Author: Awareness News

Money, the most powerful motivator of all times. Or maybe not…

February 1, 2020February 5, 2021by Awareness NewsLeave a comment

Imagine you were a manager and wanted to improve the performance of your team. What would you do? Let me guess, you would try to minimize the principle-agent problem by aligning the interests of the workers with the ones of the corporation, in a way which fitted all employees. You would take a look around, study the most commonly used sources of extrinsic motivation and finally come with the answer “money”. Why not? Who doesn’t like seeing its salary being increased and wouldn´t work harder for it? Higher salary, more effort, better performance, more profit. Pretty straight forward, right? Wrong!

Motivation is the reason for people’s actions, willingness and goals. It’s the “power” which allows us to wake up in the morning and perform difficult tasks, such as studying or going to work. There are two main types of motivation: intrinsic and extrinsic. Intrinsic motivation is the motivation which comes from “inside”, i.e., we perform a task because we enjoy it or find it interesting. Extrinsic motivation is the motivation which comes from the “outside”, i.e., when you do something for external rewards or to avoid negative consequences. Both intrinsic and extrinsic motivators can be either positive or negative. All intrinsic and extrinsic motivators, positive and negative, have its weaknesses and strengths. Intrinsic motivators differ from person to person, which makes it really difficult to apply them in large teams. However, they are much more long-lasting. Extrinsic motivators are easier to generalize. However, they may be only effective in the short-run or they may worsen the environment inside a team (in the case of negative motivators, such as threats to be fired or demoted).

Money is generally seen as a powerful extrinsic positive motivator, as it can be successfully used for motivating almost everyone. At least that’s what people believe and behave accordingly. However, they couldn’t be more wrong.

The MIT (Massachusetts Institute of Technology) conducted a study in which some of their students had to perform different tasks and received one of three levels of monetary rewards (few money, some money or a lot of money).

The students who received mechanical tasks increased their performance as the monetary rewards increased, i.e., the students who received higher rewards did a better job. However, if the challenge called for rudimentary cognitive skills, larger rewards conducted to poorer performance. In order to eliminate possible wealth variables, the researchers repeated the study in Madurai, rural India, where the purchasing power is way bellow the United States’ . Again, the study showed that, when the challenge involved cognitive skills, higher rewards led to worse performance.

This way, they concluded that the “carrots and sticks” approach (giving punishments and rewards) only works when the tasks that the employees perform are purely mechanical.

“So, the amount of money employees receive is not important?”, you may ask. Of course it is. However, it’s not the most important. If, as a manager, you don’t pay people enough for their effort, they won’t be motivated. However, if you incentivise them with monetary rewards, they may worsen their performance. This way, you should pay them enough to take the issue of money off the table, letting them focus on the work, rather than on receiving their salary.

And the question stands. What is the best way to motivate employees?

According to some scientific studies, there are three factors which lead to better performance and personal satisfaction: autonomy (the desire to be self directed), mastery (the urge to get better at performing a job) and purpose (the aim to do what we do in service of something higher than ourselves). Actually, if we look into some industry benchmarks, such as Google or Atlassian (an Australian software company) we see that these factors are taken into consideration in their management. In Google, engineers can use 20% of their working time to develop their own projects and, on a typical year, about half of the company’s new products are born during that 20% time. In Atlassian, a few times a year, employees have 24 hours to think of some new ideas and present it at a relaxed party at the end of the day. It comes that a whole array of software fixes was created during that period and may never had been created otherwise.

If we think of Wikipedia, for instance, it has a business model that economically makes no sense: it was created by employed and greatly specialised people completely FOR FREE and anyone can use it without paying. Why did the engineers provide it freely instead of profiting with their creation? On one hand, it is the desire for mastery, to overcome obstacles and create something never seen before. On the other hand, the purpose behind the platform and the free access to knowledge and information.

As a summary, people only perform difficult tasks because they are motivated to do so and, as a manager, it is vital that we keep our employees highly motivated. However, it is really difficult to find an effective motivator which fits all workers.

Money is still seen by a lot of corporations as an effective mechanism to motivate people but science proves otherwise. It may be good to incentivise mechanical tasks but, if the work involves some cognitive skills, higher monetary rewards leads to worse performance and destroys creativity. This way, managers should get rid of this extrinsic motivator, based in the “carrot and stick” approach, and replace it by the intrinsic motivator of autonomy, mastery and purpose. Besides being much long-lasting, this type of motivators engage workers and make them much more satisfied with their job, as they are contributing to a better world.

The last of a generation – Alexandre Soares dos Santos, Mr. Pingo Doce

January 29, 2020February 5, 2021by Awareness NewsLeave a comment

Alexandre Soares dos Santos, the man behind Jerónimo Martins’ empire and the main sponsor of the foundations created in his grandfather’s honour, the Francisco Manuel dos Santos Foundation (FFMS). One of the richest men in Portugal, he is accredited for changing the business environment in his family’s company, as well as the rest of Portugal.

“I am unpredictable”

Early days

Alexandre Soares dos Santos was born to a family of entrepreneurs from Oporto, at the same time as his father was taking over the helm of his father-in-law’s business. Mr. Soares dos Santos interchanged his studies between Lisbon and Oporto, eventually going on to study Law, following his father’s wishes. However, to his father’s disappointment, Alexandre Soares dos Santos soon dropped out, which led their relationship to quickly sour.

As a result, Mr. Soares dos Santos joined Unilever in Germany, the consumer goods’ giant, where he’d go on to build a career for himself. At the time that he was in charge of the marketing department in Brazil, Alexandre Soares dos Santo’s father passed away, forcing him to move back to Portugal in order to take over the firm’s leadership.

Jerónimo Martins

His beginning at JM:

When thinking about the Portuguese retailer Jerónimo Martins, Alexandre Soares dos Santos should be a name that immediately pops up in our mind, being an inevitable figure in the retail giant. His ties with the company go back to way before he took charge. In 1935, his family decided to move to Lisbon, when Alexandre ́s father was offered a job to work with his father-in-law in a relatively unknown company based in the Portuguese capital: Jerónimo Martins.

Jerónimo Martins is currently the biggest food retailer in Portugal and the 56th largest retailer in the world, according to a study conducted by Deloitte, “Global Powers of Retailing”, in 2018. Although the company ́s foundation goes back to 1792, its most glorious and prosperous times occurred during the time Alexandre Soares dos Santos was the CEO of the retailer.

Deloitte’s Global Powers of Retailing, 2018

Distribution is the answer

The revolution began as soon as Alexandre started administering the firm. In his earliest days, he started a new brand “FIMA”, bought the factories of the ice-cream company “Olá” (internationally known as Algida) and signed agreements with Unilever. This last measure is particularly relevant, as it marked the entry of the Jerónimo Martins group in the distribution market, which would later lead to the opening of the supermarket chain “Pingo Doce” – the group’s most valuable brand in Portugal. This was just the beginning of one of the most successful stories in Portuguese corporate history.

In more recent years, the group has consolidated in its main markets, with special emphasis on Poland, verifying increases in revenues from 13 billion euros in 2013 to close to 18 billion in 2017. Jerónimo Martins’ outstanding performance is not only shown by sales figures, but also by distancing itself from its closest competitor, Sonae, through a greater growth performance.

