Economies of Scale: How to take advantage of them

One of the topics, I learnt in economics, fascinated me a lot. It was economies of scale.  It refers to reduction in per unit cost owing to increased production.

It explains how a firm can reap benefits by growing in size.  This concept not only proves helpful on production side but also in consumption. The greater the size of consumption the greater will be savings in per unit cost.

Heating expense, for example, for room is constant for any number of people. Hence more the number of people living in a room lesser will be the per person expenditure for heating. Same goes for housing space. More number of people needs more rooms but space requirement for kitchen, TV. Lounge, bathrooms per person reduces as number of people rises. Machine, vehicle, etc can also be shared if more people are living in a combined household.

It is not only the case with your housing budget; it does benefits nations as well. Any country having large size of population can reap economies of scale. China and India for example have huge population and they can use it to their advantage.  They have huge bargaining power. They can use it for getting discounts which smaller nations like Maldives cannot think of. Furthermore businesses based in these countries are better able to compete globally owing to economies of scale which they achieved due to huge consumer market in their native country.

The same benefit, nations try to achieve by forming free trade regions.

Let us take the example of ASEAN region.  Combined population of ASEAN member states is 625 million. The huge population will help people access good quality goods and services at low prices. For supplying these goods and services business community will need to operate their plants at full speed, this would reap economies of scale for them as well, hence more job opportunities for people living in these regions.

Learning about these benefits, you must be thinking of ways to reap these benefits for yourself and your family. Some of them are here; while you may think of many others.

You can start living in combined household and if possible by living tribal lifestyle, take advantage of companies that are owned by their customers, purchase in bulk, eat together, for housing; get a plot of land in cooperative housing society and the best way to reap these economies is strengthening family bond; through marriages, reducing divorce rates, and keeping good relationships with kith and kin.                                 

Low birth rates in the advanced world

Germany is facing dearth of births. It has dropped below Japan to have the lowest birth rate globally.

It is expected that low birth rate would cause shrinkage in workforce by 6 million over the next 15 years.

With fall in birthrate the population between 20-65 years will fall to 54% by 2030.On the other hand, the life expectancy for women is expected to continue rising to 88 and for men to 84 by 2050. This will push the dependency ratio to 1.1, threatening the solvency of public pension system.

Germany is not alone. The entire developed world is facing the same problem. Japan, third largest economy in the world after United States and China, is also facing sharp decline in work age population.

According to U.S. Census Bureau, Japan will face 18% decrease in workforce and 8% decrease in consumer population by 2030. Fall in workforce and consumer population may hurt companies as they have to face escalating cost of labor along with loss of economies of scale.

United States is also facing workforce shrinkage, due to age, albeit at low rate than faced by the rest of the developed world. China, in order to avert population decline, has ended one child policy.

United States, China, Japan, Germany along with Italy, and Russia contribute nearly 50% of global GDP. Fall in their population can cause balance of power to shift away from these regions.

Eco-friendly shipping

Vindskip is a concept designed, by Norwegian firm Lade AS, for harnessing wind energy to propel cargo vessels.  The designed ship, Vindskip, uses a hull that acts as a sail.

According to its manufacturer, Lade AS, the designed ship reduces fuel consumption up to 60% while reducing greenhouse emission up to 80%.

It uses liquefied natural gas-powered generator for the remainder of its energy and get it moving from standstill.

Germany’s Fraunhofer Center for Maritime Logistics and Services has developed its software. This software will help choose best possible route in accordance with the wind direction. Cruise Control will balance the LNG-electric propulsion system with the Wind Power System - keeping a constant speed of the ship.

The development in wind-powered shipping is important as today 95 % of goods are carried through ships, furthermore, according to the guardian, one giant container ship can emit as much cancer and asthma causing chemicals as 50 million cars. Therefore, small reduction in emission by shipping industry can have great impact on the global greenhouse emission.

today 95 % of goods are carried through ships

For reducing greenhouse emission ships should be more fuel efficient, as reduced fuel consumption means reduced greenhouse emission.

Along with using renewable energy sources another way of reducing fuel consumption is slow steaming.

Marine engine manufacturer Wärtsilä estimates that fuel consumption can be reduced by 59% by reducing cargo ship speed from 27 knots to 18 knots, at the cost of an additional week's sailing time on Asia-Europe routes.

Fall in bunker prices may prove to be barrier in opting for slow steaming and going for renewable energy sources. Therefore UN's International Maritime Organization and the EU should intervene to tighten laws governing ship emissions and fuel efficiency.

