The Great US Give Away to China begins in 1980s
With Soviet presence in Afghanistan and election of a strongly anti- Soviet Ronald Reagan in 1980, was the beginning of the period when US moneys was pumped into the coffers of its former enemy i.e. China . The US leaders forgot the sacrifices of its citizens who had fought and died in Korea only 30 years earlier. Surprisingly none of President Reagan's inner coterie of advisors had served in Korea , hence that war and its sacrifices were ignored. China development became the buzzword in Washington . To make it easy for the monies to flow from the West to China, the Chinese leadership did whatever the West asked them to do i.e. enact laws and rules to facilitate the arrival of direct cash from the US and European businesses. In return China agreed to maintain an equivalent Cash reserve in US banks or buy treasury bonds. The latter was to be used as a surety for future Chinese good behavior. The money started to trickle, initially in small doses of about $3 to 5 billion a year from 1982 to 1986 and then increased to $10 billion a year until 1992. President Clinton for his own ideological reasons opened the floodgate. At that time the Soviet Union had vanished but momentum to pump monies into China was accelerated. It reached $20 billion a year until 1998 and then after the Asian financial crisis in 1997-98, it was increased to $40 billion a year till 2003. Year 2004& 2005 are witnessing an unprecedented $50 billion to $55 billion year Foreign Direct Investment.
In the nineties the British relented on its position on the colony of Hong Kong . They decided to transfer it back to China . By then, China had become a major trading nation. Continuing British rule in Hong Kong was pointless. Chinese wished to exploit the unique position of Hong Kong as a trading headquarters with full control over its destiny.
From 1980 to 2000, Chinese turned in a huge growth, mainly at the back of Foreign Direct Investment. Its growth averaged 7 to 8% every year except in 1988 - 90. This period was marred by student demand for additional freedoms. This revolution was crushed by force. By the year 2000, Chinese economy had grown from to $800 billion strong. This twenty years period from 1980 to 2000 had been an epoch making period in Chinese history. Never before in two thousand years history such a dramatic development had taken place.
The development of the Chinese economy had a very interesting feature. Whereas the FDI built the factories, the Chinese used their own cash to build the infrastructure and prestige projects for the foreigners to see and get impressed. They built a huge airport in Shanghai with Maglev train system. Civil and road construction took precedent over rural development. Interestingly Chinese claim of the same living standard as the West is true in the cities only. In the rural areas, it is another matter. It is hard to believe that with only $850 per capita income, Chinese cannot compare themselves with the West. In fact they are still at poverty line threshold.
India from 1980 to 2000
India maintained a bit slow pace of progress during this period. Not much of FDI was coming India 's way. A foreign aid cum soft loan package of about $1.5 billion a year all that India got. Political upheaval in the eighties created uncertainties. Bad and antiquated laws protected the local industry, and discouraged the private sector. Indian businesses yearned for Chinese type of Foreign Direct Investment, but nobody was listening. Situation came to a head on when in 1992, India ran out of money to buy raw material and spares abroad. Hence first step was taken to open up the market. These minor reforms allowed private sector to make a major progress. A much bigger step but still inadequate was taken from 1999 to 2004. At that time a much smarter political coterie was in power. They did much more than the steps of the 1992 reforms. Economic progress did not match China , but economic growth of about 6% was achieved. Whereas the Chinese quadrupled their economy and curtailed their population (1.2 billion), India could only triple its economy, but let its population grow unhindered. By Year 2000 Indian economy was $475 billion with 950 million mouths to feed. Surprisingly, the slow poked Indian economy had generated momentum. By Year 2004, it started to grow at about 8% a year with a very little FDI.
In this period, the historic difference of about 20% in per capita income diverged. Chinese per capita income in year 2000 was 30% higher than India . This must be un-nerving for political and economic leaders in India . They had to do something dramatic. At President Clintons behest, US companies started to outsource IT services to India followed by BPO services floodgate. It is now being followed by more knowledge-based industry. This onset provided the Indian businesses to reach out to the world. It is just a matter of time that India will narrow the per capita income gap, which currently favors China . In addition, there is a difference. Chinese products are sold at rock bottom prices to retain and grab a bigger share of the market. On the other hand, India gets a fair share of the margin for all its services exported. The latter helps greatly in new capital formation and building up its cash reserves. It has created a highly paid consumer class in the country. This is an envy of the world.
Years 2001 to 2005 for China and India .
China was making a phenomenal progress on the back of FDI. It has turned in a 9% growth rate with $55 billion FDI in 2004-05. Its economy today is a bit higher than a trillion dollars. Surprisingly, India has turned in 7% growth with bad monsoon and only $2.5 billion in FDI (and about $8 billion in loans and aid). India s economy is at about $650 to $700 billion level. On per capita basis the improvement achieved by the Chinese from 1980-00 will be narrowed in next 10 to 20 years.
Now, if you ask - Who do you think is doing better?
It is not the Chinese.
Imagine that the current US - China differences on military spending, Taiwan etc. escalate into a serious rivalry. The FDI will disappear. With free market access to the Chinese products withdrawn, its currency will be forced to revalue upwards. Suddenly, cheap Chinese products may not be not cheap anymore. This together with poor quality of workmanship is a disaster in the making (Anything made in China has a three year life. The TVs breakdown, the printer quits printing before even three years, the zippers in the pants stop functioning. All this forces the consumer to buy again). If the current mood of US Congress is read correctly, then trade advantage, which the Chinese have enjoyed, is about to be curtailed. The Chinese currency will be revalued 20 to 30% higher. Free market access will be denied.
Future Prospects
China will be very careful in doing anything to invite US focus on it. Case in point is Chinese testing of 6,000 KM range missile recently. US consider these as a direct threat to their security. Suddenly, US Defense Secretary is up in arms asking them the purpose of these missiles. In addition Chinese are unable to oblige the Americans by disciplining the North Koreans of their nuclear ambitions.
Economically, even with huge lobbying by the Chinese interests in US, the US has given them a limited time to revalue their currency. Also the cheap Chinese textiles have been shut out of the US and the Europe .All these point to the worsening diplomatic status of the Chinese in the West. Although US will wait and give Chinese time to think and relent, but US patience is not infinite.
India stands to gain with any hiccup in US-China relationship. Indian textiles will have a better time in the US and Europe , since Chinese are being shut out. Indian IT Services, BPO Services and upcoming KPO services industry together with medical services industry will have no match in Chinese bag of tricks. Indian products and services roughly earn three times more than the cheap Chinese products. All this is advantage India . But there is a wrinkle; India does not have showpiece projects. Its airport is rickety and cows still roam the streets. Indians politicians love to wash their dirty linen in public inviting western amusement.
India will chug along ahead, less spectacular, but never the less very confident and with very profitable service industry.
Conclusion
China has made spectacular economic progress. India has achieved the same without the influx of huge foreign funds. Economically, Chinese were ahead of India in 1950, as they had not suffered the indignity of a long foreign rule. Today, this gap is not much wider than in 1950, but only a trifle higher. The latter can be traced to a huge financial advantage, which China has enjoyed in last 25 years. This situation has made Chinese very much dependent on the Wests for its benevolence on market access for its products, low value of its currency and un-tethered flow of money. Indian success in past 25 years is mainly based on its service sector and pulling ahead in-spite of adversity. The future for the Chinese is a bit cloudy as it tries to break free of its dependencies. The latter is advantage India .
This WEEK's BUSINESS Headlines
The board of Airbuss parent company, EADS, approved the launch of its new mid-sized aircraft, the A350. But the company will not proceed to draw down launch aid promised by European governments while it hopes for a bilateral settlement of the trade row with America over such subsidies.
----------------
NTL, a British cable operator, confirmed it was buying Telewest, a rival, in a deal worth 3.4 billion ($6 billion). The move creates a "triple play" provider (phones, TV and broadband) in Britain's telecoms market that will provide competition to both BT (phones and broadband) and BSkyB (TV).
----------------
A subsidiary of Sprint Nextel, America's third-biggest telecoms firm, filed a lawsuit against Vonage and Voiceglo Holdings claiming that the companies had infringed Sprint's patents relating to voice over internet protocol technology. Both Vonage and Voiceglo offer services that enable calls over the internet.
-----------------
Google and Sun Microsystems threw down a challenge to Microsoft by agreeing jointly to "promote and distribute" their technologies. As a start, Sun will incorporate Google's toolbar into its Java packages, but techies were more excited by the potential for collaboration on OpenOffice, an alternative to Microsoft's Office software.
-------------------
Electronic firms that back the Blu-ray technology for high-resolution DVDs, notably Sony, received a boost when Paramount Home Entertainment said it would also support the format in addition to supporting HD-DVD, a rival and incompatible format. Last week, HD-DVD had received a boost when Intel and Microsoft said they would be supporting it, not Blu-ray.
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Ford and General Motors reported sharp falls in vehicle sales for September. Ford's overall sales fell by 20%, compared with September 2004, and GM's by 24%. Sales of light trucks, which include sport-utility vehicles, shrank by even more as consumers fretted about petrol prices. Meanwhile, GM said it was selling its 20% stake in Fuji Heavy Industries, a Japanese carmaker. Toyota, which reported its best-ever quarterly sales in America, will buy almost half of GM's stake.
--------------
Boots, a British health and beauty retailer, said it intended to merge with Alliance UniChem, a pharmaceutical retailer and distributor. The new company will have a market capitalisation of around 7 billion ($12 billion). Boots wants to refocus its business, but most analysts think the merger comes too late for the icon of the British high street to challenge the fierce competition it has encountered from supermarkets.
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Parmalat is laying another claim against a large financial institution for allegedly contributing to its collapse in 2003. It will sue Credit Suisse First Boston for euro7.1 billion ($8.5 billion). The trial of the Italian dairy firm's founder and 15 others on fraud charges connected to the euro14 billion bankruptcy began last week, only to be adjourned until December. This week, Parmalat also began trading on Milan's stockmarket again after it had relisted.
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Kazakhstan's government said it would seek "strategic control" of PetroKazakhstan's assets in the country, despite its imminent takeover by China National Petroleum Corporation. PetroKazakhstan's shareholders (the company is listed in Canada) are due to approve the $4.2 billion deal on October 18th. Meanwhile, Lukoil, Russia's biggest oil company, confirmed that it is close to buying Nelson Resources, another Canadian-listed firm that maintains energy assets in Kazakhstan, for $2 billion.
------------------------------
NRG Energy, based in New Jersey, said it would buy Texas Genco, an electricity wholesaler in the Houston area, for $5.8 billion.
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BP issued an assessment on the effects of Hurricanes Katrina and Rita to its business, the first big oil company to do so. The storms swept away $700m in profit for the third quarter and caused the loss of 145,000 barrels a day in oil productionmore than analysts had thought. Separately, the Insurance Services Office, a firm that provides data to the insurance industry, estimated that 1.6m American policy-holders would file claims, stemming from Katrina, that would total $34.4 billion.
SOURCE : Economist
The board of Airbuss parent company, EADS, approved the launch of its new mid-sized aircraft, the A350. But the company will not proceed to draw down launch aid promised by European governments while it hopes for a bilateral settlement of the trade row with America over such subsidies.
----------------
NTL, a British cable operator, confirmed it was buying Telewest, a rival, in a deal worth 3.4 billion ($6 billion). The move creates a "triple play" provider (phones, TV and broadband) in Britain's telecoms market that will provide competition to both BT (phones and broadband) and BSkyB (TV).
----------------
A subsidiary of Sprint Nextel, America's third-biggest telecoms firm, filed a lawsuit against Vonage and Voiceglo Holdings claiming that the companies had infringed Sprint's patents relating to voice over internet protocol technology. Both Vonage and Voiceglo offer services that enable calls over the internet.
-----------------
Google and Sun Microsystems threw down a challenge to Microsoft by agreeing jointly to "promote and distribute" their technologies. As a start, Sun will incorporate Google's toolbar into its Java packages, but techies were more excited by the potential for collaboration on OpenOffice, an alternative to Microsoft's Office software.
-------------------
Electronic firms that back the Blu-ray technology for high-resolution DVDs, notably Sony, received a boost when Paramount Home Entertainment said it would also support the format in addition to supporting HD-DVD, a rival and incompatible format. Last week, HD-DVD had received a boost when Intel and Microsoft said they would be supporting it, not Blu-ray.
------------------
Ford and General Motors reported sharp falls in vehicle sales for September. Ford's overall sales fell by 20%, compared with September 2004, and GM's by 24%. Sales of light trucks, which include sport-utility vehicles, shrank by even more as consumers fretted about petrol prices. Meanwhile, GM said it was selling its 20% stake in Fuji Heavy Industries, a Japanese carmaker. Toyota, which reported its best-ever quarterly sales in America, will buy almost half of GM's stake.
--------------
Boots, a British health and beauty retailer, said it intended to merge with Alliance UniChem, a pharmaceutical retailer and distributor. The new company will have a market capitalisation of around 7 billion ($12 billion). Boots wants to refocus its business, but most analysts think the merger comes too late for the icon of the British high street to challenge the fierce competition it has encountered from supermarkets.
-----------------
Parmalat is laying another claim against a large financial institution for allegedly contributing to its collapse in 2003. It will sue Credit Suisse First Boston for euro7.1 billion ($8.5 billion). The trial of the Italian dairy firm's founder and 15 others on fraud charges connected to the euro14 billion bankruptcy began last week, only to be adjourned until December. This week, Parmalat also began trading on Milan's stockmarket again after it had relisted.
-----------------
Kazakhstan's government said it would seek "strategic control" of PetroKazakhstan's assets in the country, despite its imminent takeover by China National Petroleum Corporation. PetroKazakhstan's shareholders (the company is listed in Canada) are due to approve the $4.2 billion deal on October 18th. Meanwhile, Lukoil, Russia's biggest oil company, confirmed that it is close to buying Nelson Resources, another Canadian-listed firm that maintains energy assets in Kazakhstan, for $2 billion.
------------------------------
NRG Energy, based in New Jersey, said it would buy Texas Genco, an electricity wholesaler in the Houston area, for $5.8 billion.
--------------
BP issued an assessment on the effects of Hurricanes Katrina and Rita to its business, the first big oil company to do so. The storms swept away $700m in profit for the third quarter and caused the loss of 145,000 barrels a day in oil productionmore than analysts had thought. Separately, the Insurance Services Office, a firm that provides data to the insurance industry, estimated that 1.6m American policy-holders would file claims, stemming from Katrina, that would total $34.4 billion.
SOURCE : Economist
A Warner Bros. Green Light for Blu-ray?
The outfit's support would be a boon for Sony's next-generation DVD -- and a major blow to rival Toshiba's HD DVD format
Warner Brothers is poised to raise the stakes in what has become a pitched battle over the next generation of digital videodisks, or DVDs. Warner Brothers is expected to throw its weight behind a new generation of high-definition DVDs sponsored by long-time rival Sony , BusinessWeek Online has learned.
The new DVD, called Blu-ray, could eventually replace the standard DVD format that today accounts for an estimated $18 billion a year in U.S. sales and has been Hollywood's hottest growth engine for the last six years.
Endorsement by Warner Brothers -- a division of Time Warner -- would be a crucial vote of confidence in a new technology that has already drawn support from Walt Disney and Fox , both of which said they would release their movies only on Blu-ray disks. It could also undermine efforts by Toshiba to garner support for a rival next-generation disk, the so-called HD DVD.
