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FLOW Vision News: NOVEMBER 2007

Dear FLOW Members,

Someone who knows Sergey Brin, the co-founder of Google, says that “he thinks about scalability the way a teenager thinks about sex.”  If we want to be effective at making the world a better place, we all need to think about scalability the way (at least some of us) used to (or still do) think about sex.  Entrepreneurs working within functioning markets are one of the most effective means of scaling solutions.

I recently discovered an initiative, of the John Ernest Foundation (TJEF), which lit my imagination with its scalability and thereby with its power to stimulate innovation.  The initiative aims to achieve one simple objective:  Expanding the market for and, thereby reducing the per unit cost, of a portable solar-power lamp.

Most of you may not be immediately struck by the sexiness of this project.  But consider just India:  Kerosene is used by 76 million households in rural India for nighttime lighting.  It costs the consumer $12 annually and the government an additional $29 per household, for a total expenditure of $915 million for the households and $2.2 billion for the Indian government (The Indian government provides a total kerosene subsidy estimated at $4.3 billion, $2.2 billion being the estimated amount used for rural lighting).  Kerosene is a leading cause of house fires and burns in India.  Kerosene pollution, burned in tiny shacks in close quarters, causes lung cancer and other diseases.  Kerosene emissions from rural lighting are responsible for 1% of the greenhouse gas emissions in India.  And unreliable lighting limits the ability of poor Indians to work or study after dark.

At present, TJEF is working with a lamp that retails for $55 per unit in India, and is essentially only affordable to the middle class.  They’ve sold about 10,000 units so far,  largely to aid organizations who in turn donate the light to victims of natural disasters, as well as a limited number of middle class consumers through traditional commercial channels.  But the goal of the John Ernest Foundation is to reduce the per unit cost to $25 by June 2008 and then down to the $10 -15 range by June 2009.  This is where it gets exciting.

There are currently 1.7 billion people without electricity.  What happens sales exceed 100,000 lights per year?  One million?  Ten million?  One hundred million?

The lamp was designed by Stanford engineers and designers specifically to provide low cost solar lighting for developing world poor.  It is one of many philanthropic entries into this market, which includes a $75 device sold by Light Up the World Foundation and a $300 – 500 solar lighting system subsidized by U.N. loans.  It is, arguably, the best entry into this market due to its extremely low cost combined with durable, functional design.  And yet while we should admire the Stanford engineers and designers who created the first edition of this device, in order to understand the real sexiness of their achievement it is important to realize that the focus on well-intentioned university-based innovation is merely the tip of the innovation iceberg.  Real innovation starts when large-scale markets are created.

I once met an engineer who worked for a company that sold rectangular window fans.  His full-time job was to increase the performance, while reducing the cost, of the screws that held the fan motor together.  He was part of a team of engineers all of whom focused on improving the performance, while reducing the cost, of the fan motor, blade, and case.  It turns out that this particular window box fan shipped millions of units each year, so many that it was profitable for the company to pay a full-time engineering salary to someone whose sole focus was on innovations relating to screw performance.  Some of us might have thought that screw performance had been optimized a long time ago, but apparently not – it turns out that just about anything can be improved endlessly.  And, under the right circumstances, “market forces” lead quite literally to endless improvements.

It is obvious that no university researcher would devote his or her time to the full-time perfection of one component of one particular type of motor.  Likewise, regardless of the talent and positive intentions of the lamp creators, the amount of time and attention that they can spend on improving, as long as the market for the product is small, is limited.  But if manufacturers are shipping a million units or more a year, a dramatically different product design ecosystem will come into being.  Much of the designers’ true genius comes from deliberately designing a low cost, commercially viable product that has the potential to scale.

At a million units per year, not only will TJEF (or the company that is spun off) be interested in paying full-time engineers and designers ongoing salaries devoted to continuously improving the product, but a similar effect will take place on down the supply chain.  Vendors of solar cells will experience a tremendous demand for their product, and for the sake of innovation in the solar cell industry we should be grateful for the fact that TJEF is not likely to be “loyal” to any one solar cell supplier.  Instead, they will constantly seek out the best cost/performance ratio provided by diverse solar cell producers.

This fact, in turn, will cause successful solar cell suppliers to devote full-time engineering talent to improving the cost/performance ratio for each sub-component and design element of their product.  Again, this specific type of endless innovation can only come into being in a market.  Due to market forces, these solar cell design engineers will learn to focus on aspects of the product that might not interest a university based designer (except insofar as they attempt to replicate market-based design principles, as the Stanford team did in creating the lamp). 

