing pressure on the EU to reform itself to better respond to the expectations of its citizens. At the same time, the European member states will only be able to overcome common challenges like the refugee crisis, terrorist threats, or Russia’s aggressive foreign policy if they act together.
With its economic and political weight, Germany will play a key role in any further decisions regarding the EU’s future, but it needs partners to assume the leadership required to help navigate these crises.
I think it’s important to mention that from a European perspective, the European project is not only about crisis and about bad news, even if it’s what the media here in the U.S. and in Europe like to focus on. The European project is the project that since 1950 is giving Europe peace and stability and prosperity. That’s something we should keep in mind while talking about all these crises and these programs.
This prosperity, this freedom, this peace, that’s still something that is true today that we have from the European project. Think of the single market. Think of the common currency and of all these common laws and regulations and norms that make it possible to manage together 28 countries—28 countries that represent roughly 500 million citizens. It might be that’s only 7 percent of the world population, but that’s 25 percent of the world GDP and 50 percent of all social expenditures worldwide.
I will give you a quick overview of the different issues we are facing in the EU today. I would like to present five top challenges I think for the EU in the future, that influence also the quality of the trans-Atlantic partnership. These five top challenges are as follows: unity, solidarity, communication, leadership, and international responsibility.
I will start with the first challenge—unity—the idea that we should stay together. That’s closely related to Brexit and to our British friends over there. The British referendum is a big backlash for the European project from a historical perspective because for the first time in the history of the European Union a member state will leave the union. For the first time in the history of the EU, the whole project will move backwards. That’s one for history and symbolically that’s bad news.
Politically speaking, that’s not good news either because the EU will lose a major partner—a key member state, one of the biggest member states, and a key player for security and foreign issues. For the current German government, Berlin will also lose an economic partner since the British are traditionally an economically liberal partner compared to the South of Europe.
Officially the negotiations between the EU and the UK haven’t started yet because London needs to trigger Article 50 of the European treatise. Since the referendum, they haven’t done it; they are not rushing into it. That is the proof that the British government wasn’t prepared for this outcome on June 23rd, that they had nothing in their drawers to present to the British public and to the rest of the European Union.
At the beginning of the month, though, Theresa May, who is the current Prime Minister in the UK, said that she will trigger this Article 50 by the end of March 2017. From that time, the UK will have 2 years to negotiate its departure from the EU and the kind of relationship it wants to have in the future with the Union. That’s why if you listen to the media, you will hear that the UK will leave the EU in March 2019. That’s the agenda we have.
The British are facing a dilemma these days, because on the one side they want to control the European immigration. It was the major topic of the campaign before the referendum. They also want to stop contributing to the EU budget. They think they pay too much and they could use the money better on their island. But on the other side, they want to keep access to the single market. Economically speaking, it makes complete sense.
To give you a statistic, just keep in mind that 44 percent of British exports go to the European single market. These exports represent 12 percent of the British GDP. The other way around, in comparison, the EU exports to Britain make up 3 percent of EU’s GDP. 12 percent of the GDP on one side versus 3 percent of the GDP on the other side. Bottom line, if you summarize, immigration, EU budget, and single market. The British would like to keep the advantages of the system without burden sharing and financial obligations.
Chancellor Merkel, as you might have heard, just the day after the referendum in June, made it very clear that this kind of cherry-picking is completely out of the question. She said that very clearly at the European summit following the referendum. If you know Angela Merkel, if you follow what she says and what she does in the media, you will know that she’s a tough lady. She says what she does and she does what she says. It’s likely that she will keep this line and keep this position.
Of course, the UK has been an important partner, so there are people worrying in Europe that she might want to accommodate the British better or be particularly nice to their claims. I went to the headquarters of the CDU party in Berlin last week; our headquarters are just on the other side of the road so it’s easy and we know them very well. One of my main questions was: what do you think? Will she keep this position regarding Brexit and the fact that there is no cherry-picking? So, no access to the single market if the British wants to control the border regarding EU immigration. The answers I got were quite clear. She won’t change her mind. She will stay on this line and she will follow it. Think of the refugee crisis. She said at the beginning, in fall last year, we cannot avoid it. We can make it. Since then she didn’t change her mind. Even if it’s difficult. Even if it’s expensive—for now, she keeps her words.
Why is it her position that cherry-picking is not acceptable? First, it’s a question of principle. You can’t have the advantages of a system without burden sharing and financial contributions. Second, of course, Angela Merkel and other European leaders don’t want to open Pandora’s box. If we start accommodating the British too easily, it will trigger claims everywhere in the rest of the EU in different member states. Cherry-picking would be the priority everywhere. That’s why Angela Merkel and other European leaders will probably adopt a very firm position during the negotiations with the UK once it starts, once they trigger Article 50 to start officially talking about that.
In this context, what we call a “hard Brexit,” is likely when it comes to Brexit. Hard Brexit means no access to the single market because they want to control immigration, because Angela Merkel and other states won’t bend. The other option would be a “soft Brexit.” It means that the British would keep access to the single market, but have obligations coming with that. The British would have to respect what we call “the 4 European freedoms.” Freedom of movement, for goods, for services, for capital, and for workers. It means open borders for the Europeans. That would be one first requirement. The UK would also have to abide by most of EU regulations. Then they would have to keep contributing to the EU budget. It’s not for free to have access to the European market.
On top of that, they would have no say in European legislation. For those of you that know our system in detail, that’s what we call the Norwegian model. Norway, Lichtenstein, Iceland, they have these relationships. They are not part of the EU, but they have access to the single market and these are the conditions. Norway is paying to have access to the single market. That might be a solution for the UK, but since they want to control EU immigration, we say that a hard Brexit is more likely. No immigration, but also no access to the single market.
A hard Brexit means a complete exit then of the EU, but also comprehensive negotiation of all treaties the UK is part of as an EU member. Think about it. For example, the UK is member of the WTO as an EU member. That’s something that they will need to renegotiate once they leave the EU. They will need to have another trade agreement with the EU. Hard Brexit, no access to the single market, okay. But what comes next? Which kind of trade agreement will we have together? That will be a second thing the British will need to negotiate urgently.
Think of the 12 percent GDP with the EU. The British will also need to negotiate trade agreements with all the countries worldwide the EU has a trade agreement with—roughly 50 countries in the world. Trade agreement with the U.S., for example, they will need a mini-agreement for trade agreement with Canada. If they are not part of the EU, they will also need an extra global trade agreement. You see the list of the things they will need to do is very long. It’s not only about leaving the EU. It’s about renegotiating your trade partnership, your trade agreements with almost everybody on the planet.
If we take the example of a new trade agreement with the EU, for example, it means that all the member states including the European parliament and in some cases regional parliaments must agree to the new deal. Everybody has to sign that they agree to give these new trade agreements with the UK, otherwise standard international loads will apply again for trade relationships between the UK and the EU. It means standard pricing and tariffs.
If you’re cynical, you can say the financial future of this huge country, the UK, is in the hands of a country like Malta. They are 400 people. In the hands of a country like Luxembourg, also a small country with half a million people. Also, they will of course need the backing of the biggest of the big member states like Germany, France, Spain, Italy, countries that have no interest in giving hope to their own nationalistic movements, but something is a great idea to start.
I think it will be a very hard negotiation for the UK. It’s not about bashing the British for leaving us, punishing the Brits for Brexit. The British will of course in the negotiation for a new trade agreement be very tough and they will defend their national interests. That’s normal. But on the other side the other member states will defend their national and continental interests as vigorous as London will. That’s just how business works.
It will be a tough discussion, I guess, because you can see with what I just presented that the cards, I think, are better on the European side than on the British side. In my opinion, the UK is in a critical position currently and that might explain why their local currency, the pound, is plunging towards the Euro currently, why they have difficulties with investments currently coming from abroad, and why growth forecasts for next year have been reduced.
To give you a little bit of continental perspective on all of this—what is the current strategy of the EU? Currently, as I said, there are no negotiations with the British. We are waiting for them to trigger Article 50, so officially there are no talks about that with London, but the 27 members are already thinking about what it means for the future of the European Union. For that, they started in September what we called “the Bratislava process,” because the last European council in September took place in Bratislava in Slovakia. The goal of this process is to the organization—the future of the European Union without the UK. Most of all this demonstrates EU’s capacity to act and to come forward to show unity with the message that it’s not because the UK is leaving that the European Union is falling apart. That’s the message the heads of state and government would like to communicate.
It’s a big challenge, though. It’s easy to say, but it’s harder to implement, of course. The idea is not to say, “Everything is fine. We’ll just ignore the fact that the big member state is leaving.” No. It’s a way of acknowledging that we have a crisis and we need to come forward and of course it’s hard with all the nationalistic trends that we have in different member states. The goal concretely is to prove or to show to the citizens that the EU is still the European project—EU is still a good idea and something that brings the citizens advantages in their everyday life, economically speaking, or in terms of security or culturally.
For now, the strategy is to focus on very concrete issues like national security, international security, counter-terrorism to prove that the citizen understands that we have the whole narrative of the EU. Peace, prosperity, freedom, but we also have these very relevant narratives currently of security. So, if we work together, we can improve the security and that’s what Europeans want to show now, to improve currently.
They also want to do more to support economic victims in the EU, people that are suffering because of global trends. For example, in unemployment. So, they want to help also these people to feel better, to avoid having these guys go to the extremist, euro-sceptic parties.
All these must be done without any treaty change. As soon as we have a new crisis in the EU, one first reaction from one capital or from someone is to say, “We need to change the EU treaties. If we change the treaties, everything will be better.” That’s not currently the discussion that we are having at the European level because the people who are in favor of more EU integration think that it’s not the right time to do it. That if we start opening these other Pandora’s box, that won’t work and indeed, even the opposite might come that we will end up with less integration. So, nobody’s talking about treaty changes for the time being. As a matter of fact, the treaties are offering different mechanisms we are not using currently. We can do more than what we are doing now based on the current European treaty. The idea is to try to use what we have instead of saying we need to change everything again.
For the German government, this Bratislava process is going in the right direction to show unity, to try to work concretely on different very important issues the citizens are currently confronted with. Especially for Chancellor Merkel, it’s very important to maintain EU’s unity with 27 member states. Maybe you are aware of this discussion that comes back regularly also, but maybe it might be better to have a core Europe. a smaller group of member states that could come forward and maybe the rest will follow or not. Currently that’s not the strategy in Berlin, in the Chancellery. The idea is more that the other 27 should stay together in a global world, in a multi-polar world. Angela Merkel thinks that the Germans and the Europeans in general are better off if they try to speak with one voice and if they try to articulate their different interests together.
My second challenge in this context is solidarity. That’s a challenge that is currently connected to the ongoing crisis in the Euro-zone, but also to the refugee crisis. I will focus on this refugee crisis for this presentation, but I would be happy also to talk about the Euro-zone later if you would like. The word solidarity in the middle of these discussions regarding the refugee crisis, because as you might know, thousands of people came to Europe since the beginning of last year in the wake of the Syrian war, conflict over land and over sea. Thousands of Syrians, but not only Syrians. We also have a lot of people from Iraq, coming from Afghanistan, and from Africa, especially from the horn of Africa. That’s a mix of refugees, people fleeing their home because of war, and economic migrants like many Africans who think that they could have a better future in Europe.
To face this challenge, last year in May 2015, the European commission came with a new resettlement mechanism to make sure all member states will participate and help to find solutions for all these waves of migrants because the problem in the EU is that’s very imbalanced. Most of the migrants are in Greece and in Italy—these are the points of entry when you try to enter the EU, the main points of entry. Then they are in Germany and in Sweden, countries that are particularly generous with their welfare systems, so they hope that they can start a better life quickly. The German chancellor’s very generous attitude toward the refugees has also helped a lot of people to decide to go to Germany.
But because of lack of solidarity and load sharing, the member states didn’t implement the resettlement. It was a good idea on the paper, but concretely it doesn’t work because for some reason. Different member states for different reasons don’t want to take in refugees or migrants in general. We are still facing a lot of tensions and dramas, especially in Greece and in Italy where the are still way too many people waiting for resettlement. Also in Sweden or for Germany, it’s quite a challenge to find schools and to find homes and apartments for everybody.
Nevertheless, I think it’s important also to say that the situation has improved since last fall. Especially because if the Europeans couldn’t agree on a resettlement program, at least they could agree on the fact that we need to protect EU’s external borders a little bit better. We are doing that, for example with the Frontex agency, and as a matter of fact, now it’s harder for the migrants to enter the European Union. One major factor in this Frontex is also the fact that the so-called Balkans route is now closed. It was one of the main land routes to access the European Union.
Over the Balkans, over Turkey, Greece, and then Macedonia, Serbia and Hungary, or Slovenia, Bulgaria. Bulgaria’s another situation, but if you went to Hungary, for example, then you’re free to go everywhere because Hungary is a member of the Shengen coastline area, so once you’re there, there is no border controls anymore, so you are free to go to Germany, to Austria, and to the other countries. The Hungarian government was very committed to change this and they changed the border in cooperation with Austria, for example. Now it’s very difficult to enter the EU this way and it makes it in general more difficult to access the Shengen area.
The situation is better in general from the perspective of the member states. Less people are coming, but this lack of solidarity and burden sharing is for sure something that is still in the room during European meetings and that’s still a source of tensions between the member states. It also has political consequences.
That brings me to my third challenge I call communication. I think that communication between the political elites and the population in general is a huge challenge currently in the European Union. That’s not something the media are talking a lot about. Every day it’s more about Brexit and the refugee crisis and terrorist attacks. But as a matter of fact, with all these different challenges, these different crises, populist, Euro-sceptic and nationalistic movements, nationalist movements are growing bigger in many member states. You’re aware of UKIP in Great Britain, the independence party that played a key role in the campaign for Brexit before the referendum.
If you think of France, we have the Front National over there. That’s an old party that was created in the ’80s but they are very successful currently and we will have general elections next spring and experts or polling institutions agree on the fact that they might become between 20 and 23 percent of the vote for the first round of the presidential elections. They might end up being the first party of France. Even if it’s very likely that they lose, then the run off, the second, it’s a source of concern that’s almost one quarter of the population is willing to support the Euro-sceptic and nationalist party.
Talking about elections, in the Netherlands, we will have general elections there in March. This tall blonde guy, Geert Wilders, is a very popular nationalist candidate so the election might be tough there, too. We have nationalist and often xenophobic parties that are very successful also in Austria, in Denmark, in Finland. Since 2013, in Germany, we also have the AfD, the alternative to Deutschland. The alternative for Germany. That’s a new party that was created before the last parliamentary election in September 2013. They set up the party a couple of months before. Their major topic at the beginning related to the Euro-zone crisis. It was all about leaving the Euro-zone and coming back to the mark, leaving the common currency. That’s what they focused a lot on in 2013, so Euro-sceptic, if you want.