CHOOSING SIDES. Last November, Warner along with Paramount, Universal and New Line Cinema, had said they would provide their movies to the HD DVD disks. For now, Warner would declare "nonexclusive" support for Blu-ray, meaning it could theoretically produce films in both formats.
Still, the support for Blu-ray would indicate Warner Brothers is no longer convinced Toshiba and HD is the only way to go, and it leaves open the prospect of exclusive backing for Blu-ray. Paramount on Oct. 2 said it would make its movies in both formats. Microsoft and Intel , meantime, have thrown their weight behind the Toshiba-led group backing HD DVD.
Like everything in this on-again-off-again DVD battle among media and technology heavyweights, an agreement between Warner and Sony could still fall apart. But the sides appear close to a deal, say knowledgeable sources.
HIGH-STAKES GAMES. The next generation DVD is considered crucial for Hollywood, which has seen growth in sales of traditional DVDs slow as the number of consumers with new DVD players reaches saturation. The new high-definition DVDs would provide a crisper picture and hold more material, letting studios resell their older movies with more bonus features, such as alternate endings and so-called director's cuts.
The Sony-backed format, which draws more on the latest technology, is projected to produce a disk with far larger capacity than the Toshiba-backed disk. Toshiba's HD DVD disk, based more on existing technology, is said to be cheaper to produce, however.
Disney and Fox were likely influenced in their decision to back Blu-ray after Toshiba said on Sept. 30 that it would delay launch of its new format to "February or March" from December. Sony has swayed Hollywood with promises that it will include a Blu-ray device in its PlayStation 3 game console, expected to be a hot seller when introduced early next year. Paramount said in a statement that it was "intrigued" by Sony's decision. The game player is expected to use the Blu-ray drive to show games as well as movies, thus priming the pump for the high-definition market.
THREE POINTS. Backers of the competing technologies have been tussling for support from Hollywood to insure that consumers would be able to buy movies from all the studios for whatever technology gets to market first. Thus, Warner, which traditionally has among the heftiest box office market shares, would be key for Sony.
On top of that, Warner, which owns 11 patents to make DVDs, had been a leader in assembling the Hollywood studios that backed Toshiba's HD DVD format. And in the mid-90s, Warner and Toshiba had beaten Sony's efforts to have its technology adopted for the standard definition DVD, with most of the technology based on patents controlled by Toshiba, Warner, and other companies. Sony had some of its patents adopted by the standard definition DVD.
Neither Sony nor Warner would discuss their talks. But those with knowledge of the negotiations say they have focused on three key areas: the cost of producing the DVDs, how Sony would treat Warner's patents, and guarantees that the Blu-ray disk can be manufactured on time. Additionally, the sides are said to be discussing whether Blu-ray licensees, which include computer makers Dell and Hewlett-Packard and DVD makers Samsung and Pioneer , would be able to link to computers based on Microsoft's Windows software.
NOT OVER YET. At present, Blu-ray uses Java software. Hollywood insiders say that Sony has also been offering studios a cap on the costs of producing its Blu-ray disks and perhaps some break on royalties for its patents. That might enable Warner to get a break on the so-called cross-licensing of its patents -- where the costs for its patents are traded off against the cost of patents it uses that are controlled by members of the Sony consortium.
Concerns still remain over whether the Sony-sponsored Blu-ray can be produced on time or in large enough amounts. Backers of Toshiba's HD DVD standard have argued that Sony has yet to produce detailed engineering and cost data to support its claim that it can soon begin production. That's one reason why Toshiba remains in the race -- and why, in early October, 2005, it added three Chinese DVD manufacturers to its collation -- as it tries to prove to Hollywood that it can make its version of the hot little disk on time and at a reasonable cost.
SOURCE : BusinessWeek
The outfit's support would be a boon for Sony's next-generation DVD -- and a major blow to rival Toshiba's HD DVD format
Warner Brothers is poised to raise the stakes in what has become a pitched battle over the next generation of digital videodisks, or DVDs. Warner Brothers is expected to throw its weight behind a new generation of high-definition DVDs sponsored by long-time rival Sony , BusinessWeek Online has learned.
The new DVD, called Blu-ray, could eventually replace the standard DVD format that today accounts for an estimated $18 billion a year in U.S. sales and has been Hollywood's hottest growth engine for the last six years.
Endorsement by Warner Brothers -- a division of Time Warner -- would be a crucial vote of confidence in a new technology that has already drawn support from Walt Disney and Fox , both of which said they would release their movies only on Blu-ray disks. It could also undermine efforts by Toshiba to garner support for a rival next-generation disk, the so-called HD DVD.
CHOOSING SIDES. Last November, Warner along with Paramount, Universal and New Line Cinema, had said they would provide their movies to the HD DVD disks. For now, Warner would declare "nonexclusive" support for Blu-ray, meaning it could theoretically produce films in both formats.
Still, the support for Blu-ray would indicate Warner Brothers is no longer convinced Toshiba and HD is the only way to go, and it leaves open the prospect of exclusive backing for Blu-ray. Paramount on Oct. 2 said it would make its movies in both formats. Microsoft and Intel , meantime, have thrown their weight behind the Toshiba-led group backing HD DVD.
Like everything in this on-again-off-again DVD battle among media and technology heavyweights, an agreement between Warner and Sony could still fall apart. But the sides appear close to a deal, say knowledgeable sources.
HIGH-STAKES GAMES. The next generation DVD is considered crucial for Hollywood, which has seen growth in sales of traditional DVDs slow as the number of consumers with new DVD players reaches saturation. The new high-definition DVDs would provide a crisper picture and hold more material, letting studios resell their older movies with more bonus features, such as alternate endings and so-called director's cuts.
The Sony-backed format, which draws more on the latest technology, is projected to produce a disk with far larger capacity than the Toshiba-backed disk. Toshiba's HD DVD disk, based more on existing technology, is said to be cheaper to produce, however.
Disney and Fox were likely influenced in their decision to back Blu-ray after Toshiba said on Sept. 30 that it would delay launch of its new format to "February or March" from December. Sony has swayed Hollywood with promises that it will include a Blu-ray device in its PlayStation 3 game console, expected to be a hot seller when introduced early next year. Paramount said in a statement that it was "intrigued" by Sony's decision. The game player is expected to use the Blu-ray drive to show games as well as movies, thus priming the pump for the high-definition market.
THREE POINTS. Backers of the competing technologies have been tussling for support from Hollywood to insure that consumers would be able to buy movies from all the studios for whatever technology gets to market first. Thus, Warner, which traditionally has among the heftiest box office market shares, would be key for Sony.
On top of that, Warner, which owns 11 patents to make DVDs, had been a leader in assembling the Hollywood studios that backed Toshiba's HD DVD format. And in the mid-90s, Warner and Toshiba had beaten Sony's efforts to have its technology adopted for the standard definition DVD, with most of the technology based on patents controlled by Toshiba, Warner, and other companies. Sony had some of its patents adopted by the standard definition DVD.
Neither Sony nor Warner would discuss their talks. But those with knowledge of the negotiations say they have focused on three key areas: the cost of producing the DVDs, how Sony would treat Warner's patents, and guarantees that the Blu-ray disk can be manufactured on time. Additionally, the sides are said to be discussing whether Blu-ray licensees, which include computer makers Dell and Hewlett-Packard and DVD makers Samsung and Pioneer , would be able to link to computers based on Microsoft's Windows software.
NOT OVER YET. At present, Blu-ray uses Java software. Hollywood insiders say that Sony has also been offering studios a cap on the costs of producing its Blu-ray disks and perhaps some break on royalties for its patents. That might enable Warner to get a break on the so-called cross-licensing of its patents -- where the costs for its patents are traded off against the cost of patents it uses that are controlled by members of the Sony consortium.
Concerns still remain over whether the Sony-sponsored Blu-ray can be produced on time or in large enough amounts. Backers of Toshiba's HD DVD standard have argued that Sony has yet to produce detailed engineering and cost data to support its claim that it can soon begin production. That's one reason why Toshiba remains in the race -- and why, in early October, 2005, it added three Chinese DVD manufacturers to its collation -- as it tries to prove to Hollywood that it can make its version of the hot little disk on time and at a reasonable cost.
SOURCE : BusinessWeek
NOBEL PREACE PRIZE
The International Atomic Energy Agency and its chief, Mohamed ElBaradei, have been awarded the Nobel Peace Prize for their efforts to stop the proliferation of nuclear weapons. While the choice has been welcomed by world leaders, the Bush administration may not be best pleased
TWO years ago, pleading in a signed Economist article for a strengthening of the United Nations regime for stopping the spread of nuclear weapons, Mohamed ElBaradei, the head of the UNs International Atomic Energy Agency (IAEA), accurately described the anti-proliferation regime as battered. In recent times, Mr ElBaradei has himself come in for a battering. Earlier this year, the Bush administration, with the support of some other countries, tried to stop him being re-elected to a third term as head of the agency, after reportedly tapping his phones to seek evidence to discredit him.
In 2003, ahead of the Iraq war, Mr ElBaradei had a spat with America over the quality of its intelligence on Saddam Hussein's allegedly continuing programme to build nuclear weapons. America went ahead and invaded anyway, only to find that the programme no longer existed. More recently, and perhaps with more justification, the Bush administration has accused Mr ElBaradei of not being tough enough with Iran over its highly suspicious nuclear dabblings. However, other countries on the IAEAs governing board, including some of Americas closest allies, declined to back the Bush administrations attempts to turf him out given the lack of a credible successor and, in June this year, he was re-elected for a further four years. On Friday October 7th, the agency and its chief received an important vote of confidence when a committee in Oslo announced that they were the joint winners of this years Nobel Peace Prize.
Though many others had been nominated for the Peace Prize, including Bob Geldof and Bono, two rock singers turned anti-poverty campaigners, the choice of Mr ElBaradei and his agency might have been expected, given that this year is the 60th anniversary of the dropping of atom bombs on Hiroshima and Nagasaki. The Nobel committee had awarded the Peace Prize to anti-nuclear campaigners on the 40th and 50th anniversaries of what were the first andso faronly nuclear attacks the world has seen.
Meeting in Paris on Friday, as news of the Peace Prize broke, Jacques Chirac and Tony Blair welcomed it. In Washington, Americas secretary of state, Condoleezza Rice, called it well deserved. But whatever the Bush administration says publicly, it is unlikely to be pleased. Though the Nobel committees chairman, Ole Danbolt Mjoes, denied that the award was a veiled criticism of Washington and its unilateralist tendencies, the committees announcement made it sound rather that way: At a time when the threat of nuclear arms is again increasing, the Norwegian Nobel Committee wishes to underline that this threat must be met through the broadest possible international co-operation.
Despite its dissatisfaction with Mr ElBaradei's performance, America has given strong financial support to the IAEA, providing it with the resources to keep its inspectors in the field. The agency's record, overall, has been mixed. Perhaps its most notable coup in recent years was to help investigate an astonishingly sophisticated international ring of nuclear-technology peddlers, centred on Pakistans leading nuclear scientist, Abdul Qadeer Khan, whose customers included Iran, Libya and North Korea. This network of proliferators distributed everything from bomb designs to nuclear materialsand even offered clients an after-sales service.
The IAEA played an important role in tracing the trail of clues that connected Mr Khans laboratory to the nuclear dabbling that some countries were conducting in defiance of their obligations under the Nuclear Non-Proliferation Treaty (NPT). In 2003, the IAEAs inspectors confronted Irans authorities with traces of bomb-usable, highly-enriched uranium that had been found on its secretly imported centrifuges. This prompted Iran to point the finger at their supplier, back in Pakistan. In the same year, Libyas leader, Colonel Muammar Qaddafi, owned up to a secret nuclear programme and agreed to scrap it, after he was confronted with evidence gathered with the agency's help.
However, much of the initial information about the Khan network came from intelligence services, not the IAEAfor instance, it was South Koreas spooks who first pointed to Pakistan as a likely source of North Koreas uranium-enrichment technology. In the case of Iran, many of the initial revelations about its nuclear facilities came from exiled opposition groups. The eventual discovery of what a shocked Mr ElBaradei called a Wal-Mart of black-market proliferation only underlined how little he and his agency had known about an enormous operation that had been going on right under his inspectors noses.
As with any other important UN agency and its leader, the ability of the IAEA and Mr ElBaradei to do their job properly depends to a great degree on the powers given to them by the UNs member governments, and on the diplomatic support they get when pressuring a rogue regime to come clean. World powers often put their rivalries, and their national interests, first. For instance, Russias programme to build a nuclear-power station in Iran has sometimes made it reluctant to join wholeheartedly in efforts to press Iran to co-operate with the IAEA.
A leaky treaty
Nobel prize notwithstanding, Mr ElBaradei and the IAEA may not get much further in their efforts to keep nuclear weapons out of the hands of rogue states and terrorists without agreement among world governments to strengthen both the NPTs safeguards and the powers of the IAEAs inspectors to enforce these. After the discovery, following the 1991 Gulf war, of Saddams earlier attempts to build nuclear weapons, the agencys member states introduced a tough new inspections regime. But it was not made compulsory for NPT members to accept itand many of the countries most in need of close monitoring have declined to sign up for it. There is thus a strong case for making this more intrusive inspections regime mandatory. Likewise, the right enshrined in the NPT for countries to enjoy the benefits of civilian nuclear powerwhich Iran misinterprets to argue it has a right to whatever nuclear technologies it likescould be repealed or curtailed.
But the chances of such a tightening seem dim. At last month's big gathering of world leaders at the UN, its secretary-general, Kofi Annan, expressed dismay at their failure to agree on any statement on anti-proliferation or disarmament. Even countries that seem unlikely to be secretly coveting an atom bomb of their own, such as Brazil, bristle at the idea of being forced to let IAEA inspectors snoop freely around their civilian nuclear facilities. By arguing that the original five nuclear powersAmerica, Russia, China, Britain and Francehave made insufficient efforts to reduce their stocks of weapons, other countries have found a handy excuse to drag their feet. As Mr ElBaradei lamented a couple of years ago, In all of human history, no civilisation has ever voluntarily laid down its most powerful weapons. It remains to be seen whether ours can be the first.
SOURCE : Economist
The International Atomic Energy Agency and its chief, Mohamed ElBaradei, have been awarded the Nobel Peace Prize for their efforts to stop the proliferation of nuclear weapons. While the choice has been welcomed by world leaders, the Bush administration may not be best pleased
TWO years ago, pleading in a signed Economist article for a strengthening of the United Nations regime for stopping the spread of nuclear weapons, Mohamed ElBaradei, the head of the UNs International Atomic Energy Agency (IAEA), accurately described the anti-proliferation regime as battered. In recent times, Mr ElBaradei has himself come in for a battering. Earlier this year, the Bush administration, with the support of some other countries, tried to stop him being re-elected to a third term as head of the agency, after reportedly tapping his phones to seek evidence to discredit him.
In 2003, ahead of the Iraq war, Mr ElBaradei had a spat with America over the quality of its intelligence on Saddam Hussein's allegedly continuing programme to build nuclear weapons. America went ahead and invaded anyway, only to find that the programme no longer existed. More recently, and perhaps with more justification, the Bush administration has accused Mr ElBaradei of not being tough enough with Iran over its highly suspicious nuclear dabblings. However, other countries on the IAEAs governing board, including some of Americas closest allies, declined to back the Bush administrations attempts to turf him out given the lack of a credible successor and, in June this year, he was re-elected for a further four years. On Friday October 7th, the agency and its chief received an important vote of confidence when a committee in Oslo announced that they were the joint winners of this years Nobel Peace Prize.
