A Bumpy Road for Delphi, GM and U.S. Auto Workers
Following the October 8 announcement that Delphi, the nation's largest auto parts manufacturer, is filing for reorganization under Chapter 11 of the U.S. Bankruptcy Code, one thing became clear: the road ahead is going to be bumpy not only for Delphi, but also for General Motors, the United Auto Workers and the federal Pension Benefit Guaranty Corp., the government-run entity that stands behind defined-benefit plans when they are terminated.
Experts at Wharton and elsewhere who follow the auto industry say Delphi's decision to file for bankruptcy was hardly surprising but nonetheless significant. Also important was GM's subsequent announcement, on October 17, that it had reached a tentative agreement with the UAW to cut the healthcare benefits of unionized retirees, reducing by about $15 billion the company's $77.5 billion in healthcare obligations to retirees. On the same day, GM announced a loss of $1.63 billion for the third quarter, its largest quarterly loss in more than 10 years. GM also said it was considering selling a controlling interest in General Motors Acceptance Corp., its highly profitable finance subsidiary, as part of an overall effort to strengthen the parent company.
The Delphi filing and the tentative GM-UAW accord set in motion a chain of events that may forever alter the relationship between America's Big Three carmakers and the UAW, and they underscore the degree to which globalization is exerting downward pressure on the wages and benefits paid to U.S. workers. The fates of GM, Delphi, and their workers and retirees are inextricably linked because GM has some level of responsibility -- it is not yet clear exactly how much -- for the billions in benefits owed to retirees at Delphi, which was spun off from GM in 1999. Ford and Daimler-Chrysler, adhering to a tradition of pattern bargaining, are expected to follow GM's lead and seek their own concessions from the UAW.
The news from Delphi and GM also drives home the point that the days of defined-benefit pension plans -- where retirees get a monthly check for a fixed amount in return for years of corporate service -- are under increasingly intense pressure, at least at firms like auto companies and airlines that are struggling to turn a profit. This is an especially key takeaway for workers of all ages who may not have yet come to terms with the seismic shifts in the pension and healthcare landscape as many major companies struggle to figure out ways to reduce both current healthcare expenses and the so-called "legacy" liabilities of pension payments and related retirement costs.
After Delphi filed for bankruptcy, its chairman and CEO, Robert "Steve" Miller, said that the company needs to get rid of a "substantial" number of its North American operations and reduce its 51,000-member workforce. He wants the UAW to agree to concessions that would reduce members' average wage-and-benefit packages from about $65 an hour to about $20 or $25 an hour. Of that total compensation package, the hourly wage alone would drop from $27 to $10 if Miller has his way. In an interview with The Wall Street Journal, Miller said Delphi cannot stand up to non-union competitors if it has to pay such high wages and the kind of blue-ribbon benefits UAW members now enjoy. He called the traditional defined-benefit pension plan that Americans have come to expect in the last 50 or 60 years an "anachronism."
Since the spin-off from GM, Delphi has made many positive changes of the kind that auto parts manufacturers need to make to stay competitive in global markets, according to MacDuffie, who is also co-director of the International Motor Vehicle Program (IMVP), which has a network of researchers at universities worldwide and is funded by major automakers and suppliers. Delphi adopted new production methods to streamline the way in which it deals with its suppliers. It hired talented executives from Toyota in Japan and the head of purchasing for Honda in America. Moreover, Delphi was early and aggressive about globalizing its manufacturing footprint, opening technical centers in Mexico, Poland and China.
But there were tough problems, too -- inefficient businesses and pressure to sell some parts to GM at less than cost. "Delphi has older businesses where labor costs are high," MacDuffie says. "The question is why there wasn't pressure to deal with that issue sooner. There wasn't much of an inclination to invest in those businesses, maybe because labor costs were seen as insurmountable barriers."
One of Delphi's key goals after it was spun off was to increase sales to companies other than GM. When Delphi became independent, fully 70% of its sales were to its former parent. Today, that figure is lower but still higher than Delphi would like -- around 50%.
"Delphi had hoped to make further progress in that area," says MacDuffie. "They were excited about Toyota as a customer because Toyota is known for working with suppliers to help them improve cost performance. Delphi was not able to shift away from this GM-dependent business as quickly as it had hoped. And for those GM-dependent businesses in the last few years, GM was putting extreme pressure on them to cut costs. I think Delphi was selling to GM at less than cost in some cases. If, in fact, that situation hadn't developed, both Delphi and GM would have felt pressure sooner to deal with the lagging parts of their business. The hope had been that GM would get healthier and that car sales would increase, bringing in revenue to less competitive parts of Delphi's businesses. But, as we know, GM's sales have declined."
John Moavenzadeh, executive director of IMVP, agrees with MacDuffie's diagnosis of Delphi's problems. "In some business lines, Delphi was quite innovative, like diesel systems. They had a great product, great technology, and they were doing well. But unfortunately, their sales to GM were low-margin to negative-margin sales. So they kept GM as a customer but they weren't necessarily making money -- and in some cases were losing money. As a result, Delphi found itself in the same dilemma that a lot of the auto industry finds itself in: labor becomes a fixed cost. You have to pay workers whether they are working or not, and for that you need a lot of volume. Delphi in many ways faced some of the same strategic decisions as GM has faced in recent years: they had to keep the volume of their sales up because of the high cost of their unionized workforce."
Intertwined Companies
GM's future is intertwined with Delphi's because GM became responsible for Delphi's legacy costs once Delphi filed for bankruptcy -- a move that Miller, the Delphi CEO, had hoped would focus heightened attention on the looming national issue of healthcare and legacy costs. "When Delphi was spun off, there were agreements with GM about certain aspects of labor contracts," MacDuffie explains. "In the case of bankruptcy, GM agreed to pay benefits to about 12,000 Delphi retirees. Delphi is now going to ask GM to do that as part of the bankruptcy filing. The bankruptcy reflects the view of the leadership at Delphi that they needed to be willing to do something dramatic that would force GM, as well as Delphi, to confront this issue."
Moavenzadeh and MacDuffie agree that Delphi could very well emerge from Chapter 11 as a stronger, more competitive company. "I think they probably will get back to being a competitive supplier," says MacDuffie. But, he adds, "It's hard to see any outcome that doesn't involve wage cuts."
MacDuffie says it is too soon to tell whether, and how much, the October 17 tentative agreement between GM and the UAW to trim healthcare benefits for retirees will serve as a model for Delphi and its unionized employees and retirees. Relatively deep cuts in medical costs by Delphi, along with the sale of certain assets, might allow the company and the union to reach agreement on wage cuts that would not be as deep as currently envisioned by Miller.
"There are unionized parts suppliers that pay more than $10 an hour and are quite competitive in doing so, and I guess the UAW will ask Delphi why wages would have to be cut below what other workers at other companies are getting," MacDuffie notes. "We may also see Delphi sell its least-competitive businesses. In Delphi's other businesses, where wage-cost reductions would have to occur, the union may negotiate to have Delphi spend more in capital improvements to restore those businesses to competitiveness."
Many Uncertainties
Olivia S. Mitchell, professor of insurance and risk management and executive director of Wharton's Pension Research Council, and Wharton accounting professor Wayne Guay say that many questions remain unresolved as the Delphi filing begins to wend its way through the bankruptcy court and as Delphi and GM hold their separate discussions with the UAW over reducing wages and benefits for current and retired workers.
"In the near term the workers and retirees at Delphi are facing great challenges to their compensation and benefits packages," says Mitchell. "It's not completely clear whether the Delphi bankruptcy will trigger termination of the pensions. Also, Delphi had received some guarantees from GM to help cover or subsidize pensions and other benefits in the event of a Delphi bankruptcy. But there is a lot of uncertainty around that issue, too. There are huge uncertainties about what the Delphi workers and retirees will get, what GM will have to shoulder, and what the PBGC might be responsible for down the road. There will be a morass of claims and counter-claims by GM and Delphi, and it will take a long time to sort out."
Just how much money is involved? As of Dec. 31, 2004, Delphi had a total of $22.5 billion in obligations to retirees -- $12.8 billion in the form of pensions and $9.6 billion in health insurance, life insurance and other retirement benefits. How well funded are Delphi's obligations? Delphi has set aside assets of just $8.5 billion to cover the total that it owes retirees.