Now it’s all about the refugees, the migrants, so it’s an anti-immigration party and they were very successful. They have been very successful at the regional level. All experts agree on the fact that they will probably enter the German parliament next year in September when it comes to the general election. Their leader is a woman named Frauke Petry. There was a long article about her in the New Yorker two weeks ago, I think. In my opinion, it’s a quite positive article about her that was written. Once again, a strong lady in Germany. It might be worth reading if you want to know more about her.
These parties in France, in the Netherlands, in Finland, in Germany, everywhere, are exploiting fears in the population. They are offering simple solutions that probably won’t work. But the problem is that for now that they are appealing to a lot of people who feel overwhelmed with all these crises and international issues and insecure in the global context. There are some parallels between what is happening in the U.S. and in the EU, I think, in this regard.
That’s why I wanted to make this point. I think we need good communication about facts, about policy, to make sure that people understand what is going on. The European level is for sure difficult to understand. That’s one of the problems of this project. We have the European council, which is completely different in its work from the council of the EU. How do you make sure that the people understand the differences between these instances? Everything has the same name.
What does it mean for the normal citizens that are not dealing everyday with the European council? It’s a major problem that we have in the EU. It’s complicated. We have different mechanisms. It’s difficult to understand why it’s democratic, so it’s easier to say it’s not democratic and that’s something that we need to do better in the future, to communicate about these projects and how it works and why it’s worth continuing this path.
This giant is connected to my fourth challenge, leadership, as I said. You have a message, you need a strong leader to deliver the message and to communicate about that. That’s something that is also a huge challenge in the EU currently. We need people that are willing to stand up for the European project, to present why it’s in the interest of the Europeans to continue. As I said, peace, prosperity. That’s also projected a good new narrative because peace it sounds boring for young people. Yeah, of course peace, yeah. Everybody takes it for granted.
One of the new narratives, something we are promoting a lot in our foundation is to say, “You know, at least it gives us a little bit more leverage at the international level to try to speak with one voice.” Germany is a big country. But compared to China or to the U.S. or to India, well as the Chinese were in Germany. I’m not sure it will have the right understanding … I tried. They know where the Eiffel Tower is, but more than that they don’t know. They don’t make the difference. A lot of people don’t. That’s why it’s one of our narratives to say, “for international negotiations with big partners like China and the US, it’s better if we try to do it together. At least 28 countries, that’s something. A little bit more significant than just one country like Portugal and just France or just Germany.”
We need a strong leadership to do that because it makes sense for the European project in general. Just to give another current example—the refugee crisis—most of the experts agree on the fact that we can make it in the EU, that we can absorb these newcomers. In Germany, for example, we are talking about 1.2 million people that came since January 2015. These are the last official numbers that came out two weeks ago. It’s not about 1.5 million or 2 million like they mention are going up and up. We are talking about only 1.2 million people for 2015. 890,000 people and then it means much less for this year. Germany has a population of 82 million people. 82 million on one side. 1 million on the other side. That’s a little bit more than 1 percent on top. It should be doable.
Economically speaking in the country where the population is aging, it’s even smart to do it. Maybe now it’s difficult and it costs money, for sure. It’s a challenge regarding integration issues and German language and everything, but down the road, in 10 years, in 20 years, in 30 years, these people will contribute to German growth. Roughly one third of the refugees in Germany are kids. These young persons will learn German and integrate if they are part of the system. That is something that is doing, but of course, for now we have general election in Germany in September next year. It’s easier to say, “We can’t afford to have all these refugees. It’s too expensive. Let’s do something else.” They are quite successful with this message and that’s why we need strong leader that can explain why the picture is a little bit more complicated than that. And a little bit more positive.
The last challenge is international responsibility. I wanted to mention that to open the discussion to the trans-Atlantic partnership. Be sure that the Europeans are aware of discussions taking place here in the U.S. about the fact, for example, that there are free riders in the NATO alliance. That they don’t contribute enough financially for the security that the NATO alliance gives them. No matter who will win the election in November here in the U.S., it’s also quite clear that the Europeans will need to do more in the future for their own security in the EU and in the neighboring countries. That could be also interesting for the trans-Atlantic partnership.
As a matter of fact, all bloody attacks that have taken place in Europe in the last month, especially in Belgium, in France, but also in Germany, are wake-up calls that we need to do more in terms of national security, international security, counter-terrorism, international affairs, and development aid. It’s also clear that it should be or it would be in the interest of all member states to coordinate their different policies a little bit better, their different actions better.
For the external part of the security policy, the European Union has a mechanism. In 2001, the EU started to develop what’s called the common security and defense policy. The idea is to work better together on security issues worldwide. This Italian lady, Federica Mogherini, is our high representative of the European Union for foreign affairs and security policy. She’s the person in charge of coordinating the action of the different member states. As you can imagine, it’s very difficult for 28 member states to agree on a topic like this.
When it comes to security, of course all European capitals want to make sure that’s exactly as they want to have it. They are wary of giving sovereignty to a supra-national level. Also, for good reason. It’s serious. If we have states, if we have national governments, that’s first of all to make sure that people are safe in the country. Working together at the European level on these issues is not something simple for member states and governments. When you think we are doing nothing and we are way too slow, think about what it means to cooperate with 27 other member states. Progresses are there, but very slow.
To mention Germany briefly, I think it’s fair to say that Germany is a cautious partner in the efforts to establish more common security and defense policy for obvious historical reasons. It’s still difficult to imagine that soldiers, German soldiers, can be active abroad and in the country. They are very reluctant in Germany to play an important role in this area. Once again, if you think that nothing is happening and that’s annoying, keep in mind that things are changing, but only with small, small steps.
From a German perspective, for example, the fact that president Gauck, in January 2015, started the debate on this issue is a big deal. President Gauck said that Germany needs to take more responsibility at the international level and to engage more in zones of conflict. For Germans, it was a big deal. There were a lot of talks about that. There have been a lot of talks about that since then.
In July, this year, the current defense minister, another strong lady, Ursula Von der Leyen, published a new white paper about security policy in Germany and the future of the Bundeswehr, the German army. This paper also reflects that the mentality is changing a little bit in Germany currently regarding this question of taking more responsibility at the international stage in zones of conflict or to help fix conflicts. The road is still ahead. There is still a lot of progress to make, but things are changing. Traditionally, France and the UK are more active at this level, but Germany is also getting there step-by-step. It’s important to mention it.
Celine Agathe Caro
Dr. Céline-Agathe Caro is a Senior Policy Analyst at the Washington office of the Konrad-Adenauer-Foundation (KAS), a German political foundation affiliated with the Christian Democratic Union (CDU). Dr. Caro is in charge of monitoring U.S. think tanks and universities with a special emphasis on U.S. foreign and transatlantic policy, U.S. positions on key international issues, and the American perceptions of current developments in the EU. Between 2010 and 2015, Dr. Caro was the Coordinator for European Policy in the headquarters of the KAS in Berlin. In addition, in the spring and fall of 2013, she was a visiting lecturer at the Université Sorbonne Nouvelle in Paris and at the Ecole Normale Supérieure (ENS) in Lyon, a French grande école. Dr. Caro attended the Université Sorbonne Nouvelle, where she obtained a master’s degree in German Studies as well as a joint Ph.D. in German and French Studies in cooperation with the University of Dresden.
University of Dresden.
A Tribute to Dr. Tony Zeiss at CPCC
Twenty-Four Years of Dedication – A Legacy of Workforce Training and Job Creation
By now, you know that Dr. Tony Zeiss is retiring as President of Central Piedmont Community College(CPCC) at the end of 2016. Under his leadership for nearly a quarter century, Tony Zeiss has transformed the face and expanded the mission of Central Piedmont Community College. Since taking over in 1992, the Indiana native led the college through a period of unprecedented growth.
Tony was recruited to CPCC from Pueblo College in Colorado. He says that he was initially reluctant to leave Colorado, but he tried to follow what God had planned for him. Before he knew it, he was a finalist for the position and quickly hired.
During Tony’s tenure, the U.S. General Accounting Office, Ford Foundation, and Newcomen Foundation all recognized CPCC’s leadership role in preparing a 21st century workforce, and the National Alliance of Business recognized CPCC as the “U.S. Community College of the Year.”
Tony’s contributions are not limited to the College. He has been a driving force behind Charlotte’s Little Sugar Creek Greenway and the Trail of History. He has also played a leading role in convening the Global Vision Leadership Group and creating the Regional Global Collaborative for Skill Training which will position Mecklenburg and surrounding counties to participate and prosper in the global economy.
Tony has also held and continues to hold leadership roles with regional and national entities, including: Leadership North Carolina and the Institute for Emerging Issues. He is past chair of the Board of the American Association of Community Colleges and of the League for Innovation and is Board Chair elect of Novant Health in Charlotte.
Tony’s accomplishments and contributions have been recognized with numerous awards including: the Urban League’s Whitney M. Young Humanitarian Award; Goodwill Industries’ Cornerstone Award; the National Council for Continuing Education and Training’s National Leadership Award; the UNC-Charlotte Distinguished Service Award; and the Association of Community Colleges Trustees’ National CEO of the Year Award. The list of awards goes on and on…
Tony Zeiss has consistently been driven by his energy and enthusiasm to serve students and the larger community at the same time. Tony’s dedication during the Great Recession (2008-2009-2010) was exemplary. He knew instantly that the loss of thousands of manufacturing jobs in this region meant that CPCC and other community colleges needed to greatly expand their role of training and educating workers for the new jobs that would replace those lost jobs to other countries.
CPCC went immediately to work to educate, assist and train workers for the jobs going unfilled. Tony quickly realized that many new jobs were coming from foreign firms moving into the United States domestic economy to hire American workers. He worked with those firms to provide the needed curriculum and skill training to workers in the United States and now CPCC certifies skilled workers to the standards needed at those advanced manufacturing firms.
Tony will be missed at CPCC, but he remains in the community and will continue to work with the Global Vision Leaders Group. We can all celebrate his spirit and his leadership to our community for 24 years.
Our city and region are truly the better for Tony’s efforts. Tony has truly made a difference in this community and in the lives of the thousands of students and area residents who have benefited as a result of his guidance at CPCC. Thank you, Tony Zeiss!
Delivering Electricity to Transform Lives
View Conference Video: https://www.youtube.com/embed/e6TzX1600PA?rel=0&autoplay=1
Jim Rogers is and always has been more than just a big thinker. Of his 25 years as the chief executive of electric and natural gas utilities in the U.S., he spent the last seven as head of Duke Energy, helping it grow into the largest regulated utility in the United States. Since stepping down as CEO of Duke at the end of 2013, Rogers has been focused on another one of the biggest challenges on the globe—how to bring energy to the1.2 billion— roughly 1 in 5—people in the world without electricity.
The University Fellow, Duke University Rubenstein Fellows Academy, and former chairman and CEO was keynote speaker at the Charlotte regional conference Energizing Africa Through Partnerships, produced by E4 Carolinas.
The Carolinas, believed to be the largest energy economy in the eastern United States, is emerging as a leader in sourcing energy services, products and project development facilitation in sub-Saharan Africa. At the conference, African and U.S. energy policy officials and executives engaged in the Africa-Carolinas energy trade met to learn about opportunities and develop partnerships to pursue a wide range of projects.
Rogers also provides examples of three companies—Powerhive, M-Kopa and Off Grid Electric—that have been especially innovative and have great strategies for bringing electricity to all parts of Africa.
In the following excerpts (edited for brevity and clarity), Jim Rogers provides his insights into the business opportunities in Sub-Saharan Africa and offers examples on how to succeed in business in this substantial economic development challenge.
Thank you all very much for being here and focusing on the opportunities for doing business in Africa; there are so many opportunities there.
I see Africa through the lens of electricity and energy; I see it through the opportunities that are presented. You know, my experience in Africa is limited—at Duke we used to own a company in Zambia providing electricity to the copper industry. It’s a very cyclical business, and when the business would dip, we’d then build a transmission line to provide that electricity into South Africa or the southern cone of Africa, also generating in Kenya. So the experience there is limited, but most recently I’ve done two things that have allowed me to go deeper, and have a more profound understanding of what’s going on in Africa, what the opportunities really are.
One is I wrote the book about the challenge of bringing electricity to the 630 million people that have no access to electricity. To me that’s stunning. It’s two times the number of people in the United States, almost two times, who just don’t have access to electricity, so that’s remarkable. And then there are tens of millions of people that are connected to the grid, but have intermittent access to electricity, and all this is in the context of 1.2 billion in the whole world with no access, and a billion people connected to the grid around the world, but only with intermittent access.
It’s hard to life your life, hard to plan your life, difficult to run a business when you don’t know when the power will be on or off. So that’s a great challenge—to do business in that context. So I’ve learned a lot writing the book, learned a lot talking to really smart people and really trying to get a profound understanding of what actually is happening and what the opportunities are.
The second thing I did is, just in May of this year, I went to South Africa and Cape Town at the African utility week, and there I had a chance to facilitate conversations with about 20 of the CEOS, leaders of state-owned utilities in Africa, and that gave me a more profound understanding of the challenges—the challenges of building generation, the challenges of building transmission, and you know there’s a number of power pools that have evolved in subsets there in Africa.
As it turns out, I wrote my book, solely on the 630 million with no access in rural areas, and I’ll talk more about that in a moment, but that’s really the background that I bring to the conversation today.
Electricity is so ubiquitous, it’s really back of mind if you live in the U.S. or you live in Europe, or any high income country around the world. It is not something you really ever think about, and as the CEO of Duke, I was delighted that you took us for granted. There were only two times you ever reached out to talk to us: if we screwed up the bill, you’d call us, and if the power was out. Those aren’t exactly experiences that you can say are warm and fuzzy experiences with your local utility, but when I look at the challenge of no access, it’s really remarkable.
Actually I would dare say, people from high income countries around the world have a blind spot with respect to access to electricity, because you never live without it. I mean, maybe my grandfather lived without it, maybe someone in your family, but I’d say most people in this room have not been without electricity in their lifetime, and so when you have it you don’t really know what you’re missing, or the role that it plays in your life. That’s why this blind spot exists. Let me just describe the blind spot.
People talk a lot about economic development in Africa, they talk about health issues—the need to improve the health system. By the way, there are a billion people that go to medical clinics around the world that have no access to healthcare. They talk about education—that there are millions of people that go to primary schools with no electricity. They talk about lifting people from poverty. But what they don’t talk about is bringing electricity to the people that don’t have access.
I’d say that the U.N., which is charged with responsibility of understanding poverty around the world and the opportunities—the U.N. when they did the millennial goals in 2000, never mentioned energy access. Well they corrected that. In September of 2015, they made energy access a sustainable development goal for the period of 2015 and 2030. That’s really important to countries, such as here and Africa to have that as a goal.
But what they haven’t done yet, is make access to electricity a basic human right. Only in 2010 did they make clean water and sanitation a basic human right, but I personally believe and I argue in the book that basically access to electricity is a basic human right, and I believe that because it enables better medical care, it enables better and more efficient farming, it enables education. Just go into the list of all the things it enables, and then you realize that is foundational for every society to have, and very important for people throughout the world to have access to it.