Though many others had been nominated for the Peace Prize, including Bob Geldof and Bono, two rock singers turned anti-poverty campaigners, the choice of Mr ElBaradei and his agency might have been expected, given that this year is the 60th anniversary of the dropping of atom bombs on Hiroshima and Nagasaki. The Nobel committee had awarded the Peace Prize to anti-nuclear campaigners on the 40th and 50th anniversaries of what were the first andso faronly nuclear attacks the world has seen.
Meeting in Paris on Friday, as news of the Peace Prize broke, Jacques Chirac and Tony Blair welcomed it. In Washington, Americas secretary of state, Condoleezza Rice, called it well deserved. But whatever the Bush administration says publicly, it is unlikely to be pleased. Though the Nobel committees chairman, Ole Danbolt Mjoes, denied that the award was a veiled criticism of Washington and its unilateralist tendencies, the committees announcement made it sound rather that way: At a time when the threat of nuclear arms is again increasing, the Norwegian Nobel Committee wishes to underline that this threat must be met through the broadest possible international co-operation.
Despite its dissatisfaction with Mr ElBaradei's performance, America has given strong financial support to the IAEA, providing it with the resources to keep its inspectors in the field. The agency's record, overall, has been mixed. Perhaps its most notable coup in recent years was to help investigate an astonishingly sophisticated international ring of nuclear-technology peddlers, centred on Pakistans leading nuclear scientist, Abdul Qadeer Khan, whose customers included Iran, Libya and North Korea. This network of proliferators distributed everything from bomb designs to nuclear materialsand even offered clients an after-sales service.
The IAEA played an important role in tracing the trail of clues that connected Mr Khans laboratory to the nuclear dabbling that some countries were conducting in defiance of their obligations under the Nuclear Non-Proliferation Treaty (NPT). In 2003, the IAEAs inspectors confronted Irans authorities with traces of bomb-usable, highly-enriched uranium that had been found on its secretly imported centrifuges. This prompted Iran to point the finger at their supplier, back in Pakistan. In the same year, Libyas leader, Colonel Muammar Qaddafi, owned up to a secret nuclear programme and agreed to scrap it, after he was confronted with evidence gathered with the agency's help.
However, much of the initial information about the Khan network came from intelligence services, not the IAEAfor instance, it was South Koreas spooks who first pointed to Pakistan as a likely source of North Koreas uranium-enrichment technology. In the case of Iran, many of the initial revelations about its nuclear facilities came from exiled opposition groups. The eventual discovery of what a shocked Mr ElBaradei called a Wal-Mart of black-market proliferation only underlined how little he and his agency had known about an enormous operation that had been going on right under his inspectors noses.
As with any other important UN agency and its leader, the ability of the IAEA and Mr ElBaradei to do their job properly depends to a great degree on the powers given to them by the UNs member governments, and on the diplomatic support they get when pressuring a rogue regime to come clean. World powers often put their rivalries, and their national interests, first. For instance, Russias programme to build a nuclear-power station in Iran has sometimes made it reluctant to join wholeheartedly in efforts to press Iran to co-operate with the IAEA.
A leaky treaty
Nobel prize notwithstanding, Mr ElBaradei and the IAEA may not get much further in their efforts to keep nuclear weapons out of the hands of rogue states and terrorists without agreement among world governments to strengthen both the NPTs safeguards and the powers of the IAEAs inspectors to enforce these. After the discovery, following the 1991 Gulf war, of Saddams earlier attempts to build nuclear weapons, the agencys member states introduced a tough new inspections regime. But it was not made compulsory for NPT members to accept itand many of the countries most in need of close monitoring have declined to sign up for it. There is thus a strong case for making this more intrusive inspections regime mandatory. Likewise, the right enshrined in the NPT for countries to enjoy the benefits of civilian nuclear powerwhich Iran misinterprets to argue it has a right to whatever nuclear technologies it likescould be repealed or curtailed.
But the chances of such a tightening seem dim. At last month's big gathering of world leaders at the UN, its secretary-general, Kofi Annan, expressed dismay at their failure to agree on any statement on anti-proliferation or disarmament. Even countries that seem unlikely to be secretly coveting an atom bomb of their own, such as Brazil, bristle at the idea of being forced to let IAEA inspectors snoop freely around their civilian nuclear facilities. By arguing that the original five nuclear powersAmerica, Russia, China, Britain and Francehave made insufficient efforts to reduce their stocks of weapons, other countries have found a handy excuse to drag their feet. As Mr ElBaradei lamented a couple of years ago, In all of human history, no civilisation has ever voluntarily laid down its most powerful weapons. It remains to be seen whether ours can be the first.
SOURCE : Economist
Coca-Cola - In hot water
The world's biggest drinks firm tries to fend off its green critics
WATER is to Coca-Cola as clean energy is to BP. So declares Jeff Seabright, Coca-Cola's manager of environmental affairs, when asked about the firm's new global water strategy. The fizzy-drinks maker unveiled that strategy as part of its annual environmental report, released this week. We need to manage this issue or it will manage us, says Mr Seabright.
At first sight, the analogy with oil may seem odd, but it is not so far-fetched. Big Oil has long been the target of activists clamouring for action on global warming. BP stole a march on its oily brethren by accepting that climate change is a real problem, making smallish investments in clean energy, and grandly proclaiming itself beyond petroleum.
Coca-Cola has also been targeted by activists, but over the issue of water rather than energy. The firm has been hit hardest in India. First, experts from Delhi's Centre for Science and Environment, a green think-tank, tested various soft drinks and determined that they contained high levels of pesticide. It turned out that Coca-Cola was not the cause of the problem. But its inept handling of the accusations left the firm exposed to a much more damaging allegation: that it is aggravating the growing global problem of fresh-water scarcity. An ongoing controversy in India concerns allegations that some of the firm's bottling plants use too much water in drought-prone areas, thus leaving poor local villagers with too little. Amit Srivastava of the India Resource Centre, a Californian non-governmental group, has been using the Indian controversies to stoke an international grass-roots campaign against Coca-Cola.
The firm brags that it operates in 200 countriesmore than the UN itself, says Mr Seabright. But Coca-Cola's global reach and iconic status make it an easy target. Mr Srivastava points with glee to recent decisions at a handful of university campuses in America and Britain to suspend or challenge its contracts on ethical grounds.
Worse may be in store, if some have their way. Corporate Accountability International (CAI), an activist group best known for organising a noisy boycott of Nestl (for selling infant milk powder in countries without reliable access to clean water), now has its sights set on the world's largest producer of non-alcoholic drinks. CAI turned up at Coca-Cola's last shareholder meeting to grill the firm's management over the water issue. Kathryn Mulvey, CAI's boss, is concerned not only about its fizzy-drinks divisions but also its newish and booming bottled-water business. Echoing the sentiments of other campaigners, she insists that the misleading marketing campaign for the bottled water needlessly undermines confidence in tap water, and amounts to the commodification of something that should not be bought and sold.
Company officials argue that they started measuring and improving their use of water long before its troubles in India. The firm improved its water efficiency by 6% between 2003 and 2004. In 2002, it took 3.12 litres of water to produce one litre of final product (as much water is used to clean the assembly lines, flush out glass bottles, and so on). In 2004, that global average came down to 2.72 litres. Mr Srivastava is not impressed: he grouses that it is ridiculous that a firm that calls itself a hydration company should waste so much water; most of it does not even end up in the product.
To improve that situation, Coca-Cola has just completed a detailed assessment of the water risks to its businesses and their local communities. Going plant by plant, the firm's boffins have calculated local water-scarcity ratios, depletion levels for local aquifers, water needs for the local plant, and so on. With this new information, the firm is now setting local targets for improving each plant's efficiency of water and energy use. Mr Seabright explains that before this new study, the firm tried to impose one-size-fits-all global targets which local bottlers (who are often not owned by Coca-Cola) refused to accept.
Coca-Cola is also working with non-governmental groups such as the World Wildlife Fund and CARE, as well as UN agencies, in an effort to burnish its image. In India, it is now promising to capture enough water via rainwater harvesting (an age-old technique for capturing monsoon run-off) to offset all of its water use by 2006. Even the deeply sceptical Mr Srivastava concedes that if this company were really not to put any strain on local resources then it would be a different matter. Let us see if this is just greenwash.
The accusation of greenwashenvironmental window-dressing as a front for business-as-usualhas also been hurled at BP. But there the similarities between Coca-Cola and BP end, for the question of water is far more important to Coca-Cola than the issue of climate change is to BP. That is because if oil and gas run out, or are deemed too dirty to use one day, BP could still peddle ethanol or hydrogen fuel; it is, in the end, an energy company. Coca-Cola, on the other hand, simply would not exist without water. So while BP may yet see life beyond petroleum, Coca-Cola will never get Beyond Water.
SOURCE : Economist
The world's biggest drinks firm tries to fend off its green critics
WATER is to Coca-Cola as clean energy is to BP. So declares Jeff Seabright, Coca-Cola's manager of environmental affairs, when asked about the firm's new global water strategy. The fizzy-drinks maker unveiled that strategy as part of its annual environmental report, released this week. We need to manage this issue or it will manage us, says Mr Seabright.
At first sight, the analogy with oil may seem odd, but it is not so far-fetched. Big Oil has long been the target of activists clamouring for action on global warming. BP stole a march on its oily brethren by accepting that climate change is a real problem, making smallish investments in clean energy, and grandly proclaiming itself beyond petroleum.
Coca-Cola has also been targeted by activists, but over the issue of water rather than energy. The firm has been hit hardest in India. First, experts from Delhi's Centre for Science and Environment, a green think-tank, tested various soft drinks and determined that they contained high levels of pesticide. It turned out that Coca-Cola was not the cause of the problem. But its inept handling of the accusations left the firm exposed to a much more damaging allegation: that it is aggravating the growing global problem of fresh-water scarcity. An ongoing controversy in India concerns allegations that some of the firm's bottling plants use too much water in drought-prone areas, thus leaving poor local villagers with too little. Amit Srivastava of the India Resource Centre, a Californian non-governmental group, has been using the Indian controversies to stoke an international grass-roots campaign against Coca-Cola.
The firm brags that it operates in 200 countriesmore than the UN itself, says Mr Seabright. But Coca-Cola's global reach and iconic status make it an easy target. Mr Srivastava points with glee to recent decisions at a handful of university campuses in America and Britain to suspend or challenge its contracts on ethical grounds.
Worse may be in store, if some have their way. Corporate Accountability International (CAI), an activist group best known for organising a noisy boycott of Nestl (for selling infant milk powder in countries without reliable access to clean water), now has its sights set on the world's largest producer of non-alcoholic drinks. CAI turned up at Coca-Cola's last shareholder meeting to grill the firm's management over the water issue. Kathryn Mulvey, CAI's boss, is concerned not only about its fizzy-drinks divisions but also its newish and booming bottled-water business. Echoing the sentiments of other campaigners, she insists that the misleading marketing campaign for the bottled water needlessly undermines confidence in tap water, and amounts to the commodification of something that should not be bought and sold.
Company officials argue that they started measuring and improving their use of water long before its troubles in India. The firm improved its water efficiency by 6% between 2003 and 2004. In 2002, it took 3.12 litres of water to produce one litre of final product (as much water is used to clean the assembly lines, flush out glass bottles, and so on). In 2004, that global average came down to 2.72 litres. Mr Srivastava is not impressed: he grouses that it is ridiculous that a firm that calls itself a hydration company should waste so much water; most of it does not even end up in the product.
To improve that situation, Coca-Cola has just completed a detailed assessment of the water risks to its businesses and their local communities. Going plant by plant, the firm's boffins have calculated local water-scarcity ratios, depletion levels for local aquifers, water needs for the local plant, and so on. With this new information, the firm is now setting local targets for improving each plant's efficiency of water and energy use. Mr Seabright explains that before this new study, the firm tried to impose one-size-fits-all global targets which local bottlers (who are often not owned by Coca-Cola) refused to accept.
Coca-Cola is also working with non-governmental groups such as the World Wildlife Fund and CARE, as well as UN agencies, in an effort to burnish its image. In India, it is now promising to capture enough water via rainwater harvesting (an age-old technique for capturing monsoon run-off) to offset all of its water use by 2006. Even the deeply sceptical Mr Srivastava concedes that if this company were really not to put any strain on local resources then it would be a different matter. Let us see if this is just greenwash.
The accusation of greenwashenvironmental window-dressing as a front for business-as-usualhas also been hurled at BP. But there the similarities between Coca-Cola and BP end, for the question of water is far more important to Coca-Cola than the issue of climate change is to BP. That is because if oil and gas run out, or are deemed too dirty to use one day, BP could still peddle ethanol or hydrogen fuel; it is, in the end, an energy company. Coca-Cola, on the other hand, simply would not exist without water. So while BP may yet see life beyond petroleum, Coca-Cola will never get Beyond Water.
SOURCE : Economist
Games managers should play
Game theory can help managers make better strategic decisions when facing the uncertainty of competitive conduct. If you don't change your game to gain advantage, one of your competitors will.
Call it revenge of the nerds if you like, but many high-school chess club presidents are landing the most coveted strategic-planning positions at major corporations. Chess players realize that good strategic decisions require you to take into account the likely moves and countermoves of other players. They study their competitors approaches to the game and identify the likely sequence of moves that will follow any particular move they make. By looking forward and reasoning backward, they drive the game toward a checkmate victory.
This ability to look forward and reason backward is enormously valuable to strategic-decision makers. When a company builds a new chemical plant or paper mill, its profitability will often turn on whether or not competitors add capacity as well. Similarly, the success of new marketing or pricing strategies depends on whether competitors replicate them. In oligopoly markets, it is hard to identify a strategic decision that isnt influenced by the retaliatory countermoves it sets off. The best business strategists must be skilled at predicting future rounds of competitive conduct.
Yet this is easier said than done. Uncertainty often surrounds competitive conduct, and many managers either expect the companies they compete against to engage in the kind of competitive behavior they see as normal or make some other educated guess. But such assumptions can be dangerous. Managers unwittingly set off value-destroying price wars, get buried when incumbents retaliate in markets those managers have attempted to enter, and cannibalize their own core markets because they have either ignored or made the wrong guesses about the reactions of competitors.
The good news is that game theory provides a structured process that can help managers make better strategic decisions when faced with the uncertainty of competitive conduct. Game theory isnt new; economists, mathematicians, and political scientists have been developing it for more than 50 years. What is new is an increased emphasis on game theory as a practical tool that real-world managers can use for making strategic decisions. For example, most participants in the recent US personal communications services (PCS) spectrum auctions hired game theorists to develop their bidding strategies. What follows is a systematic game theory process that has been applied successfully in more than 100 company situations in the past five years.
The rules of the game
A good game theorist gets inside the heads of other players to understand their economic incentives and likely behavior. To do this, you should focus on five key elements of competitive intelligence.
Define the strategic issue
What decision are you trying to make: pricing, capacity, market entry? How is it related to other strategic decisions being made in the market? If you are trying to make a decision on capacity investment, for example, it is vital that you know whether others in the market are also considering entering or leaving it.
Determine the relevant players
Which players actions will have the greatest impact on the success of your strategy? A common mistake is to assume that all your strategic games are played against competitors and that there is always a winner and a loser. Many of your strategic decisions turn on the actions of other players in the marketsuppliers, distributors, providers of complementary goodsand "win-win" outcomes are attainable. For example, a computer hardware manufacturer attempting to stimulate demand for its product must focus on the economic incentives of software producers to provide products consistent with its operating system. A thorough understanding of these incentives allows the hardware producer to structure contracts, joint ventures, or alliances that make both parties better off.
