All posts by dblakely

Letter from Saudi Arabia

Skater culture in the Kingdom of Saudi Arabia

The mission of the U.S. Department of State is to promote security and democracy for the U.S. and the international community. Major concerns are freedom of speech and religion, human rights, and rule of law. How in the world can the U.S. State Department advance its agenda in a country that forbids women to drive and represses all forms of public religious expression other than one school of Sunni Islam?

After a week here, I can tell you one thing we absolutely shouldn’t do: Scold and harangue the Saudis on human rights.  Well-intentioned programs to import speakers on issues such as religious pluralism are an irritant to the proud Saudi culture.

The Saudi consulate – an incredibly impressive and committed team – had a clever thought about advancing its agenda. What if we bring speakers to Saudi Arabia to discuss 21st century methods of doing business? Methods and tools like design thinking have implicit messages of pluralism, like the benefits of diverse perspectives on design projects, but we avoid overt lecturing. I had the honor of being selected for the diplomatic tour, based on past successes with the State Department and on recent successes from mach49, the venture incubator and accelerator I run with my partners in Redwood City.

That’s how I found myself in Damman and Dharan, hosting a forum of entrepreneurs, meeting with business leaders, touring middle schools, and eating Halal food in quiet restaurants (music is forbidden in public venues).

ARAMCO

Before I tell you about the trip, bear with me while we cover some terribly important numbers. State-owned oil company Saudi Aramco is Saudi Arabia’s economy, and the government shocked the business world with plans sell off a chunk of its crown jewel. A profitable IPO is intended to create a sovereign wealth fund that will generate enough investment income at home and abroad to dominate state revenue by 2030. The valuation and performance of Aramco will have a huge impact on Middle Eastern stability and on global business, and it will quantify the investment community’s attitude towards the future of fossil fuel, so this is a development we all need to watch.

What’s Aramco worth?

Deputy Crown Prince Mohammed bin Salman estimates Aramco’s worth at $2 trillion, based on 261 barrels of reserves (crude oil in the ground) and the standard benchmark for valuing oil reserves at $8/barrel. In addition, Aramco recently saw an income tax cut from 85% to 50% to make it a more attractive investment.

Here’s the biggest issue with Mr. bin Salman’s estimate:  He is assuming prices are viable for the next 73 years at current pumping rates. Will global warming and alternative energy technology curb the world’s appetite for hydrocarbons by the year 2210? I’m sure of it.

 

State-owned oil companies are rarely valued as dispassionately as the number suggest because of political risk, either real or perceived. Two examples:

  • Russia’s Rosneft OAO pumps 5 million barrels per day, half of Aramco’s output, and is valued at $35B.
  • Brazil’s Petroleo Brasileiro SA is worth $23B even though it controls every facet of Brazil’s oil industry.

EFG Hermes, an investment bank serving the Middle East and North Africa, predicted the market would value Aramco at between $1 trillion and $1.5 trillion. Even at the lower end, bringing 5% of the company public would deliver $50B in investment funds and debt service.

 

And finally…Credible economists and analysts (not short-selling trolls) are valuing Aramco substantially below $1T. Energy consultancy Wood Mackenzie has valued Aramco’s core business at around US$400 billion.

 

Over the next two years, Aramco’s valuation will tell us how the world feels about the future of hydrocarbon and the risks of investing in Saudi Arabia. Investor confidence leading to fat $2T valuation will fast-track diversification, improve the transparency of a murky organization, and bolster the King’s political capital. If investors are lukewarm, the Kingdom’s $100B economic diversification project would be unable to move forward as planned, and the Saudi economy will remain tied to a commodity that is on the wrong side of history.

 

THE IMPOSSIBLE STATE

How was my week traipsing through Saudi Arabia? As you might expect, much more confusing and nuanced than expected. Saudi Arabia is an impossible labyrinth of contradictions, held together by the endless flow of oil money.  Here are some of the experiences that still make my Western head hurt…

Holding forth on innovation in Dammam

 

Expat Attitudes

Before I arrived I had already invented  the answer here. The western expats I met would be troubled by country which, for example, forbids movie theaters and beheads men for civil disobedience. They’d have funny, sarcastic stories, and darker stories about oppression they’d witnessed.