I guess maybe I should kind of stop for a moment and share with you why I wrote this book. You know having spent 25 years providing power, in the U.S. primarily and other places in the world, and then becoming aware of this issue, I said, “You know, this needs to be fixed, and I’ve spent my whole life fixing problems. This needs to be fixed.”
I started writing a book and then I realized that, to my surprise, I came up with a conclusion that extended the grid to these rural areas in the most affordable option. Providing solar electricity was the most affordable option because across the world, not just here in Africa, but around the world, there are several billion people who live on less than two dollars a day, so capability to pay becomes a really important thing when you think of building out.
And then you look at the state of the utilities in these countries. They have limited resources, and they’re working really hard every day to build resilience in the system, to make them more reliable, to extend the grid, but they really don’t have the funds. Nor does the country have the funds to extend the grid to every home, to ever business throughout the country.
The question is, do you try to fund the state-owned enterprise to extend it or do you come up with another model? In the course of writing the book I came up with a notion of doing solar—and by the way I couldn’t have written this book five years ago because the price of solar was much higher. From 2008 to today the price of solar has fallen 80 percent—think about that—so now it is an affordable option. Although there is reluctance to embrace solar. Because people say, “That’s not first world power.” First world power is coal, it’s natural gas, it’s nuclear, it’s not solar. But I’m quick to say solar is 21st century power, because the power systems we built in the United states are retired and are going to be replaced by 2015 and solar will play an increasing role as the prices fall and as more technologies step up.
So this notion of solar in these remote areas makes sense, and it’s affordable, because the number one problem is the use of kerosene. Kerosene for light, but using kerosene even by extremely intelligent understanding can lead to fire, and inhalation of the fumes from burning kerosene, huge problem. If you can replace it with a solar lighter or you can replace it with a home solar system—I mean I think of the solar as a ladder. On the lowest rung is solar lanyards that charge cellphones, next rung is home solar systems, next rung bigger solar systems, and then micro grids. All of these are being deployed here in Africa.
And I think the opportunities are really great to make that happen because people are pricing electricity to match the cost of a liter of kerosene. Think about that—if you’re going to compete with kerosene, let’s get the price right. So that is going on in many places there.
I think the other challenge is even the World Bank, which has the duty and responsibility to loan money and to finance a lot of build out of power plants and infrastructure of the world, they only allocate one and a half percent of the dollars they have to provide renewable energy in the rural parts of Africa. That’s where the 630 million people are. So they need to rethink, because they had that same first world power notion, that I need to build a coal plant, I need to build a gas plant. By the way all of these need to be built to fill out the infrastructure of the utilities that are there, but even that won’t be fast enough to extend the grid as providing a more renewable system in these remote areas because the goal line is to get these done by 2030.
Let me just tell you a basic fact, if we maintain the current “business as usual approach” to energy access between now and 2030, we will still have 630 million people without access to electricity given the growth and the population in these countries. So we’ve got to accelerate our efforts to make this happen. That’s where the business opportunity falls. Let me for a moment talk about the challenges, and then I’m going to quickly talk about some business models entrepreneurs that are on the ground are doing today.
Let me give you a sense, because the notion of bringing electricity to the rural areas of Africa has captured the imagination of people around the world, and has captured a sense of “Yes, we can make money!”, but more importantly we can make a difference. Millennials today—I’m a baby boomer, I’d like to think I’d try to make a difference—but millennials today do not just want to make money, they want to make a difference—they want to have a life with purpose.
Let me quickly talk to you about the challenges. The first challenge is really government and government policies in these countries. One is, there’s often tariffs on solar lanyards or home solar systems, our micro grid equipment. So the important thing is how do you work with the government to reduce or eliminate tariffs, because they don’t manufacture these things in the country, so you’re not protecting an industry within the country.
The second thing is, a subsidy in a lot of countries like in Africa, is kerosene. So they’re subsidizing the cost of kerosene. In some countries like Tanzania, Kenya, have eliminated the subsidy of kerosene. More countries need to do that to allow solar (solar lanyards and home solar systems) to compete on more of a level playing field.
The benefits are overwhelming and easy to demonstrate. With respect to solar, first it’s kerosene and that needs to get done. And then there’s kind of a difficulty sometimes of state-owned utilities not so sure they want to see other people come into the country and provide electricity in the rural areas, and that’s a more complicated story, in terms of what happens.
It’s really important to get governments on the side of the people in terms of bringing electricity to remote areas of Africa—it’s critical. There’s a whole different conversation we can have about the political reasons that governments do not want to see electricity in those areas, I don’t need to go into that, but it’s there. There’s all sorts of issues around corruption in some of these countries. I’m not going to talk about that, but the governments have got to get the policy right to allow acceleration of electricity in these rural areas.
The second impediment is finance; we’ve got to get the World Bank right. We’ve got to get the African Development Bank thinking about this better. We need to develop the number of local banks. We need the World Bank to work with local banks to fill capacity in the local banks.
I remember getting in the wind business in the US. Banks had not funded wind projects, so all you had to do is go to the Netherlands to find banks who have had a lot of experience funding wind turbulence to get the money. I mean I’m talking a number of years ago. U.S. banks got it, and they’re all on board and loving it. But in the early days, they had no experience of lending money on a wind farm. We’ve learned a lot working other banks in other parts of the world to be able to fund our efforts in the early days. That needs to happen in Africa.
There are not many local banks, or even with local banks that have no risk, with an appetite for investing in energy infrastructure. Working with Africa developing a bank and the World Bank, I think improves and builds a capacity to deal with the risk and to loan money. Maybe in the early days a World Bank or African Development Bank provides 90 percent of the loan and the local bank does 10, and over time that percentage changes as they get more comfortable with the risk and have greater capital to deploy.
So, government policy is number one. Number two is finance, and by the way private equity is now being invested in companies in subsidies here in Africa, in the energy space. Hadn’t happened before, particularly with some of these companies I’m going to mention. So, the financial problem needs to get solved. Third thing, is really an issue of technology, and I mentioned the solar ladder, the build-out of micro grids is happening, there’s a learning there. So the technology is being deployed, storage technologies are coming forward. The math around deployment of those technologies is improving.
The other thing is capability to pay, and there is limited capability to pay, which makes it difficult, but a number of people have known business models that install, not perfectly, install the capability to pay. So those are the major challenges to deploy now. There are a lot of other people coming into the country. The Chinese are in these countries in a big way, but they don’t really work with the people in Africa. They bring their own workers into these countries to build roads, they build power plants, they build dams. That’s going on.
I think there are great opportunities for companies to do business in Africa—but they need to get this mantra down. First, listen. Second, engage. Third, recruit. Fourth, train people. Fifth, empower.
Every company that takes that approach and builds the capacity to lead, and builds those skill sets, those are the companies that will, in my judgement, differentiate from everybody else, whether it’s the Chinese or French or anyone. I think those companies are building capability and capacity within the communities. They have a higher chance of doing well over a long period of time, and being embraced, and not just in these communities and villages. But also they will be embraced by the government over a longer period of time, and I think that’s really important.
Now, let me quickly tell you about three companies, and I know all three companies. One’s called Powerhive. It’s run by a guy in San Francisco called Chris Hornor. Powerhive is in West Kenya, and they got the first government franchise to build a micro grid in that area. So it’s a really interesting model to take a look at, particularly on micro-grids, because most of the micro grids in the world are being deployed in India, not in subsets in Africa. We could have long conversations about why that’s happening that way, but Powerhive a good company to check up on.
Another company is M-Kopa Solar in Nairobi. I’ve been to their headquarters, a remarkable facility. I was actually there on family day, so everybody was there with their kids, but I think they call it Fun Day not family day. Everybody was there and it’s just an incredible campus. They have sold small home solar systems to over thousands of families/ homes. Pretty remarkable what they’ve been able to do, and they probably, of all the companies I’ve looked at, are doing the best job, are moving faster, are moving and scaling faster than anyone. Their co-founder and CEO is Jesse Moore, he’s a Canadian, graduated from Chapel Hill, actually tomorrow he will be in Chapel Hill getting a distinguished alumni award, and I think he’s going to stay around for the game in the afternoon. This guy is amazing; he’s raising his family in Nairobi. He has two children—one was just born about a month or two ago, there.
He is committed, but when you walk through his company the people there—they are Kenyans, working. People he’s developed, he’s trained, they’re working—their sales floor is powerful. They have a pay-as-you-go model, where they basically use the convergence between cell technology, the Internet, solar, and then a concept of local banking. You put all those pieces together, you can build a business model that works.
The great thing about their pay-as-you-go model is they’re doing something also very valuable for the people of Kenya. They are building credit histories, because they have a credit history payment, and you know we don’t value that in the United states…You don’t value that until you don’t have it.
I remember an early part of my career where I had kind of perfect credit, but the thought that you don’t have a credit history makes it difficult to buy homes—to buy anything. So I think the byproduct of providing electricity is building credit histories for people here. So M-Kopa to me is kind of setting an example.
They just received significant funding from a private equity group—one of the two companies and the first company to this space to have gotten private equity funding.
The third company is Off Grid Electric in Tanzania. It’s run by a guy named Xavier Helgesen. Xavier went to Notre Dame and then to Oxford, and basically when he was in school he conceived the idea of doing this, and then built a business, there. In Tanzania, basically only eight percent of the people have electricity, so the opportunity is great.
Interesting business models, interesting challenges, and it’s really all about recruiting. I mean all the things that I said in the mantra—you know, listen, engage, etc. Those are examples of people that are really working hard to add value and make a difference. I think it’s critical; it’s a great mission. It’s a great opportunity.
The ability to change peoples’ lives is great, and it’s a huge opportunity. So as you all think about the future, you think about opportunities, and know that there’s a number of companies here, part of E4 Carolinas. It is a huge, huge opportunity to invest in the future. With that I’ll stop and open it up to any questions that you all might have.
Yeah, I’m wondering if you were bold enough in your recommendation about what is the past and what is the future. I remember being in China and advising them on transportation infrastructure—“Please don’t do what we’re doing because we know we need a revolution. So if you build on our model, you’re going to build a problem.” So I’m wondering if you were even bolder in Africa—one of the most diverse environments on the planet—about to convert, building an energy network into that environment. Would you even be thinking that you should maybe be bolder about what the 21st century is about, as a way of thinking about energy?
Well, I thought I was being fairly bold. I guess the way I would respond to that—it’s truly a good question. It’s the right question, because you know, you have almost a blank sheet of paper and the ability to build distributed, renewable systems. I mean, in the ideal world that you discover new ideas and as people start up their economic development, they develop the capability. By the way, 50 percent of people in these rural areas—not different from the United States in the early 1900s—most of how they make money is either farming or in agriculture.
So if you could improve—for example the irrigation is huge, and there’s a lot of solar applications in all these areas—but this notion of going from solar panels to a home solar system, and actually you should design a home solar system so when the day comes it can turn into a micro grid. You can connect all the devices to have everything work as one system. And actually the way to think about this is that’s exactly the way the United States built the grid we have today. We went to cities, I mean I think about where we were in 1910 and 1920, we really built essentially micro grids in this city and that city and that city because of the density of the population, and then we started combining these city utilities, building transmission lines to connect them—and that’s how they got built.
The opportunity here is, with solar, to do it cheaper than extending the grid. Now I’m a pragmatist. I believe we are going to have to still build, whether it’s hydro facilities, utilities scale to solar, wind in some places—not in as many as you’d think, but you really need to do that for the existing grid, because the other practical point is some places the grid makes sense to extend it out to the rural areas, other places it doesn’t.
I’d say there’s a great debate about, “Well, if you’re not giving people enough electricity to build factories, to build other economic development, you’re not going to give them an opportunity to climb out of poverty.” I think that’s kind of wrong-headed, I think you have to think about… it’s not an overnight thing, and plus if you wanted to you couldn’t build it and extend the lines, because nobody can pay for it—not the people, not the government. So this goes a little slower, but the bottom line is it gives people a chance.
I think solar storage, micro-grids, the whole solar system, I think that’s the right way to go. The other thing I left out is so important—there is a huge desire to move beyond lighting. Lighting is great for a zillion reasons—it’s safety, it’s better lighting than the kerosene light, but the other thing is, people immediately want a new, and this is what’s happening—low energy, hyper efficient appliances—people love irons, they love fans, they want radios, they want TVs. I mean probably not in that order, probably in the reverse order.
The important point here is there is a huge opportunity as we build these very, super-efficient appliances, to come back into the United States and other parts of the world. Let’s build super-efficient appliances there.
I have a pretty specific question for you. You really caught my attention with I think it was off-grid in Tanzania—saying they have a pay-as-you-go model. I think if companies were able to go straight to retail, it would really change the game on a lot of things. You mentioned it’s not just energy, but it’s also TV and other stuff. So what I’m interested to know is that a model that they can replicate? Because say if you were selling a TV, direct retail, and you had an agreement with off-grid who has access to the power. That “Hey, if you don’t pay your bill, we’re shutting off the power, too, along with the TV—if they could replicate that model it might be able to allow a lot more companies to go in there if they could sell direct-to-retail as far as a government sale or working with some of the private businesses there.
Every country is not like Kenya, but in Kenya, where about 90 percent of the people have cellphones and mobile banking has sort of evolved, I think it’s a very creative idea. I mean very few people in the U.S. or Europe do mobile banking today, actually. And actually these companies—which is actually kind of back-to-the-future when the power sector of the United States got started, we had separate companies that sold refrigerators, washing machines, irons, dryers. I mean to build load.
These companies—and M-Kopa solar is one— it’s just moved to selling very efficient TVs and are selling them as fast as they can line them up. Plus, the people they’re selling them to own their system, so they know their credit history, so it’s a better bet, going forward. And actually building off to your point, I think other people have an opportunity to come behind, even with other products in that area or to build businesses. A lot of people might build a micro grid, but then if you are building a small manufacturing facility, you can use a generator along with some of the solar, et cetera, to make it 24/7 powered.
First of all, thank you Jim. That was very illuminating. My question, two of your examples were from Kenya, and those two examples have private equity projections, so is it also—I mean it sounds like fantastic management, involvement in those kind of things—but is there something in the policies based in Kenya that allows more of this type of innovation in the off-grid space?
No, actually it’s not just Kenya, it’s Tanzania, it’s Rwanda, Ghana, Tasmania, not just in the south, but in east Africa. It seems to be where the greatest creativity is going on for the moment. But I think it’s a little bit because Tanzania and Kenya are eliminating subsidies for kerosene and I think that helps. Some countries still had discussions over the price of electricity, but I really think that it’s just a unique set of acts came together in those countries for that to happen, and all three electrics are really funded by Elon Musk of Tesla and solar city—I mean part of the funding. M-Kopa has gotten the funding from a group called Generation.
Power is one of the most capital intensive industries in the world, and they’re dealing with infusions of $20 million and $30 million, which is trivial. Power Africa was slow to start, but they are making significant progress—they have $7 billion to help accelerate the build out.