"That's a severely underfunded pension plan," Guay says. "In all likelihood, Delphi doesn't have the cash flow to satisfy that obligation. The question then becomes whether Delphi will turn its obligation over to the PBGC. And GM may be on the hook for some of this."
The Role of the PBGC
Mitchell calls the PBGC, which itself has a $23 billion deficit, the insurer of "last resort," and notes that if the PBGC is left with the responsibility for Delphi's obligations taxpayers could be on the hook. "The PBCG has enough cash today to pay retirees but it's still looking at red ink. Higher taxes at the moment are not required to bail out the PBCG. But one could surmise there will be a workout arrangement like the savings-and-loan bailout in the 1980s. So I suspect taxpayers will end up bearing part of the burden."
Many people in the baby-boom generation, Mitchell adds, "didn't factor the decline of defined-benefit plans into their calculations in planning for the future. They assumed defined-benefit plans would always be there. They always assumed the upside and discounted the downside. Now we have to go back and remember that there's always risk. The chickens have come home to roost."
Mitchell notes that Congress has been working on legislation to strengthen the PBCG. "As of a few weeks ago it looked like there was an impasse and that they would stop for this year. But I hope this bankruptcy spurs legislators to restart the process and get some reforms at the PBGC. Every year they wait they're digging a hole, and it's quite dangerous to do nothing."
Helper, the economics professor at Case Western Reserve, hopes that the Delphi bankruptcy also starts a national debate over the immense changes that globalization has brought to blue-collar union families that worked for decades to earn middle-class wages and rock-solid benefits.
"Some of Delphi's problems are of its own making and some are the result of implicit policy choices that we made as a society," Helper says. "One of those policies was the decision not to have national healthcare. Another issue is the way we write trade agreements so that there is no standard at all as to the wages we pay. This is an opportunity to reexamine the policies that make it hard for Delphi and GM to compete the way they used to. Workers being able to live the American dream -- to own a house and send kids to college -- is a good thing."
SOURCE : Wharton
Non-proliferation: time for new thinking
Unless a thorough review is undertaken of the NPT, it would soon become a paper tiger. ( Hindu)
The month-long seventh quinquennial review conference of the 35-year old Nuclear Non-Proliferation Treaty (NPT) that was held in New York in May cannot claim to achieve much. Though the chairman of the conference declared that "very little has been accomplished," what became clear is how little relevance the NPT holds for the international community today. This is paradoxical given the fact that the threat of nuclear proliferation has never been higher.
The last review conference held in 2000 at least agreed on "thirteen steps" to prevent any further spread of nuclear weapons and to hold the nuclear weapon states to their commitment to eliminate their nuclear arsenals in the long run. The 2005 review conference had no such luck. There were only disagreements to show off in the end and short-term interests of the states were just too divergent to allow for any meaningful debate.
The U.S. wanted to focus the attention of the conference on loopholes in the NPT, which it accused states such as Iran and North Korea of exploiting. But Iran in a pre-emptive move blamed the U.S. and Europe for trying to keep an exclusive hold on technological development and vowed to defy these western double standards. It declared that it would pursue all legal areas of nuclear technology, including enrichment, though it was careful to specify that its pursuit is exclusively for peaceful purposes.
The U.S., on the other hand, made it clear that the impasse between the West and Iran can only be resolved with Iran ceasing its enrichment and reprocessing efforts, as well as dismantling its equipment facilities related to such activities.
There was a broader divide between the nuclear weapon states (NWS) and the rest of the world that affected the negotiations at the conference from the very beginning. Non-nuclear weapon states insisted that the NWS should focus on radically reducing their nuclear armaments, a commitment that they had made in 2000. Concerns were expressed about Bush Administration's plans to modernise the U.S. nuclear force and its nuclear posture that relies less on deterrence and more on pre-emption.
The U.S. countered that it is complying with the requirement of the NPT that nuclear states move towards disarmament by pointing to the reductions in its nuclear stockpile under an agreement with Russia in 2002. Though this failed to assuage the non-nuclear states, the U.S. was successful in blocking any mention of its commitment towards disarmament in the conference's final report.
A number of new ideas were proposed to strengthen the NPT but none of them could gain consensus. There was a proposal for limiting access to dual-use nuclear technology as well as strengthening the inspection of nuclear facilities. There was also a proposal to make withdrawing from the NPT more difficult and penalty-ridden. Both these proposals were in response to Iran and North Korea's nuclear activities but none could find sufficient acceptance that might have led to their adoption.
Inherently unstable
India has always been dissatisfied with the global non-proliferation and arms control regime because it constrained India's autonomy to make foreign policy decisions as dictated by its national interests. India argued that an inequitable regime that gave only a few countries the permanent right to nuclear weapons, and denied others this right was inherently unstable. There are reasons for India to feel vindicated by its long-held stance on these issues. Today, as the global nuclear non-proliferation regime crumbles under the weight of its own contradictions, India can rightfully claim that it was one of the first states to draw the attention of the world community to these challenges. The NPT was always a flawed document in many ways and various countries, including India, had pointed to its flaws over the years. The recent global developments make it amply clear that unless a thorough review is undertaken of the NPT, it would soon become a paper tiger, if it has not already. Given the horrors of September 11, 2001, the danger of nuclear terrorism, and the prospect of numerous Irans and North Koreas just a screwdriver away from nuclear weapons, it's time for the international community to promote a bolder nuclear arrangement than the NPT of 1968.
Source: Hindu
Unless a thorough review is undertaken of the NPT, it would soon become a paper tiger. ( Hindu)
The month-long seventh quinquennial review conference of the 35-year old Nuclear Non-Proliferation Treaty (NPT) that was held in New York in May cannot claim to achieve much. Though the chairman of the conference declared that "very little has been accomplished," what became clear is how little relevance the NPT holds for the international community today. This is paradoxical given the fact that the threat of nuclear proliferation has never been higher.
The last review conference held in 2000 at least agreed on "thirteen steps" to prevent any further spread of nuclear weapons and to hold the nuclear weapon states to their commitment to eliminate their nuclear arsenals in the long run. The 2005 review conference had no such luck. There were only disagreements to show off in the end and short-term interests of the states were just too divergent to allow for any meaningful debate.
The U.S. wanted to focus the attention of the conference on loopholes in the NPT, which it accused states such as Iran and North Korea of exploiting. But Iran in a pre-emptive move blamed the U.S. and Europe for trying to keep an exclusive hold on technological development and vowed to defy these western double standards. It declared that it would pursue all legal areas of nuclear technology, including enrichment, though it was careful to specify that its pursuit is exclusively for peaceful purposes.
The U.S., on the other hand, made it clear that the impasse between the West and Iran can only be resolved with Iran ceasing its enrichment and reprocessing efforts, as well as dismantling its equipment facilities related to such activities.
There was a broader divide between the nuclear weapon states (NWS) and the rest of the world that affected the negotiations at the conference from the very beginning. Non-nuclear weapon states insisted that the NWS should focus on radically reducing their nuclear armaments, a commitment that they had made in 2000. Concerns were expressed about Bush Administration's plans to modernise the U.S. nuclear force and its nuclear posture that relies less on deterrence and more on pre-emption.
The U.S. countered that it is complying with the requirement of the NPT that nuclear states move towards disarmament by pointing to the reductions in its nuclear stockpile under an agreement with Russia in 2002. Though this failed to assuage the non-nuclear states, the U.S. was successful in blocking any mention of its commitment towards disarmament in the conference's final report.
A number of new ideas were proposed to strengthen the NPT but none of them could gain consensus. There was a proposal for limiting access to dual-use nuclear technology as well as strengthening the inspection of nuclear facilities. There was also a proposal to make withdrawing from the NPT more difficult and penalty-ridden. Both these proposals were in response to Iran and North Korea's nuclear activities but none could find sufficient acceptance that might have led to their adoption.
Inherently unstable
India has always been dissatisfied with the global non-proliferation and arms control regime because it constrained India's autonomy to make foreign policy decisions as dictated by its national interests. India argued that an inequitable regime that gave only a few countries the permanent right to nuclear weapons, and denied others this right was inherently unstable. There are reasons for India to feel vindicated by its long-held stance on these issues. Today, as the global nuclear non-proliferation regime crumbles under the weight of its own contradictions, India can rightfully claim that it was one of the first states to draw the attention of the world community to these challenges. The NPT was always a flawed document in many ways and various countries, including India, had pointed to its flaws over the years. The recent global developments make it amply clear that unless a thorough review is undertaken of the NPT, it would soon become a paper tiger, if it has not already. Given the horrors of September 11, 2001, the danger of nuclear terrorism, and the prospect of numerous Irans and North Koreas just a screwdriver away from nuclear weapons, it's time for the international community to promote a bolder nuclear arrangement than the NPT of 1968.