Jerónimo Martins and Sonae’s revenues between 20013 and 2017

The Brazilian Setback

Although today Jerónimo Martins is a synonym of success, that has not always been the case. Back at the turn of the millennium, the company faced serious financial difficulties following the expansion into Brazil and Poland. The company lacked financial resources to withstand investing in these two growing economies, leading to debt accumulation, eventually forcing the sale of the Brazilian assets.

Despite being mostly deemed as a bad bet, Mr. Soares dos Santos took personal responsibility, blaming his own arrogance for the company’s failure in Brazil, as well as the lack of market knowledge, planning and overconfidence. He believed that the lesson learnt was a major turning point for the firm, which defined the success in Poland.

“I don’t care about the past. I only care about the day of tomorrow.”

Vision for Portugal

Alexandre Soares dos Santos was long known for his strong criticism of the political landscape and personalities in Portugal. He believed the current economic and banking systems in Portugal to be faulty, in part due to political pressure and widespread corruption. In addition, he defended that the Government creates excessive constraints to investment and job creation through a bureaucratic and centralized decision-making process, which results in little to no prosperity and growth whatsoever.

Mr. Soares dos Santos’ views of the current environment in Portugal were the result of a lifetime of investing, reflecting his several experiences abroad in countries such as Germany, the Netherlands and Poland. Nevertheless, he’d always maintain a distance from politics so as not to hamper his businesses.

“I argue that the businessman does not have to get into politics. There is a conflict between being in the government and being in a business. We obey to one goal: to defend the interests of the company and those who work there. Once a politician, a respectful guy, told me: ‘A politician’s goals are the next elections. Yours, not’”

Legacy – Fundação Francisco Manuel dos Santos

Besides his impact in business, Alexandre Soares dos Santos played a big role in some of the most relevant studies regarding the Portuguese reality in recent years, through the foundation he and his family created back in 2009: “Fundação Francisco Manuel dos Santos”. This foundation was created with the main goal of “Studying the great national problems and making them understandable for all, while stimulating open discussions regarding those topics”, as said by Mr. Soares dos Santos when presenting it. FFMS is also responsible for creating the popular statistical platform Pordata.

The database Pordata is one of the most successful projects of the FMS Foundation. It was started in 2010 as the “Database of Contemporary Portugal” and the project embodies one of the priorities of the Foundation: the collection, systematization, and dissemination of data on multiple areas of society. Pordata has a significant relevance at an economic level, as its ties with the Portuguese National Statistics Institute (INE) mean the database is one of the biggest sources of reliable economic information, not only at a national level, but regarding all of Europe.

All of this information about the Portuguese and European economic environment provide an unbiased and trustworthy analysis, which is fundamental to look into existent structural issues present in each country.

“Soares dos Santos had a great social sense, and he was sometimes frustrated that this sense was not perceived from outside.” – Seixas da Costa.

Final thoughts

Mr. Soares dos Santos was the last of a generation of industrialists, having transformed a small company into one of the most important conglomerates in the Portuguese economy, and its biggest employer. Moreover, his views of the economic and political environment led him to create a foundation which is key to understanding how Portugal can develop itself.

Mr. Soares dos Santos is seen as an example for Portuguese people, but most importantly an inspiration to the next generation of entrepreneurs who wish to make a difference.

Sources: Observador, Jornal Económico, Jornal de Negócios

Diogo Alves Duarte Vilas Boas Tiago Rebelo

Gilets Jaunes

December 8, 2019February 5, 2021by Awareness NewsLeave a comment

Introduction

Gilets Jaunes, also known as the yellow vests movement, marked its one year anniversary by going out to the streets of Paris in the past November 16th.

This movement had its beginning in mid-November of 2018 (in several regions of France) and it soon called the attention of the media all across Europe, that insisted on following up each minute of the strikes. The famous protesters wearing yellow vests attracted a large audience in 2018 for their violent and destructive behaviour. They were characterized as an atypical movement, having no designated leader nor belonging to any particular political party.

Gilets Jaunes had the power to encourage other countries, other than France, to adopt the same initiative, attaining a worldwide dimension.

History/Origin

In the second half of 2018, there was a general rise in crude oil world prices. France was also affected by this rise (making the pump prices go up) and simultaneously there was an increase in the fuel tax. As shown in the graph below, France is the fourth country in Europe with the highest diesel tax, the British being those who have the highest tax burden within the EU.

top+10+EU+countries+with+highest+excise+duties+on+diesel.jpg

This measure was already expected to be implemented as part of the country’s long-term ecological plan and it was meant to move the country’s citizens away from fossil fuels, in particular, from diesel cars. This would then work as an incentive for people to opt for more environmentally-friendly alternatives.

However, in May, a young businesswoman, outraged at the rise in fuel taxes, decided to post an online petition demonstrating her discontent. Although this petition initially didn’t achieve much, it sparked what would become one of the most commented strikes of the last few decades.

Some months later in October, Eric Drouet, a lorry driver, saw this petition as an opportunity to confront the government with its most recent measure, deciding to contact the young woman and bolster her petition. He aspired to reach the highest possible number of citizens and for that, he shared and promoted the online petition. As the world oil prices were rising, petrol prices in France were constantly increasing and, meanwhile, the previously ignored online petition gained hundreds of thousands of signatures.

French people felt really wronged in relation to the tax imposed on fuel and more generally the high cost of living of the country. As a result, the resentment towards President Emmanuel Macron became more evident.

Additionally, another factor that contributed to the discontent among French citizens were the tax cuts on businesses, investors and wealth, which mainly benefited the richer families. Previous President Hollande had raised taxes for this upper class, which caused many investors to leave France forlower tax countries. Emmanuel Macron introduced this measure in an attempt to fix the previous situation and make the investors return to France. However, from the Gilets Jaunes’s point of view, since he first cut taxes for the rich and only then introduced the fuel tax, which mostly affected low-income families, they felt like there was an unbalanced distribution of wealth. This caused sentiments of social injustice, with opponents nicknaming Macron “the President of the rich”.

On November 17th the first protest occurred, mobilising approximately 285 thousand people all across France. Protesters were dressed with yellow jackets, that French motorists are obliged by law to have in their vehicles. Thus, being a common symbol for all French citizens, it made it easier for everyone interested to participate.

In mid-November, French citizens were far from knowing the dimension that this movement would conquer, which turned out to be the longest-running protest since the Second World War. It lasted 13 weeks, gathering people every Saturday.

The brutality of the yellow vests was undeniable: there were 11 deaths, around 4,400 injured (policemen and civilians) and 220 arrests.

The violence and chaos caused by these protests was particularly evident on December 1st: more than 100 cars were burned, several buildings were set on fire, Arc de Triomphe was vandalized, store upfronts were broken in the richest streets of Paris…

However, the brutality of this so called “Acte 3” was not fully supported by all the protesters. A poll conducted after this day of extremely aggressive action concluded that despite 72% of French people supporting the Gilets Jaunes, 85% of those supporters condemned such violent practices in Paris. This might explain the decline in the number of protesters from the third demonstration onwards.