They started out with a little bias towards central station clients, but I think they’re changing and focusing more on renewable and distributed energy in the area. Let me give you a context of what $7 billion is—that’s one year of the capital budget of Duke, okay? So it takes serious money, and while the government’s doing $7 billion, I applaud them, I love what they’re doing, I mean it’s going to go on beyond this administration, it’s important to do—but we shouldn’t forget that that’s a drop in the bucket in terms of capital that’s truly needed to provide electricity in Africa.
When Chris Hornor started Powerhive, he built it with an outstanding team. So in your opinion, whether it’s a small electric cooperative back in rural Kenya or Tanzania or Ghana or Nigeria, do you think that you should chase product first or take the risk of building something versus letting people come in, and you know?
I’m old fashioned, so you’re asking the wrong guy. I’m a risk taker, but not a river boat gambler. I want the big payoff. I mean it’s just the smart way to think about it, if you’re going to invest significant dollars. The approach that M-Kopa and the others are using—they’re making a fairly significant upfront capital investment. I mean, to just be in business, train people, recruit people, etc., it’s really important to think through your model, and it’s important to make sure you have enough capital, because working capital is the number one problem of all these start-up companies. The truth of the matter is, equity investment is working capital, so it’s really important to get patient capital, a lot of up front capital, or as much as you can get, because it reduces for some time your working capital needs in a period when the business is growing.
My question is talking about grid, and I’m wondering if that’s an underground grid or in the air grid with wires—if so, is there a more efficient alternative for extending power? I’m not talking about more wires in the air, but solar on the roof, I mean a home solar system is all within the home, no wires. Other than connecting a solar panel on the roof—you talked about extending the existing grid.
Extending the grid means more transmission, more distribution build-out, more generation. And by the way most people thought if a CEO of a private company in the U.S. took a look at this, my first answer would be extending the grid. People were surprised when I said, “No, not so quick.” I distributed solar, it’s a better approach because it’s the most affordable approach for people, and I think that’s critical.
The benefit of this—and there’s a whole concept that impacted us to talk about, in these companies—you lift these villages up when you bring light to them. The number one beneficiary of electricity in these rural areas is women. It allows equality for women, and anyone that’s ever studied how you change a village, how you build an economy, you’ve got to set the women free, and I mean set them free by basically, you know, the best example in the United States is to go back to read a book by Robert Caro about Lyndon Johnson. He talked about how to transform the lives of women in Texas who lived on ranches and how all of the sudden they now begin education, they now can contribute.
I mean, most women there at 35 looked like they were at 55 with the type of lifestyle they had with water. I mean just all the work of a village, a woman does. So my belief is if you were to transform a society, provide electricity, you will transform the future of women, and that will lift the whole society going forward. So thank you all very much.
Global Opportunity Mindset
Hyde Park Partners Innovates Productivity Solutions for Manufacturing
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To see what could be versus what is.” That was the vision of Clifton Vann IV for his company Livingston & Haven, LLC five years ago.
“Going a step beyond…” That is his vision now for the various entities encompassed within his Charlotte-based holding company Hyde Park Partners, Inc., which owns and provides corporate services for Livingston & Haven, MROStop LLC and AEG International, LLC.
Vann has always been in the vanguard of American ingenuity in engineering and manufacturing. He, like his father Clifton B. Vann III, the consortium’s chairman, believes in doing “whatever it takes to ensure the long-term health of U.S. manufacturing.”
Livingston & Haven (L&H), Vann’s flagship company, was formed as an industrial distribution company in Charleston, S.C., in 1947, that later expanded into pneumatic components and hydraulics. Vann’s father had joined the firm in 1966, and in 1973 opened a branch in Charlotte that became the headquarters for the company when he purchased it in 1980.
Today, L&H is a $75 million leading industrial technology provider in the Southeast. The company specializes in providing solutions in the automation, hydraulic, pneumatic, lubrication and connector industries.
L&H utilizes a collaboration of engineers and industry-focused specialists to provide innovative productivity solutions for manufacturers. L&H also offers a variety of services including: engineering design and fabrication, research and development and resource efficiency and conservation.
Vann considers L&H a problem-solving company that helps manufacturers work smarter. With some of the highest fabrication capabilities in the country, its engineering solutions can look more like artwork than industrial tools. Vann likens it to “providing an off-balance-sheet engineering resource for clients without them having to bear that cost.”
“We’ve worked on solutions that range from improving the speed of machines that put sleeve labels on plastic bottles, to designing and reconstructing a rocket cradle used to facilitate the launch to the International Space Station,” touts Vann.
“We are a large distributor, so we took 68 years of playing with different kinds of products, 6,000 customers in 150 industries, and said ‘Given our experience, I bet we could write our own music.’”
Promising Markets in Developing Countries
L&H represents more than 850 vendors with one million products across a vast array of industries in the broad field of motion control, including fluid power, hydraulics and lubrication—“Anything that needs to be moved or packaged or distributed or built,” Vann says.
That includes aerospace, automotive, steel, medical, consumer, packing, printing, textiles, cigarettes, beer, tires, plastics, carbon fiber, extruded aluminum, fiber optics, wood products, nails, tools, and the plastic safety inserts for electrical outlets.
Employees are spread across the Southeast, numbering approximately 190, including 50 home-based salespeople.
The company’s products have evolved since its postwar beginnings when it offered gas pumps and air brakes for trains.
“We’ve changed as technology has changed,” says Vann. We’re branching out into more energy-related technologies. Solar was not part of our past.”
Vann sees promising markets in developing countries where millions of people are coming out of poverty. A decade ago, for example, Ethiopian farmers had to finance the $125 price of conventional irrigation pumps; today, they can afford to buy solar-powered pumps.
It has resulted in a broader application of skills to new products, processes and industries, all the while keeping the focus on high quality and unsurpassed knowledge the company is known for. “After all,” Vann says, “the process of vetting vendors for solar panels isn’t all that different from vetting vendors for hydraulic pumps.
“We had to think outside the box,” he continues. “We didn’t want to do something so far afield that we didn’t know what we were doing. We kept the same sort of paradigm thinking about ourselves, but we changed what we do.”
To free money for new ventures, Vann hired Strategic Pricing Associates, a consultant whose advice improved the company’s margins.
“We created a way to rob Peter to pay Paul without Peter feeling poor,” he says. “We were able to improve our corporate margins by almost 4 percent. It was a very conscious plan to develop strategy, but also to figure out a way to pay for the strategy.
“Going to Africa, making our own products, takes time. We need to be in position to be able to withstand the test of time.”
Unlocking Foreign Trade
In 2009, Vann had launched an online-sales initiative MROStop which revealed the potential of global marketing far beyond the company’s six-state Southeastern base. MROStop is an e-commerce resource for quality MRO products like hose, fittings and adapters; hydraulic products; pneumatic products; pumps and lube equipment; electrical supplies and fasteners.
MROStop demonstrated the promise of broader marketing. The website made $4,000 in 2009 after it was launched in August, $60,000 in 2010, $300,000 in 2011, $1 million in 2012, and $3 million in 2013.
Customers from such far-flung places as Russia, the United Kingdom and Thailand were paying high freight costs to get quality products from the distributor—mostly the same products L&H already sold stateside. The site now sells in 72 countries.
“That made us look internationally,” Vann says. “That made us look at other products, and that made us look at existing products in a new way. We started to wake up to this idea that there’s this whole world out there—to think about small business on global scale rather than regional or national. It’s like a gateway drug.”
MROStop also opened a solution to the distributor’s longtime, frustrating, limited ability to deal with multiple big suppliers, each wanting to block competition.
Others in the industry addressed the problem by buying other distributors, a consolidation phase that Vann, who had a longstanding territorial contract with Bosch, did not consider a solution.
“I decided not to do that because it was more of the same,” he says. “I decided to look for new territories outside the U.S. It turned out I could do things for our current suppliers in Africa that I could not do in the U.S. This was a new opportunity.”
They started in Tanzania, where Vann now has a store with 10 Tanzanian and two U.S. employees. At a trade show this year, they drew crowds with a Parker under-sink reverse-osmosis water filtration system.
“We’re getting tremendous interest in that in Tanzania. While this is not a product we would think about selling here,” Vann points out, “we’re not only developing new products—we’re finding new markets for our existing products, too.
“We can get business in other countries and people want to buy from us. We’re selling solutions, but we’re really brokering knowledge.”
In the process of exploring solar energy, Vann found that Bosch, the longtime partner for hydraulics, made solar panels with a distributor in Mooresville. So L&H started researching and developing locally generated and distributed direct current systems.
“Then we started building systems for Bosch,” Vann says, adding that the systems have markets in both the United States and Africa. “Our distribution was very nimble; we could do things for them in weeks that would otherwise have taken months. We became a contract R&D house for Bosch for renewable energy. Our facility continues to be a guinea pig for the next level of technology for Bosch.
“We’re not really in the solar business; we’re in the power management business. We look at power usage and identify waste—it makes no sense to create solar power to supply waste. We reduce the total energy footprint, then talk about where energy comes from, saving enough money to pay for the solar system. That’s really the way we approach everything,” Vann describes.
“Now we’re imparting our knowledge with solar, water, hose, fittings, and lubrication to our African friends,” says Vann. “Of course, that portfolio will grow as we determine what the needs of the community are and where those products are. When you think about it, we’re a concierge service basically for the continent of Africa.”
American Engineering Group (AEG) was the next step in Hyde Park Partners’ mission to provide innovative solutions to the global community. AEG offers the highest quality engineering products and expert engineering solutions; products that improve efficiency and quality of life with a focus in water purification, renewable energy solutions and industrial technologies.
The approach involves strong connections among L&H, AEG, and MROStop that accelerate the success of each. AEG’s Firefly technology, for example, is for sale on MROStop.
“It was all done purposely with synergy in mind,” Vann says. “We want to broker our U.S. customers from our core businesses to our customers in Africa. We’re about selling the knowledge. If we don’t have it, we’ll find somebody who does and sell it to you—from bridges and cranes to skyscrapers and aircraft carriers.”
These types of brainstorming sessions have fostered a mindset constantly open to opportunity. Vann is working on a plan to sell water drilling equipment hoses from Tanzania to Ethiopia.
“My challenge was to unlock the thinking of the team, to think about our business a little differently, to think about who our customers could be, rather than who our customers are,” he explains. “The mindset was really the biggest challenge. When you think about what’s next for your company, think about what you know, not what you do.
“We usually know a lot more than what we do. What do you do every day that other people will pay you for? The risk of doing nothing is guaranteed risk. Let’s play offense, not defense.”
Unlocking Trade with Africa
A number of Hyde Park Partners’ solar-powered products are already successful in Nigeria—namely the Firefly and the Oasis and the newer GoSol Power Box.
Made under the AEG aegis, Firefly is a solar-powered device that powers up to five bright LED lights, is lightweight, customizable, and has a built-in USB port to easily charge mobile devices—especially useful in a region where cell phones are as ubiquitous as sunlight but little electricity.
“We’re selling them in-country,” Vann says. “We’re working with NGOs, faith-based organizations, high net worth individuals—anybody who’s interested in changing the life of someone in Africa.”
Installation takes no training, the necessary screwdriver is included, the plastic box is fireproof, the lights are waterproof, and the software-run system prevents pirating by curious Chinese competitors.
Vann also works with local banks to help customers get microloans and with local cellular providers, a natural fit.
In addition to Firefly, the company created Oasis, a water filtration system that can use solar or other power to produce 75 gallons of drinking water a day by filtering any water except seawater, including chlorinated and brackish water. Smaller microgrids can run enough for a home, while larger microgrids can provide power to filter water for businesses, banks, hospitals, and other commercial operations.
“One of the things we have to overcome in Africa is the idea that solar doesn’t work,” Vann says, explaining that cheap Chinese products have made African customers wary of the technology. “We’re having to re-educate them on what solar is or can be.”
The former CEO of GE in Nigeria was powering his 12,000-square-foot house with diesel generators until he bought a AEG-designed microgrid system and saw how electric lights should shine. He flew to Charlotte and bought a second system to double his power this year.
When neighbors stopped hearing the noisy generators, they found out about this U.S.-designed microgrid and started ordering systems for themselves. Likewise, international firms that find a home in Charlotte often attract their business associates to join them.
Vann also has a Tanzanian partner in AEG Tanzania, part of American Engineering Group that hires local Tanzanians, a welcome contrast to most Asian and European firms doing business in the country.
“Part of our commitment in going to Africa was not only to bring American quality products and American technology and innovation, but to integrate ourselves into the culture and be good stewards,” he says. “It gives us a chance to present a first impression. They know American products; they love American products. It’s one of the places in the world where we are still cherished.”
The local stake qualifies Vann to export to Tanzania, opening a route for Hyde Park Partners customers to sell in that country. “I can go to our customers that make cranes, paving equipment, chicken processing equipment, steel mills, electrical plants—you name it—and say, ‘Do you want to sell something in Tanzania?’
“I can broker that now. I’ve established a bridge to make that possible,” he says.
Power Africa Charlotte 2015
“We have a keyhole view of Africa,” says Vann, the self-styled ‘ambassador between Charlotte and the African continent.’
“It’s not your National Geographic Africa anymore,” continues Vann. “These people have more buying power than the Chinese or the Brazilians. This place has come into modernity. Nigeria just had its first democratic election in history.
“The world changes and grows up. There are 50 to 100 million people coming out of poverty every year on the planet.”
Power Africa is an initiative of the U.S. Agency for International Development to bring power to sub-Saharan Africa where 600 million people—70 percent of the population—lack electricity.
Vann was so impressed with the opportunities Power Africa opens for improving people’s lives and the potential it represented for emerging markets that he hosted a Power Africa conference here in Charlotte in September 2014, bringing together about 130 business and political leaders from Africa and the United States.
Vann plans to collaborate with other regional leaders to host a larger Power Africa conference here next spring. A collateral benefit: Positioning Charlotte as a leading place of interracial partnership and mutual benefit at a time of heightened attention to black-white relations.
“How do you get middle market American and small business more involved in being the internal driver for the export economy?” he asks.
The answer, he maintains, is to combine education—both technical skills and cultural competence—with a regional perspective on economic growth and attracting international partners.
“I think what we’re seeing in industry, at least where I live in manufacturing, employers are less and less concerned whether you have a degree or not,” Vann says. “We don’t care what you know; we care what you can do. We’re going to have to educate you on what to do anyway.”
Global connections call for cultural training, including language education, beginning in K-12. Vann has learned that Nigerian culture is more gregarious and boisterous like American culture while Tanzanians are more reserved and humble, with different expectations in the partnership.
“How can we be global if we don’t understand where you are on the map and what it means to be you?” he says. “If you want to relate to these people, you can’t go with your American glasses on. You have to begin to learn what motivates them. It’s not the same as it is with us.”
By way of example, Vann recounts how a visiting CEO of Coca-Cola from Tanzania somewhat nervously got into a car at Lowe’s Motor Speedway for a 185-mile-an-hour spin around the track, but so enjoyed it he keeps a picture of the experience on his desk and tells everyone who visits about Charlotte.