Source: Hindu
AS MORE and more of the world's business is conducted online, a battle royal is taking shape. The struggle is to decide which company will become the primary gateway to the internet. Three firms, Google, Microsoft and Yahoo!, are aiming to establish the world's leading internet portalthe site that most internet users rely on for everything from searching the web to sending e-mail and catching up on the news. All three firms are hoping to strike some sort of deal with AOLthe fourth player in the battle of the portals.
It is highly convenient for Time Warner, the world's biggest media company, that its struggling web portal, AOL, is suddenly at the receiving end of competing bids from all three of the other internet giants. Microsoft, the world's biggest software company, was the first to start haggling, via its portal, MSN. Then Google, the world's most popular search engine and nowadays Microsoft's archest arch-enemy, came running, with Comcast, America's biggest cable company, as a prospective co-bidder. And now Yahoo!, the biggest web portal and determined runner-up to Google in internet search, has also entered the bidding.
Lest anybody pick the wrong metaphor, it is not the case that AOL is the prettiest girl at the dance, says Safa Rashtchy, an analyst at Piper Jaffray, a bank. Instead, he says, AOL is big open real estate and you don't want your competitor to get it. That is because the vaguely defined and fast-changing web-portal industry, though still young enough to be the fastest-growing advertising medium, is also showing the early signs of maturity. That would suggest that this industry, like many others, will evolve towards three large generalist players and several small niche firms, a phenomenon that Jagdish Sheth and Rajendra Sisodia, two academics, call the rule of three in a book of the same title. The big question is which three emerge and in what combination.
Analysing how the four portals currently measure up is surprisingly hard. Conventional wisdom says that Google is the one to beat. That is because it is the clear leader in internet searchthe most technologically exciting and profitable end of the business. Yahoo! is a strong second in search and MSN a poor third, whereas AOL does not compete in search at all. Instead, it uses Google's technology to generate search results and to make money out of them (by placing the hyperlinks of advertisers near related search results).
But when the criterion is not the number of searches but the number of site visitors in America, Yahoo! is the clear leader, with MSN in second place, AOL in third and Google last. Terry Semel, Yahoo!'s boss, used this fact to make a barbed joke when speaking at an internet conference in San Francisco last week: Gosh, it's starting to look more and more like a portal, he said of Google, whom he is suspected of envying, and as a portal it would probably be rated number four. Yahoo!'s web mail service, he added, has ten times as many users as Google's alternative.
If instant-messaging (IM) technology is the measure, AOL is the clear leader, with Yahoo! and MSN competing for second place (and, last week, linking their technologies in a partnership), while Google is again last. Instant messaging is currently hard to make money out of, but potentially crucial since it is one vehicle for free internet telephony and tends to make its users fiercely loyal.
By the more conventional measures of advertising revenues and operating profit, Google is still the clear leader and MSN the big loser, says Henry Blodget, the president of Cherry Hill Research (Mr Blodget became notorious as an equity analyst at Merrill Lynch for his role in inflating the dotcom bubble, which led to his being banned from the securities industry for life). After making losses for about a decade, MSN is now expected to make an operating profit of about $500m this year, a sharp contrast with an estimated $2.4 billion for Google. The web war is over, argues Mr Blodget, and Microsoft lost.
This might suggest that a combination of AOL with MSN makes the most sense. Both are unhappy step-children of parents that live in other industries (Microsoft in software, Time Warner in traditionalie, offlinemedia), whereas Yahoo! and Google remain the pure internet businesses they have been since their inception. For MSN, switching AOL away from Google's search technology and towards MSN's might offer a last chance of staying in the search competition. And both MSN and AOL still have lucrative but fast-shrinking side businesses in dial-up internet access, which Google and Yahoo! scoff at as holdovers from the narrowband stone age.
By contrast, Google would at first glance seem to be the least likely partner. It is run by technology puristsproud geeks who preach that computer algorithms, not human editors, will change the world. On the other hand, as confident as Google currently is, AOL is its single largest customer, accounting for 11% of its revenues in the first half of this year. Google would prefer not to lose this to MSN, so its bid appears to be defensive. Google would probably not have done this if MSN had not made this move, says Hal Varian, an academic and adviser to Google. This would explain why its bid is intended as a joint-venture. The idea is that Comcast would bring the broadband internet access, AOL the media content and eyeballs, and Google would do the monetisation through its advertising technology. This would ensure that each partner concentrated on the bit of the business in which it really excels.
A Google-Comcast-AOL combination would also be the most effective counter to Yahoo!'s (so far) successful strategy of teaming up with broadband providers. Yahoo! has deals with SBC and Verizon, America's two largest phone companies, to give their broadband customers free Yahoo! accounts, web mail and online storage; this week Yahoo! struck a similar deal with BellSouth, the country's third-largest telephone company. Google, the only portal that does not make content of its own, and Comcast, the biggest broadband provider in America, are feeling a bit left out.
But a deal between AOL and Yahoo! might be culturally the easiest. Both are at heart media companiesYahoo!'s Mr Semel made his career in Hollywood before moving to Silicon Valley. Both see media content, whether generated by teenage bloggers or professional film studios, as their natural terrain.
Ultimately, it all comes down to the three suitors' estimates of what Mr Varian calls the power of the default. Default users are the great unwashed, says Mr Varian. They are the ones who, for instance, use MSN because it comes pre-installed in Internet Explorer, the web browser that itself comes pre-installed on new computers. By contrast, teenagers and geeks mix and match their web mail, IM, online maps, search, blogging and so on from whichever service on the internet they happen to like best. Default users are less demanding, older but nonetheless rich enough to target with small hyperlinked text advertisements. For the dealmakers, it all comes down to figuring out how much these naifs, collectively, are worth.
Source : Economist
It is highly convenient for Time Warner, the world's biggest media company, that its struggling web portal, AOL, is suddenly at the receiving end of competing bids from all three of the other internet giants. Microsoft, the world's biggest software company, was the first to start haggling, via its portal, MSN. Then Google, the world's most popular search engine and nowadays Microsoft's archest arch-enemy, came running, with Comcast, America's biggest cable company, as a prospective co-bidder. And now Yahoo!, the biggest web portal and determined runner-up to Google in internet search, has also entered the bidding.
Lest anybody pick the wrong metaphor, it is not the case that AOL is the prettiest girl at the dance, says Safa Rashtchy, an analyst at Piper Jaffray, a bank. Instead, he says, AOL is big open real estate and you don't want your competitor to get it. That is because the vaguely defined and fast-changing web-portal industry, though still young enough to be the fastest-growing advertising medium, is also showing the early signs of maturity. That would suggest that this industry, like many others, will evolve towards three large generalist players and several small niche firms, a phenomenon that Jagdish Sheth and Rajendra Sisodia, two academics, call the rule of three in a book of the same title. The big question is which three emerge and in what combination.
Analysing how the four portals currently measure up is surprisingly hard. Conventional wisdom says that Google is the one to beat. That is because it is the clear leader in internet searchthe most technologically exciting and profitable end of the business. Yahoo! is a strong second in search and MSN a poor third, whereas AOL does not compete in search at all. Instead, it uses Google's technology to generate search results and to make money out of them (by placing the hyperlinks of advertisers near related search results).
But when the criterion is not the number of searches but the number of site visitors in America, Yahoo! is the clear leader, with MSN in second place, AOL in third and Google last. Terry Semel, Yahoo!'s boss, used this fact to make a barbed joke when speaking at an internet conference in San Francisco last week: Gosh, it's starting to look more and more like a portal, he said of Google, whom he is suspected of envying, and as a portal it would probably be rated number four. Yahoo!'s web mail service, he added, has ten times as many users as Google's alternative.
If instant-messaging (IM) technology is the measure, AOL is the clear leader, with Yahoo! and MSN competing for second place (and, last week, linking their technologies in a partnership), while Google is again last. Instant messaging is currently hard to make money out of, but potentially crucial since it is one vehicle for free internet telephony and tends to make its users fiercely loyal.