Objectives

Initially, the yellow vests’ goal was to revert the fuel tax imposed by the government. However, as the weeks went by, they realized the huge power they had and started demanding for more. They elaborated a list with 40 requests which they planned on presenting to the government. Among these demands, they urged more economic concessions such as lower VAT, higher minimum wage (from €1,149 to net €1,300 per month) and higher pension (no lower than €1,200/month). Regarding political matters, they demanded an alteration of the Constitution, replacing representative democracy with a more popular government. More concretely, they suggested that petitions that gathered more than 700,000 signatures would automatically turn into proposals of law. This wouldtransfer more power from the parliament and the President to “the people”.

Impact/Consequences

In the final quarter of last year, the economic cost of the yellow-vest protests was estimated in 0.1% of national output (which amounts to 2 billion euros). Some businesses like cafes, restaurants and stores dropped their weekend revenues by 20 to 30 percent, since demonstrations took place every Saturday. There was a public cost for damaged property in the amount of 30 million euros, plus other unaccountedcosts concerning police overtime and traffic radars repair.

Regarding the political environment, statistics show that the President Emmanuel Macron’s disapproval rating increased significantly, by 25%, from the beginning of 2018 until the “Acte 3”, one of the most violent protests, in early December. At the moment of this event, there was a peak of the disapproval rate (73%) and from then on it has been slowly decreasing (currently at 64%).

president+emmanuel+macron's+approval+rating.jpg

Marine Le Pen, the President of the National Rally (NR), was one of the first politicians to show support for the yellow vest movement. She may have taken advantage of the instability lived in France, during the action days, to slightly increase the NR’s position concerning the voting intention for the 2022 presidential election.

france+2022+presidential+election+voting+intention.jpg

In terms of political representation, the yellow vests failed in being heard. A couple of fully yellow-vests-composed lists applied as candidates to the last European elections in May, but they weren’t successful, winning a combined well below 1% of the votes.

Achievements

In the end, this movement achieved its main goal: it made the government postpone the planned eco-tax rise on fuel.

On top of this, Macron agreed to a reduction on taxes for lower-income families in the 2020 budget and the protesters also managed to get a tax cut for most pensionists.

Since the President, by imposing the fuel tax, had in sight the reduction of carbon emissions (aimed at a greener country), but, at the same time, knowing the tax would substantially harm the poorest, it is important to analyse this trade off: Is it better to improve France’s sustainability and thus contribute to a more conscious world or instead delay that matter and focus on the country’s internal social issues, such as wealth distribution?

Impact abroad

Even though this movement is predominantly French, it also had a relative impact abroad. Inspired by the protests in the neighbouring country, Belgium also had a protest on December 8th 2018, that gathered 1000 protesters and resulted in clashes with the police. Even though this turnout had a much lower scale than the one in France, their causes for discontent were very similar: high tax burden (tax-to-GDP ratio was 47,3% in 2017), that affects mainly the middle-lower income class. Also, even though nominal average wages have increased, the purchasing power of low income earners has shrunk, reflected in a decrease in real wages.

Besides Belgium, many other countries joined the movement, although having different goals than the ones in French and Belgian protests. For instance, unlike the French non-partisan movement, which defended changes in economic policy, taxation and rising fueling, in Canada the movement was tightly linked to far-right and alt-right initiatives, mainly focusing on anti-immigration and white supremacist rhetoric. Thus, the impact of the yellow vest movement abroad varies from country to country. Portugal also attempted similar protests on the 21st of December 2018, but it gathered just a few number of citizens in the streets.

Conclusion

The Gilets Jaunes may have had good intentions at the beginning of the protests, when they claimed that the fuel tax would widen further the gap between rich and poor. But the strikes spinned out of control, especially upon the third action, when violence soared.

On the other hand, Macron implemented the tax for sustainability purposes and this measure was already scheduled according to the government’s plans. France’s President now needs to figure out how to impose ecological responsibility without being misinterpreted, that is, he must know how to state his political position and at the same time, raise awareness among French citizens for environmental concerns.

It’s good to reflect deeper on this topic and possible solutions to this problem: Is the fuel tax the only way to move consumers away from diesel to a more eco-friendly alternative? Shouldn’t Macron consider applying a subsidy on sustainable energies instead?

Article Written By:

Nice Dress in the Closet, Big Weight in the Shoulders

December 6, 2019February 9, 2021by Awareness NewsLeave a comment

Welcome to the world of fast fashion

Dressing up fashionably is becoming an increasingly mindless task. Shop windows change every two weeks with new collections and t-shirts may cost as low as 5$. Amazing, right? You are able to be on trend without ruining your budget. Besides, according to some well known economists such as John Maynerd Keynes, you are contributing to the growth of your economy the more you consume.

Fast fashion retailers introduce new products multiple times a week, making us feel that the clothes we own are outdated or have a poor design. Most times, this is not true.

When we think of mass production which results in low quality products, labour exploitation, environmental disregard and lack of security at work, the beautiful world of fast fashion becomes a little bit less pretty.

It’s undeniable that a consumerist world may bring some economical and even social benefits for a tiny part of the population. However, in this article, we invite you to look to the other side of the coin – the one we tend to ignore, the one which doesn’t directly affect us.

Mass production in the fast fashion industry

“No, it is not our choice. We must work overtime. If not, the gate is open for us to quit our job.”

According to the world resources institute, the average consumer is buying 60% more clothes now than in 2000, which explains why the fast fashion industry has grown so much. According to the Ellen McArthur Foundation, clothing production has approximately doubled in the last 15 years, driven by a growing middle-class population across the globe. This industry is expected to continue growing due to the foreseen 400% increase in world GDP by 2050.

The fashion industry represents 4% of the global market share (406 billion dollars), having huge implications on both the economic growth and social welfare in several countries.

Since trade law changes in the 1970’s, the supply chain has been spreading out geographically to sub-developed economies, as firms wanted to keep increasing their production while reducing average costs.

To achieve economies of scale, fast fashion industries chose to produce in countries where there were low wages and poor labour regulation.

Because of that, these countries have increased their GDP. In Bangladesh as well as in India, GDP growth was exponential, growing from 25 billions of dollars in 1995 to almost 275 billions of dollars in 2015. However, this increase in GDP was not translated into an increase in welfare. According to the United Nations’ development programme, Bangladesh has an Inequality-adjusted Human Development Index (IHDI) of 0.462 and 67.3% of the total labour force lives under poverty. In India, the reality is almost the same, the IHDI is 0.462 and 42.9% of the total labour force lives with less than 3 dollars per day.

According to the American Apparel & Footwear Association, during the 1960s roughly 95% of the apparel worn in the U.S. was made domestically. Nowadays, it’s less than 3%. The fashion landscape has changed from being seasonal to new clothes arriving every week, but at what cost? In 2007, labour rights organizations in Bangalore, India, estimated that the bare minimum a garment worker’s family (average size: 4.4 members) needs is around 4364 rupees (€ 80) per month to live. Yet the minimum wage for garment workers in Bangalore starts at 2418 rupees (€ 42) per month, and, according to Labour behind the Label, many workers earn just this amount.