“Charlotte’s a great place—Southern hospitality, great place to be,” Vann says. “As they come, they define their good time. They go home and tell everybody about it. Let’s start talking it up and not taking it for granted and thinking about what’s next. We need a vision. I think we’ve got a good one. It resonates.”
For Vann, that vision involves a re-invigoration of American innovation that he has seen dwindle in recent decades.
“Our free country allows us the freedom of innovation and individualism that we grossly underestimate,” he says. “We used to be explorers; we went to places like the moon. It feels like today, we’re just happy to sit on our own porch.
“Get off the porch, talk to people you think might not be related, look under rocks that look uninteresting, network. To me, that’s part of the concept in terms of what’s we’re trying to sell to local businesses—get off your island, keep innovating. Companies have to continue to re-invent themselves.
“Look at the foreign companies that have come here,” Vann says. “The first German one comes, their friends come later. There’s unbelievable things happening around the world, many of which we’re not participating in. I think there’s a great opportunity there if we can open this concept up to more American companies—not just Africa but in general.”
Hyde Park Partners, Inc.
11529 Wilmar Blvd.
Charlotte, NC 28273
Phone: 704-588-3670; 800-825-4969
Principals: Clifton B. Vann III, Chairman; Clifton B. Vann IV, CEO; Tim Gillig, President, Livingston & Haven, LLC; James McGinn, President, MROStop LLC; James T. “Tod” Skinner, President, AEG International, LLC
Members: Livingston & Haven, LLC (1947), MROStop LLC (2009); and AEG International, LLC (2013)
Employees: 190 over the Southeast: Georgia, North and South Carolina, Tennessee, West Virginia, and Virginia
In Business: 68 years
Revenue: Over $75 million
Business: Holding company that owns and provides corporate services for Livingston & Haven, an engineering company providing solutions in the automation, hydraulic, pneumatic, lubrication and connector industries; MRO Stop, an e-commerce resource for hoses, fittings and other related technologies; and AEG International, focusing on solar and other renewable energy technologies, water filtration systems, and industrial hose fittings for the global market.
Nucor Steel: Looking for a Fair Fight
Nucor Knows that Competition Just Makes Them Better!
As vice chairman of the World Steel Association, and recipient of the Steelman of the Year Award for the second time, John Ferriola’s work in the industry has been globally recognized. Despite market turmoil and imports capturing record market share in the U.S., Nucor—the nation’s largest steel producer and North America’s largest recycler—has continued to generate profits.
Ferriola is chairman, CEO and president of Nucor Corporation. He joined Nucor Corporation in 1991 as manager of maintenance and engineering at a Texas bar mill, rising through the ranks to head up the company in 2013. Prior to joining Nucor, the SUNY Maritime Academy electrical engineering graduate had begun his career with Bethlehem Steel Corporation in 1974, and worked for 17 years in various operating and management roles.
Ferriola recently spoke at the World Affairs Council of Charlotte. Here are excerpts transcribed from his presentation (with some auditory limitations and edited for brevity and clarity), describing his company and the areas in which steel is adapting and evolving in terms of products, raw materials and teammates, and how steel is evolving as a globally traded product.
How many of you know the history of Pittsburgh, Pennsylvania—the city and its vast steel mills in the ’50s? I grew up during that time. I spent much time in Pittsburgh. They’d always talk about the billowing black smoke coming out of the smoke stacks. They said that if you’d hang your laundry out to dry, you’d take it down and it was dirtier than when you first put it up. Making steel in the past was quite an environmentally unfriendly process.
Fortunately, I can say a whole lot of progress has been made since those days, and frankly Nucor’s commercialization of the electric arc furnace changed the whole nature of the steelmaking process. We have been able to reduce the environmental impact of steel fabrication and the footprint of our steel mills today.
If you would drive by one of our Nucor facilities now, you won’t see smokestacks with smoke billowing out of them. As a matter of fact, we are in some strange places—a lot of plants are refineries in the middle of cornfields in Indiana or in the middle of cow pastures in Texas.
It’s quite a different impact on the environment and on the communities. It’s really a result of the electric arc furnace or EAF. We’re really proud as steelmaking people to have been part of that revolution.
Nucor Corporation was in the steel industry in 1962 with the acquisition of a very small steel joist company called Vulcraft, which is located in Florence, South Carolina.
At that time, we only had about 250 teammates in the company. A young engineer with an MBA by the name of Ken Iverson was put in charge of Vulcraft and by 1965, he had become president of Nucor. He decided that along with the steel joist business, we needed to buy steel product. We had such a problem buying from large integrated steel mills in terms of the quality that they would sell for us and the on-time delivery was so horrific, that he realized that the lack of a good supply of steel was adversely impacting business.
If he couldn’t buy steel or get it from a good supplier, what do you do? You go out and build a steel mill. That sounds like a pretty bold move, but Ken was that kind of a visionary. He went out. He built the first—Nucor’s first mini mill.
It was scrap-based and his thought process was, if we build something based on scrap as opposed to the traditional iron ore—using a blast furnace, which is a traditional integrated steel process—we would have a tremendous cost advantage because at that point, scrap frankly was considered a waste product. It was very, very inexpensive.
You know what? He was right.
But the Nucor culture that he created is not about technology. It’s all about our people, our teammates and our culture. He created the culture and used the ability to use technology to allow Nucor to become the largest, most diversified producer of steel and steel products in North America in just about 15 weeks.
Remember what I said when we started—250 teammates, small operation responsible for South Carolina. Last year we shipped over 17 million tons of steel with over $16 billion of sales. Today, we have over 200 locations and nearly 24,000 teammates and are global.
In addition to having our headquarters here in Charlotte, across the Carolinas we have 16 facilities that recycle scrap, make steel and use that steel to make steel products. In the Carolinas alone, we employ about 2,600 teammates who earn about $75,000 a year on average.
We recycle nearly 5.5 million tons of steel in the Carolinas alone. Just to put that in perspective, the average car weighs about 1 ton. You can think of it in terms of costs. That’s recycling 5.5 million cars in the Carolinas every year. Think about the impact that has on landfills, how environmentally friendly that is. We like to say your old Toyota can be a new GE washing machine.
In the Carolinas alone, we turn about 7 million tons of steel. In the last decade, we have invested over $300 million in new production capacity here in the Carolinas alone. As I’m standing here today, I can tell you, we’re not going anywhere. We’re here to stay.
There’s a lot of talk today about whether the steel industry can meet the needs of tomorrow’s industry. I’ve got to tell you, if you’ve been watching Charlotte’s skyline and seeing building after building going up over the past year, most of them are made out of steel. Steel continues to play a significant role in the economic growth of Charlotte, the Carolinas and of the United States.
I’m here to tell that, in spite of all the talk that you hear and the reports you read about aluminum or fiber carbons and everything else, I am absolutely convinced that steel will continue to be the backbone of the global economy through the 21st century and probably long after that.
At Nucor, we’ve been a leader in innovation and moving in new directions since our founding. As we’re introducing the electric arc furnace—the EAF—in the United States, we challenged ourselves to push the limits of what mini mills can make, constantly finding new ways to make the types of steel that our competitors were telling the industry we could never make. I’m proud to say to you that our 24,000 teammates proved them wrong.
A little side story here…I worked for Bethlehem Steel before I joined Nucor. I was with Bethlehem Steel when Nucor was building mini mills, the continuous casting process at Indiana. The team at Bethlehem decided we better do a report on this site and whether or not this is actually good technology. They got their vast engineering team together, which was probably about 1,000 people, and they wrote a report that had to be about 2,000 pages thick, saying why the continuous casting process in Indiana would not work.
I got that report. I immediately said, “It’s time to leave Bethlehem.” I joined Nucor. If you’ve got a written report saying why something won’t work instead of focusing on how can we take the technology like that and make it work, that’s the difference between saying “We can do” and saying “We can’t,” and Nucor is a “can do” company. Bethlehem was a “cannot do” company. I’m with Nucor now. I’m very happy that Nucor employed me; it convinced me it was time to make a move.
One of the things we are constantly telling our teammates is this: We’re never as good today as we’re going to be tomorrow. As a global steel company in the global industry, steel is constantly innovating and making sure it fits the global infrastructure, that we can meet the needs of the global infrastructure. To do that, we’ve got to constantly innovate with steel. The industry as a whole globally is changing. It’s changing very, very rapidly.
I’ll be in Dubai for the 50th anniversary of the World Steel Association whose members account for about 85 percent of the world’s steel production. It’s an amazing opportunity to share ideas on safety and on technology with some of the most dynamic steelmakers in the world, as one of the 24,000 Nucor teammates working hard every day to make sure that steel continues to be the backbone of the global economy.
I’d like to share with you four key areas in which steel is adapting and evolving in our products, our raw materials and our teammates, and how steel is evolving as a globally traded product.
First, let’s talk about the products. The consumer markets are constantly demanding new steel products. One market that continues to drive a lot of innovation is the automotive market. For example, in the U.S., government-mandated increase in gas mileage—what is called the CAFE standards for vehicles—is driving the need for steel that is lighter and more formable, but still provides strength that people expect and people need from steel.
I’m sure you’ve heard reports from the bloggers, some of the industry experts, that say there’s light weighting of vehicles. Will all of the automotive companies move to an alternative product? You hear a lot about aluminum, and you might think that aluminum has replaced steel as the automotives’ preferred metal. I’m here to tell you today that is not accurate. Some people believe that the steel industry can’t meet the needs of tomorrow’s automotive industry. They’d be right about that if we were using yesterday’s steel. We’re not.
Advanced high-strength steels are already in cars and the trucks that are on the road today—I’m proud to say that some of that is Nucor’s advanced high-strength steels. Our industry’s research and development is ongoing as we work with the top universities, national laboratories and our customers to further improve and expand the advantages of steel.
Steel has several advantages across all compared to some of the alternatives. First and foremost, advanced high-strength steel not only costs less than replacement materials, but usually it doesn’t require any major costly changes to the manufacturing process for the automobile.
The second advantage is steel’s superior safety performance which cannot be matched by substitutes. I visit with my customers and I talk about my grandchildren, and I say they will never ride in an aluminum car. If you’ve ever bought a can of peas in a steel can and bought a soda in an aluminum can, I challenge you to stand on it.
A third reason is that we can recycle nearly 100 percent of the steel we put into cars, so the environmental impact of steel over the lifecycle of that vehicle is substantially less than a substitute like aluminum.
Whether it be fuel-saving cars or record high skyscrapers, luxury sports stadiums or award-winning new rollercoasters at Carowinds, steel engineers are applying decades of experience and today’s newest tools and technologies to build the world around them.
Now, on to raw materials. To make the steel of tomorrow, we need reliable and competitively priced supplies or materials. Remember how we got into the business in the first place. We didn’t have a reliable cost-protected supply of materials. Now we’re faced with the same problem because the mini mill technology caught on so well worldwide that everybody is using scrap now. What used to be readily available and relatively inexpensive is now rarer and much more expensive.
We’re always looking for new ways to respond to rapidly shifting economics of our raw material supplies, especially as the markets for these resources are becoming more global and changing. It used to be that the domestic steel industry survives primarily on domestic imports. Scrap metal, for example, was something that Nucor saw very real global demand for in the first few decades that we began recycling steel.
I can tell you it’s a very different business today. In a market where information and money travel around the globe almost instantaneously, we find ourselves competing with companies worldwide for the raw materials that we need to make steel. From iron to natural gas, securing a reliable source for these key inputs poses a tremendous challenge for any company not prepared for these dramatic price and supply fluctuations. Supply chain for all iron mixes is increasingly vulnerable to geopolitical risks including the Ukraine, today Russia, Turkey, across the Middle East. The shale gas revolution has created a volatile situation in the world energy markets.
How does Nucor respond to this? We’ve adapted, as we always do. We’ve adapted to these risks by developing a raw material strategy aimed at lowering our costs and gaining greater control over the iron units that we use to make steel.
When we recognized this problem, we turned to our engineers. We challenged them. We asked them to find a way to use more of these scrap substitutes that we call direct reduced iron or DRI. Basically, that’s iron ore that we cook at extremely high temperatures to eliminate the impurities, for a very pure iron ore that you can then put into your electric arc furnace.
They found a way to do that. They found a way to use all the DRI furnaces and we found we needed more DRI. We didn’t want to depend upon the volatile geopolitically risk areas. What did we do? We built our own DRI plant. First in Trinidad, and then we built a second one in Louisiana.
Today we produce about 4.5 million tons of DRI that we can use on our furnaces which gives us a great cost advantage and tremendous flexibility behind all of our iron-based raw materials.
The second thing that we use an awful lot of in our mill is natural gas. Basically, we have the same issues of volatility and scarcity of supply. We entered into a drilling arrangement in western Colorado that gives Nucor access to a long-term supply of reliable low cost natural gas to cover our current worldwide steelmaking needs.
You might have read just earlier this week about a deal that we had done about a year and a half ago, two years ago, three. We were able to redo and restructure in a way that actually gave Nucor much more flexibility while maintaining the same hedging that we were looking to obtain when we first did the deal.
When you pair those two moves with our 2008 acquisition of scrap recycler David J. Joseph, I’m here to tell you, we have added a lot of flexibility when it comes to managing the cost of iron bits which represents about 65 percent of our total cost of production.
Then we go back to our mills to be able to change these iron units so that we have more negotiating leverage as we buy scrap, DRI, the slow form of iron. This kind of flexibility and security strengthens our competitive position in a rapidly changing market that has upended previous ways of doing business. As challenging as it can be to secure a source of diverse and reliable raw materials for our industry, successful steel companies are broadening their approach to find solutions.
Our teammates. Having a secure and affordable raw material supply chain is important, but what’s more important when we make steel than needing iron units is our people. Our teammates. Making sure that you have a secure, long-term supply of well-trained teammates is as challenging as making sure you have a source of supply of raw materials. Across the United States right now, manufacturers are having a hard time recruiting enough talent to fill the jobs that they have available.
In a 2015 study, they found that this shortage of trained talent and manpower that is happening today is only going to get worse. Today, manufacturing executives across the U.S. report that 6 out of every 10 jobs they have go unfilled due to lack of the properly trained talent to fill them. It often takes manufacturers 2 to 3 months to fill an open position.
Over the next decade, it is estimated that the U.S. economy will require about 3.5 million new manufacturing workers. What really concerns me is that based on current trends, nearly 2 million of those jobs will go unfilled. The manufacturing industry is facing a real threat of not having enough qualified workers to keep their businesses running.
This is not just an American problem. McKinsey Global Institute reported recently that the worldwide manufacturing industry is likely to see a shortage of over 40 million high-skilled workers and over 45 million medium-skilled workers by the year 2020.
Now time flies. 2020—that’s only three and a half years. We’re talking about a shortage of 85 million skilled workers worldwide. That’s a real challenge. McKinsey expects that the most pressing issue facing manufacturers in the coming years will be the struggle to find well-trained talent, it doesn’t matter where you manufacture. The rapid growth of knowledge-intensive manufacturing is going to increase the shortage of both high-skilled and medium-skilled workers in the coming decade.