By the more conventional measures of advertising revenues and operating profit, Google is still the clear leader and MSN the big loser, says Henry Blodget, the president of Cherry Hill Research (Mr Blodget became notorious as an equity analyst at Merrill Lynch for his role in inflating the dotcom bubble, which led to his being banned from the securities industry for life). After making losses for about a decade, MSN is now expected to make an operating profit of about $500m this year, a sharp contrast with an estimated $2.4 billion for Google. The web war is over, argues Mr Blodget, and Microsoft lost.
This might suggest that a combination of AOL with MSN makes the most sense. Both are unhappy step-children of parents that live in other industries (Microsoft in software, Time Warner in traditionalie, offlinemedia), whereas Yahoo! and Google remain the pure internet businesses they have been since their inception. For MSN, switching AOL away from Google's search technology and towards MSN's might offer a last chance of staying in the search competition. And both MSN and AOL still have lucrative but fast-shrinking side businesses in dial-up internet access, which Google and Yahoo! scoff at as holdovers from the narrowband stone age.
By contrast, Google would at first glance seem to be the least likely partner. It is run by technology puristsproud geeks who preach that computer algorithms, not human editors, will change the world. On the other hand, as confident as Google currently is, AOL is its single largest customer, accounting for 11% of its revenues in the first half of this year. Google would prefer not to lose this to MSN, so its bid appears to be defensive. Google would probably not have done this if MSN had not made this move, says Hal Varian, an academic and adviser to Google. This would explain why its bid is intended as a joint-venture. The idea is that Comcast would bring the broadband internet access, AOL the media content and eyeballs, and Google would do the monetisation through its advertising technology. This would ensure that each partner concentrated on the bit of the business in which it really excels.
A Google-Comcast-AOL combination would also be the most effective counter to Yahoo!'s (so far) successful strategy of teaming up with broadband providers. Yahoo! has deals with SBC and Verizon, America's two largest phone companies, to give their broadband customers free Yahoo! accounts, web mail and online storage; this week Yahoo! struck a similar deal with BellSouth, the country's third-largest telephone company. Google, the only portal that does not make content of its own, and Comcast, the biggest broadband provider in America, are feeling a bit left out.
But a deal between AOL and Yahoo! might be culturally the easiest. Both are at heart media companiesYahoo!'s Mr Semel made his career in Hollywood before moving to Silicon Valley. Both see media content, whether generated by teenage bloggers or professional film studios, as their natural terrain.
Ultimately, it all comes down to the three suitors' estimates of what Mr Varian calls the power of the default. Default users are the great unwashed, says Mr Varian. They are the ones who, for instance, use MSN because it comes pre-installed in Internet Explorer, the web browser that itself comes pre-installed on new computers. By contrast, teenagers and geeks mix and match their web mail, IM, online maps, search, blogging and so on from whichever service on the internet they happen to like best. Default users are less demanding, older but nonetheless rich enough to target with small hyperlinked text advertisements. For the dealmakers, it all comes down to figuring out how much these naifs, collectively, are worth.
Source : Economist
This Week's Business Headlines
The Chicago Board of Trade, America's oldest futures and options exchange, made its stockmarket debut on the NYSE. The initial public offering was valued at $54 a share, but CBOT's share price surged on the first day of trading, closing at $80.30.
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Refco, which saw its boss charged with fraud and the trading of its shares suspended last week, filed for bankruptcy protection. The futures and commodities broker, which had its capital-markets arm shut down, then reached an agreement to sell its key futures unit (which is still operational) to a consortium led by J.C. Flowers, a private-equity firm, for $768m.
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Federal prosecutors in America brought further indictments against former executives at KPMG, who are accused of creating fraudulent tax-shelter schemes for wealthy individuals (the "Big Four" accountancy firm has settled its part in the case). A total of 19 people, including KPMG's former chief financial officer, have now been charged in what is thought to be the biggest-ever criminal case of tax fraud.
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J.P. Morgan Chase announced that Jamie Dimon, currently the firm's president, will succeed William Harrison as chief executive at the end of the year. Meanwhile, the bank outshone a phalanx of large financial institutions that reported third-quarter earningsits net profit of $2.5 billion was an increase of 78% compared with the same period in 2004. Other stellar results came from Merrill Lynch, which recorded a 49% rise in profit, Citigroup (35%) and Wachovia (32%).
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Banca Popolare Italiana's share price fell by over 20% on October 19th. Concerns were raised about the value of certain assets, and the collateral on a loan the Italian bank had made to an entrepreneur. Meanwhile, the Bank of Italy approved the takeover of Banca Antonveneta by ABN Amro, a Dutch bank, bringing an end to a controversial battle that has raised questions about the probity of both BPI and Antonio Fazio, the central bank's governor.
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America's two biggest carmakers posted poor third-quarter earnings. General Motors reported a net loss of $1.6 billion (after losses of $1.1 billion and $286m in the first and second quarter) and Ford swung to a net loss of $284m. Both companies are making concerted efforts to reduce the size of their legacy costs (benefits pledged to workers) to stave off bankruptcy.
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Eastman Kodak reported a third-quarter net loss of $1 billion, mostly due to a $900m tax charge related to restructuring. The company is trying to shift its core business away from film photography, where sales have collapsed, to digital imaging.
The Association of American Publishers filed a copyright lawsuit against Google's project to scan books on to the internet. The firm said the move was "short-sighted".
America's Justice Department received another setback to its long-running litigation case against tobacco companies. The Supreme Court declined to hear an appeal on the amount of any award it may win in the caseit had originally sought $280 billion, but a lower court struck the amount down. In June, the department drastically cut the sum it was expected to seek from tobacco firms to fund stop-smoking programmes.
------------------
Roche reported that sales of its Tamiflu antiviral drug, touted as the best defence against bird flu, had grown by 263% in the first nine months of 2005 compared with 2004 (total drug sales rose by 20%). The Swiss pharmaceuticals group also faced some criticism for not allowing other firms to manufacture Tamiflu, but said it was ready to discuss "all available options" and would raise its production by opening a new factory in the United States.
-----------------
Shareholders in PetroKazakhstan, which is listed in Canada, approved a $4.2 billion takeover by China National Petroleum Corporation. However, Lukoil, a big Russian oil firm which claims a stake in some of PK's assets, asked a judge to delay a final ruling on the deal. Last week, CNPC eased political concerns in Kazakhstan about strategic control of the country's oil assets by agreeing to sell a 33% stake in PK to KazMunaiGaz, which is state-controlled.
-----------------
Britain, the euro area and the United States released figures on inflation that caused pundits to reach for their 1970s economics textbooks. Most startlingly, America's consumer prices rose by 1.2% in September, the largest monthly increase for 25 years. For the 12 months ending in September, consumer prices rose by 4.7%. Energy prices were blamedthe core rate, excluding energy and food, rose by only 0.1% in September.
SOURCE : ECONOMIST
The Chicago Board of Trade, America's oldest futures and options exchange, made its stockmarket debut on the NYSE. The initial public offering was valued at $54 a share, but CBOT's share price surged on the first day of trading, closing at $80.30.
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Refco, which saw its boss charged with fraud and the trading of its shares suspended last week, filed for bankruptcy protection. The futures and commodities broker, which had its capital-markets arm shut down, then reached an agreement to sell its key futures unit (which is still operational) to a consortium led by J.C. Flowers, a private-equity firm, for $768m.
-------------------
Federal prosecutors in America brought further indictments against former executives at KPMG, who are accused of creating fraudulent tax-shelter schemes for wealthy individuals (the "Big Four" accountancy firm has settled its part in the case). A total of 19 people, including KPMG's former chief financial officer, have now been charged in what is thought to be the biggest-ever criminal case of tax fraud.
----------------
J.P. Morgan Chase announced that Jamie Dimon, currently the firm's president, will succeed William Harrison as chief executive at the end of the year. Meanwhile, the bank outshone a phalanx of large financial institutions that reported third-quarter earningsits net profit of $2.5 billion was an increase of 78% compared with the same period in 2004. Other stellar results came from Merrill Lynch, which recorded a 49% rise in profit, Citigroup (35%) and Wachovia (32%).