Not so fast. I’m not trying to minimize the egregious human-rights violations in Saudi Arabia, but plenty of westerners enjoy living in the Kingdom, and not just for high pay. A fun, lively twentysomething Australian woman  told me without hesitation: “I love it here. Saudi Arabia has soul.” She’d like to stay indefinitely. And a manager in an industrial park, recently relocated from hipster Oakland, told me that he had already made deep friendships with his Saudi coworkers and appreciated their warmth and openness.

Public Sector

More impossible numbers here to make you dizzy:

  • There are 20 million Saudis and 10 million guest workers in the country
  • Of the 20 million Saudis, 70% work for the government. Oil brings in the majority of government revenue.
  • 90% of the private sector jobs – the people who cleaned my hotel room and cooked my food – are staffed by non-Saudi guest workers.
  • And the 20,000 royal family member see monthly stipends anywhere from $8K to $250K.

How is this possible? What keeps the engine running? Those government jobs have short working hours, generous benefits and substantial vacation time. And the Saudi citizens pay no income or sales tax. The answer, of course, is ten million barrels per day powering the economy.

The Art of the Workaround

One Saudi national called his culture “the art of the workaround”. The Shura is an extremist and powerful council of clerics which proposes laws and forwards them to the King. Yet within the campus of Saudi Aramco, the rules are magically lifted. Women may drive and restaurants are coed. And Bahrain is a short drive from where I stayed, with its bars and clubs.

Entrepreneurship

The Saudis are grappling with the economic challenges of finding employment for a young and growing population and diversifying an economy that is overly concentrated in the energy sector. Culturally, government jobs are encouraged, and entrepreneurship is questioned. Maybe my contacts represent a tiny fraction of the total population, but the entrepreneurs at the Entrepreneurship Diwaniya at Dhahran Techno Valley were as astute as the hottest teams in Silicon Valley.

 

Again, I’m not devaluing the significant issues in Saudi government and culture. I am pointing out the contradictions to popular opinion: When I visited the Bayan Gardens School, focusing on STEM education for girls, the science fair presentations rivaled the quality of any primary or secondary education, anywhere in the world.

Finally, here’s a shout-out to my incredible contacts at the consulate: Peter Winter was the driving force behind my visit, and Khatijah Corey handled every challenge with aplomb. And best wishes to our capable Consul General Mike Hankey from the embassy.

 

 

Government and the Next 100 Years of Space Exploration

90 years ago Robert Goddard launched the world’s first liquid fuel rocket from a cabbage patch on his Aunt Effie’s farm. It reached 40 feet, less than a third the height of the first stage of the three-stage Saturn V booster that brought three men to the moon 40 years later.

I just finished work with NASA Langley on a vision of the next hundred years of aerospace. We’re celebrating the last hundred years of air and space in this Centennial Celebration at NASA and thinking about what the next hundred years will bring us. As always, the Institute for Human and Machine Cognition did a tremendous job hosting the gathering.

Aerospace and Government in 100 Years

If you’re building narratives of space travel in 2117, you should think about how the public sector will (or won’t) support the exploration of space. The future of government was foundational to our NASA program and it led to some of the most interesting discussions. Historians are great at “future of…” programs because they spend their time thinking about 100-200+ year sweeps of history, so an American historian on the team was a great addition to help NASA build possible futures.  Boston University historian (and dear friend) Bruce Schulman did an amazing job outlining  durable trends that may persist into the next century, and current fracture lines in our nation’s history of trends that will be disrupted. He also (reluctantly) gave some predictions for the next 100 years.

Here’s what Bruce imagines as a possible future, though he pointed out that historians are notoriously bad at predicting the future (think of Lenin’s “end of capitalism” or Fukuyama’s “end of history”):

Two Durable Trends continuing over the next 100 years:

Dr. Schulman imagines the continued rise of direct democracy via popular ballot propositions pushed by the voters as an instrument of governance and constitutional amendment. Opinion-driven propositions originated in the 19th century, doubled from the 70s to the 90s, and doubled again in the last ten years. No end in sight.

A second “durable trend” is the growth of para-state institutions, from the private and voluntary/charitable sectors. The public-private partnership has been the characteristic mode of American governance for 2 centuries and is likely to persist. As Bruce pointed out, while some see US government as “underdeveloped” compared to many Western European democracies, he feels a more accurate term is “other-developed”. 

Two Fault Lines for 20th century trends that will not extend for the next 100 years:

Federalism and centralization will continue to be in conflict with popular movements that seek regional autonomy and minority group representation. Think of state-by- state marijuana legalization in the US in defiance of federal law. We face persistent instability to patterns of governance going forward as regional, state and local governments might be playing greater roles and nation-states might even dissolve.