McKinsey also expects this problem to be worsened by the aging of labor forces in all the developed nations and also in China. Globally, we’re all in the same boat.
What do you do about that? Just one of the things that we’ve done at Nucor is to partner with Shelton State Community College in Tuscaloosa, Alabama, to create what we call Nucor Technical Academy. Students receive classroom education at the college and also get hands-on work experience at a nearby Nucor mill. Nucor pays for the tuition and the books and students get paid for the hours that they work in the mill.
After they graduate with their associate’s degree in three years, they get started with a Nucor job right away. This has worked out very well for us. We’ve also worked with universities and colleges around the nation to fund scholarships and teaching positions in STEM and to build relationships with career advisors to get Nucor’s message out to the up and coming generation of potential recruits. Securing the next generation of high potential talent is crucial to manufacturing success and the nation going forward.
We have a real opportunity to recruit the best and the brightest of tomorrow, tomorrow’s talent, and bring them in as workers into our industry. I’m sure that this is going to be a challenge that everyone in this room and every company is going to face. It’s one challenge that I’m convinced that Nucor will rise to the occasion and find a way to supplement.
The future. Steel’s innovative future is going to be built on three things that I’ve talked about so far. The lighter more formidable, stronger steel products for tomorrow; the innovative acquisition, development and use of raw materials; and the creative improvement of people we need to make steel for the 21st century marketplace.
There’s one more area where steel is facing a tremendous challenge, and solving it is going to require the efforts of the entire global steel industry. Let me start by explaining one of the greatest challenges that we’ve seen in steel in the last 30 years. That is the rapid growth of domestic steel production in nations around the world. This globalization of steel is a good thing. It expands our markets, creates new trading relationships, and it allows goods and raw materials to flow around the planet.
Every one of our 24,000 teammates relishes competition from steelmakers all over the globe. Nothing makes the company stronger than having to innovate to stay ahead of good competitors. I truly believe that the best way to achieve global prosperity is to have the most efficient economic system, a system of free trade.
What I mean by free trade is trade free of government interference. Having the most efficient economic system will provide high paying jobs, which increases the demand for goods around the world. Increased demand for goods means that there’s an increase in the supply and the need for goods, which creates even more jobs, and thus completing what we call a circle of economic growth.
What some people forget is that free trade does not mean ‘free for all’ trade. There are rules, rules that have been agreed to and adopted by the nations, by all nations of the international trading community. And it’s critical that these agreements and these trade laws be rigorously enforced.
When governments ignore or intentionally break the rules by which we free trade, then our businesses are forced to compete against entire nations instead of competing against other companies. The only way to have a strong, global industry is through the robust competition that the free markets create with companies competing against other companies; not companies competing against the power of entire governments.
You might ask, “John, what do you mean by that? How do you compete against the government? How can the government compete against a company? Governments aren’t businesses,” you might say. Well in free markets, free market economies, that’s generally true. Let me give you an example of a government that is the business for itself. Anyone want to guess what I’m going to talk about next? A clue, it’s not Canada, but it starts with a “C.”
The steel industry in China is primarily owned by the Chinese government. Over 80 percent of the steel industry in China is owned by the Chinese government. China has illegally subsidized their steel industry and built a great wall around their markets. China manipulates its currency to keep exports cheap and imports expensive.
Put it simply, the Chinese government is acting like the parent company of a bunch of subsidiaries in China. It’s using the nation’s own resources to engage in economic warfare on behalf of its manufacturing industries. I’m here to tell you, they are winning that war. Businesses in free market economies are not competing against Chinese companies. We’re competing against the entire nation.
As a result, to put this in perspective for you, last year China exported more steel, they exported more steel than was produced in the United States, Canada and Mexico combined. Chinese exports are flooding every market around the world, and when Chinese steel displaces steel in a country’s own market, what happens? You get the domino effect. Steelmakers in that country are forced to export their product into other markets.
We all know that in the long run, everyone is better served when businesses compete on a level playing range. Products that result in honest competition are the best designed, the best quality and the best value. That kind of competition cannot happen when governments act as businesses in the marketplace.
It’s Nucor’s view and the view of many of our friends the free market economies around the world that there must be cooperation from all major manufacturing countries to solve this problem—a commitment from all governments to get out of the manufacturing business. No government ownership, no government control, no illegal subsidies.
But, until these actions are taken, we must be proactive and innovative in dealing with the cheaters who are threatening the health of our industry. That’s why Nucor continues to work with our industry allies to bring trade cases against nations that break the rules, break the law on trade.
Last year we saw Congress enact a law that gave the steel industry a new toolbox to help level the playing field on which we compete against illegal steel imports.
Now let me be clear. Utilizing trade learnings is not protectionism. These actions are legitimate and necessary responses to subsidized exports and dumping practices of nations with excess capacity. Breaking the rules, breaking all laws must have consequences.
Preaching that everyone should have free markets is just not enough. We must hold companies and governments accountable when they violate our trade rules. Trade wars, trade enforcement is one of the many ways to drive change toward a true market-based system.
Regardless of the challenges that face us, new products, raw material markets, the labor markets, the global trade markets, steel will continue to find ways to accomplish what others say we cannot do. We start from a position of strength and we will develop the innovative steel our customers need for a sustainable tomorrow.
What role should government play in protecting free trade?
The role of government, particularly the U.S. government, is relatively simple. There are laws on the books. There are international trade agreements that we’ve made with countries. Our government must rigorously enforce those laws and those agreements. When they are violated, they need to have the courage to take to task the countries or the companies that are liable to those laws and not worry so much about geopolitical issues that might result from that.
I knew Ken Iverson and I have tremendous respect for him and for the organization. Probably the only company that I ever got to know in any depth that I thought, “This is the kind of company that people really love working for.” You were involved in some major incentive programs for all your staff, for the guys on the production line and the women on the production line. Can you talk a little bit about how that works for you all and why it works? I was fascinated in those conversations I had with him a long time ago.
Well I’m always very, very careful at pointing out that Nucor’s success is not based on frankly Ken Iverson, Dan DiMicco or with John Ferriola. I like to tell people and I remind my team all the time, I’m a call center. They are profit center. What we like to do is make sure that everyone understands Nucor’s success is based on 24,000 teammates working hard, working safe, working together and incentivized the right way.
I mentioned that, on the average, most of our teammates make about $75,000 a year. About 60 percent of that comes from bonuses and it’s always based on incentive systems. You have be careful to make sure that they are based on the things that people can control, or they become meaningless. When 60 percent of your total compensation is dependent upon some measure, you want to make sure that you have absolute control or as much as you can absolute control over that metric.
Our teammates on the front lines that produce the steel, they get compensated for high quality tons of steel produced safely. If it’s not high quality, they don’t get the bonus. If they don’t do it safely, they don’t get the bonus.
Our steel goes through several processes. It goes through melting, we cast it, we roll it, sometimes we do additional work with galvanizing it. It goes through several stages.
The way that we have our bonus system set up is the stage in which the problem is caught gets a bonus. If the melt shop makes a mistake, they don’t catch it, it goes on to the rolling mill. The rolling mill sees that the steel was not made correctly back at the melt shop, they say, “Stop the process.” They get their bonus. Melt shop loses their bonus. If no one catches it, it goes all the way down the line and it’s caught by our quality control department at the end of the process, many of our mills, everyone on the entire line loses two times the bonus.
In some of our mills, if that product gets past the quality control and gets shipped to a customer, the entire line loses three times the bonus. Clearly, we incent to make sure that everyone produces high quality products and that they produce them safely.
Now our staff in the offices, engineers and so forth—management—they have more control over the assets of that division as opposed to the production of a ton of steel. They earn on a return on asset basis. We make sure if the executive team was working well at the end of the day, it’s all about return on equity, ROE, the stock price performance. We’re paid based on ROE.
Just so you don’t think that it gets less dangerous as you go up in the organization, I mentioned that the teammates on the floor, 60 percent of their compensation comes from bonus. As you move up, there’s the executive team, it’s probably closer to 80-85 percent of our compensation.
It’s really a great system because when anyone in the group does well, the entire group does well. Everything aligns through the line, all the way up to the organization. When everyone does well and makes money, Nucor does well and makes money. That’s a key element of our culture, and that’s what has led to Nucor’s success.
We talked about technology, but it’s really not about technology. It’s about the culture and the confidence. I always tell people that Nucor’s management system is extremely easy. When I retire, I’m going to write a book, The Key to Nucor’s Management Success. It’s going to be a great book. It’s going to make a lot of money, and it’s going to be the shortest book ever written. Because here’s the key to Nucor’s management success.
We hire the right people and we go through a rigorous interview process. Testing. Psychological profiling. You name it, we do it. We hire the right person.
Then we make sure and absolutely certain that they understand exactly what we want them to do. Then we make sure that they have all the tools that they need to do it. Whether they have the physical tools or whether it be training and development.
Then the fourth step, the last step, which is the most important step: It’s to get the hell out of their way. Because if you have the right person, they know what you want them to do and they have everything they need to do it, all you’re going to do is slow them down. That’s the key to Nucor’s management success and it’s a core element of our culture. It’s called trusting your team, trusting your team. It means that the person closest to the process is trusted to make the decisions that he knows the most about.
You touched on some of the challenges you faced on competing against China flooding different world markets with what sounds like cheaper steel. What are some of the ways that you’re mitigating the impact from that? How do you compete?
Well, several ways. We work hard with the government to enforce the trade laws. That’s number one. The second, we will go out and we’ll actually buy Chinese product and run it through the testing cycles to try to catch inferiorities. Many times, that we find the steel is not made to the metallurgical specifications that is signed off on, that the chemistry sheets are signed off on, which means that the steel is inferior for the applications in which it’s being used. And people could be killed.
It’s a lot of things that we do, but at the end of the day, it’s really up to our government to enforce the trade rules and we help them understand who is violating them, how easy it is to identify those people and go after them when we catch them doing that.
Several years ago, 2007, maybe something like that, we brought a Canadian company called Harris Steel. Great company. It’s been a great addition to the Nucor family. We love them. As part of that was a very small company that came along called Fisher & Ludlow. They make grating. It looks like steel and it’s used on walkways.
Because they had such a good reputation under the name of Fisher & Ludlow, the brand was very strong. We decided not to change the name. When you see the big sign that still says Fisher & Ludlow and now in little letters underneath it that says a Nucor company.
So not everyone immediately recognized that Fisher & Ludlow as a Nucor company, unless you really researched a little bit. The Chinese were caught dumping grating into the United States. A clear violation. They were assessed a trade tariff. They had to pay a penalty for every ton of steel grating that they brought into the United States.
What did they do? They got smart and said, “You know what? The Canadian companies that make grating, they have no tariff going to the United States. So, we’re going to contact one of them.” All right, so they wrote a letter to Fisher & Ludlow.
They send this letter on a Chinese company letterhead signed by the CEO of the company that says basically this: “Look, you guys have no tariff going into the United States. We have somewhere around 40 or 50 percent tariff going into the United States. Let’s make a deal. We will send you our gratings. We will send you the tags that go on our gratings, the Chinese tags. We’ll send you Fisher & Ludlow tags to put on to that product. Cut off our tags, put these tags on, send them into the United States and we’ll split the 40 or 50 percent tariff.”
Now if this wasn’t ironic enough, the gentleman who runs that business used to run our government affairs on trade rules. I was back in my office one day and I get a phone call—I could tell it was Pat just from his voice. I couldn’t understand what he was saying, he was so excited. He’s going on, he’s ranting about China and gratings and tags, and he explains this to me. He was just so irate.
That’s the things that we come up against. That is how blatant China and some other countries have gotten in finding ways to break our trade laws. It’s just not right. There are tens of thousands of steel workers out of work today because of this type of violation.
It goes across industries. There’s probably hundreds of thousands of textile workers out of work. Look at what a great textile state North Carolina used to be. Or who wants to talk about furniture manufacturing? Drive through some of those towns that were once just alive with people making beautiful furniture. They’re all gone today because of people who violated our trade rules. The steel industry and every industry, its customers, its suppliers suffer.
Running a technology-driven company, it’s very exciting to hear all the things that you’ve talked about. I would like to get some insight from you when it comes to additive manufacturing, which is the next frontier now with all the interest in 3D printing. Do you have some insight to share about that?
We believe that’s a very exciting technology, and just as we have gone on the steel side, always knowing what the next big step in technology is all about. We have teams that are looking at that. I can’t say too much more about Nucor’s participation in that. We’ll be deciding the proper time on public information. Clearly, we’re aware of that. We are looking at it and we’re excited about that technology.
Let me just branch off for just one minute by saying that at Nucor, we always like to say that we’re climbing the mountain without a tunnel. The steel industry’s proven track record of innovation has allowed a city like Charlotte to see its skyline built with taller and taller buildings every generation. Our commitment to you as a city is that we will continue to find ways to make steel better, stronger, more economical so that we can continue to build some of the great buildings in Charlotte together. Thank you for your attention today.
Nucor’s John Ferriola
Ferriola at Trade Hearings
1915 Rexford Rd., Ste. 400
Charlotte, NC 28211
NYSE: NUE (S&P 500 Component)
Principal: John James Ferriola, Executive Chairman, CEO and President
Headquarters: Charlotte, N.C.
Plants: Operates 23 scrap-based steel production mills
Products: Steel, rebar; in 2015, the company produced and sold over 25 million tons of steel
Net income: $357.6 million (2015)
Employees: 23,700 (2015)
Business: Publicly traded domestic steel fabricator currently ranking as the largest steel producer in the United States of America and the largest “mini-mill” steelmaker (i.e. it uses electric arc furnaces to melt scrap steel as opposed to blast furnaces to melt iron); America’s largest recycler of any material and recycled 16.9 million tons of scrap in 2015.
Immigration: A Foundation That Helps the U.S. Prosper
Immigration Helps Build and Strengthen our Economy
America is a nation built by immigrants and continues to support the largest flow of immigration around the world. One in five international migrants lives in the U.S. In 2015, 46,630,000 people living in the U.S. were born in other countries, almost 15 percent. Immigrant population growth alone has accounted for 29% of U.S. population growth since 2000. The chart below shows the number and share of immigration growth relative to the whole population.
Immigrants as a Share of U.S. Population Source: http://www.migrationpolicy.org/programs/data-hub/charts/immigrant-population-over-time
Here are some important contributions by the generations of immigrants who have helped us build our economy, and made America the economic engine of the world.
❶ Immigrants start businesses. According to the Small Business Administration, immigrants are 30 percent more likely to start a business in the United States than non-immigrants, and 18 percent of all small business owners in the United States are immigrants.
❷ Immigrant-owned businesses create jobs for American workers. According to the Fiscal Policy Institute, small businesses owned by immigrants employed an estimated 4.7 million people in 2007, and according to the latest estimates, these small businesses generated more than $776 billion annually.
❸ Immigrants are also more likely to create their own jobs. According the U.S. Department of Labor, 7.5 percent of the foreign born are self-employed compared to 6.6 percent among the native-born.