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Banca Popolare Italiana's share price fell by over 20% on October 19th. Concerns were raised about the value of certain assets, and the collateral on a loan the Italian bank had made to an entrepreneur. Meanwhile, the Bank of Italy approved the takeover of Banca Antonveneta by ABN Amro, a Dutch bank, bringing an end to a controversial battle that has raised questions about the probity of both BPI and Antonio Fazio, the central bank's governor.
---------------------
America's two biggest carmakers posted poor third-quarter earnings. General Motors reported a net loss of $1.6 billion (after losses of $1.1 billion and $286m in the first and second quarter) and Ford swung to a net loss of $284m. Both companies are making concerted efforts to reduce the size of their legacy costs (benefits pledged to workers) to stave off bankruptcy.
----------------------
Eastman Kodak reported a third-quarter net loss of $1 billion, mostly due to a $900m tax charge related to restructuring. The company is trying to shift its core business away from film photography, where sales have collapsed, to digital imaging.
The Association of American Publishers filed a copyright lawsuit against Google's project to scan books on to the internet. The firm said the move was "short-sighted".
America's Justice Department received another setback to its long-running litigation case against tobacco companies. The Supreme Court declined to hear an appeal on the amount of any award it may win in the caseit had originally sought $280 billion, but a lower court struck the amount down. In June, the department drastically cut the sum it was expected to seek from tobacco firms to fund stop-smoking programmes.
------------------
Roche reported that sales of its Tamiflu antiviral drug, touted as the best defence against bird flu, had grown by 263% in the first nine months of 2005 compared with 2004 (total drug sales rose by 20%). The Swiss pharmaceuticals group also faced some criticism for not allowing other firms to manufacture Tamiflu, but said it was ready to discuss "all available options" and would raise its production by opening a new factory in the United States.
-----------------
Shareholders in PetroKazakhstan, which is listed in Canada, approved a $4.2 billion takeover by China National Petroleum Corporation. However, Lukoil, a big Russian oil firm which claims a stake in some of PK's assets, asked a judge to delay a final ruling on the deal. Last week, CNPC eased political concerns in Kazakhstan about strategic control of the country's oil assets by agreeing to sell a 33% stake in PK to KazMunaiGaz, which is state-controlled.
-----------------
Britain, the euro area and the United States released figures on inflation that caused pundits to reach for their 1970s economics textbooks. Most startlingly, America's consumer prices rose by 1.2% in September, the largest monthly increase for 25 years. For the 12 months ending in September, consumer prices rose by 4.7%. Energy prices were blamedthe core rate, excluding energy and food, rose by only 0.1% in September.
SOURCE : ECONOMIST
A widely accepted 'working definition' of knowledge management applied in worldwide organizations is available from the WWW Virtual Library on Knowledge Management (http://www.kmnetwork.com/):
"Knowledge Management caters to the critical issues of organizational adaptation, survival, and competence in face of increasingly discontinuous environmental change.... Essentially, it embodies organizational processes that seek synergistic combination of data and information processing capacity of information technologies, and the creative and innovative capacity of human beings." In simpler terms, Knowledge Management seeks to make the best use of the knowledge that is available to an organization, creating new knowledge, increasing awareness and understanding in the process.
"The goal of commercial knowledge is not truth, but effective performance: not 'what is right' but 'what works' or even 'what works better' where better is defined in competitive and financial contexts" Demarest, M, 1997.
Personal_knowledge_management - PKM pays attention to the organization of information, thoughts and beliefs. In this approach, the responsibility for knowledge creation lies with the individual who is charged to learn, connect and share personal insights.
Enterprise knowledge management - EKM is concerned with strategy, process and technologies to acquire, store, share and secure organizational understanding, insights and core distinctions. KM at this level is closely tied to competitive advantage, innovation and agility.
It is helpful to make a clear distinction between knowledge on the one hand, and information and data on the other.
Information can be considered as a message. It typically has a sender and a receiver. Information is the sort of stuff that can, at least potentially, be saved onto a computer. Data is a type of information that is structured, but has not been interpreted.
Knowledge might be described as information that has a use or purpose. Whereas information can be placed onto a computer, knowledge is emergent, and socially constructed, exists in the heads of people. Knowledge is information to which an intent has been attached.
First and second generation Knowledge Management
By the early nineties, it was clear that there were two distinct branches of Knowledge Management.
First generation Knowledge Management
First generation Knowledge Management involves the capture of information and experience so that it is easily accessible in a corporate environment. An alternate term is "knowledge capture or harvesting". Managing this capture allows the system to grow into a powerful information asset and Corporate memory. This led to organisations investing heavily in technological fixes that had either little impact or a negative impact on the way in which knowledge was used.
A typical scenario might have seen an organisation install a sophisticated intranet in order to categorize and disseminate information, only to find that the extra work involved in setting up the metadata meant that few within the organisation actually used the intranet. This occasionally led to management mandating the use of the intranet, resulting in resentment amongst staff, and undermining their trust in the organisation. Thus first generation solutions are often counterproductive.
Knowledge is not a commodity but a process. But a suitable epistemology was found, in the form of that developed by Michael Polanyi. Polanyis epistemology objectified the cognitive component of knowledge learning and doing by labelling it tacit knowledge and for the most part removing it from the public view.
Its failure to provide any theoretical understanding of how organisations learn new things and how they act on this information meant that first generation Knowledge Management was incapable of managing knowledge creation.
Second Generation Knowledge Management
The advent of complexity theory and chaos theory provided more metaphors that enable managers to replace models of organisations as integrated systems with models of organisations as complex interdependent entities that are capable of responding to their environment.
Second generation Knowledge Management gives priority to the way in which people construct and use knowledge. It derives its ideas from complex systems, often making use of organic metaphors to describe knowledge growth. It is closely related to organizational learning. It recognises that learning and doing are more important to organisational success than dissemination and imitation.
Source: www.apna-hyderabad.com
Betting on China's Banks
The biggest IPO on earth may signal the start of a rich, new era of financial markets. No wonder Western institutions are lining up
Never accuse the Chinese of thinking small. The global public offering in late October of China Construction Bank, the mainland's third-largest bank, is set to raise a head-turning $8 billion on Oct. 27 -- the biggest IPO on the planet this year, and the biggest anywhere since Kraft Foods (KFT ) went public in 2001.
The offer is vastly oversubscribed, as investors line up to buy a piece of a bank with $521.8 billion in assets, the first of China's Big Four state-owned banks to publicly list shares overseas. "We are well positioned to capitalize on the growth in China," says CCB Chairman Guo Shuqing. Guo just completed a road show in the U.S. to keep investor enthusiasm stoked.
The Buy China syndrome has long gripped global investors entranced by the country's hypergrowth story. Some 117 Chinese companies have raised $45.5 billion in global equity markets in the past decade. Just last August, Baidu.com, a Beijing search-engine outfit, blew away a five-year record on Nasdaq for best first-day trading performance as its share price jumped fivefold, to $154 per share.
THE NEXT TURN. Yet the China Construction deal is in a different realm. First, CCB already has the backing of Bank of America (BAC ), which has committed $3 billion for a minority stake. BofA is just one of several major banks, including Citigroup (C ), HSBC Securities (HBC ), Goldman Sachs (GS ), and American Express (AXP ), that have ponied up some $20 billion to buy into China's financial institutions, the biggest of which have plans to go public in the next year or so.
Bank of America is probably already sitting on a hefty profit. Steven E. Wharton, portfolio manager of the Morgan Stanley Financial Services fund, which holds BofA shares, figures the U.S. bank bought its Construction Bank stake at 1.15 times book value. Smaller Chinese banks, he notes, have gone public at 1.6 times book -- implying a nearly 40% gain for BofA since it cut the deal in the summer. (Morgan -- MWD -- is also an underwriter of the CCB offering.)
Not bad. But what has BofA, Goldman, HSBC, and others excited is the prospect of winning a giant bet on China's next turn. The wager is that China's financial system, long one of the most dysfunctional anywhere, is finally getting fixed. It will blossom into one of the world's biggest profit machines as its banks make lucrative loans, the local bourses take off, a bond market develops, and consumers learn the joys of credit cards, mortgages, and personal finance. China, with more than $1.8 trillion in personal savings -- and a savings rate of close to 50% -- could become the financial market of the 21st century .
UNREAL BANKS. That's the idea, at least. At the moment, Beijing is in a titanic struggle to reinvent its financial system against considerable internal opposition. "The scale of what is happening has never been seen in the world," says U.S. Treasury Secretary John W. Snow.