 Related link

vindskip

slow steaming
shipping pollution

How to keep your home cool without AC

Hot summers have arrived. With rampant power outages many Pakistanis are suffering from severe wrath of sun. Air conditioning can help but it costs a lot in terms of electricity bills and installation expenditure. Furthermore when summers are its peak air conditioning efficiency falls to its lowest.

So you should find some other means to remain cool in face of severe electricity crisis. One of the best ways is to avoid your home and offices from heating up. Rather than consuming electricity for cooling the building after it gets warmed up by sun, you should be proactive and take some steps which can help you keeping your residence cool.  This can be done in many ways.

 Roof shading

About a third of the unwanted heat that builds up in your home comes in through the roof. By shading the roof you can save a lot on energy bills along with reduced emission of green house gases.

Shading your home can reduce indoor temperatures by as much as 20°F (11°C). Effective Shading can be done by growing trees strategically around your home or office.

Window coverage

Roughly 40% of the unwanted heat that builds up in your home comes in through windows. You can close windows in the day time in order to avoid heat gain. Alternatively you can use window awning for shading windows.

Window blinds, as well, horizontal or vertical, can help reduce heat gain in summer and heat loss in winter.

An awning is a secondary covering attached to the exterior wall of a building

Roof garden

Roof garden also helps you in keeping the building cool and is legally compulsory for all new buildings in many countries.

Roof garden also helps you keeping your roof cool. Photosynthesis, evaporation and shading are the ways in which plants keep your roof cool.

Roof gardens help reduce heat gain in buildings

Research published by the National Research Council of Canada found that an extensive green roof reduced the daily energy demand for air conditioning in the summer by over 75% (Liu 2003).

Other benefits of green roofs does include Increase in building’s marketability.

Moreover, roof with more trees can help reduce the temperature of your house, to protect your home against fire and noise reduction effectively.

Ground covering

A grass-covered lawn is usually 10°F (6°C) cooler than bare ground in the summer. So you can grow grass on ground rather than keeping it bare.

Slow steaming saves fuel

Slowing down may not seem to be a good advice for many businesses but many shipping lines are saving hefty amounts in fuel by just reducing their speed a little bit.

Marine engine manufacturer Wärtsilä estimates that fuel consumption can be reduced by 59% by reducing cargo ship speed from 27 knots to 18 knots, at the cost of an additional week's sailing time on Asia-Europe routes.

The speed less than 18 knots is called super slow steaming.

 This practice of slow steaming in maritime industry emerged during the financial crisis of 2008-2009. During the crisis international trade and demand for containerized shipping plummeted at the same time as new capacity in pipeline came online. As a response, maritime shipping companies adopted slow steaming and even extra slow steaming services on several of their routes. This response helped these companies to accommodate additional ships with similar demand. As an increase of just one knot would free up enough vessels to grow global capacity by 6.2 percent and one further knot would add another 5.9 percent of global capacity.

Slow steaming does involves adjusting the ship engines.

The additional benefit of high fuel efficiency is reduced emission of green house gases. Ships are most efficient mode of transport as far as green house emission is concerned.

Slow steaming may has its own downside. For example Slow steaming' upsets some customers, who worry about delays in delivery. At the same time the risk of pirates attacking the ship increases as Pirates have never managed to board a vessel travelling at 18 knots or more and container ships and other faster vessels have traditionally crossed the high risk area up to 1,500 miles off Somalia’s coast at up to 24 knots.

6 thirsty industries

Water, the most abundant compound on earth, is used by many industries. When you use computers, wear cotton shirts, drink beverages you are actually consuming water. The industries which are most water thirsty are listed below. In terms of direct water usage, agriculture and power-generation industries top the list, which together are responsible for 90 percent of direct water withdrawals.

1.       Agriculture

Agriculture is the major water consumer of all the industries. For India more than 90% fresh water usage is in agriculture industry.

 The room for improvement in water usage efficiency is also in this industry. Using modern techniques like sprinter irrigation, drip irrigation etc can help to make use of water efficiently. In developing countries huge amount of water can be saved by simple improvements in the method of irrigation.

2.       Power generation

Generation of electricity is another bigg consumer of water.  Ultimately, it takes a staggering 95 liters of water to produce one kilowatt-hour of electricity, according to Tamim Younos, research professor of water resources at Virginia Tech.

Pumping oil, cooling the power plant, removing pollutants from power plant exhaust, generating steam to run turbines, and washing away residue after fossil fuels are burned all involve water usage.