❹ Immigrants develop cutting-edge technologies and companies. According to the National Venture Capital Association, immigrants have started 25 percent of public U.S. companies that were backed by venture capital investors. This list includes Google, eBay, Yahoo!, Sun Microsystems, and Intel.
❺ Immigrants are our engineers, scientists, and innovators. According to the Census Bureau, despite making up only 16 percent of the resident population holding a bachelor’s degree or higher, immigrants represent 33 percent of engineers, 27 percent of mathematicians, statisticians, and computer scientists, and 24 percent of physical scientists. Additionally, according to the Partnership for a New American Economy, in 2011, foreign-born inventors were credited with contributing to more than 75 percent of patents issued to the top 10 patent-producing universities.
There is no doubt that immigration makes America stronger and more prosperous. And immigration positions America to lead in the 21st century. No other nation in the world welcomes so many new arrivals. Here are some illustrations that provide perspective to the global flows of people.
This map shows net migration (inflows minus outflows) by country of origin and country of residence between 2010 and 2015.
Mapping Immigration Flows: Country-to-Country Net Migration (2010-2015)
In an earlier newsletter, we showed immigration movement over the last two centuries. You might be curious to visualize the country-to-country net migration over just a five-year period from 2010 to 2015. Here is a Metrocosm visualization.
Top 10 Immigrant Countries
The 10 countries with greatest number of foreign-born residents:
- Spain 6.5 million immigrants (13.8% of pop)
- Australia 6.5 million immigrants (27.7%)
- Canada 7.3 million immigrants (20.7%)
- France 7.4 million immigrants (11.6%)
- United Kingdom 7.8 million immigrants (12.4%)
- United Arab Emirates 7.8 million immigrants (83.7%)
- Saudi Arabia 9.1 million immigrants (31.4%)
- Germany 9.8 million immigrants (11.9%)
- Russia 11 million immigrants (7.7%)
- USA 45.7 million immigrants (14.3%)
CSX Rail – Economic Developments
CCX – Intermodal in Rocky Mount & Queen City Express to Wilmington
CSX Railroad has been busy lately in the State of North Carolina. Joe Horton, Terminal Manager at CSX Intermodal Terminal in Charlotte reported to the Charlotte World Trade Association about its plans for substantial growth that will enhance the opportunities for significant economic development in conjunction with its corporate growth plans for the next 25 years.
In July 2016, the state of North Carolina, the Carolinas Gateway Partnership and CSX proudly announced Rocky Mount, North Carolina, as the home for a new intermodal rail terminal known as the Carolina Connector, or CCX. This $272M+ critical infrastructure project will serve as a major transportation hub in the Southeast, and a catalyst for substantial economic growth throughout the state of North Carolina.
Horton described the partnership between North Carolina and CSX that has developed over its 150+ years of service. He went on to say that “CSX eager to play an even larger role in N.C. economy in coming years.”
This new $272M investment in N.C.’s critical infrastructure is a transformational opportunity to attract more advanced manufacturing companies to the east side of the state. Their state-of-the-art facility will improve North Carolina’s economic competitiveness and bring more than 1,500 jobs to the state.
In addition, this new facility will enable companies to convert freight shipments to rail at this new terminal to eliminate more than 16 million truck miles annually from heavily-traveled North Carolina highways, the equivalent of eliminating 270,000 truck trips from the roads each year. This will consequently reduce congestion, improve road safety and preserve roadway conditions. In total, CCX is expected to save the state $16 million in pavement maintenance savings.
At the same time, this Carolina Connector (CCX) will be the most environmentally friendly way to move goods over land. It is four times more fuel efficient than trucks. In fact, one intermodal train can carry the load of 280 trucks. Converting freight from highway to rail reduces emissions and improves air quality. Intermodal operations at CCX are estimated to reduce CO2 emissions in the state by 655,000 tons – the equivalent of taking 138,000 cars off the road.
The CCX will capture a vibrant Raleigh market and provides hub connectivity in 100+ lanes. Its initial build will serve 186 lanes, 265,000 loads with 60% expected for local service and 40% for connectivity to other regions. The full build out is expected to provide expansion potential on proposed footprint up to 500,000 loads.
Horton then moved to his special announcement for the Charlotte region. A new intermodal rail link will begin this month between the North Carolina State Ports Authority’s Port of Wilmington and the CSX intermodal terminal in Charlotte. Horton says “it is being touted as a game-changer. It is called the Queen City Express!”
North State Ports Authority Executive Director Paul J. Cozza noted that this will be Wilmington’s first intermodal service in 30 years, terming the offering “fantastic.”
Cozza expects that the Queen City Express “is really going to enhance North Carolina’s connections with the rest of the world.”
The new shuttle service is to transport double-stacked containers on existing CSX tracks between the two points, creating a reduced cost for cargo destined for the greater Charlotte region and out into the global marketplace.
CSX is one of three major railroads serving the East Coast region. Norfolk Southern and the Canadian Pacific Railroad are its competition, although Norfolk Southern is its major competitor in the Southeast USA. These three are all Class 1 railroads hauling freight throughout the east-west service East of the Mississippi River. Headquartered in Jacksonville, Florida, CSX owns about 21,000 miles of track.
CLT Airport’s New Long-range Plan
First Draft of New Plan Released for Comments
We all know that the Charlotte Douglas International Airport (CLT Airport) is a huge boon to economic development in this region. This over-sized hub for American Airlines is the second largest in its network and its traffic is a major reason for it being the 6th busiest hub in the United States. From its gates, you can fly to visit or conduct business in nearly every U.S. market without changing planes. As such, it makes the Charlotte region a great location for doing business throughout the U.S. domestic economy.
Just two years ago, Norfolk Southern Railroad (NS) built a new NS Intermodal Center at the south end of CLT Airport between two of the runways with an initial capacity to manage over 200,000 shipping containers per year with options on additional land to handle another 400,000 containers each year.
While the two operations do not affect each other, they are important assets that can be enhanced to spur even more substantial investment in the greater Charlotte region.
CLT Airport and the NS Intermodal have been in the plans since 1996 when the first long-range plan was prepared. Previous CLT Airport Director Jerry Orr and urban planner Michael Gallis laid the groundwork for many of the changes that have been incorporated into the airport over the last 20 years.
Just this year, the State of North Carolina granted a fuel tax exemption for American Airlines and plans for an expanded passenger terminal have been completed and construction is on schedule. Serving over 40 million passengers each year requires an expansion of the main terminal to accommodate further growth. All this work was rewarded when American Airlines extended their contract of gates and the maintenance of the airport services for another 10 years.
Aside from expanding the number of gates from 93 to 169 gates over the next 20 years, American Airlines is interested in expanding its service for passengers and for air cargo. Their activity and the growth of the airport is also bringing a new state-of-the-art airport tower that will be built over the next five years and at least one 12,000-foot runway will be added.
In January of f2016, CLT Airport contracted for a new long-range plan with the approval of the Charlotte City Council. CLT Airport contracted with MXD Developers out of British Columbia to conduct this long-range planning study for $900,000. MXD has considerable airport planning experience having worked with the Denver International Airport as well as airports in Memphis, Atlanta, Halifax, Alberta and Edmonton in the U.S. and in Canada. They have also been instrumental to plans in South America, Australia and South Africa.
MXD was charged with developing a long-range plan that included all of the land within the CLT Airport and NS Intermodal operations and the surrounding 6,000 acres owned by the airport. See map.
MXD, with the guidance of CLT Airport officials met with as many airport stakeholders as they could to gain input about the wisest and best use of that area. They were anxious to learn all they could and to gain the ideas of that will further enhance the land use and maximize its value to the City of Charlotte and its citizens.
Following extensive meetings, they have drafted the first version of their report and are disseminating it for additional comments and recommendations. Stuart Hair, Director of Economic Affairs at CLT Airport, conducted the briefing to the Charlotte City Council on September 12th. “One of CLT’s principals is strategic growth: How do we grow appropriately?” said Stuart Hair, economic affairs manager at Charlotte Douglas. “This is about protecting our future of our core business (but) the economy can grow and diversify, and there is unique connectivity offered by transportation modes at and around the airport.”
Hair outlined four primary objectives of the long-range plan:
- to protect future growth and flexibility of CLT aeronautical operations through compatible-use development;
- maintain the airport’s competitiveness by growing non-aeronautical revenue;
- leverage CLT and the Norfolk Southern Intermodal Facility as economic engines to diversify the local economy;
- and grow and enhance employment opportunities for local and expanding businesses.
The plan identifies five catalyst
areas around CLT that are primed for development, all with different uses and targeted economic clusters.
- CLT – Front Door Office Village – A CLT Gateway District would sit at the entrance to the airport, primarily containing office development and on-site meeting and corporate event facilities.
- CLT Terminal Hotel – Another development area includes a hotel directly connected to the terminal as well as a retail and events plaza, which Cagle and Hair said would be attractive for passengers and CLT employees.
- CLT Retail Village and Events Plaza – Demand for retail and services would also naturally be driven by new office development to the CLT West region and to the Billy Graham corridor.
- CLT Fast Cycle Logistics – A fast-cycle logistics and e-commerce fulfillment hub would target specific tenants, particularly ones in advanced manufacturing — “machines and materials that make the machines and materials,” according to Hair.
- CLT temperature controlled logistics and distribution center – A second hub proposed for another area would focus on temperature-controlled logistics, a subset of the industrial sector that would be advantageously positioned near transportation modes in the immediate vicinity — the airport, rail and interstates.
Aviation-related tenants are expected to fill a majority of the office component. As CLT grows, so does the need for more employees to staff new divisions, all of which requires more square footage — even the airport’s current offices are running out of room. “We have 20,000 employees — they all need space,” said Brent Cagle, aviation director at Charlotte Douglas. “Some of our tenants are running out of space at the terminal.”
Remaining commercial space in the office development could target users that necessitate direct proximity to the airport. The airport seeks to partner with third-party development and brokerage firms to develop the buildings and lease office space, but the airport — and, by extension, the Federal Aviation Administration — would still own the land, likely striking concession agreements and ground leases with those seeking to develop around the airport.
“We would always retain ownership,” Cagle said. “It would also mean we could control the uses and that it doesn’t one day down the road become an issue for non-compatible uses.” Cagle added that the FAA generally expects individual airports to be “self-sustaining” and that leaders at those hubs should come up with ways to grow revenue and competitiveness in their individual market, one of the stated intentions of CLT’S AASDP.
Cagle and Hair also articulated that they would continue to collaborate with Lincoln Harris and Crescent Communities, who are spearheading a massive mixed-use project called River District in close proximity to the airport. That project will add millions of square feet of office space and thousands of residents when built out. They also intend to work with other brokers and developers on other projects.
This initial draft of the long-range plan will undergo scrutiny by the various stakeholders to ensure their ideas, thoughts and concerns will be considered and captured before the final plan is written and submitted for approval by the City Council sometime in November or December.
Pew Research Center
Contrary to Political Rhetoric, Immigration in Decline
Certainly one of the most championed issues of this year’s Presidential campaign has been illegal immigration, particularly from Mexico. However, like much of the rhetoric during the campaign, the question of illegal immigration has been largely devoid of facts.
While there are no reliable statistics for how many illegal immigrants cross the border with Mexico, experts use the number of apprehensions as a proxy. By that measure, the number of Mexicans apprehended at the border has dropped from more than 1.5 million in 2000 to just about 229,000 in 2014. Meanwhile, the number of non-Mexicans (mostly from Central American countries including El Salvador, Guatemala and Honduras) rose sharply and exceeded the number of Mexicans apprehended in 2014. A big part of this increase in non-Mexican immigration is accounted for by unaccompanied children.
Meanwhile, under President Obama, the number of deportations has risen sharply, to a record of more than 435,000 in 2013. Between 2009 and 2014, more than 2.4 million illegal residents were deported. Donald Trump will approve of the fact that more than 40 percent of those deported were convicted criminals. Read more…
BCBSNC Health Care Challenges
Blue Cross Blue Shield of North Carolina is In
Blue Cross and Blue Shield, North Carolina’s largest health insurer, has announced that it will continue offering individual coverage under the Affordable Care Act in all 100 counties of the state in 2017. Until recently, Blue Cross Blue Shield had questioned their participation in the ACA Exchange. Having lost $405 million in the previous two years, BCBS was unsure about continuing its involvement with the ACA Exchange.
Their announcement ensures that all North Carolina residents will have ACA access for at least one more year as the federal exchange enters its fourth year of public enrollment. Previously, two major insurers – Aetna and United Healthcare – announced that they would not offer ACA plans in North Carolina and many other states in 2017. Cigna is the only other carrier offering coverage under the ACA Exchange, but it will only offer plans in five counties in the Raleigh Durham region.
The pricing and other details of Blue Cross insurance plans will not be released until October. The company is seeking an 18.8 percent average rate increase for 2017 plans from the N.C. Department of Insurance, after being granted a 32.5 percent average rate increase for this year’s plans.
Open enrollment for 2017 will begin on Nov. 1, and will end Jan. 31. Customers who want health insurance by Jan. 1 will need to be enrolled by Dec. 15
Blue Cross Will Continue Its Participation in ACA Exchange
Brad Wilson, President and CEO of BCBSNC, outlined the insurer’s options in a presentation before the Hood Hargett Breakfast Club on September 9, 2016. He also offered his recommendations for changes to the ACA so that it might continue more successfully.
Here are some of his comments, edited for brevity and clarity as necessary:
Brad Wilson, President and CEO of Blue Cross Blue Shield North Carolina on Health Care Challenges:
It’s already been said that this is an important and timely topic, health care. It has been for a long time and is going to continue to be very much a part of our state and national conversation holding into the future, and I’m not talking about characterizing it in political terms.
Let me ask you to do this first—set aside whatever particular political energy that you may have around health care for just a few minutes. I’m going to share some information with you that’s data, reality about the ACA and also about the transformation that’s taking place in health care, so that as you listen to the conversation through the political whims and in particular at this time of year as we move through the campaign season, hopefully you will be centered and grounded in reality, as we all enjoy lots and lots of acrimony and spend from every corner.
This is the second time that I’ve had the opportunity to be with you and so thanks for inviting me again. The first was 5 years ago, back in 2011. I had been in this role about a year at that time and we talked about how quickly health care was changing, how we were transforming our system into one that pays for quality rather than for procedures—items, the more you do, the more you get paid.
We talked about what was driving health care costs even higher back in 2011 and we also talked about why consumers, patients, customers, consumers, all of us individually need to be at the center of health care. That is a multi-dimensional responsibility—education of ourselves about reality, full engagement in taking better care of ourselves, and of course being informed and engaged with our wonderful partners. We need help and to be compliant patients when we in fact become a patient. It’s not a question of whether or not we are going to be a patient, it is just a question of when we will be a patient.
Now let me set the term right here at the beginning. As I talk about health care costs I am not talking about your health insurance premium. That is one component part of health care costs, but those terms are not synonymous. When I talk about health care costs, I’m talking about what is being paid for the goods and services that are being delivered when we need them that when you add them up then becomes translates into a health insurance premium. We have to begin to think about it and understand that and so one is related to the other.