Yet the great turnaround could still end up as the great flop, and global banks jumping into the fray could get hurt. A major economic slowdown could derail China's banks, some of which are hooked on real estate loans that sour easily. It will also be a struggle to escape the legacy of the past and forsake state-directed lending that almost brought the banks down.
Ever since the Great Helmsman Mao Zedong nationalized China's banks more than 50 years ago, they have served as massive employment agencies, money pots for pet projects, and key props for the party apparatus. They've done everything except act as real banks -- institutions that gauge risk correctly, lend to the most promising businesses, and develop sophisticated services for consumers and companies alike.
WASTE PILE. Instead, China piled up half a trillion dollars in bad loans by the late '90s. Huge bailouts courtesy of Beijing have lessened that load, but some analysts say a fresh crisis may be developing as the banks back too many new real estate projects and too many new factories.
Beijing's grand plan is to fix the main banks, inject foreign capital and expertise into the system, clean up the local bourses -- and throw the financial markets virtually completely open to outside competition by December 6, 2006.
"It would be difficult to overstate the importance of this transformation," says Nicholas R. Lardy, a senior fellow and China watcher of the Institute for International Economics in Washington. "The financial sector is immense relative to China's GDP." Immense -- and wasteful. It takes about three times as much investment to generate $1 of gross domestic product in China as it does in the U.S., Japan, and Western Europe. That's largely because the banks have been ineptly run.
STILL FRAGILE. So a lot is riding on the successful transformation of CCB from a plaything of state planners into a viable business. Since the late 1990s, the Chinese government has pumped $259 billion into CCB and the three other big state-owned banks -- Bank of China, Industrial & Commercial Bank of China, and Agricultural Bank of China. With good reason: These Fantastic Four account for 57% of all lending, control $1.8 trillion in deposits, and have bounced back from near insolvency in the late '90s.
The government's cash infusions have stabilized the banks, but the situation is still fragile. Neither China nor its banks have the managerial resources they need to build a better banking system. For that they are depending on investors like Bank of America. The Charlotte (N.C.) lender, the largest retail bank in the U.S., bought a 9% stake in CCB for $2.5 billion. It will spend an additional $500 million to buy equity during CCB's global offering of up to 30 million shares.
Although it will get only one seat on the board, BofA plans to send in a swat team of some 50 managers to help implement best practices in a Chinese context. Bank officials declined to comment during a "quiet period" ahead of the Construction Bank listing, but if everything goes according to plan, Bank of America could exercise an option to raise its stake to 19.9% by March, 2011.
SHAPING UP. Executives at BofA will train their local partners in such basics as due diligence on potential borrowers and fine-tuning loans to reflect borrowing costs and client risk. Construction Bank also desperately needs help in corporate governance and information technology. Of course, CCB officials may not be such quick studies. "There's a lot of work to be done when it comes to straightening up the bank sector in China," says banking analyst Andrew Collins at Piper Jaffray & Co. in New York. "You don't know how long this change in culture is going to take."
Yet as the new era of IPOs begins, the banks are in better shape than they have been in decades. Not only are the Big Four profitable, but thanks to the economy's white-hot growth and rising incomes, they saw 18% annualized growth in deposits from 2000 through 2004.
China Construction Bank is raking in profits. It says nonperforming loans are now 4% of its portfolio, down from 17% in 2002, although it has a much higher percentage of loans that need careful watching. Chairman Guo, a fluent English speaker, is a well-regarded former deputy governor of the country's central bank, the People's Bank of China. Better yet, CCB is earning a fat spread thanks to China's heavily regulated interest-rate regime. Banks can charge a 5.76% rate on one-year loans, but only need to pay out 2.23% on 12-month deposits.
EMBEZZLEMENT. True, former bank Chairman Zhang Enzhao was arrested last June for allegedly taking bribes, and the banks and authorities have disclosed precious little about who got the money. Also, the offering prospectus reveals more than 100 cases of theft and embezzlement at the bank between 2002 and 2004.
But CCB earned $6.07 billion in net income in 2004 -- and $3.5 billion during the first half, according to accounts audited by KPMG in Hong Kong. The bank has also acted to cut costs by trimming its branches from 21,391 in 2002 to 14,458 today. Head count has been pruned 20%, to 311,000, over the same period. "CCB management is extremely focused on cost controls," says bank President Chang Zhenming.
What's in it for BofA? It's buying into a bank with a huge footprint and millions of potential customers for Bank of America products and services. China Construction already controls loans valued at about $293 billion, or 12% of the industry total. The bank enjoys dominant market positions in home loans (23.1%) and even credit cards (18.7%). Guo says CCB has a huge edge with blue-chip companies in growth industries such as power and telecoms.
LACK OF LEVERAGE. With the Bank of China and Industrial & Commercial Bank of China expected to list in 2006 and investors already chomping at the bit to buy shares, it's clear that China will get all the Western help it wants to help it with bank reform. The question is whether that help will be enough. Beijing still insists the government retain a majority stake in its Big Four state banks. (Post-IPO, CCB will be 62.5% owned by the state.) China has refused, despite pressure from Washington, to lift its 25% cap on total equity held by outsiders and 20% for any single investor.
And while foreign investors may land a board seat or two at the banks, they won't be calling the shots on bank strategy or structure. If BofA CEO Kenneth D. Lewis or other foreign investors want to cut back on some of the banking industry's 1 million employees -- CCB alone has 300,000-plus -- they will have no leverage to do so. The American bank has also agreed to abandon any solo efforts on the mainland and any tie-ups with other Chinese lenders.
These rules don't appeal to some of its global competitors. Citigroup, for example, plans to expand its existing mainland retail network -- although it has hedged that by taking a 4.6% stake in Shanghai Pudong Development Bank. Analysts say Citi officials are actively scouting for branch locations in urban areas throughout China.
WHAT IF IT FLOPS? Beijing, meanwhile, is still keeping as tight a grip on bank reform as it has on its broader economic opening -- despite a weeklong visit by U.S. Treasury Secretary Snow and Securities & Exchange Commission Chairman Christopher Cox. In meetings with PBOC Governor Zhou Xiaochuan and China Securities Regulatory Commission Chairman Shang Fulin, Cox says he heard a lot of talk about gradual steps, not quick leaps. As Cox puts it: "If you take nothing but half-steps to reach the wall, will you ever reach it?"
Given all the hoopla, it could prove embarrassing for Chinese leaders if CCB flops as a listed bank. For starters, about 25% of its loan portfolio is tied to the highly volatile residential mortgage and property-development markets at a time when many worry about a possible housing bust in big cities such as Shanghai.
"Its exposure to China's red-hot property sector is higher than many of its peers, but the asset quality of CCB's property portfolio is slightly better," says May Yan, vice-president and a senior analyst with Moody's Investors Service in Hong Kong.
GROWING PAINS. The other issue with CCB is the quality of its numbers. Although the books have been examined by Western auditors, the possibility of unpleasant surprises is still there. Moody's notes the disturbing existence of "special mention" loans on CCB books that represent almost 17% of borrowing activity. Moody's is monitoring them closely, since a portion of these credits could eventually tip into the bad loan column.
Chinese officials urge the critics to be patient. After all, they say, just a few years ago there was no financial system to speak of that a Western banker would recognize. "China's capital markets were created out of nothing," says securities regulator Shang. Now they have to grow up.
SOURCE : BusinessWeek
The biggest IPO on earth may signal the start of a rich, new era of financial markets. No wonder Western institutions are lining up
Never accuse the Chinese of thinking small. The global public offering in late October of China Construction Bank, the mainland's third-largest bank, is set to raise a head-turning $8 billion on Oct. 27 -- the biggest IPO on the planet this year, and the biggest anywhere since Kraft Foods (KFT ) went public in 2001.
The offer is vastly oversubscribed, as investors line up to buy a piece of a bank with $521.8 billion in assets, the first of China's Big Four state-owned banks to publicly list shares overseas. "We are well positioned to capitalize on the growth in China," says CCB Chairman Guo Shuqing. Guo just completed a road show in the U.S. to keep investor enthusiasm stoked.
The Buy China syndrome has long gripped global investors entranced by the country's hypergrowth story. Some 117 Chinese companies have raised $45.5 billion in global equity markets in the past decade. Just last August, Baidu.com, a Beijing search-engine outfit, blew away a five-year record on Nasdaq for best first-day trading performance as its share price jumped fivefold, to $154 per share.