Similarly in Bangladesh, a study for Clean Clothes Campaign by Martin Hearson discovered some workers on the minimum wage of 1662 taka (€ 16.60) and most factories paying an average take-home wage (boosted by considerable amounts of overtime) in the region of 2,500-3,000 taka (€ 25-30). However, at the time that this minimum wage was set, in 2006, living wage1 estimates for a Bangladeshi garment worker’s family were around 4,800 taka (€ 48). Low payment like this often means that garment workers are keen to work overtime to help bring in more money. However, in the majority of workplaces that Clean Clothes Campaign surveyed, a significant proportion of the overtime is unpaid. This is often because employers set impossible daily targets, requiring workers to stay at work until they have met them. Only then they are paid. A tailor in Tirupur told Clean Clothes Campaign “No, it is not our choice. We must work overtime. If not, the gate is open for us to quit our job.”

Besides paying low wages, the factories where these workers spend most of their time have, in general, really poor working conditions, which frequently leads to severe accidents. According to Reuters, between 2005 and 2016 at least 9 deadly accidents happened in Bangladesh, most of them in garment factories which supply global clothing brands.

The worst accident happened in April 2013 when an eight story building, Rana Plaza, housing 5 garment factories, collapsed due to a structural failure. Besides the failure to meet security standards, according to the head of Bangladesh Fire Service & Civil Defence, the upper floors had been built without permission. On the day before the collapse, some cracks in the walls of the building had been noticed and the building was evacuated. However, on the following day, workers were ordered to enter the factory despite the complaints about the appearance of cracks in the walls. Bank and stores employees were not there but more than 3000 workers, mostly women and young people, were inside the building when it collapsed, and 1134 of them died.

Affordable does not always mean sustainable

Besides the social harm of mass production, this practice will also generate negative environmental externalities. According to the World Resources Institute, to produce one cotton shirt 2,700 liters of water are needed, the equivalent of what a regular person drinks in two and a half years. On the other hand, the production of a pair of jeans generates as much greenhouse gases as driving a car for more than 80 miles. Washing clothes releases 500,000 tons of microfibers into the ocean every year.

This way, the fast fashion industry is responsible for 20% of the global water waste and 10% of total gas emissions.

To produce at a lower cost firms use cheaper materials (such as polyester, acrylic or nylon), synthetic fabrics, dangerous dyes and toxic chemicals. Moreover, when consumers wash their clothes they release plastic fibres into the ocean as most of the materials used to produce clothes in the fast fashion industry are made from petroleum. The most widely used input in the fast fashion industry, polyester, is a fine example. More than 70 million barrels of oil are used every year to produce this material and it is responsible for 35% of the microplastics present in the ocean.

“ If we only have one body, why do we need thousands of clothes?”

Slow fashion, which is the deliberate choice of purchasing better quality items, but less often, has risen in opposition to fast fashion. By using high quality resources and production methods, guaranteeing better working conditions and compensation for employees, this alternative is considered environmentally and ethically conscious rather than trend driven.

However, there are other ways beyond slow fashion capable of softening fast fashion environmental consequences, such as:

Donating unused clothes to charity institutions or to your family and friends. Do not throw them in the organic bins as, if they are composed of synthetic, non-biodegradable fibers, they will just pile up in the landfill;

Looking for shops which take back used clothes from their own brands or even from other’s;

Trying your luck in second hand stores, a sustainable and economically efficient way of getting rid of what you don’t need anymore but which may be useful for someone else.

If it is true that not all of us are able to afford slow fashion items or they simply don’t satisfy our tastes, it is also true that companies produce according to our “production orders”. That is, if we keep on buying clothes just because they are fashionable or cheap, disregarding the environmental and social impacts of their production, this situation is never going to change.

As consumers, we have the power to dictate the rules. If we demand corporations to give their employees better working conditions or their production cycle to be more sustainable, they have no other way than to adapt. However, this would require a collective change of behaviour, so that corporations feel forced to satisfy our “new purchasing preferences”.

Besides, this problem could simply be solved with pure rationality. If we only have one body, why do we need thousands of clothes? Does it make any sense?

The first step in the fight against the environmental deterioration and social damages caused by the fast fashion industry is the change in our shopping routines, something reachable by all of us. We need to work together – there are no jobs on a dead planet. There is no equity without rights to decent work and social protection. Ultimately, there is no peace if we are uncertain about the sustainability of our planet.

It’s time to change.

1 A living wage enables workers and their dependents to meet their needs for nutritious food and clean water, shelter, clothes, education, health care, and transport, as well as allowing for a discretionary income.

Article Written By:

The Interesting System of a Islamic Finance

December 3, 2019February 5, 2021by Awareness News2 Comments

“Those who consume interest cannot stand [on the Day of Resurrection] except as one stands who is being beaten by Satan into insanity. That is because they say, “Trade is [just] like interest.” But Allah has permitted trade and has forbidden interest. So, whoever has received an admonition from his Lord and desists may have what is past, and his affair rests with Allah. But whoever returns to [dealing in interest or usury] – those are the companions of the Fire; they will abide eternally therein.”

— Qur’an – Surah Al-Baqarah [2:275]

““O you who have believed, fear Allah and give up what remains [due to you] of interest, if you should be believers.”
And if you do not, then be informed of a war [against you] from Allah and His Messenger. But if you repent, you may have your principal – [thus] you do no wrong, nor are you wronged.
”

— Qur’an – Surah Al-Baqarah [2:278-279]

If you wish to hear the recitation of the verses, links are provided here: 2:275; 2:278; 2:279

These three quite ominous verses sum up, succinctly and clearly, what grim fate Allah has planned for those who deal in interest. However, it might be more accurate to say riba (ربا), rather than interest. Indeed, it could be argued that translations of the verses above which keep riba untranslated are more accurate. (Truthfully, any version of the Qur’an in English could be classified as unduly westernized.) This Arabic word’s original meaning is something along the lines of “increase”, “excess” or “addition” but is now primarily used to refer to the practice of interest or usury.

Some defend that riba doesn’t apply to all interest but, rather, only to unusually high interest-rates: usury. There is a lot of Islamic literature which equates riba with interest and that claims that there is a consensus amongst Muslim scholars that this is so.

There are many justifications given by religious scholars for the banning of interest by Allah, namely claiming that lending with interest is exploitative and that the lender/borrower relationship created undermines the spirit of brotherhood that should exist amongst Men. This religious ideal is not unique to Islam. Indeed, other Abrahamic religions have things to say about interest:

“Do not charge interest on the loans you make to a fellow Israelite, whether you loan money, or food, or anything else.”

Holy Bible – Deuteronomy [23:19]

Human beings’ innate fear of falling in eternally burning fires and our puzzling love for masochistic submission to an almighty father figure came together in the Muslim world to create a Sharia-compliant banking system commonly referred to as Islamic Banking. In broad terms, to be in accordance with Allah, Islamic banks must not receive nor pay interest and must not invest in or involve themselves with businesses which partake in haram (forbidden) activities, such as selling alcohol, pork, gambling, etc.

Now, the question lingering in everyone’s minds: “How do these institutions function?”

In Islamic Banking, the most common way of financing is what is called Murabaha. It is, essentially, a contract of sale in which the bank buys a good that its client needs and then sells it to him with a previously agreed upon mark-up cost. Say, for instance, that you need a new set of tables for your restaurant. The bank buys said set of tables from the table-maker at X€ and sells them to you at X+P€, an amount that you pay through deferred payments.