There is a cause and effect relationship there that we cannot separate, so as you think about the health insurance part think about health insurance this way. Really your health insurance premium is the average cost of what is being paid for goods and services when you need to access them, plus taxes that we pay, plus administrative costs of running our company. You take those 3 ingredients and then you spread that cost across a group of people, a pool of people, a well-defined group of people, and you come up with a premium.
Now my actuarial friends would say, “Oh, it’s a lot more complicated than that,” and it is, but it works. If you don’t like your health insurance premium, that’s okay, but you have to understand that it does reflect those 3 ingredients.
Let’s explore just a little bit more about 2011 and how far we have come. We talked about something that in 2011 was not yet implemented. It was the law, but it was just sitting there, and that was the Affordable Care Act. The ACA has now been implemented. In 2014, it went wide and the consequences of the ACA, now in 2016, are beginning to be well understood—both the good and the bad—and there’s both ingredients in the story.
You can see that the topics that we talked about with each other back in 2011 are still the same topics that we’re discussing today and that’s why we are going to talk about them again—and we all need to understand that we all have skin in this game. Doctors, hospitals, insurers, employers, government—all working together—that’s what it’s going to take. That is the formula to improve upon and make things better whatever the things are that you care the most about. It is going to require more different and better collaboration.
Let’s start with the ACA, the law to expand coverage. The law did expand coverage to nearly everyone who chooses to or chose to purchase it and it has helped accelerate the reshaping of our system, but the consequences of that have not worked out exactly like we had planned. Indeed, more people are covered. More people have insurance today than they did before the ACA was enacted and that’s a good thing. But conversely costs are much higher.
Costs (remember the definition of costs?) are much higher, and they continue to climb even more, and quite frankly there is no end in sight according to the Congressional Budget Office. If the trend continues, by 2020, 20 percent of the GDP will be spent on health care. That’s $1 of every $5 in your pocket that will be dedicated to health care somehow, someway.
Why should you care about the ACA? I’m confident that in a crowd this size that many of you have your insurance through your employer or through some other mechanism that’s not the ACA and I’m pretty confident that many of you may have your coverage through the ACA or you know someone or you have a family member who now has coverage through the ACA purchasing it through the exchange. Well the reason that we should all care about it is that the employer group market and the ACA market, two different market places, are in inextricably linked. You cannot separate the two.
We are not going to make the progress that we need to make in health care in improving all of health care, every aspect of health care, until we improve the ACA. Getting ACA right and that means making it affordable for consumers and sustainable for insurers and providers is on our minds every day at our company and I know that it is on the minds of all our provider partners around the state and it needs to be on your radar too.
If you don’t know much about what it is we are talking about this morning, here’s a homework assignment. You really need to pay more attention to every aspect of health and health care. Now as I’ve already said, the ACA has had profound impact both positively and negatively on the health care eco-system. First let’s remind ourselves of some of the positives and I’ve already mentioned that more people are insured today than before, but what does that mean for North Carolina? What that means is there is about half a million—500,000 to 600,000 North Carolinians who got coverage today under the ACA that didn’t have it previously. Those folks are not eligible for Medicaid so that’s a separate conversation that we can have at some other point in time, but that’s a good result. Think about all of the money that brings into the medical economy of our state now that those folks are insured and more importantly think about the care that these folks need, want and deserve so they are getting their needs tended to.
Now one of the aspects we lean into at Blue Cross is trying to educate all consumers, but particularly this consumer group about how the ACA works, the options that they have. Many, many, many of these customers for the first time in their lives have insurance and they really don’t understand how it works or how to use it. Our competitors have done and are doing the same and there was much optimism about 100s of 1,000s of people having health care coverage. Unfortunately, the headlines today are different. Let me give you 3 real headlines from around the country. “Enrollment in Affordable Care Act insurance exchanges are half the initial forecast so while we should celebrate 5 to 600,000 the end there is at least another 5 to 600,000 who for whatever particular reason have not signed up.” Another headline, “Obama Care exchanges are in trouble. What can be done?” And the last one, “Aetna to pull out of most of Obama Care exchanges.” A recent event here in North Carolina that I’ll mention in just a second.
It’s clear that something is wrong. Something is not working right or we would have these headlines. The ACA is drawing customers who need a lot of expensive medical services, but it’s not drawing enough younger, healthier, customers to pay into the insurance pool to balance that book out. That’s a simple fact. That is what the data shows. The math is pretty simple. Insurers like us are paying out more than they are taking in. All of you are business people. You don’t have to get an MBA to understand that if you are not taking in enough to pay for what’s going out that that is an unsustainable business model. What happens when that is the reality? Premiums go up. When premiums go up that forces more of the younger, more of the healthier customer to drop coverage. They don’t need it. Not going to use it. Going to live forever. Can’t afford it. All of the things that we’ve heard so they drop out and then guess what happens? Premiums go up even more. The premiums must move higher to make up for the customers dropping because it’s too expensive. That’s what’s called the death spiral and that’s what we staring, we are staring that in the face right now in North Carolina and across the country in terms of the ACA.
Now let me bring it back home here, here in North Carolina. Here’s some details about our experience with the ACA. Over the last 2 years we have lost $405 million on this piece of business. We have 3.9 million customers. I’m going to round up for simplicity. Out of those 3.9 million customers, we have 450,000 ACA customers and those 450,000 have generated $405 million loss. Compare that with Aetna who reported losses of $430 million in 2 years. Aetna is a national company. We only do business in North Carolina. Aetna is 7-1/2 times the size of Blue Cross Blue Shield in North Carolina and they are pulling out. Even though their losses are simply comparable to ours across the country and United has already announced that they will live. That was back in the spring. 2 big names of competitors have already announced they are out here. Now to me that says a lot about how serious this issue is for North Carolina.
With our for-profit competitors leaving the ACA market it leaves just us. Blue Cross Blue Shield of North Carolina and perhaps 1 other carrier (Cigna) who has filed rates to be in 5 counties. Those 5 counties are essentially Wade County and the counties continuous to Wade. Not here. That is my point to this group. If they stay in there will be 2 there and if we stay in, there will be 2 options in the marketplace, Blue Cross in all 100 counties and a competitor in 5. That is not a formula to make this work as good as it could to the people of our state and I’ve already told you the need is great. 600,000 people have coverage here in our state under the ACA. That places us 4th in the country for ACA enrollment and we are not the 4th largest state in the country. We are behind California, Florida and Texas and then there is North Carolina.
These customers for the most part are working North Carolinians who rely on Federal subsidy to get coverage. In fact, across the whole population about 70% of all those folks rely on Federal subsidy in order to be able to purchase the insurance fees and many of them have chronic conditions and acute need for medical services so as we think about it at Blue Cross and I hope you will too. Behind all the numbers, 600,000, 700,000 more than [inaudible 00:15:01] these are real people, individuals, your neighbors. I was telling a group the other day, I was driving to work, first day of school and you are seeing everybody standing out at the curb taking pictures, first day of school and I wondered all the way to work, I wonder if they are covered by the ACA and what are they going to do if we can’t stay in? This is serious business folks. I also remember that a gentleman in Asheville who spoke to the Citizen-Times up there and said this about his situation, his wife’s ACA plan jumped from $511 a month to $853 in just 2 years. What am I going to do because even with the government subsidy that it is making it unaffordable?
Think about this comment. He also closed by saying, “What options are we going to have if Blue Cross pulls out?” The answer is none. The ACA effectively will not exist in our state. Now I’m not saying this to bring how important Blue Cross Blue Shield North Carolina is. I am telling you this because if there is not an ACA program in this state, there will be 600 to 700,000 people who have insurance today who will not have it tomorrow. I think that’s a big deal if you just stop right there, but think about it 1 more step. They’re going to continue to need and demand services that all of our wonderful provider partners across this state and they are not going to be able to pay for it and that means our provider partners will move that from 1 side of their ledger to the other and it will again show up as uncompensated care.
Uncompensated care is paid for somehow, someway. Nothing is free so it will show up in insurance premiums ultimately because they are then forces when they negotiate and have conversations with us about what we are going to pay them. They want us to pay more so that they can pay for that man’s uncompensated care. That’s the way it works. That’s why you should be concerned about whether or not there is an ACA program here in North Carolina.
Now, we have 2 or 3 more weeks before we will make a decision on whether we are going to be in or out. That decision has not been made and we are hard at work trying to figure out how to answer that questions yes, but let me be clear, we have not yet made that decision so stay tuned. We have a strong commitment to North Carolina. We are going to do everything we can to stay in all 100 counties, but we have a responsibility to the 3.85 million people who are not on the ACA to remain a viable, healthy, financially stable and solid company that we are today.
Let me give you a quick word about health care transformation and then I’m going to open it up to you for questions if we have time. I hope somebody’s got their eye on the clock. The ACA has everybody’s attention right now. We’ve spent a good while here talking about it this morning, but let me be clear. There’s lots of transformation because of and outside of the ACA taking place across our nation and in North Carolina. In fact, North Carolina is looked to as one of the leaders in health care transformation. Even if there was no ACA, we need to be shifting away from our outdated system where doctors and hospitals are rewarded for doing more tests and more procedures. In fact, some experts believe that our traditional method for paying or paid by procedure is the single biggest driver of medical costs and so the fundamental model had to change. The fact is skyrocketing health care costs are forcing us to act even if we didn’t have the ACA and we are all working very, very hard to try to search for better ways to provide value in health care and 1 thing that we have to do is put the consumer more at the center of health care.
Let’s ask this question. We won’t completely answer it this morning, but let me give you some examples. Why does health care cost so much? Why does it keep going up? It’s not just 1 or 2 factors. It is complex and it’s multi-dimensional, but here are a couple of suggestions that I want to have you considering when answering that question. Pay by procedure instead of paying for outcomes is inefficient and rewards the wrong thing. A lack of price and quality transparency and information would allow consumer to make better choices. We were talking about yesterday with 2 or 3 conversations on this subject. You can find out more about how to buy your large screen TV than you can about how to get your knee replaced. A little something wrong with that and availability of data, transparency and price and quality is a part of that.
We’re working on this. We’ve developed tools and sources to help consumer help understand the value of the proposition. This is not about looking for the cheapest. It’s about looking for where the most value is on the goods and services that they pay. Unhealthy lifestyles, everybody groans. We’ve heard that before, but it is true. If you look at chronic conditions across the board: heart disease, diabetes, obesity, those 3 things account for about 3 quarters of medical spending. If we all took better care of ourselves, health care would come down and a lot of this is certainly preventable through better lifestyle habits.
The skyrocketing costs of prescription drugs. Now that’s been in the news a lot lately and it’s going to stay in the news. Particularly specialty drugs. These are the drugs that are for rare and chronic conditions or have to be administered in a specific way and frankly they are breaking the bank in health care costs. Let me give you an example that was in the Raleigh News Observer this morning. Humira and Embrel, those 2 drugs alone, you see a lot of television advertisements for them so even if you’re not taking it you probably know a lot about it. That represents 1% of the scrips in America, but those 2 drugs represent 10% of the entire pharmacy cost in America. The price of those 2 drugs have doubled in recent years.
Now, it is a valid question to ask one. I am not criticizing the efficacy of those drugs. I’m simply giving you data points that while we celebrate the wonderful and positive impacts of pharmaceuticals and I like my drugs as much as you like yours. The ones that I have to take, but we have to have a serious conversation about the cost. Why? Because our specialty drug spending at Blue Cross last year alone jumped 34%. Remember your health insurance premium? When the pharmacy costs jump 34% in 1 year, yes it will put pressure on the health insurance premium and the pharmacy cost is more than any other single category of spending in our company and in companies like ours across the country and unfortunately there is no end in sight. You probably heard about the EpiPen which is the most recent poster child for price escalation when consumption has not increased commensurate with that.
Optimistically there is a better way. Measures which value best care where high quality and good patient outcomes and effect management of costs are being rewarded. We are moving in that direction. I was in a conversation with a great provider partner yesterday in this community. That was said and we agreed that we are not moving fast enough. It’s hard work, but the pace of that change needs to pick up, but we continue to see an evolution in the cost and quality equation around our state and we are encouraged that one of these days while we are all continuing to consume and grow older that we can get to the place where the transformation will catch up with they need and last but not least, I’ll go back to where I started. We’ve got to figure out a way to make the ACA sustainable otherwise the cost burden that’s associated with the ACA is on that list of things that are driving up the cost to both individuals, patients, tax payers and to our provider partners.
As I get ready to conclude, let me leave you with 4 points that I always get asked this question so I’ll answer it now before you ask me. If you were king, what would you do to improve the ACA tomorrow? Now what that means is, number 1 you need to be king. We don’t have one of those. Secondly, what could you do that wouldn’t involve Congress because a lot of the fundamental changes will require and needs an act of Congress. This is what I would do. Stronger enforcement of the individual mandates that requires coverage. Mandate has been too weak. Last night I had a question, why doesn’t health insurance work like automobile insurance? Well, you are required by law to have automobile insurance. Even with that mandate 10% of the folks in North Carolina ride around without any kind of automobile insurance. Well, 90% do so the pool is a lot bigger and when that happens, when there are more participants that makes more things possible in terms of price.
I will also say that tighter control of special enrollment periods during the year. Those need to shrink. Right now there’s far too many opportunities for people to jump in and jump out. That destabilizes the whole market and it runs costs up. I would say you have normal enrollment period, October 1 to December 31. Get in or you’re out until the next year with certain limited exceptions like certain life circumstances: you have a baby, you get a divorce, somebody dies. There’s lots of examples in the commercial space about how that works and works well.
Shorter grace period for paying premiums. In the ACA you get 90 days to catch up on your premium if you don’t pay. What that has caused is a behavior where folks pay through the end of September, stop paying October, November, December, continue to consume services and the reward for that is you get sign up again January 1st. There are no consequences to not paying except for the fact that for the first 30 days if there are claims and the premium doesn’t come in, Blue Cross Blue Shield of North Carolina pays for those claims. The remaining 60 days, we don’t pay the claims and our provider partners have to pick up that tab and finally, fully fund the Federal program that stabilize the health insurance market. That’s the 3 R program that I won’t bore you with, but that would certainly be very, very helpful as we stabilize the market.
Let me simply say in concluding that situation can and should and will change. With these and other adjustments the ACA will become sustainable in my opinion and begin to work as intended to give millions of Americans a better option than remain uninsured. In the meantime, what can you do? What can we do together as a business and community and health care leaders here in Charlotte? You need to raise your voice. You need to educate yourself and you need to advocate for making health care more affordable. You can remain committed to offering competitive health benefits to your employees if that’s a business that you are in and I would urge you to consider offering incentives to those employees to change their lifestyle so that they will be healthier and by the way, a healthier employee is a more productive employee. I think if you do these things it will help accelerate the transformation and we look forward to working together with all of you to make these things happen. That’s the only way transformation and change occurs is when people of good will work hard together to solve a common problem. I look forward to your ideas on how to do just that.