Current anti-globalization movement will grow and drive decentralization of transnational governance. The post-World War II trend to integrate the global management of goods, ideas, capital, software, energy, people and microbes  across national boundaries via organizations such as NATO, WHO, IMF and the World Bank, is threatened by growing opposition to globalization. Think of Brexit, Putinism, or President Trump’s revival of the America First idea.

What does this mean for NASA?

When forced to predict, here’s what Dr Schulman said:

We’re unlikely to see large tax-funded public sector efforts in any realm including NASA (except, perhaps, military affairs).

We can expect a persistence of governance by para-state institutions.

As our concepts mature for the next 100 years of space exploration, I’ll be sure to keep you posted. I’m hoping for your thoughts on one topic came up persistently: The future of physical versus virtual presence. Technologies for remote presence are improving at an incredible pace — just play with Oculus Rift or Google Cardboard and you’ll know what I mean — and by 2117 remote presence could be nearly indistinguishable physical presence. So, readers…What are the most compelling reasons to actually bring  humans to Mars or Ganymede? Think about this and I’ll keep you informed.

Asia Sprint

My business partner Jason and I just spent a week dashing through Hong Kong, Singapore and Mumbai, meeting with prospects for our venture incubator mach49. I first visited all three of these cities in 1984 after I saved a few bucks working in Japan. One of the few good things about growing older (and there are very few) is the opportunity to compare my perspective over a few decades.

HONG KONG 

In the 80’s the bustle in Hong Kong was on par with New York and London but much more chaotic. Ever since then I’ve thought of Hong Kong the economic gateway to Southeast Asia so it came as a big surprise when our hosts and our potential clients talked about a general decline in the business climate in HK. Everyone cited the same three factors driving uncertainty in the economy:

Hong Kong is becoming a tier-two Chinese City.  

Everyone I spoke with seems resigned to HK’s economic clout being overshadowed by China’s major cities within 10 years. While HK’s GDP growth hovers around 2%, major industrial centers in China boast a growth of 7% (though this is slowing). It seems to me that the “special administrative region” is no longer special. Economic concerns have led to protests in HK’s central financial district, but people we met all agreed that Beijing will not be influenced by civil disobedience. 

Shenzhen is overtaking Hong Kong in both innovation and entrepreneurship.  

My host has lived in Hong Kong all his life and he opened our long dinner by telling me that he has watched Shenzhen overtake and outpace HK in innovation. Top talent from large Shenzhen companies like Tencent, Huawei and ZTE often strike out on their own. Shenzhen’s tech scene has achieved critical mass and there are all kinds of exciting opportunities. Incubators are popping up everywhere in Shenzhen and local government is investing heavily in innovation and technology to create sustainable local economy that can move beyond assembly and manufacturing. Again, think about what this disruption means to this old fossil with his long view. When I took a train from Hong Kong to Canton 30 years ago, Shenzhen was a tiny farming town.

Hong Kong is losing its dominance in financial services. 

Hiring is weak in the financial sector which contributes about 20% of HK’s employment, and executives that I met are concerned that HK could turn into a tourism city filled with low-skilled labor rather than an international financial center. Meanwhile, a third of China’s growing venture capital and private equity companies hail from Shenzhen, a short train ride away.

SINGAPORE

More memories, at the risk of being really tiresome: Thirty years ago I arrived in Singapore exhausted and pissed off. Four weeks of backpacking through Indonesia had tired me out, and thieves on a public bus in Jakarta had swiped some things from my pack that I could not replace in Indonesia, including my prescription glasses. 

Singapore was a jewel after Indonesia. I ate healthy fresh food, got my new glasses, and wandered around the streets where no one is allowed to spit or chew gum (unless the gum is prescribed by a medical doctor). That said….three days of Singapore was plenty, then I was off for more adventure hiking in Thailand.

And thirty years later?  Singapore is still a jewel with a diversified manufacturing base, highly educated workforce, and effective rule of law with zero tolerance for corruption. My business partner and I met people in healthcare, transportation, and electronics and they were visibly proud of Singapore’s business-friendly, trade-oriented economy. Every single person who I met pointed to government-supported incubators and accelerators like Infocomm Investments as drivers of the next phase in Singapore’s growth. 