All sources of power generation are not equal in water consumption efficiency. For example natural gas is the most efficient source of energy in terms of water consumption.

3.       Food processing

Huge water is used to wash and rinse fruits, vegetables and meat. Food processing industry uses water to

1.       Wash raw food,

2.       washing after steaming/peeling/ size reducing,

3.       Balanching

4.       Filling

5.       Sanitation and plant cleaning

Half of the water used in the fruit and vegetable sector is for washing and rinsing

4.       Textile and garment industry

Textile and garment industry is very water intensive. Most of the water used is in wet processing and dyeing fabrics. The textile industry uses 100 liter of water to process only 1 kg of textile fabrics.

5.       Meat production

According to a study by the UNESCO Institute for Water Education, conducted between 1996 and 2005, “29 percent of the total water footprint of the agricultural sector in the world is related to the production of animal products.”

 It takes more than 1,800 gallons of water to produce 1 pound of beef

6.       Semiconductor manufacturing

Semiconductor Manufacturing Plants can use as much water as a small city. These plants use water in washing the silicon wafers with ultra pure water. One manufacturing plant uses anywhere between 2 to 4 million gallons of very, very pure water— ultrapure water—per day, and that is roughly equivalent to the water usage of a city of around 40,000 people.

Ultrapure water is a term in the semiconductor industry to emphasize the fact that the water is treated to the highest levels of purity for all contaminant types, including: organic and inorganic compounds; dissolved and particulate matter; volatile and non-volatile, reactive and inert; hydrophilic and hydrophobic; and dissolved gases.

15 Ways to Finance Your Start-up

Not all small businesses need financing. Accurately gauge the need for financing because usually entrepreneurs make mistakes in assessing the need for financing.

There are number of ways in which small entrepreneurs can arrange financing. Some of them are listed below along with brief description.

1.       Bootstrapping is when you reinvest the profits of your business. Growth is slow, when you work your way up, but business decisions are under your control.

2.       Friend and family loans Arab Americans prefer to get loans from family rather than bank. Getting financed from family is easy in strong families as they are more willing to trust you. Regular meetings and communication is important in order to avoid misunderstanding with friends and family.

3.       Savings Utilizing your own saving is one of the most common methods to grow and simultaneously have control over the business decision.

4.       Home-equity Home equity may serve as collateral for a home equity loan or home equity line of credit (HELOC).

5.     Angel investors These are wealthy individuals who fulfill financing needs of start-ups against convertible securities or ownership equity.

6.       Venture capital Getting financed from venture capital is another option. Usually venture capital funds take ownership interest in young companies. They also take part in management of your business.

7.       Crowd funding Crowd funding is pooling funds from large number of people, often using internet. Many websites help you in arranging crowd funding for your venture. Some of the sites are Kickstarter, Indiegogo, etc. The highest amount raised from Crowdfunding is USD$70,000,000. This amount was raised by Star citizen, upcoming video game.

8.       Rotating saving and credit association In this arrangement members of the association meet and every member pay fixed amount. The total amount is than paid to one member. Same cycle is repeated to pay lump sum amount to every member of the society. When every member has received lump sum amount the association is disbanded.

9.       Factoring It is selling your account receivable to financer.

10.   Applying for small business loan Akuwat, and Grameen bank are some of the institutions in developing countries for aspiring entrepreneurs.

11.   Sale and leaseback transaction A company sells some of its equipment to a lessor, such as a bank or another financial institution, which leases the equipment back to the company. Thus the company is no longer the owner of the equipment but keeps the use of it. This commercial transaction allows to companies to have at their immediate disposal the cash to make investments in new business opportunities.

12.  Keep your financing requirement to minimum. Squandering your cash will play havoc with your business. Efficient management is most important thing in keeping your finances under control.

13.  Efficient management Keep your debtors’ collection day to minimum.

14.     Buying on credit. Buying on credit is another means of financing with added advantage that it is interest free. The down-side is that relationship with client can deteriorate if you fail to pay within stipulated time.

15.      Merchant cash advances. It is selling your future credit sales against a lump sum amount. For example if you get 10,000 Rupees lump sum than you have to sell 13000 rupees worth of future sale to the lender.  

Family offices: managing the fortune of wealthy dynasties

Family office is a private investment arm of wealth families. When family office manages the wealth of single family it is known as Single Family Office (SFO) and when it manages the wealth of many families it is called multi-family office. Family office manages every task related to the wealth of family from accounting to succession planning, investing and philanthropy management

Establishing SFO is very expensive. In order to justify cost your family need to have at least half a billion dollars. The wealthier a family is the more cost effective it is to have a SFO.