Moreover, because of the tremendous surge in demand, a similar explosion in highly specialized and focused innovation will take place on down the supply chain of the solar cells – the producers of monocrystalline silicon wafers optimized for solar energy production will experience a dramatic increase in demand, the fabricators of the specialized machines for producing these particular cells will develop ever greater refinements of each step in the production process, and so on down the line.  Those cells made using a sodium hypochlorite solution will stimlate greater refinements and innovation in a distinctive sodium hypochlorite production process optimized for solar cell production.  Each company that supplies each material or supply or solar cell design or analysis package will devote more time, talent, and resources to focused, specialized innovation than would otherwise have been the case.

In short, in twenty years time their may well be engineers, chemists, designers, and machine tool makers in Cincinnati, or Romania, or Singapore or wherever who have full-time careers in sub-specialties of solar cell design that don’t even exist right now.  Money will flow from billions of the world’s poor who are overjoyed to replace their dirty kerosene with clean solar energy, to the companies that sell the product, produce the product, that produce the components of the product, that produce the goods and services from which the components and materials from which the components of the product are supplied, and so on.  In the end, the world’s poorest people will be “hiring” highly specialized experts at high salaries to do jobs that we really can’t imagine right now – and everyone will be much better off.

We live in a world in which miracles of innovation take place every day, and these miracles remain largely unnoticed.  But since learning to see the world in this way, I walk around simply dumbfounded and delighted by the miracles that surround us, and cheerfully work to support the creation of more miracles whenever and however I can.

When we hear headlines about crises and disasters, we often feel an impulse to “do something.”  I agree that we should do something, but that the best way to “do something” is to support the creation of more miracles.  It takes a certain mental discipline, given the noise of the world, to remain focused on the creation of miracles that will change our lives for the better.

The John Ernest Foundation is accepting donations to subsidize the cost of their lamp in order to accelerate their progress along the cost/quantity curve.  They are also looking for partners, including microfinance organizations, interested in marketing these lamps to the poor.  While their dream is brilliant, it will take work to get microfinance organizations, which are rightly focused on their own missions, to support the distribution of this particular product through their networks.  If you want to “do something,” or know someone who does, they can either subsidize the purchase of these lamps or work to “sell” the idea of marketing these lamps to those organizations that have already existing networks among the world’s poor.  The financial innovators among you might consider how to cross the credit bridge latent in this problem – at $15 per unit, the lamp represents about the cost of one year’s kerosene for a poor family, but they are able to purchase kerosene for a few pennies a week.  Without a credit card, how do they come up with $15 in capital for a consumer product with a one year pay-back cycle?

These problems are interesting and fun to solve.  And they can make all the difference in the world for the environment and for the world’s poor.  Once one learns to see the world through the eyes of creativity, innovation, and entrepreneurship, one becomes more optimistic as well as more effective at making the world a better place.  Criticize by creating, and thereby love living your life lived in flow.

Peace,

Michael Strong
CEO & Chief Visionary Officer
FLOW, Inc.

P.S. Our "Member's Platform" this month is Leonard Read's "I, Pencil," the classic story of how markets work as decentralized systems to create ordinary products.  My newsletter analysis of the solar lamp was inspired, in part, by Read's classic essay, and it feels right to give credit where credit is due by pointing readers to the classic original.

Although Read is no longer living, and of course is not in that sense a member of FLOW, I recently re-read his other classic essay, "Anything That's Peaceful," which includes the following section on creativity:

Let Energy Flow Freely Society-wise, the teachable human being, the one who conceives himself as agent through whom this mysterious, creative power has the potentiality of flowing, concedes that what applies to him must, perforce, apply to other human beings; that this same power has the potential of flowing through them; that his own existence, livelihood, and opportunity to serve as an agency of that power depends on how others fare creatively.  He realizes he can no more dictate its flow in others than he can in himself.  He knows only that he must not thwart it in others and that it is in his interest and theirs, and in the interest of all society, that there be no thwarting of this force in anyone.  Leave this power alone and let it work its miracles!"

This passage, written in 1964, more than qualifies Read as an fore-father of FLOW.

Please contact us at contact@flowidealism.org with ideas, insights, and inspiration. And remember that FLOW is a non-profit organization that promotes economic freedom and broadly distributed prosperity. You can support FLOW through your financial contributions among other means.