I don’t need a revelation from Allah to know that many of my esteemed readers are scratching their heads in utter confusion trying their hardest to understand how such a transaction amounts to anything different than paying interest on a loan. Is it just interest with extra steps? Indeed, this is a criticism which Murabaha-type financing receives in ample amount, implying, therefore, that it is not Shariah compliant. However, since this removes the much-frowned-upon aspect of “money generating money on its own” and involves specific commodities, supposedly, Allah is pleased. And so, in spite of its criticisms, Murabaha contracts are calculated to represent about 80% of total financing made by Islamic Banks.

Another type of financing contract that exists in Islamic finance is called Mudarabah which, contrary to Murabaha agreements, is broadly accepted as Shariah compliant. This method, which closely resembles venture capital financing, is a type of contract in which an agent provides the capital (called the rabb-ul mal (رب المال), literally “lord of money) to another agent, who invests it and operates the investment (called the mudarib). The mudarib has complete authority in operating and managing the investment. Profit after the repayment of the borrowed capital, when it exists, is split amongst both parties in a previously agreed-upon manner. On the other hand, if the project fails, the losses fall entirely on the rabb-ul mal, who will lose his invested capital.

Due to the very high risk that the rabb-ul mal faces, Mudarabah contracts contain covenants which protect him from negligence by the mudarib. However, the viability of this method of financing still suffers heavily from structural agency problems: the mudarib does not suffer from losses nearly as much as the rabb-ul mal. For the financier to be willing to take projects with higher risk, he will demand a higher profit share. However, this, in turn, diminishes the incentives that the borrower has to generate profits. And so, mechanisms that better align the incentives of both parties, like the ones used to align the incentives of shareholders and managers (for example shareholders voting to elect a Board of Directors), need to be incorporated to actually make this a practical way of financing.

A similar type of contract exists, called Musharakah, but where two or more parties pool capital for an investment and divide profits according to it.

There is a hadith in which prophet Muhammad says:

A dirham of riba which a man receives knowingly is worse than committing adultery thirty-six times.

Assuming that this is true, and that people, in general, don’t like adultery, then, it is no surprise that Islamic Finance continues to grow, with global assets exceeding $2000bn. However, its growth is not restricted to Muslim-majority countries. Many financial companies, like J.P.Morgan, now offer Sharia-compliant financial services and the United Kingdom is at the forefront of this industry’s growth in the west. With about 5% of its population being Muslim there are already 5 different, completely Islamic, banks operating in the U.K.

This is a topic whose surface I was only able to scratch in this article due to its surprising complexity. But, surely, its relevance will only increase as Islamic Finance evolves and migrates from the Muslim-majority countries to the rest of the world.

A Step Towards a More Sustainable Financial Market

November 30, 2019February 5, 2021by Awareness NewsLeave a comment

Undeniably, society’s concern about being green has been growing tremendously for the past years and environmental awareness is, certainly, one of the burning issues of the century. Consumers are changing their behaviors, opting for sustainable products and making more aware choices. However, is replacing a plastic bag for a paper one the only way of being green?

12 years ago, the European Investment Bank issued the first ever Climate Awareness Bond (CAB). These green bonds are designed to encourage sustainability and to support not only climate related but also other types of environmental projects. Backed by the issuer’s balance sheet, these sometimes called “climate bonds” are intended to fund projects that are environmentally friendly, going towards new or existing projects that are meant to have positive environmental or climate effects, supporting sectors such as renewable energy, transport or waste management.

“Green bonds offer investors the option to diversify their portfolio by not only income-based decisions but environment-based ones as well.”

This market works as a common bond market, in which borrowers are institutional investors trading their financial assets. Companies, local, state and national governments and supranational institutions ensure the lending of this eco-friendly project, representing the supply side of a growing market that has, nowadays, more than 50 issuers.

The field of action is large, involving several sectors of the economy. For instance, in June of 2013, Commonwealth of Massachusetts, as the North American pioneer in this field, sold green bonds amounting to $100 million and publicly shared which projects are being financed by green bonds and how does society benefit from the investment in this innovative financial asset. Being the main market supplier, the US, led by the mortgage giant Fannie Mae, plays an important role promoting this environmentally friendly financial asset and, since Poland opened the sovereign market in 2016, France, Belgium, Ireland and the Netherlands did not take long to follow the example of Uncle Sam’s country.

Throughout the years, the green bonds’ market has been experiencing a boost of investors looking for conscientious choices to allocate their funds. According to Bloomberg, until 1st October 2019, “assets under management at 644 funds focused on environmentally friendly investments stand at more than $220 billion, compared with around $80 billion at the end of 2014”. Also in the past month, George Ammond wrote for the Financial Times, concluding that Asia-Pacific issuance of green bonds had hit a record of $18.9bn. This value was raised from 44 green bond issuances that were open to international investors, which positively correlates with the growing interest from investors in green finance.

global+green-bons+sales+across+all+currencies.png

Moreover, this green investment method has revealed to be beneficial for both parties: sellers and investors. The first ones benefit from the eco-friendly vision of the investment which is propitious to attract new investors, resembling almost to a marketing strategy and drawing the attention of the most concerned consumers. The second ones benefit from the fact that these financial assets are characterized by having tax-exempt income. Additionally, investing in green bonds enables buyers to monitor these projects, contrarily to the very little insight investors have into what happens with the funds raised on debt capital markets.

However, a major dilemma arises. Are these “bonds for the planet” truly used to start and develop eco-friendly projects or are they just part of a bigger marketing strategy?

As previously mentioned, green bonds have tax-exempt income, they are supported and sponsored by governments, what closely fills the expectations of environmentalists in trying to solve climate change problems. What about the cases in which green bonds are issued to promote other projects that are not so “green” and institutions still benefit from all of these advantages? Firstly, it depends on the perception of green. This broad concept can differ not only internationally but also nationally, making it difficult for issuers to comply with both standards. Moreover, the lack of a “standard universal certification system” allows for green bonds not to be analysed through a universal procedure that accounts for the borrower’s creditworthiness or “greenness” of a bond. For instance, China is the biggest carbon emitter and occupies the second position in issuing green bonds. The problem started when the chinese power used this concept to finance coal-burning plants which, even if less polluting than previous methods, don’t reduce the carbon emission in the long-run. Another dilemma, pointed by Boardman, the chief financial officer of clean energy developer Sindicatum, comes with the lack of benchmarks that causes green bonds not to “qualify as a mainstream investment vehicle.”

“I think we need to think differently, we need governments to sit down and say all finance has to be green. There has to be strong incentives, clarity over the status of green bonds, status of green loans and bank financing.”

— Michael Boardman

In an attempt to clarify this problem, several studies were conducted aiming to broaden the definition of “green”. Oslo-based Cicero (Center for International Climate Research) came up with the idea of using three shades of green according to the ecological impact of the project in question: dark green, for projects reducing the carbon emission in the long run (wind energy); medium green, for projects that take a good step forward; and light green for steps that won’t change the long-term outlook on their own, consisting in more efficient projects (China’s case).