Identify each players strategic objectives
In real business games, players often base decisions, at least in the short run, on criteria such as market share or growth
Textbook game theory commonly assumes that the players seek rational, profit-maximizing objectives. However, in real business games players often base decisions, at least in the short run, on criteria such as market share or growth. It is extremely important to get such criteria right. If you make the decision to enter a new market in the belief that the incumbent players are profit maximizers when they are really driven primarily by short-run market share objectives, you might suffer unexpected losses when the incumbents slash prices to maintain share.
Identify the potential actions for each player
For each player in the game, including yourself, develop a list of potential actions on the strategic issue. Generate this list from the perspective of the other players, not just your own. What options might they be considering? How will they evaluate these options? Dont assume that you and your competitors have the same set of strategic options. Competitive role-playing exercises involving external experts and your management team can help generate these lists.
Determine the likely structure of the game
Will decisions be made simultaneously, in isolation, or sequentially, over time? If sequentially, who is likely to lead and to follow? Will this be a one-shot decision, or will it be repeated? Most business games are repeated, sequential games; pricing decisions, for example, are made over and over in sequence in most markets.
Learning from the game
Many business games are more difficult to define and solve. In fact, this duopoly chemical case was more complicated than shown here, because capacity decisions were repeated over time, and Matco and Chemco competed across a broad range of product lines. Some economists even argue that real-world business games are so complex, and their solutions so sensitive to model assumptions, that game theory is irrelevant for business decision making. This is not so.
First, a surprising number of oligopoly strategy problems can be modeled as simple, quantifiable games: pricing, capacity management, marketing, new-entry, bidding, and contract design problems are particularly common.
Second, game theory applications need not identify unique, robust equilibrium solutions to be valuable strategic-decision-making tools. Since the process itself forces managers to think explicitly about the incentives and likely moves of other players, it can generate a breakthrough in strategic insight even when the game cant be modeled explicitly. Qualitative role-playing exercises and structured game theory discussions may generate enough insight to lead to a change of direction on new-entry, capacity addition, pricing, and other fundamental strategic decisions.
Game theory can help you play your current game better, but often its greatest value is to help players define new games
Third, and perhaps most important, while attempting to model the current industry, game managers invariably develop insights about how to change games to drive more favorable outcomes. Unlike board games such as chess, business games dont have fixed rules, players, and potential moves. Although game theory can help you play your current game better, its greatest value often comes from helping players define new games. In some cases, for example, game theory predicts that current market conditions make price wars highly likely because customers switch easily between competitors. The current game-modeling exercise identifies the need to change the game by implementing customer loyalty programs, such as frequent-flyer discounts, that create value for customers and companies and decrease incentives for destructive price competition.
Apply game theory the next time you need to make a strategic decision about which competitive interactions matter. Look forward and reason backward to generate insights about how to play your current business game more successfully. At the same time, make sure you leverage these insights to define better games to play. If you dont change your game to gain advantage, one of your competitors will, and there is not much value in being the best chess player when everyone else is playing checkers.
SOURCE :McKinsey
Game theory can help managers make better strategic decisions when facing the uncertainty of competitive conduct. If you don't change your game to gain advantage, one of your competitors will.
Call it revenge of the nerds if you like, but many high-school chess club presidents are landing the most coveted strategic-planning positions at major corporations. Chess players realize that good strategic decisions require you to take into account the likely moves and countermoves of other players. They study their competitors approaches to the game and identify the likely sequence of moves that will follow any particular move they make. By looking forward and reasoning backward, they drive the game toward a checkmate victory.
This ability to look forward and reason backward is enormously valuable to strategic-decision makers. When a company builds a new chemical plant or paper mill, its profitability will often turn on whether or not competitors add capacity as well. Similarly, the success of new marketing or pricing strategies depends on whether competitors replicate them. In oligopoly markets, it is hard to identify a strategic decision that isnt influenced by the retaliatory countermoves it sets off. The best business strategists must be skilled at predicting future rounds of competitive conduct.
Yet this is easier said than done. Uncertainty often surrounds competitive conduct, and many managers either expect the companies they compete against to engage in the kind of competitive behavior they see as normal or make some other educated guess. But such assumptions can be dangerous. Managers unwittingly set off value-destroying price wars, get buried when incumbents retaliate in markets those managers have attempted to enter, and cannibalize their own core markets because they have either ignored or made the wrong guesses about the reactions of competitors.
The good news is that game theory provides a structured process that can help managers make better strategic decisions when faced with the uncertainty of competitive conduct. Game theory isnt new; economists, mathematicians, and political scientists have been developing it for more than 50 years. What is new is an increased emphasis on game theory as a practical tool that real-world managers can use for making strategic decisions. For example, most participants in the recent US personal communications services (PCS) spectrum auctions hired game theorists to develop their bidding strategies. What follows is a systematic game theory process that has been applied successfully in more than 100 company situations in the past five years.
The rules of the game
A good game theorist gets inside the heads of other players to understand their economic incentives and likely behavior. To do this, you should focus on five key elements of competitive intelligence.
Define the strategic issue
What decision are you trying to make: pricing, capacity, market entry? How is it related to other strategic decisions being made in the market? If you are trying to make a decision on capacity investment, for example, it is vital that you know whether others in the market are also considering entering or leaving it.
Determine the relevant players
Which players actions will have the greatest impact on the success of your strategy? A common mistake is to assume that all your strategic games are played against competitors and that there is always a winner and a loser. Many of your strategic decisions turn on the actions of other players in the marketsuppliers, distributors, providers of complementary goodsand "win-win" outcomes are attainable. For example, a computer hardware manufacturer attempting to stimulate demand for its product must focus on the economic incentives of software producers to provide products consistent with its operating system. A thorough understanding of these incentives allows the hardware producer to structure contracts, joint ventures, or alliances that make both parties better off.
Identify each players strategic objectives
In real business games, players often base decisions, at least in the short run, on criteria such as market share or growth
Textbook game theory commonly assumes that the players seek rational, profit-maximizing objectives. However, in real business games players often base decisions, at least in the short run, on criteria such as market share or growth. It is extremely important to get such criteria right. If you make the decision to enter a new market in the belief that the incumbent players are profit maximizers when they are really driven primarily by short-run market share objectives, you might suffer unexpected losses when the incumbents slash prices to maintain share.
Identify the potential actions for each player
For each player in the game, including yourself, develop a list of potential actions on the strategic issue. Generate this list from the perspective of the other players, not just your own. What options might they be considering? How will they evaluate these options? Dont assume that you and your competitors have the same set of strategic options. Competitive role-playing exercises involving external experts and your management team can help generate these lists.
Determine the likely structure of the game
Will decisions be made simultaneously, in isolation, or sequentially, over time? If sequentially, who is likely to lead and to follow? Will this be a one-shot decision, or will it be repeated? Most business games are repeated, sequential games; pricing decisions, for example, are made over and over in sequence in most markets.
Learning from the game
Many business games are more difficult to define and solve. In fact, this duopoly chemical case was more complicated than shown here, because capacity decisions were repeated over time, and Matco and Chemco competed across a broad range of product lines. Some economists even argue that real-world business games are so complex, and their solutions so sensitive to model assumptions, that game theory is irrelevant for business decision making. This is not so.
First, a surprising number of oligopoly strategy problems can be modeled as simple, quantifiable games: pricing, capacity management, marketing, new-entry, bidding, and contract design problems are particularly common.
Second, game theory applications need not identify unique, robust equilibrium solutions to be valuable strategic-decision-making tools. Since the process itself forces managers to think explicitly about the incentives and likely moves of other players, it can generate a breakthrough in strategic insight even when the game cant be modeled explicitly. Qualitative role-playing exercises and structured game theory discussions may generate enough insight to lead to a change of direction on new-entry, capacity addition, pricing, and other fundamental strategic decisions.
Game theory can help you play your current game better, but often its greatest value is to help players define new games
Third, and perhaps most important, while attempting to model the current industry, game managers invariably develop insights about how to change games to drive more favorable outcomes. Unlike board games such as chess, business games dont have fixed rules, players, and potential moves. Although game theory can help you play your current game better, its greatest value often comes from helping players define new games. In some cases, for example, game theory predicts that current market conditions make price wars highly likely because customers switch easily between competitors. The current game-modeling exercise identifies the need to change the game by implementing customer loyalty programs, such as frequent-flyer discounts, that create value for customers and companies and decrease incentives for destructive price competition.
Apply game theory the next time you need to make a strategic decision about which competitive interactions matter. Look forward and reason backward to generate insights about how to play your current business game more successfully. At the same time, make sure you leverage these insights to define better games to play. If you dont change your game to gain advantage, one of your competitors will, and there is not much value in being the best chess player when everyone else is playing checkers.
SOURCE :McKinsey
Games managers should play
SOURCE :McKinsey
Hey Vijay
You didn't mention about the example of Chemco V/s Matco which is there in this article :)
Coming to speak of Game Theory there is an article worth mentioning, its on Strategy-Business website titled The Thought Leader Interview - Reinhard Selten.
Playing the game: Chemco vs. Matco
These five elements of competitive intelligence define your business game, but more work is generally required before such information can be used to "solve" it. A thorough economic analysis of the industryincluding market research and estimates of your competitors costs and capacityis usually needed to estimate the payoffs of different strategies for different players, given their strategic objectives. This information is summarized in a payoff diagram (Exhibit 1) and can be used to guide strategic decision making.
The exhibit is based on a duopoly chemical market case in which two competitorscall them Chemco and Matcoare each deciding whether to build a new plant. It is unclear which will be the first to reach a conclusion, but the decisions will certainly be made sequentially; for simplicity, this diagram assumes that Chemco moves first. Each companys long-term objective is to maximize profits, so the numbers in the payoff diagram represent calculations of net present value (NPV). For example, if neither builds a new plant, each player should earn an NPV of 100.
Chemco ought to look forward and reason backward to make its decision. If Chemco builds a new plant, the payoffs suggest that Matco will not; these decisions will earn Matco an NPV of 80 and Chemco an NPV of 125. However, if Chemco decides not to build the plant, Matco should choose to build instead; this will earn Matco and Chemco NPVs of 115 and 80, respectively. The diagram also shows that while it is profitable for one new plant to be built in the industry, two new plants will lead to significant excess capacity, deep price discounting, and lower profits for both players.
What strategic insights can be learned from this exercise? First, it illustrates the first-mover advantage in the game; by making a commitment to new plant capacity before Matco does, Chemco can influence Matcos incentives to build and avoid a dismal outcome in which both players bring on new plants. It also demonstrates the symmetry of the first-mover advantage: Matco has its own incentives to move first, suggesting that Chemco must credibly commit itselfperhaps through real bricks and mortarto new capacity as soon as possible. In addition, the case demonstrates how important it is for both players to understand the limited prospects for growth in market demand. If Matco believes, erroneously, that the market can profitably support both new plants, its plans to expand capacity wont be influenced by Chemcos commitments to build.
ever since i have started browing pg tis thread has become one o my favs.it ought to be made stickyyyyy.nehow teesra banda n govi keep on wid ur gud work.
i m loving it.........
hi teesra banda
jus tell me where do u get the article from?
neways keep up the good work.
can u tell me some good books for GK?
Hey Vijay
You didn't mention about the example of Chemco V/s Matco which is there in this article :)
Sorry !!!...
Actually tht was crossing the limit so thot of dropping it
But didnt know people are following up so closely
Thanx Govi !!!
ever since i have started browing pg tis thread has become one o my favs.it ought to be made stickyyyyy.nehow teesra banda n govi keep on wid ur gud work.
i m loving it.........
Samsite bhai...Ye request MODS ko PM maaro
hi teesra banda
jus tell me where do u get the article from?
neways keep up the good work.
can u tell me some good books for GK?
Well...I never followed books for GK. GK is an ongoing process which keeps on going while undergoing reading and following news.
As for where do i get articles from ! I do mention SOURCE at the bottom of every post. They are one of best places to get good articles from.
Cheers
This Week's BUSINESS Headlines !!!
Delphi, America's largest supplier of auto parts, sought bankruptcy protection for its domestic operations. The firm is negotiating with unions to cut its "legacy costs" in pension and health-care provision. The move is a worrying portent for America's troubled carmakers. The share price of General Motors fell by 10% after the carmaker gave warning that Delphi's woes could cost it up to $11 billion in benefits it guaranteed to Delphi's workers when it spun off the firm in 1999.
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Bridgestone Firestone ended a long-running dispute with Ford by agreeing to pay $240m to settle claims stemming from a huge safety recall of its tyres in 2000.
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Inco, a Canadian mining company, said it was buying Falconbridge, a domestic rival, in a deal worth around C$12 billion ($10.2 billion) that creates the world's biggest producer of nickel. Xstrata, based in Switzerland, had expressed keen interest in Falconbridge, taking a 20% stake in August.
---------------
Carl Icahn sent an open letter to shareholders in Time Warner attacking the "dismal record" of management. The billionaire investor heads a consortium with a 2.8% stake in the media conglomerate that wants the group to spin off its cable-TV unit and buy back billions in shares.
--------------
Rupert Murdoch said that his decision in August to prolong a poison pill in News Corporation (designed primarily to stop John Malone's Liberty Media from increasing its voting stake in the group) was "totally legal". Last week, a group of investment and pension funds filed a lawsuit in Delaware to block the extension, arguing shareholders should have been consulted first.
-------------------
It was a busy week for Microsoft. The software giant reached a $761m settlement with RealNetworks, ending the last major antitrust lawsuit brought against it in America. The two companies also agreed to collaborate to tackle growing competition from firms offering media downloads over the internet. Microsoft then announced an alliance with Yahoo! that enables interaction between their instant-messaging services, a direct challenge to AOL. Techies were also excited by reports that both Microsoft and Google (in alliance with Comcast, a cable-TV operator) were jostling to buy a stake in AOL.
--------------------
Apple Computer reported net profit of $1.34 billion for the year ending September 24th, a 384% increase on a year earlier. However, although this was "the best year in the company's history", Apple's share price fell on news that the 6.5m shipments of its iPod music player in the fourth quarter had fallen short of Wall Street's expectations. Apple also launched its new video iPod, and announced a deal with Disney enabling the download of some popular TV shows on to the device.
------------------
India's two biggest providers of software services, Infosys Technologies and Tata Consultancy Services, reported a rise in net profit for the quarter ending September 30th of 36% and 20.5% respectively, compared with a year earlier. Both firms benefited from inclusion in a big contract to manage ABN Amro's IT systems.
-----------------
Refco, a large futures and commodities broker based in New York, replaced its boss, Phillip Bennett, for allegedly using a separate company to "hide" $430m. Mr Bennett (who repaid the sum to the firm) was subsequently charged with fraud by federal prosecutors. Refco's share price collapsed as it revealed that financial statements going back to 2002 were unreliable.
--------------
Antonio Fazio defended his conduct in the takeover battle for Banca Antonveneta. The governor of Italy's central bank was questioned by prosecutors investigating whether he had abused his powers by apparently favouring a domestic offer (ABN Amro, a Dutch bank, eventually won the bid). No charges have been brought against Mr Fazio.
Lincoln National, an insurance company based in Philadelphia, announced a $7.5 billion merger with Jefferson-Pilot, a rival from North Carolina. The deal creates America's fourth-biggest life insurer.
