The speed of change in the digital economy

Global shortage of rare earth elements is coming … without you can kiss goodbye IT & green tech

Geologists who have calculated the cost of new technologies in terms of materials they use, all agree that the planet’s booming population and rising standards of living are set to put unprecedented demands on the materials that only Earth itself can provide. Global shortage of rare earth elements is coming and there is possibility to synthesized them … Without these rare earth elements, entire industries grind to a halt. Kiss your green wind turbines good-bye. And your Toyota Prius production lines, too. No more iPhones and iPods either. Platinum, indium, gallium, hafnium and many other rare metals are being consumed in unprecedented quantities to make green and IT technologies. Estimating the exactable reserves is difficult to know with an certainty since these figures are kept closely guarded by mining companies. Some metals could be taken from seawater. But it’s all a matter of energy cost. We could go to the moon to mine precious materials. The question is could we afford it?

When resources run short, conflict is often not far behind. It is widely accepted that one of the key motives for civil war in the Democratic Republic of the Congo between 1998 and 2002 was the riches to be had from the country’s mineral resources, including tantalum mines - the biggest in Africa. The war coincided with a surge in the price of the metal caused by the increasing popularity of mobile phones. The Chinese government is investing in mineral mines in Africa and buying up high-tech scrap to extract metals that are key to its developing industries. The US now imports over 90 per cent of its so-called “rare earth” metals from China.

Urgent action is required. Firstly, we need accurate estimates of global reserves and consumption. We need to minimize the waste, find substitutes where possible, and recycle the rest. Because let’s also face it: Mining these rare earth elements is a very dirty business. That’s part of the contradiction in “green” technologies, by the way: To manufacture them, you need rare metals mined out of ecologically disastrous operations in China. It’s the (literal) “dirty little secret” of the green industry. All these wind turbines, solar panels, hybrid car batteries and fiber optics may seem green to the consumer, but behind them there’s a very dirty mining business that rapes the planet and pollutes the rivers in order to recover these “green” rare metals.

In any case, unless scientists find less-rare alternatives to many of these rare earth metals, we are looking at a serious global supply crunch for the years 2012 - 2020. Add the “rare earth elements bubble” to your list of other bubbles to watch out for in the years ahead. The recent announcement of the creation of an asteroid-mining company by an all-star cast of adventure capitalists and space entrepreneurs - James Cameron, Larry Page, Eric Schmidt, and others – is perfect illustration of this bubble. 

Changes in market dynamics due to IT & digitalization

Scale without mass

IT & digitalization has enabled firms to more rapidly replicate improved business processes throughout an organization, thereby not only increasing productivity but also market share and market value. IT has become a means of not only embedding business innovations, but also replicating them with high fidelity across a large “footprint”. Today, managers can scale up their process innovations rapidly via technology without the degree of inertia historically associated with larger firms. In other words, they can achieve scale without mass. As firms continue to invest in IT to embed and diffuse knowledge, competition today becomes more knowledge-based. Knowledge-based competition tends to become monopolistic over time (Romer, 1992). Increasing returns to knowledge, a cornerstone of new growth theory, implies that leading firms will build up significant advantages over their rivals such  that they become monopolies.  Knowledge-based competition, in other words, is associated with winner-takes-all dynamics. 

Combination of increased turbulence and concentration

Firms that successfully use IT to embed and diffuse innovations grow relatively rapidly at the expense of other firms, leading to winner-take-all dynamics and hence greater concentration at the industry level.  But because firms operate in dynamic environments, successful adoption of a set of IT enabled business innovations at one point in time does not guarantee sustained dominance.  Competitors and new entrants can also innovate and replicate with IT over time, leading to high levels of turbulence within an industry.  Therefore, the increased  use of IT will increase both turbulence and concentration at the industry level.  The combination of increased turbulence and concentration, especially among IT-intensive industries, is consistent with theories of hypercompetition as well as Schumpeterian creative destruction.  The improved ability of firms to replicate business innovations has therefore changed the nature of business competition. 

According to D’Aveni (1994), hypercompetition is an environment with intense and rapid change, in which competitive rules of the game change rapidly, and firms must move quickly to build new advantages and erode the advantages of their  rivals. While traditional approaches to strategy emphasize sustainable competitive advantage (e.g., Porter 1985), the hypercompetition perspective suggests that markets today have become inherently unstable as they are fraught with uncertainty, diverse global players and rapid technological changes. As a result, competitive advantage is temporal and can only be obtained by continuous exploitation of short-term opportunities and creative destruction of opponents’ advantage.

Source: Scale without Mass: Business Process Replication and Industry Dynamics  - Erik Brynjolfsson; Andrew McAfee; Michael Sorell; Feng Zhu (2008)

“Small World” & “Scale Free” networks theories

Networks are everywhere. Many systems in nature can be described by models of complex networks, which are structures consisting of nodes or vertices connected by links or edges. Examples are numerous. The Internet is a network of routers or domains. The World Wide Web (WWW) is a network of websites. The brain is a network of neurons. An organization is a network of people. The global economy is a network of national economies …  

The ubiquity of complex networks in science and technology has naturally led to a set of common and important research problems concerning how the network structure facilitates and constrains the network dynamical behaviors. For example, how do social networks mediate the transmission of a disease (or of a viral marketing materials)? How do cascading failures propagate throughout a large power transmission grid or a global financial network? What is the most efficient and robust architecture for a particular organization or an artifact under a changing and uncertain environment?

In this endeavor, two significant recent discoveries are the small-world effect and the scale-free feature of most complex networks.

It’s a small world, after all

In mathematics, physics and sociology, a small-world network is a type of mathematical graph in which most nodes are not neighbors of one other, but most nodes can be reached from every other by small number of hops or steps. Specifically, a small-world network refers to an ensemble of networks in which the mean geodesic distance between nodes increases sufficiently slowly as a function of the number of nodes in the network. 

In the context of social networks, this results in the small world phenomenon of strangers being linked by a mutual acquaintance (Stanley Milgram). Many empirical graphs are well-modeled by small-world networks. Social networks, the connectivity of the Internet and networks of brain neurons all exhibit small-world network characteristics.

It is hypothesized by some researchers such as Barabási that the prevalence of small world networks in biological systems may reflect an evolutionary advantage of such an architecture. One possibility is that small-world networks are more robust to perturbations than other network architectures. If this were the case, it would provide an advantage to biological systems that are subject to damage by mutation or viral infection.

Scale Free Networks

Over the past few years, investigators from a variety of fields also have discovered that many networks – from the World Wide Web to a cell’s metabolic system to actors in Hollywood – are dominated by a relatively small number of nodes that are connected to many other (Barabasi 1998).

A simple definition of scale-free networks is the network whose nodes aren’t randomly or evenly connected, but includes many “very-connected” nodes know as the hubs of connectivity responsible for shaping the way the network operates. A scale-free network doesn’t have a fixed size but can grow with time. The ratio of the “very-connected” nodes to the number of nodes in the rest of the network remains constant as the network’s size changes.

Networks containing such important hubs, tend to be what we call “scale-free”, in the sense that some hubs have a seemingly unlimited number of links and no node is typical of the others. These networks also behave in certain predictable ways; for example, they are remarkably resistant to accidental failures but extremely vulnerable to coordinated attacks.

Scale Free Networks and Small-World Models offer convincing proof that various complex systems have a strict architecture, ruled by fundamental laws – laws that appear to apply equally to cells, computers, languages and society.