Indeed, in the mesmerizing bonds’ market, if an investor understands the environmental risks better, the cost of capital will go down for green projects. The benefits this financial asset brings to the environment have evidently been shown. However, in order to really create an impact on sustainability, this market has to grow much more than the observed heretofore. Massive investments are required to change the way we produce energy, reinforcing the urgency for individuals to take a proactive approach against climate change. As an “idea that captures investor imagination to combine the force of capital markets for a good end”, green bonds arise as a “tool to reconnect the dots between finance and the real economy”. What determines the effect of this revolutionary financial asset not only on the environment, but also on society, is how institutions and companies incorporate and allocate these green investments and in which degree are individuals incentivized to engage in an eco-conscious behavior. It is crucial to acknowledge that ecological progress is not simply imposed on society, but rather a consequence of conscious and informed choices by society’s decision makers and green bonds are certainly an important step towards a more sustainable financial market.

Sources: S&P Global Report, Bloomberg, European Investment Bank, CNBC, Dealogical Data, The Financial Times, CNBC.

The Power of 0.99$

November 26, 2019February 5, 2021by Awareness NewsLeave a comment

“In my opinion, there is no better theoretical and methodological basis than behavioural economics. ”

— Dr. Florian Bauer

Alongside psychologists, behavioural economists understand that there are countless things that influence the human brain, hence there are countless ways of changing its perception. A known approach is Behavioural Pricing. By understanding what influences its customers, companies are finding ways to turn the consumer’s behaviour in their favour, under the premise that, even though they don’t behave rationally, consumers are predictable. And so, over the years, marketing has been designed with the objective of making us go down a specific, well-planned path.

If companies were to price items only based on traditional economic models, they wouldn’t be maximizing profit margins because these models assume that consumers already know, when buying a certain product, exactly how much they’re willing to pay for it.

However, as Dr. Florian Bauer1 tells us, “Behavioural Pricing has empirically proven that the notion of people having a predefined “willingness to pay” is wrong. Rather than having a willingness to pay, people tend to develop a price acceptance throughout their decision-making process“.

Herewith, one of the most known approaches is one we all have already been a victim of: the .99$ (or .95$) phenomena. This odd way to price items is an important tool to trick our subconscious into thinking that an item is cheaper than it actually is. There are two theories (one doesn’t invalidate the other) about why this has brought such extraordinary results. On one hand, it is thought that, when reading a price tag, our brain only focuses on the first digit, so when the price is something like 29.99$, our brain tends to think of it as being “20$ and something” and not 30$. On the other hand, and quoting Tim Harford2 (Financial Times), “a price ending in 99 is simply a shorthand for good value”.

On our day-to-day, many situations confuse our objective reasoning with this technique. For example, let’s imagine we are choosing from two exactly equal gyms, only different in price subscription. Gym A costs a straightforward amount of 31$ per month, full time. Gym B costs 65$ per month full time, but only 34,99$ if you choose a less-hour schedule (8am-12am + 2pm-5pm). Rationally, 31$ is lower than 34,99$ or 65$ and full-time is greater than part-time, so a cost-minimizing consumer would choose the cheaper gym without even pondering the other alternative option. However, in reality, consumers think greatly on the subject and even knowing the gyms are exactly equal (same chain and location), there is always the thought in our heads that, if B is more expensive, then it may be better and we can take advantage of it by choosing the part-time option for more or less the same value because 31$ and 34,99$ are both “30$ and something”.

Is this irrational? Yes. Does it make any sense? No. But does it happen? Absolutely.

Professor Kenneth J. Wisniewski3 (University of Chicago) conducted a study on this topic to test the efficacy of prices ending in 9. In a local grocery chain, he lowered the price of margarine from 0.89$ to 0.71$ and observed an increase in sales of 65%. Then, he lowered it again to 0.69$, they’re increase in sales was 222%. The difference of 0.02$ translated in an exponential increase of 157% that proved empirically that the ending number of a given price is not as relevant as the initial one (0.6$ greatly preferred than 0.7$), even though the real difference being so low. Consumers’ neurological action influences choice as much as their tastes and needs.

In order to have a better understanding on the psychological games corporations like to play, let’s take a look into the Decoy Effect. Essentially, we face this effect when companies insert irrelevant, unprioritized alternatives to a set of options to trick consumers into buying the more expensive one. Imagine the following situation:

For a subscription of The Economist you have three options:

59$ with access to the online journal;
125$ with access to the printed journal;
125$ with access to both the online and printed journal.

The behavioural economist Dan Ariely4 analysed this set of alternatives and asked his students which one would they pick. Obviously, no-one chose only the printed option since it would cost the same to have both printed and online. Although, 16% chose only the online journal, a majority of 84% of his students preferred the combo. Alternatively, when he didn’t present them the “printed only” option, only 32% chose the combo and 68% chose the “online only” version. Thus, it seems that, when presented a clearly inferior alternative, by comparison, the combo option seemed more attractive.

It is eye-opening how simple tricks can influence our choices without our conscious perception.

Unlike what we previously thought, pure rationality is reserved to mathematics whereas everything that relates to humans and how they behave has a good dose of irrationality behind.

In fact, there are already consulting companies, like Vocatus, that specialize in Behavioural Pricing and advise other multi-sector companies to implement it on their own marketing and placing agendas.

“Behavioural economics demonstrates that people do not decide rationally and are not fully informed. They often behave (and purchase) hastily, forgetfully, illogically, impulsively, emotionally, myopically, or simply with indifference. At the same time, behavioural economics experiments show us that decisions follow clear patterns. So while they are irrational, they are in fact predictable. As soon as you have really understood the decision-making process of your customers, you can begin to influence them. This will give you a clear advantage over your competitors and a lasting edge.”

— Vocatus website, Consulting Company

Overall, the question that arises from this is:

How is this knowledge going to change the way you behave? Are you going to continue being tricked by marketeers?

Simple Biographies:

1 Dr. Florian Bauer is an internationally renowned expert and speaker in pricing psychology and behavioural pricing and is the author of several books on pricing research. He has a PhD in psychology and studied on the MIT and Harvard.

2 Tim Harford, “the undercover economist” is an economist, journalist and columnist for Financial Times.

3 Professor Kenneth J Wisniewski is author of the paper “Price-Induced Patterns of Competitors” with University of Chicago’s Professor Robert C Blattberg.

4 Dan Ariely is a Professor of psychology and behavioural economics at Duke University, he is also author to the New York Times best seller “Predictably Irrational”

Sources:

Fast Company
Financial Times
The Economist
OV Blog

Article Written By:

Harmony OS

November 22, 2019February 9, 2021by Awareness NewsLeave a comment

“Hongmen” is a name which can be traced back to Chinese mythology, representing the primordial chaos of the world before creation. That’s the idea beyond the new open source, microkernel-based distributed operating system (OS) being developed by Huawei, known in China by Hongmen OS and in Europe by Harmony OS.