---------------------
At a meeting of trade ministers in Zurich, Rob Portman, the United States' trade negotiator, said he was prepared to offer major concessions to reduce farm subsidies. The EU responded with somewhat less ambitious proposals.
--------------------
China's trade surplus in September fell to $7.6 billion from $10.6 billion in August. For the 12 months ending September, the surplus was $96.4 billion. Imports to China grew sharply for the second month, a sign that domestic demand may be picking up. China released the figures just before John Snow, America's treasury secretary, arrived to seek further flexibility on its currency policy.
SOURCE : Economist
Delphi, America's largest supplier of auto parts, sought bankruptcy protection for its domestic operations. The firm is negotiating with unions to cut its "legacy costs" in pension and health-care provision. The move is a worrying portent for America's troubled carmakers. The share price of General Motors fell by 10% after the carmaker gave warning that Delphi's woes could cost it up to $11 billion in benefits it guaranteed to Delphi's workers when it spun off the firm in 1999.
-----------------
Bridgestone Firestone ended a long-running dispute with Ford by agreeing to pay $240m to settle claims stemming from a huge safety recall of its tyres in 2000.
-------------------
Inco, a Canadian mining company, said it was buying Falconbridge, a domestic rival, in a deal worth around C$12 billion ($10.2 billion) that creates the world's biggest producer of nickel. Xstrata, based in Switzerland, had expressed keen interest in Falconbridge, taking a 20% stake in August.
---------------
Carl Icahn sent an open letter to shareholders in Time Warner attacking the "dismal record" of management. The billionaire investor heads a consortium with a 2.8% stake in the media conglomerate that wants the group to spin off its cable-TV unit and buy back billions in shares.
--------------
Rupert Murdoch said that his decision in August to prolong a poison pill in News Corporation (designed primarily to stop John Malone's Liberty Media from increasing its voting stake in the group) was "totally legal". Last week, a group of investment and pension funds filed a lawsuit in Delaware to block the extension, arguing shareholders should have been consulted first.
-------------------
It was a busy week for Microsoft. The software giant reached a $761m settlement with RealNetworks, ending the last major antitrust lawsuit brought against it in America. The two companies also agreed to collaborate to tackle growing competition from firms offering media downloads over the internet. Microsoft then announced an alliance with Yahoo! that enables interaction between their instant-messaging services, a direct challenge to AOL. Techies were also excited by reports that both Microsoft and Google (in alliance with Comcast, a cable-TV operator) were jostling to buy a stake in AOL.
--------------------
Apple Computer reported net profit of $1.34 billion for the year ending September 24th, a 384% increase on a year earlier. However, although this was "the best year in the company's history", Apple's share price fell on news that the 6.5m shipments of its iPod music player in the fourth quarter had fallen short of Wall Street's expectations. Apple also launched its new video iPod, and announced a deal with Disney enabling the download of some popular TV shows on to the device.
------------------
India's two biggest providers of software services, Infosys Technologies and Tata Consultancy Services, reported a rise in net profit for the quarter ending September 30th of 36% and 20.5% respectively, compared with a year earlier. Both firms benefited from inclusion in a big contract to manage ABN Amro's IT systems.
-----------------
Refco, a large futures and commodities broker based in New York, replaced its boss, Phillip Bennett, for allegedly using a separate company to "hide" $430m. Mr Bennett (who repaid the sum to the firm) was subsequently charged with fraud by federal prosecutors. Refco's share price collapsed as it revealed that financial statements going back to 2002 were unreliable.
--------------
Antonio Fazio defended his conduct in the takeover battle for Banca Antonveneta. The governor of Italy's central bank was questioned by prosecutors investigating whether he had abused his powers by apparently favouring a domestic offer (ABN Amro, a Dutch bank, eventually won the bid). No charges have been brought against Mr Fazio.
Lincoln National, an insurance company based in Philadelphia, announced a $7.5 billion merger with Jefferson-Pilot, a rival from North Carolina. The deal creates America's fourth-biggest life insurer.
---------------------
At a meeting of trade ministers in Zurich, Rob Portman, the United States' trade negotiator, said he was prepared to offer major concessions to reduce farm subsidies. The EU responded with somewhat less ambitious proposals.
--------------------
China's trade surplus in September fell to $7.6 billion from $10.6 billion in August. For the 12 months ending September, the surplus was $96.4 billion. Imports to China grew sharply for the second month, a sign that domestic demand may be picking up. China released the figures just before John Snow, America's treasury secretary, arrived to seek further flexibility on its currency policy.
SOURCE : Economist
SECURING ASIA'S ENERGY FUTURE:
Source: McKinsey Archives
Cooperation among the region's countries will help guarantee a steady supply of oil and natural gas.
As Asia's appetite for energy surges, the desire of the region's leaders to ensure a reliable flow of reasonably priced oil and natural gas will also intensify. If they fail, Asia's fast-growing economies could stumble. A race is now under waybetween China and India, in particularto buy energy reserves in such far-flung places as Iran, Russia, and Sudan.
The magnitude of Asia's future energy needs explains this urgency: the region's share of global consumption will nearly double in the next 20 years, to about 48 percent for oil and 22 percent for natural gas. By 2010, the region's oil consumption will surpass North America's. Such rapid growth has led world energy markets to their most critical juncture in more than two decades: today's tight supply and hefty prices could conceivably spark an energy boom and bust like the one that shook the world economy in the 1980s.
How might this scenario come about? If, in response to the tight supply, oil-producing countries that don't belong to the Organization of Petroleum Exporting Countries were to add significant capacity, thus increasing their market share, OPEC might in turn attempt to boost its production, generating a global oversupply. The price volatility inherent in this kind of situation would be damaging to both producing and consuming countries.
Confronting the challenges
Fortunately, Asian governments and their national oil companies can do plenty to promote stable prices and reliable supply in the regionbut only if they work together. The first step is for countries to acknowledge the challenges: Asian oil and natural-gas markets are currently neither as deep nor as transparent as are those in Europe and North America. Buyers can't hedge risks, and sellers get less for their products than they would elsewhere because of the relatively inefficient and volatile markets. Moreover, Asia has limited strategic reserves, which can soften the impact on prices in the event of a sudden supply shortage.
Asia also lacks the infrastructure to transport large quantities of natural gas from the well to the consumereven though the cost of pipelines continues to decline, making them a viable option over distances of thousands of miles. Since pipelines cross borders, the difficulty is that nations must work together to secure funding, agree on routes, and set equitable transportation tariffs. Even projects to transport liquefied natural gas by ship often require both the supplying and the consuming countries to invest in infrastructure.
It may sound unlikely, but many of the world's big oil-producing countries don't have sufficient resources to expand their production in order to meet Asia's future energy demand. Capital investment in Africa and the Middle East alone will need to increase to $45 billion a year over the next three decades, up from $8 billion a year during the past one. That amount is more than Middle Eastern countries can spend and still provide education, health care, and other social services to their rapidly growing populations. Foreign partners will likely be needed to bridge this funding gap and spread the investment risk.
Where to cooperate
Asian governments should take several concrete measures in a concerted fashion. As a crucial first move, they need to create a regional market for petroleum productsone that attracts the backing of key buyers and sellers and has the financial sophistication to enable risk hedging. They also need to establish a regional benchmark crude oil (similar to Europe's Brent blend) that can serve as a pricing yardstick for other types of crude. Major buyers (such as China, India, and Japan) and big sellers (such as the OPEC producers) should commit themselves to using a single exchange in order to ensure that the market has the necessary volume and financial liquidity to be efficient. Countries should help the market build storage facilities equal to about 30 percent of its daily volume to smooth physical delivery. In addition, all parties should agree on standard contracts and common regulations for the settlement of transactions and on arbitration to resolve disagreements.
Governments should also move to improve energy security in the region, taking steps to ensure an adequate supply of oil and natural gas in the event of a major refinery fire or other supply disruption. For starters, governments in Asia and the Middle East will need to begin sharing detailed information on demand, supply, and inventories. The International Energy Agency's role in compiling detailed statistics to help reduce price volatility and avoid market panics for its member countries in Europe and North America demonstrates the benefits of such cooperation.
Buyers and sellers should also jointly increase the strategic reserves for Asian countries. These reserves currently stand at 25 days of demand or less but should be closer to the United States' 60-day supply or Europe's 90 days. Moreover, the region's governments should establish contingency plans for opening the reserves' spigots in case of an emergency.
Cooperation between buyers and sellers could include investments in each other's energy infrastructurea trend that has already begun
This cooperation between buyers and sellers could extend to include investments in each other's energy infrastructurea trend that has already begun in a small way. Producers such as Kuwait and Saudi Arabia could purchase stakes in refineries in China and India. The latter two countries could increase their investment in exploration and production in the Middle East's extensive oil and gas fields, thus helping to close the investment gap Middle Eastern nations are likely to face. Finally, energy producers and consumers alike could invest in a pan-Asian natural-gas distribution network similar to those that already link countries within Europe and North America.
None of these tasks will be easy, of course. Aligning disparate priorities and forging common goals can take months or years of painstaking negotiations. Cultural differences and historical rivalries can often overrule common sense. The way for Asian countries to overcome such hurdles is to focus initially on the areas of shared interest that are relatively uncontroversial and inexpensive, such as promoting greater transparency. To make progress, leaders need a regular forum where they can address sensitive geopolitical issues. The inaugural Asian ministers' energy roundtable, in New Delhi, in January 2005, represents a promising start.
Cooperation among the region's energy-hungry nations, as well as between them and the energy-rich producers in the Middle East, is a good strategy to ensure that affordable oil and natural gas continue flowing to the businesses and consumers that need it. For Asia's economiesand the rest of the worldmaking the right decisions now will be a boon to them in the decades to come.
Why America's stockmarkets are ailing while others are hale
STOCKMARKETS around the world have had a ropey couple of weeks. First renewed fears about inflation, then the biggest bankruptcy yet of an American manufacturer (Delphi, a maker of car parts), pushed share prices down for a bit. But contrary to the old saying that when America sneezes, the rest of the world catches cold, the rest this time suffered less and recovered faster, thank you.
Shares have generally done less well in America this year than in Europe, Japan and emerging markets. Britain's FTSE 100 hit a four-year high this month. So did Japan's Nikkei, late in September. The Chicago Mercantile Exchange has just announced a new derivative contract on Asia's top shares, to capture their ebullience. American share prices, meanwhile, are moving sideways.
As the chart shows, the total return (including price appreciation and dividends) on equities in America has been slightly negative this year. In continental Europe, it has been a bit over 6%. Emerging markets, recent stars in the investing firmament, have returned even more, 21% to date. One of the brightest, Brazil, has produced 47%; othersin the Middle East, for exampleeven more. And this is after translation into dollars. In most instances, the difference in local currencies is even starker.
This is an odd state of affairs, on the face of it. America's economy has been the wonder of the western world, shaking off rising interest rates and sharply higher oil prices to persist in growth that is the envy of much of Europe. Its debt-ridden, gas-guzzling consumers have only recently begun to show signs of flagging. And most firms are defending their profit margins.
Explanations range from the technical through the fundamental to the psychological. Relative valuations head the list. American equities were more expensive than those elsewhere when the year began, and the gap, though smaller now, remains. Stockmarket valuations are always a contentious business, but most measures show the same pattern.
Another negative factor is that interest rates are rising and the yield curve is flattening, both normally bad signs for business. While the Federal Reserve has hiked short rates by 275 basis points (hundredths of a percent), since June 2004, the difference in the yields on ten-year and two-year Treasury bonds has shrunk from 192 to 20 basis points. Against this, the euro zone's central bank has held rates steady for more than two years, and Britain recently cut them. And while long-term yields in America are lower than they were when the Fed started raising short-term rates, they are still higher than in almost any other rich country (Australia is an exception). Shares globally look cheap relative to bonds when yields on the two are compared, but in America they look less cheap than elsewhere.
Then there are fundamentals, and each country has its saga. Germany's companies have restructured and cut costs, helped by cheap labour in central Europe. With a large manufacturing sector by the standards of developed countries, its export-oriented firms are riding the wave of global industrial expansion. Japan, for its part, is coming out of seven years of deflation with its companies modernised and profits shooting upwardsand maybe more economic reform ahead. Emerging markets have been re-rated, thanks to broadly more investor-friendly economic policies and booming commodity prices.
In America, by contrast, several worries are sapping optimism about economic prospects. One concern is inflation: though the evidence is mixed, it may be making a comeback. Another is the country's trade and budget deficits, which by some lights appeared to be improving until Hurricane Katrina boosted the government's projected outlays. A third has to do with the sustainability of corporate earnings: America's are among the farthest above their historical trend and thus may have farthest to fall.
Americans themselves prefer foreign shares these days, another reason why their own are lagging. The trend, though volatile, has been rising since March 2004. This June the net outflow was $11.8 billion and in July $8.9 billion, on Treasury figures. This supports the view that American investors are not that pleased with the valuations on US equities and think that other markets are more geared to the pick-up in the world business cycle, says Richard Batty, global strategist at Standard Life Investments, part of a British insurer.
Anywhere but America
Mutual-fund flows confirm the Treasury trend and bring it up to date. Brad Durham, managing director of Emerging Portfolio Fund Research, which monitors mutual funds with $2.3 trillion in assets, says that net flows into American-domiciled American-equity funds are just positive for the year so far, but have deteriorated sharply. Net outflows in August were $6.9 billion, and a further $2.2 billion or so has walked since. Meanwhile, mutual funds based in America have poured $14.5 billion this year into emerging markets, another $14.5 billion into global and international funds and $5.5 billion into Japan. Europe suffered outflows earlier in the year, but is now attracting dollars.
Behavioural finance contributes a final piece to the puzzle. A new paper published by London's Centre for Economic Policy Research looks, unusually, at trustconfidence that financial data is reliable, that the overall system is fairas a factor in stockmarket participation. The authors (Luigi Guiso and Luigi Zingales, of the University of Chicago, and Paola Sapienza, of Northwestern University) find that levels of trust, variously defined, are correlated with investors' propensity to buy shares. This supports the notion that scandals involving the likes of Enron and WorldCom may have turned off American investors. Indeed, Italy, whose once-tainted Parmalat returned to the stockmarket last week, is another underperformer.
Are America's shares now poised to close the gap? A couple of short-term indicators are less than bullish. For one thing, analysts have steadily raised the bar in their earnings forecasts, making it increasingly likely that companies will stop beating and start missing their targets. Investors often punish that. And for another, the number of companies suspending their dividends rose last month: to 11, from a monthly average of under three, points out Mark Hulbert, a market commentator. Though only a few firms are involved, the trend may be significant: much academic literature suggests that when a company suspends its dividend, returns on its shares fall over the next 12 months.
The broader outlook is more encouraging, however. Most forecasters believe that America's growth will continue to outpace Europe's. Equity valuations are more in line than they were. And the bloom is slightly off various developing-country roses. The dependence of Asian countries on imported oil, a possible peak in commodity prices and some emerging political risk in Latin America are all things that investors are keeping an eye on. Nor does Japan fill everyone with confidence, for it is foreigners, not locals, who are pouring the money into shares there.