Singapore has all the physical infrastructure that it requires and they’ve made a strategic decision to pour public expenditure into the ‘soft’ infrastructure needed to build and sustain a knowledge economy. Hell, they committed to $4B to advanced R&D in 2015 which is a remarkably large budget for a country of 5M people. Two of the incubators we met talked to us about data science as an exciting new domain, but Singapore’s Biopolis is also world-class in synthetic biology which is probably the next exponential technology that will rock the world. 

Enough gushing. There’s trouble in paradise: Cracks are beginning to show in Singapore’s lack of government transparency. I met with an American petroleum engineer with a beard that scared me. He and his beard were really disturbed by the regulation of political speech and the lack of a free press, but he had to admit that the system worked pretty damn well. However, harsh judicial punishments are beginning to grate on the citizens with an increasingly international perspective. Homosexual acts remain illegal and public protests are not permitted. A new generation is quietly questioning whether Singapore is really that fragile, and they are beginning to resent the restrictions on their freedom.

INDIA

Mumbai the polychromatic “maximum city” is so complex that I need to limit my observations to the attitudes that I observed about disruptive innovation. First of all, our business contacts and our potential clients all agreed that india is a notoriously difficult place to do business, despite the unprecedented economic liberalization. It was clear to me that having local contacts on board at mach49 is critical to unlocking the country’s vast potential for innovation. The good news here is that incubating innovation is a hot topic in India and we have some heavy hitters interested in working with us.

The Indian firms I met with are slowly making an adjustment from a scarcity mentality, which leads naturally to a focus on operational excellence, to a cautious interest in organic growth through innovation. I spoke to a huge firm with revenues in excess of US$40B and over 100K employees and they were unable to point to any substantial innovation initiatives. We’ll need to ease gradually into the Indian market, starting with workshops.

I sensed a palpable national pride among all the Indians I met, and this pride may be a factor that accelerates innovation. Given the massive social challenges and resource constraints, there is a huge need for innovation to drive growth and improve social indicators. India still has the world’s largest number of poor people, 70% literacy, and public health scourges such as tuberculosis. Rapid growth through innovation and entrepreneurship will raise quality-of-life and will bring in revenues that are desperately needed for social reform.

Moore’s Law May Be Slowing But The Flood Of Exponential Technologies Is Just Beginning

synbioLeslie Berlin is right on point in her latest blog post making a case for the three forces that continue to shape Silicon Valley: A culture born of a high quality of life and world-class universities, investment funds from the Valley’s efficient capital markets, and technology that continues to enable cycles of creative destruction. Her post is a welcome relief from breathless techie media pundits who seem to lose interest in anything that is more than a week old. It’s sure nice to see someone place Silicon Valley in a historical context.

Ms. Berlin reminds us that transistor technology started the relentless tick-tock of Moore’s law. Transistors per square inch of chip will continue to double until transistor size reaches seven nanometers, which I expect to happen in….2018! Once we meet the material boundaries of silicon, we’ll need to migrate to new materials like graphene, a one-atom-thick layer of crystallized carbon.

You lovers of disruptive technology don’t need to dread the 2018 deadline. From my perspective as a 30-year valley veteran, you can expect technology-driven innovation and disruption to actually accelerate as more exponentially advancing technologies emerge alongside silicon. We should all watch the advance of synthetic biology — my money is on engineered biological platforms as the next enabler of insane growth. Early successes are all around us: A lab of the next-gen Shockleys at U.C. Berkeley created yeast cells that eat sugar and convert it to a frontline drug for malaria. Other syn bio teams in Silicon Valley are creating fossil fuels from CO2 and sunlight.

If you’re anything like me, you read words like “engineered biological platforms” and you need to suppress a shudder. It’s incumbent on technologists to think though the implications of their work and to acknowledge that technology advances are not an unalloyed positive. Technology is inherently neutral and can be applied for good or evil. Local futurists like Marc Goodman are at the vanguard of thought on the unintended consequences of technology on business and international security.

I might be wrong about the timing of the imminent expansion of synthetic biology — these trends are inherently unpredictable — but you can be sure that other exponential technologies will change everything in the way we live, work and play. And the intellectual nexus of thinking around these technologies is — yep, you guessed it — Silicon Valley. Singularity Labs is full of entrepreneurs harnessing nanomaterials, artificial intelligence, and robotics. Sound kooky? It shouldn’t. Sober-minded Global 1000 companies like Lowe’s and Coca-Cola are bunking with with the Singularity University team in Mountain View to learn more. As Ms. Berlin says, proximity matters.