Harmony OS has been in development since 2012. However, in May of 2019, Huawei increased its efforts in the operating system as a response to the export restrictions imposed by the United States. It was born from the war between the US and Huawei, which begun with strong suspicions by American intelligence agencies that Huawei was linked with Chinese military forces, being able to supply the Chinese government with access to data using a backdoor. For the US, it was a question of national security. Consequently, the US started imposing export restrictions to Huawei. Companies such as Google and Microsoft were prohibited of making business with the Chinese company. This created a problem for Huawei, given that the operating system used by their devices was Android, owned by Google. Within this new context, the necessity to innovate and create a solution in order to respond to the restrictions on commerce appeared. Necessity is the mother of creation, and so the Harmony OS was born. Harmony OS was announced to the world without warning at 9th of August of 2019, as a plan B to the use of Android.

Huawei’s senior vice president, Catherine Chen, said that Harmony OS was designed for any Internet of Things (IoT) hardware. This means devices such as smartphones, televisions, smart speakers, cars, computers and other connected devices will have the same OS. The creation of an ecosystem, removing barriers will make contact between devices much easier, a convenience which may be pivotal to attract consumers. Google doesn’t have such an advantage, and probably never will. It will be also an overall smoother OS, making it more appealing to app developers.

Huawei’s Harmony was presented as being transparent, smooth, safe and unified, while Google’s Android was described as “unstable” and “fragmented”.

Although we can only trust Huawei’s words to a certain point, it is important not to forget that this is a more contemporary OS in comparison to the more modern versions of the now outdated Android.

Ready to take the market?

We already established that this new operating system is, being as euphemistic as one can be, bearable. But is it enough to compete with the leading OS’s in the market? Android absolutely dominates the market, being the OS of current Huawei smartphones, and iOS has Apple, the company with a powerful brand and the merits of having introduced smartphones to the world, as a backbone. Various OS’s supported by big companies have failed in the past. Microsoft Phone was very convenient between devices and had the fortune of Bill Gates’ support it, but lacked in practicality, becoming unattractive for consumers, which led app developers to become uninterested in developing Microsoft-supported. Samsung had the Tizen, which is still one of the smoothest OS’s ever developed. However, Google answered to this threat by limiting the access from Tizen users to the Google App store, making it rather difficult to download apps. Tizen is now restricted to Samsungs’ smartwatches and smart TV’s. In both these cases, Windows and Samsung, two gigantic players in the software industry, were strangled by this Google dominated market.

Huawei knows this, which may be the main reason that it will not use Harmony OS for smartphones, at least not immediately. Huawei is playing safe, continuing to use Android for as long as they can. However if US sanctions continue, Huawei will have no choice but to change to Harmony.

Will it work?

It will be quite the challenge for Huawei, but it certainly can make it happen.

Transition will be more difficult in Western markets. It is true that Huawei is everywhere nowadays, but we are all very used to Android and we don’t see any good reason to change. Being an overall best OS is not good enough. Most western apps will take time to convert, even though they will operate smoother than in android when they do. With only the past sanctions on Huawei, there was a considerable drop in sales in Europe, but they remained the second most bought brand.

In China however, it’s a whole new world for Huawei. With all the buzz between China and the US, and after seen as such conflicts affect the smartphone industry, Huawei is considered a patriotic symbol against America. In a way, the US government helped giving the perfect environment for the home success of the company. In China, not only Google but other American apps like Facebook and Uber were banned. Years have passed and now there are homegrown alternatives. The dependence on Android weakened and Huawei might finish it for good. There are over 200 000 000 Huawei users in China. If Huawei decided to lunch Harmony OS for smartphones, and all these users potentially convert, they finally become free of any American dependence. App developers will have no problem into converting their apps to be Harmony supported as it is overall better and has a minimum of 200 000 000 users as potential customers. And from there, as more developers work to be supported by Harmony, it will become more appealing to the Western world. It will spread to the European and American markets as Huawei keeps its success as a brand.

For now, Harmony OS isn’t ready to take the world market of smartphones, but you can already find it on Huawei new Smart TV’s. If these times of uncertainty continue, who knows until where this operating system could go. Huawei already said that it will not wait much longer – it will launch Harmony to smartphones between May and August of 2020 if the sanctions do not end. Android is a dinosaur compared to this brand new OS, and it may very well become obsolete. Conquering China seems easily possible to Harmony OS, and thereafter, there will be a world for the taking.

Sources:

CNN Business;
Technode;
Publico;
Business Insider.

Article Written By:

The Impact of 5G

November 21, 2019February 9, 2021by Awareness NewsLeave a comment

Over the years, new inventions have usually impacted the world economy as well as the business environment, contributing to the so-called creative destruction. At this day and age, a new technology is about to revolutionize the way we interact with the digital world: it is the new generation of cellular network, also known as 5G. While it is true that this disruption has raised controversies regarding health issues, privacy and external political interference, the expected economic returns from the availability of mobile high-speed and low-latency connections are highly relevant, and should therefore be considered and assessed.

One of the most important and relevant impacts of this new technology is the increase in productivity derived from cost reductions or efficiency improvements, which are predicted to occur in virtually all economic sectors. For example, in industries that are directly linked with vehicles or machines of any kind that require human intervention, the possibility for remote control and monitoring of these assets allows for operational tasks to be performed by someone who is far away, thus reducing time spent and transportation costs.

Even in public administration benefits are expected, with high-speed connections allowing for faster responses of emergency services. Another case is the healthcare industry, in which the possibility for remote procedures, more effective monitoring of medical equipment and collection of data from wearable devices will reduce reduce costs and improve the quality of healthcare provided. Accordingly, this contributes to a healthier and more productive workforce, thus generating multiplying effects on the rest of the economy.

Overall, this expected increase in productivity reveals extreme importance, since it will enable a higher economic growth in the long-run.

Another positive impact foreseen from 5G is the ability to unlock the full potential of the Internet of Things. With the explosive growth in the number of connected devices and gadgets, existing networks are struggling to keep pace. Therefore, 5G’s high capacity is expected to allow seamless connections, with this product connectivity allowing firms to create and launch completely new business models, thus driving entrepreneurship and growth.

Furthermore, in remote regions where the installment of wired infrastructure is not economically viable due to low population density, 5G emerges as an alternative to offer these areas more reliable and higher quality internet connections than they currently have. This allows for the settling of businesses and job creation, with all the benefits associated with it. However, urban areas are predicted to be the first ones to receive the technology, meaning that this may only occur further in time.

At such a premature stage, forecasting the economic impacts of this novelty is a quite complex task. However, all in all, 5G is expected to bring a push to economic growth and prosperity for the countries that pursue the disruption, leaving behind, in relative terms, the nations that forego the opportunity. Therefore, this may be a major source of inequality between the richer countries, which are able to implement the technology, and the poorer nations that still have to employ a significant share of their scarce resources in satisfying more crucial and basic needs, and so contributing even more for the digital divide.

Sources

Cnet
Medium
McKinsey & Company

Fantastic Unicorns and Where to Find Them

November 20, 2019February 9, 2021by Awareness NewsLeave a comment

Unicorns: The Origin

More than a mythological creature, a unicorn has gained a new application in this century – to designate privately-held startups with a value of over $1 billion. The majority of these companies are in the vanguard of their industry, building the path for a generation of new technologies, while being considered as a bellwether of future economic development. This unique expression was created by Aileen Lee, founder of venture capital fund CowboyVC, in her article “Welcome to the Unicorn Club”, where she proceeded to study software startups founded between 2003-2010, coming to the conclusion that only a mere 0.07% of these privately-held companies would ever reach the billion-dollar valuation, realizing that finding a firm with such characteristics was as difficult as finding a mythical unicorn.