An intriguing twist in Credit Suisse First Boston's much-followed risk-appetite indicator seems to confirm this view. Last week, it shot into the euphoria zone for several days, which would normally be a signal to sell equities. But for the first time in ten years, enthusiasm for developed countries' shares did not accompany the spike, points out Andrew Garthwaite, a global equity strategist. It is bonds that investors are crazy about, plus shares in Japan and some emerging markets. Continental and American equities leave them cold, and British ones even colder. The indicator last shot up without support from shares in 1995, the beginning of a memorably snorting bull market in equities. Without implying anything half so dramatic now, the moral would appear to be to buy shares, and buycuriouslyBritish.
SOURCE : Economist
STOCKMARKETS around the world have had a ropey couple of weeks. First renewed fears about inflation, then the biggest bankruptcy yet of an American manufacturer (Delphi, a maker of car parts), pushed share prices down for a bit. But contrary to the old saying that when America sneezes, the rest of the world catches cold, the rest this time suffered less and recovered faster, thank you.
Shares have generally done less well in America this year than in Europe, Japan and emerging markets. Britain's FTSE 100 hit a four-year high this month. So did Japan's Nikkei, late in September. The Chicago Mercantile Exchange has just announced a new derivative contract on Asia's top shares, to capture their ebullience. American share prices, meanwhile, are moving sideways.
As the chart shows, the total return (including price appreciation and dividends) on equities in America has been slightly negative this year. In continental Europe, it has been a bit over 6%. Emerging markets, recent stars in the investing firmament, have returned even more, 21% to date. One of the brightest, Brazil, has produced 47%; othersin the Middle East, for exampleeven more. And this is after translation into dollars. In most instances, the difference in local currencies is even starker.
This is an odd state of affairs, on the face of it. America's economy has been the wonder of the western world, shaking off rising interest rates and sharply higher oil prices to persist in growth that is the envy of much of Europe. Its debt-ridden, gas-guzzling consumers have only recently begun to show signs of flagging. And most firms are defending their profit margins.
Explanations range from the technical through the fundamental to the psychological. Relative valuations head the list. American equities were more expensive than those elsewhere when the year began, and the gap, though smaller now, remains. Stockmarket valuations are always a contentious business, but most measures show the same pattern.
Another negative factor is that interest rates are rising and the yield curve is flattening, both normally bad signs for business. While the Federal Reserve has hiked short rates by 275 basis points (hundredths of a percent), since June 2004, the difference in the yields on ten-year and two-year Treasury bonds has shrunk from 192 to 20 basis points. Against this, the euro zone's central bank has held rates steady for more than two years, and Britain recently cut them. And while long-term yields in America are lower than they were when the Fed started raising short-term rates, they are still higher than in almost any other rich country (Australia is an exception). Shares globally look cheap relative to bonds when yields on the two are compared, but in America they look less cheap than elsewhere.
Then there are fundamentals, and each country has its saga. Germany's companies have restructured and cut costs, helped by cheap labour in central Europe. With a large manufacturing sector by the standards of developed countries, its export-oriented firms are riding the wave of global industrial expansion. Japan, for its part, is coming out of seven years of deflation with its companies modernised and profits shooting upwardsand maybe more economic reform ahead. Emerging markets have been re-rated, thanks to broadly more investor-friendly economic policies and booming commodity prices.
In America, by contrast, several worries are sapping optimism about economic prospects. One concern is inflation: though the evidence is mixed, it may be making a comeback. Another is the country's trade and budget deficits, which by some lights appeared to be improving until Hurricane Katrina boosted the government's projected outlays. A third has to do with the sustainability of corporate earnings: America's are among the farthest above their historical trend and thus may have farthest to fall.
Americans themselves prefer foreign shares these days, another reason why their own are lagging. The trend, though volatile, has been rising since March 2004. This June the net outflow was $11.8 billion and in July $8.9 billion, on Treasury figures. This supports the view that American investors are not that pleased with the valuations on US equities and think that other markets are more geared to the pick-up in the world business cycle, says Richard Batty, global strategist at Standard Life Investments, part of a British insurer.
Anywhere but America
Mutual-fund flows confirm the Treasury trend and bring it up to date. Brad Durham, managing director of Emerging Portfolio Fund Research, which monitors mutual funds with $2.3 trillion in assets, says that net flows into American-domiciled American-equity funds are just positive for the year so far, but have deteriorated sharply. Net outflows in August were $6.9 billion, and a further $2.2 billion or so has walked since. Meanwhile, mutual funds based in America have poured $14.5 billion this year into emerging markets, another $14.5 billion into global and international funds and $5.5 billion into Japan. Europe suffered outflows earlier in the year, but is now attracting dollars.
Behavioural finance contributes a final piece to the puzzle. A new paper published by London's Centre for Economic Policy Research looks, unusually, at trustconfidence that financial data is reliable, that the overall system is fairas a factor in stockmarket participation. The authors (Luigi Guiso and Luigi Zingales, of the University of Chicago, and Paola Sapienza, of Northwestern University) find that levels of trust, variously defined, are correlated with investors' propensity to buy shares. This supports the notion that scandals involving the likes of Enron and WorldCom may have turned off American investors. Indeed, Italy, whose once-tainted Parmalat returned to the stockmarket last week, is another underperformer.
Are America's shares now poised to close the gap? A couple of short-term indicators are less than bullish. For one thing, analysts have steadily raised the bar in their earnings forecasts, making it increasingly likely that companies will stop beating and start missing their targets. Investors often punish that. And for another, the number of companies suspending their dividends rose last month: to 11, from a monthly average of under three, points out Mark Hulbert, a market commentator. Though only a few firms are involved, the trend may be significant: much academic literature suggests that when a company suspends its dividend, returns on its shares fall over the next 12 months.
The broader outlook is more encouraging, however. Most forecasters believe that America's growth will continue to outpace Europe's. Equity valuations are more in line than they were. And the bloom is slightly off various developing-country roses. The dependence of Asian countries on imported oil, a possible peak in commodity prices and some emerging political risk in Latin America are all things that investors are keeping an eye on. Nor does Japan fill everyone with confidence, for it is foreigners, not locals, who are pouring the money into shares there.
An intriguing twist in Credit Suisse First Boston's much-followed risk-appetite indicator seems to confirm this view. Last week, it shot into the euphoria zone for several days, which would normally be a signal to sell equities. But for the first time in ten years, enthusiasm for developed countries' shares did not accompany the spike, points out Andrew Garthwaite, a global equity strategist. It is bonds that investors are crazy about, plus shares in Japan and some emerging markets. Continental and American equities leave them cold, and British ones even colder. The indicator last shot up without support from shares in 1995, the beginning of a memorably snorting bull market in equities. Without implying anything half so dramatic now, the moral would appear to be to buy shares, and buycuriouslyBritish.
SOURCE : Economist
Why Is Microsoft Afraid of Google?
In the few short years of its existence, Google has come a long way, simultaneously striking fear in the hearts of major players in the computer industry and also arousing their curiosity.
Its search engine is so ubiquitous that "to Google" somebody or something is now part of the lexicon of hard-core knowledge workers and casual web users alike. Google also has become a gateway to the Internet and taken steps to develop desktop applications, such as Google Toolbar and Google Desktop, not to mention other products like Gmail and Google Earth. The company's initial public offering was a big success and its stock has risen ever since. What, everyone wonders, will Google be up to next?
While Google, of Mountain View, Calif., is keeping all competitors on their toes, it poses a special threat to one particular company -- Microsoft. Why? Because Google's existing and potential products -- as well as those of other firms -- raise the specter that the behemoth of Redmond, Wash., may witness the erosion of its control over the platform for the next generation of software application development, according to Wharton faculty members who follow the technology sector.
But being a threat -- even a formidable threat -- is one thing. Actually beating Microsoft would be a different accomplishment altogether, the Wharton experts agree, and only time will tell how this David-and-Goliath-style rivalry will fully shake out.
Microsoft's concern over Google has been evident recently on several fronts. Microsoft recently announced a major reorganization designed to streamline the company's huge bureaucracy and make the firm more nimble -- a move that the Wharton scholars say was in direct response to fear of continued inroads made by competitors, especially Google, on Microsoft's turf. Microsoft has also suffered the embarrassment of watching key employees defect to Google. Most recently, on Oct. 4, Sun Microsystems and Google announced a partnership to distribute each other's software, a deal that is viewed as another assault on Microsoft. Among other things, the Google Toolbar for web browsers will be a standard component of the software that computer users receive when they download Sun's Java software.
But the central challenge to Microsoft goes beyond corporate reorganizations, defecting employees or the popularity of Google's search engine as a gateway to the web, according to Kendall Whitehouse, senior director of information technology at Wharton. Microsoft's success has been due in large part to its realization two decades ago that control of the operating system on personal computers would give it a great amount of leverage over PCs, he says. Most companies in the 1980s saw the operating system as a pure commodity product, but Microsoft understood that it held the keys to the kingdom.
But many in the computer business have long believed that the core platform could be moved to a higher level, that technology gurus could establish a web-based platform that runs in the browser and is written in the language of the browser rather than the language of the operating system.
"This was the dream of Marc Andreessen and others back in the mid-1990s when Andreessen boasted that the web would reduce computer operating systems to nothing more than 'a poorly debugged set of device drivers,'" Whitehouse recalls. "And this is why Microsoft responded so aggressively to the threat of Netscape after Bill Gates issued his famous memo warning of an Internet 'tidal wave' that threatened Windows. Netscape didn't succeed. Microsoft managed to thwart Netscape's attempt to establish a new platform on the web."
How, specifically, do innovations at Google threaten Microsoft? Whitehouse points, for example, to Google Maps. The API of Google Maps lets developers embed Google Maps in their own web pages using JavaScript. A visit to http://www.googlemapsmania.blogspot.com/ -- which bills itself as an unofficial Google Maps blog tracking the websites, ideas and tools being influenced by Google Maps -- shows a long list of applications built using Google Maps as the underlying engine.
Google is not the only company offering products and services that run on a web platform. Feeling the heat, Microsoft has already announced products to compete with those of Adobe (developer of the PDF document format) and Macromedia (developer of Flash and ShockWave software for video and animation), which announced a merger earlier this year. "To the extent that PDF and the Flash SWF file format could be an emerging platform for web application development," Whitehouse notes, "Microsoft has to be worried."
A Commodity Product?
It is important to note, Whitehouse adds, that "all the applications I have talked about are written in the web browser. They work equally well on Windows, Mac or Linux. Your computer still needs an operating system to run -- but it doesn't matter which one. The operating system may eventually become the commodity that people in the 1980s thought it would be, and that's bad news for Microsoft."
Lee says Google benefits from two key strengths. The company gives free rein to talented people to innovate and it encourages program developers to use Google as the basis for products of their own. "Google has hired really, really smart people. Some of the smartest graduates coming out of the top computer science programs are going to Google. When you put that many smart people in one place, neat things happen. Google also has not been threatened by people working off their products. Look at all the product extensions that are tied to Google Maps."
Balaji Padmanabhan, professor of operations and information management at Wharton, agrees with Whitehouse that "there is a move toward PCs that don't have a lot of software installed on them, where most applications can run off a network." Padmanabhan notes that Sun Microsystems and Oracle envisioned such a system, in which people using nothing more than a simple PC would wirelessly communicate with a central computer.
"But that idea never really took off, to a large extent because the network was not as large and as fast as it is today," says Padmanabhan. "Yet there are advantages to that concept -- less software to update for users, for one thing, and that's exactly what Google would capitalize on. The second advantage is PC users get better security, since apps can be constantly updated on a server to fix errors and add patches. The big challenge is the reliability of the network. You don't want to get into a situation where users want to open a spreadsheet program but can't because the network isn't up right now. That is certainly an issue that will have to get resolved down the road."
Legal studies professor Kevin Werbach asserts that the competitive issues facing Microsoft go beyond Google. "At some level, any successful Internet and software company is a threat to Microsoft," he says. "Microsoft is in a uniquely dominant position in the computing ecosystem. Anything that attracts a significant amount of use or activity is potentially a threat to them. Microsoft is a threat to, in some ways, virtually everyone in the industry and likewise everyone is a threat to Microsoft."
Werbach says that Microsoft is in such a powerful position because the PC operating system is at the center of most users' experiences with computers. As the Internet becomes more of an essential part of the computing experience, if anything else from a network becomes a central link in the user's experience, that poses a challenge to Windows and software programs like Office, which has higher profit margins than Windows itself. "Google does not prevent people from using any particular operating system on a PC," he says, "but if the functionality that users engage with is driven through a Google experience rather than something controlled by Microsoft, that harms Microsoft."
The Task Ahead
"The big challenge for Microsoft is the law of large numbers," Werbach notes. "It's harder and harder for the company, as it gets bigger, to keep growing as it historically did. The computer industry is a mature industry. In the developed world, virtually everyone has a computer. So Microsoft, to continue growing, needs to find new ways to expand its market, which is why they want to get into games, wireless and business-software markets. In these areas they're generating substantial losses. To the extent that Google becomes a dominant player in the Internet market, it blocks an opportunity for Microsoft to expand."
But Microsoft did not achieve the position it enjoys today by rolling over in the face of adversity. Microsoft executives "aren't sitting on their laurels; they see the threat," according to Lee. "They see a future revenue stream in web advertising and desktop search functions and in better knowing the consumer. So they are organizing their own formidable brainpower to attack the competition. And there are plenty of people who like Microsoft and its products just fine."
"If you ask me why I didn't buy Google shares at the IPO, I'd say Google at the time had one product -- its search engine," says Amit. "As it expands its base, it might harm Microsoft. But Microsoft has a much broader product line. It's sitting on 90% of all computers around the world and Google has a long way to catch up."
Marketing professor Peter S. Fader says Google's threat is a tune Microsoft has heard before. "It's history repeating itself over and over and over. Every time a new threat emerges to Microsoft, people think, 'Oh, this is it -- the one that's going to knock Microsoft off the block.' There's no reason to believe it will play out any differently this time. Google is a different kind of competitor, but Microsoft has dealt with a pretty wide range of competitors before. It's a tortoise-and-hare scenario. And Microsoft is a very good tortoise. What the company will do is figure out a way to replicate the features of competitors' products. The products won't necessarily be better, but they will be adequate."
Whitehouse suggests that Microsoft may have to change its philosophy if it truly wishes to compete with Google. "Microsoft has tremendous resources, and it performed a similar turnaround once before when it took on Netscape in the 'browser wars' of the late 1990s. Microsoft, however, tends to focus on stopping the onslaught of the web -- which it did very well with Internet Explorer in the late 90s -- but then falls back and refocuses on its core operating system and desktop application businesses. So, for example, in recent years we've seen a major push to develop Vista , but there have been no major new improvements in Internet Explorer in years.
"It's not clear how much Microsoft actually believes that the web is the platform of the future. After conquering its immediate adversary, the company tends to retrench and fall back on developing its core assets. That may work again this time. But, eventually, it may not be enough to forestall the Internet tidal wave that will eventually arrive."
SOURCE : Wharton
In the few short years of its existence, Google has come a long way, simultaneously striking fear in the hearts of major players in the computer industry and also arousing their curiosity.
Its search engine is so ubiquitous that "to Google" somebody or something is now part of the lexicon of hard-core knowledge workers and casual web users alike. Google also has become a gateway to the Internet and taken steps to develop desktop applications, such as Google Toolbar and Google Desktop, not to mention other products like Gmail and Google Earth. The company's initial public offering was a big success and its stock has risen ever since. What, everyone wonders, will Google be up to next?