THE NEXT TURN. Yet the China Construction deal is in a different realm. First, CCB already has the backing of Bank of America (BAC ), which has committed $3 billion for a minority stake. BofA is just one of several major banks, including Citigroup (C ), HSBC Securities (HBC ), Goldman Sachs (GS ), and American Express (AXP ), that have ponied up some $20 billion to buy into China's financial institutions, the biggest of which have plans to go public in the next year or so.
Bank of America is probably already sitting on a hefty profit. Steven E. Wharton, portfolio manager of the Morgan Stanley Financial Services fund, which holds BofA shares, figures the U.S. bank bought its Construction Bank stake at 1.15 times book value. Smaller Chinese banks, he notes, have gone public at 1.6 times book -- implying a nearly 40% gain for BofA since it cut the deal in the summer. (Morgan -- MWD -- is also an underwriter of the CCB offering.)
Not bad. But what has BofA, Goldman, HSBC, and others excited is the prospect of winning a giant bet on China's next turn. The wager is that China's financial system, long one of the most dysfunctional anywhere, is finally getting fixed. It will blossom into one of the world's biggest profit machines as its banks make lucrative loans, the local bourses take off, a bond market develops, and consumers learn the joys of credit cards, mortgages, and personal finance. China, with more than $1.8 trillion in personal savings -- and a savings rate of close to 50% -- could become the financial market of the 21st century .
UNREAL BANKS. That's the idea, at least. At the moment, Beijing is in a titanic struggle to reinvent its financial system against considerable internal opposition. "The scale of what is happening has never been seen in the world," says U.S. Treasury Secretary John W. Snow.
Yet the great turnaround could still end up as the great flop, and global banks jumping into the fray could get hurt. A major economic slowdown could derail China's banks, some of which are hooked on real estate loans that sour easily. It will also be a struggle to escape the legacy of the past and forsake state-directed lending that almost brought the banks down.
Ever since the Great Helmsman Mao Zedong nationalized China's banks more than 50 years ago, they have served as massive employment agencies, money pots for pet projects, and key props for the party apparatus. They've done everything except act as real banks -- institutions that gauge risk correctly, lend to the most promising businesses, and develop sophisticated services for consumers and companies alike.
WASTE PILE. Instead, China piled up half a trillion dollars in bad loans by the late '90s. Huge bailouts courtesy of Beijing have lessened that load, but some analysts say a fresh crisis may be developing as the banks back too many new real estate projects and too many new factories.
Beijing's grand plan is to fix the main banks, inject foreign capital and expertise into the system, clean up the local bourses -- and throw the financial markets virtually completely open to outside competition by December 6, 2006.
"It would be difficult to overstate the importance of this transformation," says Nicholas R. Lardy, a senior fellow and China watcher of the Institute for International Economics in Washington. "The financial sector is immense relative to China's GDP." Immense -- and wasteful. It takes about three times as much investment to generate $1 of gross domestic product in China as it does in the U.S., Japan, and Western Europe. That's largely because the banks have been ineptly run.
STILL FRAGILE. So a lot is riding on the successful transformation of CCB from a plaything of state planners into a viable business. Since the late 1990s, the Chinese government has pumped $259 billion into CCB and the three other big state-owned banks -- Bank of China, Industrial & Commercial Bank of China, and Agricultural Bank of China. With good reason: These Fantastic Four account for 57% of all lending, control $1.8 trillion in deposits, and have bounced back from near insolvency in the late '90s.
The government's cash infusions have stabilized the banks, but the situation is still fragile. Neither China nor its banks have the managerial resources they need to build a better banking system. For that they are depending on investors like Bank of America. The Charlotte (N.C.) lender, the largest retail bank in the U.S., bought a 9% stake in CCB for $2.5 billion. It will spend an additional $500 million to buy equity during CCB's global offering of up to 30 million shares.
Although it will get only one seat on the board, BofA plans to send in a swat team of some 50 managers to help implement best practices in a Chinese context. Bank officials declined to comment during a "quiet period" ahead of the Construction Bank listing, but if everything goes according to plan, Bank of America could exercise an option to raise its stake to 19.9% by March, 2011.
SHAPING UP. Executives at BofA will train their local partners in such basics as due diligence on potential borrowers and fine-tuning loans to reflect borrowing costs and client risk. Construction Bank also desperately needs help in corporate governance and information technology. Of course, CCB officials may not be such quick studies. "There's a lot of work to be done when it comes to straightening up the bank sector in China," says banking analyst Andrew Collins at Piper Jaffray & Co. in New York. "You don't know how long this change in culture is going to take."
Yet as the new era of IPOs begins, the banks are in better shape than they have been in decades. Not only are the Big Four profitable, but thanks to the economy's white-hot growth and rising incomes, they saw 18% annualized growth in deposits from 2000 through 2004.
China Construction Bank is raking in profits. It says nonperforming loans are now 4% of its portfolio, down from 17% in 2002, although it has a much higher percentage of loans that need careful watching. Chairman Guo, a fluent English speaker, is a well-regarded former deputy governor of the country's central bank, the People's Bank of China. Better yet, CCB is earning a fat spread thanks to China's heavily regulated interest-rate regime. Banks can charge a 5.76% rate on one-year loans, but only need to pay out 2.23% on 12-month deposits.
EMBEZZLEMENT. True, former bank Chairman Zhang Enzhao was arrested last June for allegedly taking bribes, and the banks and authorities have disclosed precious little about who got the money. Also, the offering prospectus reveals more than 100 cases of theft and embezzlement at the bank between 2002 and 2004.
But CCB earned $6.07 billion in net income in 2004 -- and $3.5 billion during the first half, according to accounts audited by KPMG in Hong Kong. The bank has also acted to cut costs by trimming its branches from 21,391 in 2002 to 14,458 today. Head count has been pruned 20%, to 311,000, over the same period. "CCB management is extremely focused on cost controls," says bank President Chang Zhenming.
What's in it for BofA? It's buying into a bank with a huge footprint and millions of potential customers for Bank of America products and services. China Construction already controls loans valued at about $293 billion, or 12% of the industry total. The bank enjoys dominant market positions in home loans (23.1%) and even credit cards (18.7%). Guo says CCB has a huge edge with blue-chip companies in growth industries such as power and telecoms.
LACK OF LEVERAGE. With the Bank of China and Industrial & Commercial Bank of China expected to list in 2006 and investors already chomping at the bit to buy shares, it's clear that China will get all the Western help it wants to help it with bank reform. The question is whether that help will be enough. Beijing still insists the government retain a majority stake in its Big Four state banks. (Post-IPO, CCB will be 62.5% owned by the state.) China has refused, despite pressure from Washington, to lift its 25% cap on total equity held by outsiders and 20% for any single investor.
And while foreign investors may land a board seat or two at the banks, they won't be calling the shots on bank strategy or structure. If BofA CEO Kenneth D. Lewis or other foreign investors want to cut back on some of the banking industry's 1 million employees -- CCB alone has 300,000-plus -- they will have no leverage to do so. The American bank has also agreed to abandon any solo efforts on the mainland and any tie-ups with other Chinese lenders.
These rules don't appeal to some of its global competitors. Citigroup, for example, plans to expand its existing mainland retail network -- although it has hedged that by taking a 4.6% stake in Shanghai Pudong Development Bank. Analysts say Citi officials are actively scouting for branch locations in urban areas throughout China.
WHAT IF IT FLOPS? Beijing, meanwhile, is still keeping as tight a grip on bank reform as it has on its broader economic opening -- despite a weeklong visit by U.S. Treasury Secretary Snow and Securities & Exchange Commission Chairman Christopher Cox. In meetings with PBOC Governor Zhou Xiaochuan and China Securities Regulatory Commission Chairman Shang Fulin, Cox says he heard a lot of talk about gradual steps, not quick leaps. As Cox puts it: "If you take nothing but half-steps to reach the wall, will you ever reach it?"
Given all the hoopla, it could prove embarrassing for Chinese leaders if CCB flops as a listed bank. For starters, about 25% of its loan portfolio is tied to the highly volatile residential mortgage and property-development markets at a time when many worry about a possible housing bust in big cities such as Shanghai.
"Its exposure to China's red-hot property sector is higher than many of its peers, but the asset quality of CCB's property portfolio is slightly better," says May Yan, vice-president and a senior analyst with Moody's Investors Service in Hong Kong.