Looking back at the first decade of this century, which was analyzed in the article that created the “unicorn” concept, billion-dollar startups were generated at a rate of four per year, which amounted to 39 unicorns in total. Furthermore, San Francisco was identified as the headquarters to the vast majority of unicorns (15), followed by New York (3) and, tied in third place, Seattle and Austin (2). Lastly, the most fertile industries for unicorns were e-commerce, consumer audience, software-as-a-service (SaaS) and enterprise software.

In only nine years, this landscape has changed immensely and China is to be held accountable. In 2018, a study conducted by Hurun revealed that Chinese unicorns were being conceived at a rate of one every 3.8 days, with the country owning up to 41.7% of the world’s unicorns, with a sum of 206, shortly followed by the USA, with 203 unicorns. The top three ecosystems were Beijing (82), San Francisco (55) and Shanghai (47), and the aggregated value of unicorns in the world sums up to a staggering $1.7 trillion. Lastly, the industries containing the largest percentage of unicorns are e-commerce, fintech, cloud and AI.

Aileen Lee mentioned disruptive technology as a conductor for the creation of unicorns. This inference still holds, as we evolve into a technology-dependant society that requires the expansion and automatization of various fields ranging from health to blockchain, which creates a need for constant technological breakthroughs and, consequently, fertilizes soil for innovative startups to blossom. Moreover, capital injection into these initiatives has been subject to exponential growth across the years through venture capital, that enables startups to raise private equity and ensure long-term growth, while allowing investors to potentially earn disproportionately high returns.

Why China?

As seen, the unicorn phenomenon was most prominent in the US but, recently, China has turned into the leading country. The fast economic growth and rapid modernization of the economy play a major role in the development of newly-founded companies.

Privately held companies valued at $1 billion or more - 2012 — *Privately held companies valued at $1 billion or more – 2012*

Privately held companies valued at $1 billion or more - 2018 Source: Wall Street Journal — *Privately held companies valued at $1 billion or more – 2018*

*Source: Wall Street Journal*

This massive growth was only made possible by the increased pace of technological innovation, as mastering the use of technology turned into the biggest source of competitive advantage for startups. In the particular case of China, around 40% of the unicorns are technology-driven, and the majority of them consider big data technology to be the biggest source of innovation and differentiation. Big data is especially relevant, as it allows tracking consumer habits and studying behaviors, thus improving overall marketing strategies adopted by the companies. This contributes to higher competitiveness and lower operating costs.

China’s capital market performance is also essential for the promotion of unicorns. The country’s capital usually arises from two forces – government policy and extremely diversified sources of financing channels. China, in particular, is living in a golden era of opportunities for startups who are looking for investors, as the CSRC (China Securities Regulatory Commission) is currently smoothing regulations for investment, hence attracting more unicorns based overseas to pursue their interests in the Chinese market. Apart from the Chinese government, the main global unicorn investors include the likes of Alibaba, Tencent and the venture-capital giant Sequoia, which has invested in 92 unicorns.

Some argue that the valuation of the Chinese unicorns might be inflated compared to the US, but the growth in investment in those firms has largely surpassed the values registered in American startups, which can be explained by the difference between the capital markets of both countries. The Chinese government ended up injecting a big dose of “Patriotism” in their market, directing resources specifically to make their firms more competitive, while the US opted for a more passive approach in terms of access to credit. Furthermore, the American system is more regulatory compared to the Chinese market, which facilitates investments in the oriental market when compared to the occidental one.

The following companies have not only been dominating the Chinese but also on a global scale, having conquered the title of China’s (and the world’s) most valuable unicorns, with a combined value close to 280 billion dollars (around 16% of all unicorns combined):

● Ant Financial: This fintech company, founded just 5 years ago, is currently the highest valued unicorn in the world, with a valuation of $150 billion. The startup was spun out by the Alibaba Group, it has as subsidiaries the world’s largest online payment platform (Alipay) and the largest money-market fund (Yu’e Bao). The company views itself as “dedicated to bringing to the world equal opportunities”, while being able to answer the financial needs of society, through the use and development of innovative technologies.

● Bytedance: Created in 2012 by Zhang Yiming, the internet technology enterprise gained importance through the development of AI platforms that informed and enhanced interactions between people all around the globe. Combined, all the apps and platforms of Bytedance have about 1.5 billion monthly active users (more than Instagram) as of July. Providing trustworthy information was what Zhang’s team had in mind when they created their most successful project “Toutiao”, which not only works as a news platform but, due to the complex algorithms used, is also able to provide a tailored feed to each individual user.

● Didi Chuxing: Finishing the top 3, the ride-sharing company serves approximately 550 million users in over 400 cities. The 7-year-old enterprise triumphed from the moment it was launched, reaching 55% of the smartphone-based taxi-hailing market only 1 year after its creation. The founder Cheng Wei did not settle for the Chinese market, having invested in Uber and Lyft, while expanding to Japan, Brazil, and Australia. Didi was also included twice in Fortune’s “Change the World” list.

The downturn

Despite having experienced rapid growth in the number of unicorns, China’s ability to incubate billion-dollar startups has plummeted in the first semester of this year. In the first six months of 2019, only 36 unicorns were fostered in China, corresponding to a 30% drop when compared to the same period in 2018.

The development of the Chinese tech industry has put the country in the crossfire of the trade war, with the Trump administration accusing China of intellectual property theft. In May 2019, the US blocked Huawei Technologies Co. from importing American materials, and is considering doing the same for a wide variety of startups. The trade war has affected valuable startups such as smartphone-maker Xiaomi Corp. and delivery company Meituan Dianping, who saw their stocks plunge after going public, which reinforced to investors that private-market valuations are disproportionate to their real value.

The deceleration of economic growth has resulted in uncertainty in the funding market, drying up venture capital. The second quarter of this year was marked by a 77% tumble in investments in China, which translates to $9.4 billion, contrasted with the $41.3 billion investment in the second quarter of 2018, a peak for the China venture deals. Meanwhile, venture deals in the US rose about 15% and investment in Europe climbed 32%, according to Preqin.

The truth is that China had entered in a tech bubble, with the median tech enterprise valuation corresponding to about 31 times its EBITDA. Years of steep growth in tech investments resulted in enormous profits. Now, concerns regarding pre-IPO valuation recall the ones of the dotcom bubble. In 2017 and 2018, around 62% of venture-backed Chinese internet and software companies that filed for a public offer lost more than 30% of their values within the first 12 months after their listing.

However, valuations have not yet declined in China. The country’s startups have been resistant to down rounds (when a private company offers additional shares for sale at a lower price than had been sold for in the previous financing round). Meanwhile, venture firms are pivoting funding to alternative business models that require less capital, such as enterprise software.

This may simply be a time when Chinese venture capitalists are being more cautious, provided the volatile negotiations between Donald Trump and Xi Jinping with yet unpredictable results in the tech industry. All in all, whether the current downturn is just a setback or turns into the burst of a financing bubble depends on how venture investors, entrepreneurs and market regulators behave through this economic tension.