While Google, of Mountain View, Calif., is keeping all competitors on their toes, it poses a special threat to one particular company -- Microsoft. Why? Because Google's existing and potential products -- as well as those of other firms -- raise the specter that the behemoth of Redmond, Wash., may witness the erosion of its control over the platform for the next generation of software application development, according to Wharton faculty members who follow the technology sector.
But being a threat -- even a formidable threat -- is one thing. Actually beating Microsoft would be a different accomplishment altogether, the Wharton experts agree, and only time will tell how this David-and-Goliath-style rivalry will fully shake out.
Microsoft's concern over Google has been evident recently on several fronts. Microsoft recently announced a major reorganization designed to streamline the company's huge bureaucracy and make the firm more nimble -- a move that the Wharton scholars say was in direct response to fear of continued inroads made by competitors, especially Google, on Microsoft's turf. Microsoft has also suffered the embarrassment of watching key employees defect to Google. Most recently, on Oct. 4, Sun Microsystems and Google announced a partnership to distribute each other's software, a deal that is viewed as another assault on Microsoft. Among other things, the Google Toolbar for web browsers will be a standard component of the software that computer users receive when they download Sun's Java software.
But the central challenge to Microsoft goes beyond corporate reorganizations, defecting employees or the popularity of Google's search engine as a gateway to the web, according to Kendall Whitehouse, senior director of information technology at Wharton. Microsoft's success has been due in large part to its realization two decades ago that control of the operating system on personal computers would give it a great amount of leverage over PCs, he says. Most companies in the 1980s saw the operating system as a pure commodity product, but Microsoft understood that it held the keys to the kingdom.
But many in the computer business have long believed that the core platform could be moved to a higher level, that technology gurus could establish a web-based platform that runs in the browser and is written in the language of the browser rather than the language of the operating system.
"This was the dream of Marc Andreessen and others back in the mid-1990s when Andreessen boasted that the web would reduce computer operating systems to nothing more than 'a poorly debugged set of device drivers,'" Whitehouse recalls. "And this is why Microsoft responded so aggressively to the threat of Netscape after Bill Gates issued his famous memo warning of an Internet 'tidal wave' that threatened Windows. Netscape didn't succeed. Microsoft managed to thwart Netscape's attempt to establish a new platform on the web."
How, specifically, do innovations at Google threaten Microsoft? Whitehouse points, for example, to Google Maps. The API of Google Maps lets developers embed Google Maps in their own web pages using JavaScript. A visit to http://www.googlemapsmania.blogspot.com/ -- which bills itself as an unofficial Google Maps blog tracking the websites, ideas and tools being influenced by Google Maps -- shows a long list of applications built using Google Maps as the underlying engine.
Google is not the only company offering products and services that run on a web platform. Feeling the heat, Microsoft has already announced products to compete with those of Adobe (developer of the PDF document format) and Macromedia (developer of Flash and ShockWave software for video and animation), which announced a merger earlier this year. "To the extent that PDF and the Flash SWF file format could be an emerging platform for web application development," Whitehouse notes, "Microsoft has to be worried."
A Commodity Product?
It is important to note, Whitehouse adds, that "all the applications I have talked about are written in the web browser. They work equally well on Windows, Mac or Linux. Your computer still needs an operating system to run -- but it doesn't matter which one. The operating system may eventually become the commodity that people in the 1980s thought it would be, and that's bad news for Microsoft."
Lee says Google benefits from two key strengths. The company gives free rein to talented people to innovate and it encourages program developers to use Google as the basis for products of their own. "Google has hired really, really smart people. Some of the smartest graduates coming out of the top computer science programs are going to Google. When you put that many smart people in one place, neat things happen. Google also has not been threatened by people working off their products. Look at all the product extensions that are tied to Google Maps."
Balaji Padmanabhan, professor of operations and information management at Wharton, agrees with Whitehouse that "there is a move toward PCs that don't have a lot of software installed on them, where most applications can run off a network." Padmanabhan notes that Sun Microsystems and Oracle envisioned such a system, in which people using nothing more than a simple PC would wirelessly communicate with a central computer.
"But that idea never really took off, to a large extent because the network was not as large and as fast as it is today," says Padmanabhan. "Yet there are advantages to that concept -- less software to update for users, for one thing, and that's exactly what Google would capitalize on. The second advantage is PC users get better security, since apps can be constantly updated on a server to fix errors and add patches. The big challenge is the reliability of the network. You don't want to get into a situation where users want to open a spreadsheet program but can't because the network isn't up right now. That is certainly an issue that will have to get resolved down the road."
Legal studies professor Kevin Werbach asserts that the competitive issues facing Microsoft go beyond Google. "At some level, any successful Internet and software company is a threat to Microsoft," he says. "Microsoft is in a uniquely dominant position in the computing ecosystem. Anything that attracts a significant amount of use or activity is potentially a threat to them. Microsoft is a threat to, in some ways, virtually everyone in the industry and likewise everyone is a threat to Microsoft."
Werbach says that Microsoft is in such a powerful position because the PC operating system is at the center of most users' experiences with computers. As the Internet becomes more of an essential part of the computing experience, if anything else from a network becomes a central link in the user's experience, that poses a challenge to Windows and software programs like Office, which has higher profit margins than Windows itself. "Google does not prevent people from using any particular operating system on a PC," he says, "but if the functionality that users engage with is driven through a Google experience rather than something controlled by Microsoft, that harms Microsoft."
The Task Ahead
"The big challenge for Microsoft is the law of large numbers," Werbach notes. "It's harder and harder for the company, as it gets bigger, to keep growing as it historically did. The computer industry is a mature industry. In the developed world, virtually everyone has a computer. So Microsoft, to continue growing, needs to find new ways to expand its market, which is why they want to get into games, wireless and business-software markets. In these areas they're generating substantial losses. To the extent that Google becomes a dominant player in the Internet market, it blocks an opportunity for Microsoft to expand."
But Microsoft did not achieve the position it enjoys today by rolling over in the face of adversity. Microsoft executives "aren't sitting on their laurels; they see the threat," according to Lee. "They see a future revenue stream in web advertising and desktop search functions and in better knowing the consumer. So they are organizing their own formidable brainpower to attack the competition. And there are plenty of people who like Microsoft and its products just fine."
"If you ask me why I didn't buy Google shares at the IPO, I'd say Google at the time had one product -- its search engine," says Amit. "As it expands its base, it might harm Microsoft. But Microsoft has a much broader product line. It's sitting on 90% of all computers around the world and Google has a long way to catch up."
Marketing professor Peter S. Fader says Google's threat is a tune Microsoft has heard before. "It's history repeating itself over and over and over. Every time a new threat emerges to Microsoft, people think, 'Oh, this is it -- the one that's going to knock Microsoft off the block.' There's no reason to believe it will play out any differently this time. Google is a different kind of competitor, but Microsoft has dealt with a pretty wide range of competitors before. It's a tortoise-and-hare scenario. And Microsoft is a very good tortoise. What the company will do is figure out a way to replicate the features of competitors' products. The products won't necessarily be better, but they will be adequate."
Whitehouse suggests that Microsoft may have to change its philosophy if it truly wishes to compete with Google. "Microsoft has tremendous resources, and it performed a similar turnaround once before when it took on Netscape in the 'browser wars' of the late 1990s. Microsoft, however, tends to focus on stopping the onslaught of the web -- which it did very well with Internet Explorer in the late 90s -- but then falls back and refocuses on its core operating system and desktop application businesses. So, for example, in recent years we've seen a major push to develop Vista , but there have been no major new improvements in Internet Explorer in years.
"It's not clear how much Microsoft actually believes that the web is the platform of the future. After conquering its immediate adversary, the company tends to retrench and fall back on developing its core assets. That may work again this time. But, eventually, it may not be enough to forestall the Internet tidal wave that will eventually arrive."
SOURCE : Wharton
An ounce of contri frm my side:
ALL ABOUT VAT
Value Added Tax (VAT) is a general consumption tax assessed on the value added to goods and services.
It is a general tax that applies, in principle, to all commercial activities involving the production and distribution of goods and the provision of services. It is a consumption tax because it is borne ultimately by the final consumer.
It is not a charge on companies. It is charged as a percentage of price, which means that the actual tax burden is visible at each stage in the production and distribution chain.
It is collected fractionally, via a system of deductions whereby taxable persons can deduct from their VAT liability the amount of tax they have paid to other taxable persons on purchases for their business activities. This mechanism ensures that the tax is neutral regardless of how many transactions are involved.
In other words, it is a multi-stage tax, lavied only on value added at each stage in the chain of production of goods and services with the provision of a set-off for the tax paid at earlier stages in the chain. The objective is to avoid 'cascading', which can have a snowballing effect on prices. It is assumed that due to cross-checking in a multi-staged tax, tax evasion will be checked, resulting in higher revenues to the government.
Over 130 countries worldwide have introduced VAT over the past three decades and India is amongst the last few to introduce it.
India already has a system of sales tax collection wherein the tax is collected at one point (first/last) from the transactions involving the sale of goods. VAT would, however, be collected in stages (instalments) from one stage to another.
The mechanism of VAT is such that, for goods that are imported and consumed in a particular state, the first seller pays the first point tax, and the next seller pays tax only on the value-addition done - leading to a total tax burden exactly equal to the last point tax.
VAT will replace the present sales tax in India. Under the current single-point system of tax levy, the manufacturer or importer of goods into a State is liable to sales tax. There is no sales tax on the further distribution channel. VAT, in simple terms, is a multi-point levy on each of the entities in the supply chain with the facility of set-off of input tax - that is, the tax paid at the stage of purchase of goods by a trader and on purchase of raw materials by a manufacturer. Only the value addition in the hands of each of the entities is subject to tax. For instance, if a dealer purchases goods for Rs 100 from another dealer and a tax of Rs 10 has been charged in the bill, and he sells the goods for Rs 120 on which the dealer will charge a tax of Rs 12 at 10 per cent, the tax payable by the dealer will be only Rs 2, being the difference between the tax collected of Rs 12 and tax already paid on purchases of Rs 10. Thus, the dealer has paid tax at 10 per cent on Rs 20 being the value addition in his hands.
Purchase price - Rs 100
Tax paid on purchase - Rs 10 (input tax)
Sale price - Rs 120
Tax payable on sale price - Rs 12 (output tax)
Input tax credit - Rs 10
VAT payable - Rs 2
VAT levy will be administered by the Value Added Tax Act and the rules made there-under.
Theres something called MODVAT
Modvat stands for "Modified Value Added Tax". It is a scheme for allowing relief to final manufacturers on the excise duty borne by their suppliers in respect of goods manufactured by them. eg ABC Ltd is a manufacturer and it purchases certain components from PQR Ltd for use in manufacture. POR Ltd would have paid excise duty on components manufactured by it and it would have recovered that excise duty in its sales price from ABC Ltd. Now, ABC Ltd has to pay excise duty on toys manufactured by it as well as bear the excise duty paid by its supplier, PQR Ltd. This amounts to multiple taxation. Modvat is a scheme where ABC Ltd can take credit for excise duty paid by PQR Ltd so that lower excise duty is payable by ABC Ltd.
The scheme was first introduced with effect from 1 March 1986. Under this scheme, a manufacturer can take credit of excise duty paid on raw materials and components used by him in his manufacture. Accordingly, every intermediate manufacturer can take credit for the excise element on raw materials and components used by him in his manufacture. Since it amounts to excise duty only on additions in value by each manufacturer at each stage, it is called value-added-tax (VAT)
The modvat credit can be utilized towards payment of excise duty on the final product.
When the scheme was first introduced, it covered only some excisable goods. Gradually, the scope of the modvat scheme has been enlarged from time to time under various notifications.
Cheers,
Lass
What is this?
Believe me We r all members of this solid goldmine.
I mean everytime i check this thread, it amazes me like anything.
Keep up the good work dudes and dudettes.
Adios
The Greatest Mad
can anyone tell me in detail abt operation mgt and systems and IT mgts
their scope good institutes
The World Economy: Mostly Cruising
Global GDP overall is growing robustly, fed primarily by China, India, and the U.S. However, Europe and Japan are lagging behind
Despite the sharp uptrend in energy prices -- and the continuing interest rate hikes undertaken by many central banks -- the world economy continues to be characterized by high growth, low inflation, and low "real" (adjusted for inflation) yields.
But the major global players aren't faring equally. Which nations, and regions, are enjoying solid growth -- and which are lagging? We at Action Economics decided to look at the trends at work in the world economy in the context of the most recent global projections from the International Monetary Fund.
SHIFTING SHARE. First of all, world gross domestic product is poised for a robust 4.4% gain in 2005, in our view. This is just short of the 5% rise in 2004 that marks the high reading in our set of data extending back to 1984. The IMF forecast of 4.3% 2005 growth in its biannual projections released in September is only slightly lower. We expect 4.5% growth in 2006, vs. the 4.4% IMF estimate. The bulk of the discrepancy is due to differences in forecasts for U.S. GDP.
Though the financial press has mostly described global growth this year and last year as mixed, the results for the aggregate "advanced" and "emerging" economies have been anything but. Growth slowed modestly in 2005, but in most countries it remains quite high.
Rapid expansions in China and India, and solid growth in the larger U.S. economy, are driving world GDP, while growth rates in Europe and Japan remain anemic. As shown below, the share of global GDP held by these five largest countries/regions is rapidly shifting. As would be expected, the Chinese economy's share is exploding, largely at the expense of Europe and Japan. India's is rising more slowly, only because the high growth rates in the subcontinent -- up until now -- are from a lower base.
The U.S. is actually losing global share only slowly, because it has a large current size and still a reasonably high growth rate.
The interplay between "high growth" and "large size" is evident when looking at the contribution of these big countries/regions to aggregate global growth. The result is counterintuitive to many U.S. pundits who fear the increasing size of China: The U.S. has added to its economy over the last two years at close to the same rate that China has added to its economy, despite the much higher Chinese growth rate.
ENERGY-PRICE DRAG. In total, the U.S. is "adding a new Australia" each year, and China is doing a bit more than that. Rather than converging, these two economies have been pulling far ahead of other countries in terms of size since the 1980s, though India has been dancing around an impressive third-place growth clip, and will eventually start to gain ground on the U.S.
In the future, the unusually high percentage growth rates of China and India are expected to moderate. And the paths for these large countries, and the U.S., are now being restrained less by domestic productivity and labor-force growth than by the global "supply constraint" appearing in energy markets, where soaring prices are functioning as a throttle to global growth. This drag is being shared globally among high-growth and low-growth countries alike.
Alongside the world economy's apparently still-solid trajectory, inflation appears to be well under control, despite a modest global uptrend led by rising energy prices. In the advanced economies, prices are rising above the rates seen in much of the 1990s, but below those of the decades before that.
BOND-MARKET "CONUNDRUM." This encouraging global-inflation outlook is even more impressive if we include the historically high-inflation countries of the emerging-economy category. The graph below shows global CPI growth, with the IMF's "advanced" and "emerging" dichotomy. And here it's clear that the emerging economies have worked hard to bring inflation under control, just as the advanced economies have recently loosened up on the monetary restraints to price gains. The world consumer price index should rise 4% in 2005, with a mix of a 2.4% gain in the advanced economies and a 5.9% gain in the emerging economies
As for interest rates, we see Federal Reserve Chairman Alan Greenspan's infamous "conundrum" -- that policy tightenings were failing to boost long-term rates -- in the context of this global moderation in inflation. Of course, the Fed chief has cited other culprits: A global savings glut partly related to the growing size of the high-savings Asian economies, rising foreign central bank holdings of U.S. debt, shifting demographics, and rising pension-fund fixed-income investments.