If a family doesn’t own enormous wealth to justify having SFO than a family can have Multi-Family Office (MFO). MFOs can provide services to those families whose net worth is in the range of 100 million dollars to 500 million dollars. MFOs are charged with the same responsibilities, as taken over by SFO. The difference lies in the number of families, served by the family office. SFO serve single family while multifamily offices serve a number of families.

The rise in popularity of family offices against the alternatives can be attributed to a number of reasons. The triggering event of this rise was global meltdown in 2008. Wealthy families, heirs of wealthy dynasties, watched, helplessly, their fortunes being destroyed by the meltdown. The families felt cheated by asset managers, wealth managers and others large institutions for losing their fortune without going themselves into bankruptcy. Banks, for instance, were saved from bankruptcy during the crisis. Families who were invested in large funds and other big institutions watched their entire fortune being wiped away without being able to take out their investments owing to, for example, gates in case of hedge funds.

Feeling cheated, these wealthy families now wanted to take control of their wealth. In order to take control of their wealth they created another type of financial institution, Family office. The impact of rise of these institutions was felt by many in the industry of asset management. As their competitors, family offices invest in much different way than did the alternative institutions. Take for instance the time horizon considered in case of investments. As investors, they have far longer time frames than private equity houses or venture capitalists. Often the long range investment means that there is no exit strategy planned at the time of investment by FO.

Benefits from family office accrue to both parties, one owning the family office and the other receiving investment form these family investment’s arms.

The benefits accrued to wealthy families far outnumber than the benefits to the investees. These include control of wealth, flexibility in investing, and privacy.

The major benefit is control over your family wealth, has been discussed in preceding paragraphs.

The family office helps not only to take complete control of your wealth management but also provides flexibility in investing. The choice of investments can vary widely from real estate investments to investment in start-ups. The increased tolerance for risk taking, when the returns justify, is the edge over other institutions. Now families can invest in those areas where there is more return.

Another benefit to the families is privacy. The privacy afforded by Family Offices can’t be provided by conventional wealth management institutions.

The benefits to the investee firms and companies include the long time period of investment, and the increased risk tolerance.

Owning to long time period investments by family offices, they are given preference by nascent companies over private equity houses.

"With a family office you don't have a time horizon. We like the long-term focus. It's great to have an investor who doesn't view going public as an exit opportunity, but rather a chance to buy more stock," said Pere Valles, Chief Executive of Spanish electoraltechnology company Scytl.

The increased risk tolerance means much more to start ups than to other types of investee entities. The increased trend in investing in technology related companies has added another dimension to the investment.  Generally technology companies don’t have tangible assets, to use them as pledge for arranging loan from bank. Many Family offices are betting on technology, stepping in where venture capital and banks are reluctant to tread.

Another benefit is that those who successfully receive old wealth, for their start-up, need not spend their time searching for new investors hence finding more time to focus on their business.

Related links
Single family office
Multi-family office
Blommber's family office report
Hedge funds close the gate

Rice Duck farming

Japanese farmer Takao Furuno is architect of integrated rice duck farming. In this method the rice crop is grown along with duck farming. Duck farming helps control pests and other harmful insects in rice farm.

Duck is useful bird. Its eggs and meat are useful sources of protein. the bird can be used to provide supplemental income for farmers. Another benefit is to produce meat.

Duck’s meat is halal if slaughtered according to Islamic principles. Halal food market has grown to 1.1 trillion dollars in 2013.

 Duck fat contains 35.7% saturates, 50.5 monounsaturates,and 13.7% polyunsaturated fats (containing omega-6 and omega-3 essential oils). This resembles olive oil which contain 75% monounsaturated fats (oleic acid), 13 % saturated fats, and 10% omega-6 linoleic acid and 2% Omega-3 linoleic acid.

Duck meat is also a source of zinc and selenium. Zinc can also boost your immune system while selenium helps your thyroid function properly.

The droppings of ducks can act as a fertilizer. Ducks also churn up water with their feet hence providing oxygen to rice plant roots, thereby boosting growth of the plant. Using this method per acre yield of rice can be increased to two fold.  Furthermore the rice produced using organic method is more wholesome as compared to grown using pesticides. Organically grown rice also fetch high price in the market. 

Popularizing duck rice farming method can help solve food problem as rice provides carbohydrates to human population. Duck and rice farming when combined increase per acreage yield of rice. Using organic method of agriculture can also help reduce damage to ecosystem.