The graph below shows the global trend in "real" long-term yields in the five major advanced economies. It displays the bond market conundrum as a global phenomenon that gained steam this year. It's equally clear that fears of moderating economic growth haven't played a big role in the global downtrend in "real" bond yields, as GDP growth has posted two back-to-back years of impressive gains. In our view, it's a falling global-inflation rate, and reduced uncertainty in global fixed-income markets, that's a more likely contributor.
In total, world growth slowed modestly in 2005 and is poised for a further modest easing in 2006, though the rate of growth for world GDP remains robust overall. And although the global focus has shifted to surging commodity prices, and energy prices in particular, world measures of inflation suggest that price gains overall remain under control.
While the markets talk about recession risks and soaring prices, the world economy is still best characterized as exhibiting widespread, solid growth, against a backdrop of restrained inflation.
SOURCE : BusinessWeek
Global GDP overall is growing robustly, fed primarily by China, India, and the U.S. However, Europe and Japan are lagging behind
Despite the sharp uptrend in energy prices -- and the continuing interest rate hikes undertaken by many central banks -- the world economy continues to be characterized by high growth, low inflation, and low "real" (adjusted for inflation) yields.
But the major global players aren't faring equally. Which nations, and regions, are enjoying solid growth -- and which are lagging? We at Action Economics decided to look at the trends at work in the world economy in the context of the most recent global projections from the International Monetary Fund.
SHIFTING SHARE. First of all, world gross domestic product is poised for a robust 4.4% gain in 2005, in our view. This is just short of the 5% rise in 2004 that marks the high reading in our set of data extending back to 1984. The IMF forecast of 4.3% 2005 growth in its biannual projections released in September is only slightly lower. We expect 4.5% growth in 2006, vs. the 4.4% IMF estimate. The bulk of the discrepancy is due to differences in forecasts for U.S. GDP.
Though the financial press has mostly described global growth this year and last year as mixed, the results for the aggregate "advanced" and "emerging" economies have been anything but. Growth slowed modestly in 2005, but in most countries it remains quite high.
Rapid expansions in China and India, and solid growth in the larger U.S. economy, are driving world GDP, while growth rates in Europe and Japan remain anemic. As shown below, the share of global GDP held by these five largest countries/regions is rapidly shifting. As would be expected, the Chinese economy's share is exploding, largely at the expense of Europe and Japan. India's is rising more slowly, only because the high growth rates in the subcontinent -- up until now -- are from a lower base.
The U.S. is actually losing global share only slowly, because it has a large current size and still a reasonably high growth rate.
The interplay between "high growth" and "large size" is evident when looking at the contribution of these big countries/regions to aggregate global growth. The result is counterintuitive to many U.S. pundits who fear the increasing size of China: The U.S. has added to its economy over the last two years at close to the same rate that China has added to its economy, despite the much higher Chinese growth rate.
ENERGY-PRICE DRAG. In total, the U.S. is "adding a new Australia" each year, and China is doing a bit more than that. Rather than converging, these two economies have been pulling far ahead of other countries in terms of size since the 1980s, though India has been dancing around an impressive third-place growth clip, and will eventually start to gain ground on the U.S.
In the future, the unusually high percentage growth rates of China and India are expected to moderate. And the paths for these large countries, and the U.S., are now being restrained less by domestic productivity and labor-force growth than by the global "supply constraint" appearing in energy markets, where soaring prices are functioning as a throttle to global growth. This drag is being shared globally among high-growth and low-growth countries alike.
Alongside the world economy's apparently still-solid trajectory, inflation appears to be well under control, despite a modest global uptrend led by rising energy prices. In the advanced economies, prices are rising above the rates seen in much of the 1990s, but below those of the decades before that.
BOND-MARKET "CONUNDRUM." This encouraging global-inflation outlook is even more impressive if we include the historically high-inflation countries of the emerging-economy category. The graph below shows global CPI growth, with the IMF's "advanced" and "emerging" dichotomy. And here it's clear that the emerging economies have worked hard to bring inflation under control, just as the advanced economies have recently loosened up on the monetary restraints to price gains. The world consumer price index should rise 4% in 2005, with a mix of a 2.4% gain in the advanced economies and a 5.9% gain in the emerging economies
As for interest rates, we see Federal Reserve Chairman Alan Greenspan's infamous "conundrum" -- that policy tightenings were failing to boost long-term rates -- in the context of this global moderation in inflation. Of course, the Fed chief has cited other culprits: A global savings glut partly related to the growing size of the high-savings Asian economies, rising foreign central bank holdings of U.S. debt, shifting demographics, and rising pension-fund fixed-income investments.
The graph below shows the global trend in "real" long-term yields in the five major advanced economies. It displays the bond market conundrum as a global phenomenon that gained steam this year. It's equally clear that fears of moderating economic growth haven't played a big role in the global downtrend in "real" bond yields, as GDP growth has posted two back-to-back years of impressive gains. In our view, it's a falling global-inflation rate, and reduced uncertainty in global fixed-income markets, that's a more likely contributor.
In total, world growth slowed modestly in 2005 and is poised for a further modest easing in 2006, though the rate of growth for world GDP remains robust overall. And although the global focus has shifted to surging commodity prices, and energy prices in particular, world measures of inflation suggest that price gains overall remain under control.
While the markets talk about recession risks and soaring prices, the world economy is still best characterized as exhibiting widespread, solid growth, against a backdrop of restrained inflation.
SOURCE : BusinessWeek
The spreading bird-flu menace reaches Europe
European countries are taking emergency measures to contain the spread of a deadly strain of bird fluwhich has already led to the deaths of millions of birds and 60 people in Asiaafter confirmation that it has arrived inside the EU's borders. The disease is a serious threat to the worlds sizeable poultry industry but its spread round the globe also increases the chances of it mutating into a form that causes a human pandemic.
THE deadly H5N1 strain of bird flu, which has already led to the deaths of millions of fowl and more than 60 people in Asia since an outbreak began in South Korea in 2003, was confirmed to have reached the European Union on Monday October 17th, when Greece announced it had found one definite case at a poultry farm. The news came on the day that Romania announced the completion of a mass cull of all poultry in a region of the Danube delta affected by the disease.
Despite Romanias assurances that all poultry in the two affected towns had been culled and that no further cases of the disease had emerged, neighbouring Bulgaria was setting up a national crisis headquarters and stepping up surveillance of farms and wetlands along its Danube boundary. Up river, the southern German region of Bavaria ordered the closure of its poultry markets. The discovery of the disease in Romania came a few days after cases were discovered in Turkey. Migratory birds seem the most likely explanation for its spread.
The European Union has moved swiftly to ban poultry imports from Turkey and Romania. Last Friday the EUs member states agreed measures to cut the risk of the outbreak's spread, including improved surveillance along migratory birds flyways. Other sensible measures which may be considered if the disease does continue spreading include keeping all poultry indoors in high-risk areas, especially near to wetlands where migratory birds congregate.
On Tuesday, the EU's foreign ministers and other officials met to review plans for coping with the outbreak. After the meeting, the Union's commissioner for health, Markos Kyprianou, insisted that the arrival of the deadly bird flu in Europe did not affect the chances of it developing into a human influenza pandemic.
In America, the Bush administration, following criticism of its response to Hurricane Katrina, is straining to demonstrate it is alert to the risks the disease poses, and is expected shortly to publish an emergency plan for dealing with a bird-flu outbreak, which the government has been working on for some time. Canada will host a summit of health ministers and officials later this month, to discuss international co-ordination of efforts to curb the diseases spread.
One priority that ought to be discussed at this summit is how to help poorer countries, where people are more likely to live in close contact with animals and birds, to improve their veterinary services and disease surveillance. Public-health officials have also suggested a fund to compensate farmers who have to cull poultry. In cases where such countries cannot contemplate the destruction of such an important food source, an alternative to culling might be to vaccinate flocks in affected areasin which case, richer countries could help out by supplying vaccines.
The threat to humans
Poultry-keeping is big business, so a pandemic among birds would be bad enough news. But it could be worse still: the more widespread the occurrence of the disease in birds, the more likely it is that the virus will either mutate into a form easily transmissible between people, or recombine (swap genes) with an existing strain of human influenza, resulting in a human pandemic that kills millions. That said, Mr Kyprianou has a point: there is a much lower risk of such a human pandemic getting started in Europe, whose health systems and disease surveillance are strong, than in poorer countries, where the spread of the disease from birds to people is much less likely to go unchecked.
So far at least, this strain of bird flu has proved rather hard for people to catch. But this could easily change. Scientists believe that H5N1 is a very good candidate for becoming a human pandemic strain. It mutates rapidly, has a propensity to acquire genes from viruses infecting other animal species, and has already shown itself capable of causing severe illness or death in people.
Human flu pandemics are expected three to four times every century, though it is still hard to predict when or where the next one will begin. The worst in living memory, in 1918, killed perhaps 50m people worldwide. Though there are no signs yet of such a grave risk to human life, the European Commission is urging the 25 EU member countries to stock up on anti-viral drugs and the World Health Organisation is urging all countries to produce contingency plans. On Tuesday, Roche, a Swiss drugs firm, said it would consider granting other firms licences to produce its anti-viral treatment, Tamiflu, to ensure that supplies were sufficient.
Even if an outbreak of a new human flu strain were quickly contained, it could still have drastic economic consequences. The outbreak of severe acute respiratory syndrome, or SARS, in Asia in 2003 only infected around 8,000 people and killed about a tenth of these. According to the most pessimistic estimates, it caused almost $60 billion of lost output, with tourism-related businesses being especially hard hit.
A large-scale outbreak of human flu would put health services under enormous strain. To slow its spread, such measures as the closure of schools and the prohibition of large social gatherings might need to be contemplated. However, since people with the flu virus can be highly infectious despite showing no symptoms, it would be almost impossible to create an effective quarantine regime.
In the short term, anti-viral drugs will need to be stockpiled in those countries that can afford them, and decisions will need to be taken about who (eg, health-care workers) should have priority in receiving them. A vaccine against any new strain of human flu might take many months to develop. On Monday, Thomas Lonngren, the head of the European Medicines Agency, said such a human vaccine might not be ready before next years winter flu season.
In the longer term, maybe five to ten years, research into new treatment options, diagnostics and epidemiology could transform the situation: it is not unthinkable that an all-purpose magic bullet flu vaccine might be created, which prevents all strains, old and new. Until then, all countries need to prepare for the worst.
SOURCE : ECONOMIST
European countries are taking emergency measures to contain the spread of a deadly strain of bird fluwhich has already led to the deaths of millions of birds and 60 people in Asiaafter confirmation that it has arrived inside the EU's borders. The disease is a serious threat to the worlds sizeable poultry industry but its spread round the globe also increases the chances of it mutating into a form that causes a human pandemic.
THE deadly H5N1 strain of bird flu, which has already led to the deaths of millions of fowl and more than 60 people in Asia since an outbreak began in South Korea in 2003, was confirmed to have reached the European Union on Monday October 17th, when Greece announced it had found one definite case at a poultry farm. The news came on the day that Romania announced the completion of a mass cull of all poultry in a region of the Danube delta affected by the disease.
Despite Romanias assurances that all poultry in the two affected towns had been culled and that no further cases of the disease had emerged, neighbouring Bulgaria was setting up a national crisis headquarters and stepping up surveillance of farms and wetlands along its Danube boundary. Up river, the southern German region of Bavaria ordered the closure of its poultry markets. The discovery of the disease in Romania came a few days after cases were discovered in Turkey. Migratory birds seem the most likely explanation for its spread.
The European Union has moved swiftly to ban poultry imports from Turkey and Romania. Last Friday the EUs member states agreed measures to cut the risk of the outbreak's spread, including improved surveillance along migratory birds flyways. Other sensible measures which may be considered if the disease does continue spreading include keeping all poultry indoors in high-risk areas, especially near to wetlands where migratory birds congregate.
On Tuesday, the EU's foreign ministers and other officials met to review plans for coping with the outbreak. After the meeting, the Union's commissioner for health, Markos Kyprianou, insisted that the arrival of the deadly bird flu in Europe did not affect the chances of it developing into a human influenza pandemic.
In America, the Bush administration, following criticism of its response to Hurricane Katrina, is straining to demonstrate it is alert to the risks the disease poses, and is expected shortly to publish an emergency plan for dealing with a bird-flu outbreak, which the government has been working on for some time. Canada will host a summit of health ministers and officials later this month, to discuss international co-ordination of efforts to curb the diseases spread.
One priority that ought to be discussed at this summit is how to help poorer countries, where people are more likely to live in close contact with animals and birds, to improve their veterinary services and disease surveillance. Public-health officials have also suggested a fund to compensate farmers who have to cull poultry. In cases where such countries cannot contemplate the destruction of such an important food source, an alternative to culling might be to vaccinate flocks in affected areasin which case, richer countries could help out by supplying vaccines.
The threat to humans
Poultry-keeping is big business, so a pandemic among birds would be bad enough news. But it could be worse still: the more widespread the occurrence of the disease in birds, the more likely it is that the virus will either mutate into a form easily transmissible between people, or recombine (swap genes) with an existing strain of human influenza, resulting in a human pandemic that kills millions. That said, Mr Kyprianou has a point: there is a much lower risk of such a human pandemic getting started in Europe, whose health systems and disease surveillance are strong, than in poorer countries, where the spread of the disease from birds to people is much less likely to go unchecked.
So far at least, this strain of bird flu has proved rather hard for people to catch. But this could easily change. Scientists believe that H5N1 is a very good candidate for becoming a human pandemic strain. It mutates rapidly, has a propensity to acquire genes from viruses infecting other animal species, and has already shown itself capable of causing severe illness or death in people.
Human flu pandemics are expected three to four times every century, though it is still hard to predict when or where the next one will begin. The worst in living memory, in 1918, killed perhaps 50m people worldwide. Though there are no signs yet of such a grave risk to human life, the European Commission is urging the 25 EU member countries to stock up on anti-viral drugs and the World Health Organisation is urging all countries to produce contingency plans. On Tuesday, Roche, a Swiss drugs firm, said it would consider granting other firms licences to produce its anti-viral treatment, Tamiflu, to ensure that supplies were sufficient.
Even if an outbreak of a new human flu strain were quickly contained, it could still have drastic economic consequences. The outbreak of severe acute respiratory syndrome, or SARS, in Asia in 2003 only infected around 8,000 people and killed about a tenth of these. According to the most pessimistic estimates, it caused almost $60 billion of lost output, with tourism-related businesses being especially hard hit.
A large-scale outbreak of human flu would put health services under enormous strain. To slow its spread, such measures as the closure of schools and the prohibition of large social gatherings might need to be contemplated. However, since people with the flu virus can be highly infectious despite showing no symptoms, it would be almost impossible to create an effective quarantine regime.
In the short term, anti-viral drugs will need to be stockpiled in those countries that can afford them, and decisions will need to be taken about who (eg, health-care workers) should have priority in receiving them. A vaccine against any new strain of human flu might take many months to develop. On Monday, Thomas Lonngren, the head of the European Medicines Agency, said such a human vaccine might not be ready before next years winter flu season.
In the longer term, maybe five to ten years, research into new treatment options, diagnostics and epidemiology could transform the situation: it is not unthinkable that an all-purpose magic bullet flu vaccine might be created, which prevents all strains, old and new. Until then, all countries need to prepare for the worst.
SOURCE : ECONOMIST