GROWING PAINS. The other issue with CCB is the quality of its numbers. Although the books have been examined by Western auditors, the possibility of unpleasant surprises is still there. Moody's notes the disturbing existence of "special mention" loans on CCB books that represent almost 17% of borrowing activity. Moody's is monitoring them closely, since a portion of these credits could eventually tip into the bad loan column.
Chinese officials urge the critics to be patient. After all, they say, just a few years ago there was no financial system to speak of that a Western banker would recognize. "China's capital markets were created out of nothing," says securities regulator Shang. Now they have to grow up.
SOURCE : BusinessWeek
Why Microsoft, Google and Yahoo! are fighting over AOL
AS MORE and more of the world's business is conducted online, a battle royal is taking shape. The struggle is to decide which company will become the primary gateway to the internet. Three firms, Google, Microsoft and Yahoo!, are aiming to establish the world's leading internet portalthe site that most internet users rely on for everything from searching the web to sending e-mail and catching up on the news. All three firms are hoping to strike some sort of deal with AOLthe fourth player in the battle of the portals.
It is highly convenient for Time Warner, the world's biggest media company, that its struggling web portal, AOL, is suddenly at the receiving end of competing bids from all three of the other internet giants. Microsoft, the world's biggest software company, was the first to start haggling, via its portal, MSN. Then Google, the world's most popular search engine and nowadays Microsoft's archest arch-enemy, came running, with Comcast, America's biggest cable company, as a prospective co-bidder. And now Yahoo!, the biggest web portal and determined runner-up to Google in internet search, has also entered the bidding.
Lest anybody pick the wrong metaphor, it is not the case that AOL is the prettiest girl at the dance, says Safa Rashtchy, an analyst at Piper Jaffray, a bank. Instead, he says, AOL is big open real estate and you don't want your competitor to get it. That is because the vaguely defined and fast-changing web-portal industry, though still young enough to be the fastest-growing advertising medium, is also showing the early signs of maturity. That would suggest that this industry, like many others, will evolve towards three large generalist players and several small niche firms, a phenomenon that Jagdish Sheth and Rajendra Sisodia, two academics, call the rule of three in a book of the same title. The big question is which three emerge and in what combination.
Analysing how the four portals currently measure up is surprisingly hard. Conventional wisdom says that Google is the one to beat. That is because it is the clear leader in internet searchthe most technologically exciting and profitable end of the business. Yahoo! is a strong second in search and MSN a poor third, whereas AOL does not compete in search at all. Instead, it uses Google's technology to generate search results and to make money out of them (by placing the hyperlinks of advertisers near related search results).
But when the criterion is not the number of searches but the number of site visitors in America, Yahoo! is the clear leader, with MSN in second place, AOL in third and Google last. Terry Semel, Yahoo!'s boss, used this fact to make a barbed joke when speaking at an internet conference in San Francisco last week: Gosh, it's starting to look more and more like a portal, he said of Google, whom he is suspected of envying, and as a portal it would probably be rated number four. Yahoo!'s web mail service, he added, has ten times as many users as Google's alternative.
If instant-messaging (IM) technology is the measure, AOL is the clear leader, with Yahoo! and MSN competing for second place (and, last week, linking their technologies in a partnership), while Google is again last. Instant messaging is currently hard to make money out of, but potentially crucial since it is one vehicle for free internet telephony and tends to make its users fiercely loyal.
By the more conventional measures of advertising revenues and operating profit, Google is still the clear leader and MSN the big loser, says Henry Blodget, the president of Cherry Hill Research (Mr Blodget became notorious as an equity analyst at Merrill Lynch for his role in inflating the dotcom bubble, which led to his being banned from the securities industry for life). After making losses for about a decade, MSN is now expected to make an operating profit of about $500m this year, a sharp contrast with an estimated $2.4 billion for Google. The web war is over, argues Mr Blodget, and Microsoft lost.
This might suggest that a combination of AOL with MSN makes the most sense. Both are unhappy step-children of parents that live in other industries (Microsoft in software, Time Warner in traditionalie, offlinemedia), whereas Yahoo! and Google remain the pure internet businesses they have been since their inception. For MSN, switching AOL away from Google's search technology and towards MSN's might offer a last chance of staying in the search competition. And both MSN and AOL still have lucrative but fast-shrinking side businesses in dial-up internet access, which Google and Yahoo! scoff at as holdovers from the narrowband stone age.
By contrast, Google would at first glance seem to be the least likely partner. It is run by technology puristsproud geeks who preach that computer algorithms, not human editors, will change the world. On the other hand, as confident as Google currently is, AOL is its single largest customer, accounting for 11% of its revenues in the first half of this year. Google would prefer not to lose this to MSN, so its bid appears to be defensive. Google would probably not have done this if MSN had not made this move, says Hal Varian, an academic and adviser to Google. This would explain why its bid is intended as a joint-venture. The idea is that Comcast would bring the broadband internet access, AOL the media content and eyeballs, and Google would do the monetisation through its advertising technology. This would ensure that each partner concentrated on the bit of the business in which it really excels.
A Google-Comcast-AOL combination would also be the most effective counter to Yahoo!'s (so far) successful strategy of teaming up with broadband providers. Yahoo! has deals with SBC and Verizon, America's two largest phone companies, to give their broadband customers free Yahoo! accounts, web mail and online storage; this week Yahoo! struck a similar deal with BellSouth, the country's third-largest telephone company. Google, the only portal that does not make content of its own, and Comcast, the biggest broadband provider in America, are feeling a bit left out.
But a deal between AOL and Yahoo! might be culturally the easiest. Both are at heart media companiesYahoo!'s Mr Semel made his career in Hollywood before moving to Silicon Valley. Both see media content, whether generated by teenage bloggers or professional film studios, as their natural terrain.
Ultimately, it all comes down to the three suitors' estimates of what Mr Varian calls the power of the default. Default users are the great unwashed, says Mr Varian. They are the ones who, for instance, use MSN because it comes pre-installed in Internet Explorer, the web browser that itself comes pre-installed on new computers. By contrast, teenagers and geeks mix and match their web mail, IM, online maps, search, blogging and so on from whichever service on the internet they happen to like best. Default users are less demanding, older but nonetheless rich enough to target with small hyperlinked text advertisements. For the dealmakers, it all comes down to figuring out how much these naifs, collectively, are worth.
SOURCE : Economist
AS MORE and more of the world's business is conducted online, a battle royal is taking shape. The struggle is to decide which company will become the primary gateway to the internet. Three firms, Google, Microsoft and Yahoo!, are aiming to establish the world's leading internet portalthe site that most internet users rely on for everything from searching the web to sending e-mail and catching up on the news. All three firms are hoping to strike some sort of deal with AOLthe fourth player in the battle of the portals.
It is highly convenient for Time Warner, the world's biggest media company, that its struggling web portal, AOL, is suddenly at the receiving end of competing bids from all three of the other internet giants. Microsoft, the world's biggest software company, was the first to start haggling, via its portal, MSN. Then Google, the world's most popular search engine and nowadays Microsoft's archest arch-enemy, came running, with Comcast, America's biggest cable company, as a prospective co-bidder. And now Yahoo!, the biggest web portal and determined runner-up to Google in internet search, has also entered the bidding.
Lest anybody pick the wrong metaphor, it is not the case that AOL is the prettiest girl at the dance, says Safa Rashtchy, an analyst at Piper Jaffray, a bank. Instead, he says, AOL is big open real estate and you don't want your competitor to get it. That is because the vaguely defined and fast-changing web-portal industry, though still young enough to be the fastest-growing advertising medium, is also showing the early signs of maturity. That would suggest that this industry, like many others, will evolve towards three large generalist players and several small niche firms, a phenomenon that Jagdish Sheth and Rajendra Sisodia, two academics, call the rule of three in a book of the same title. The big question is which three emerge and in what combination.
Analysing how the four portals currently measure up is surprisingly hard. Conventional wisdom says that Google is the one to beat. That is because it is the clear leader in internet searchthe most technologically exciting and profitable end of the business. Yahoo! is a strong second in search and MSN a poor third, whereas AOL does not compete in search at all. Instead, it uses Google's technology to generate search results and to make money out of them (by placing the hyperlinks of advertisers near related search results).
But when the criterion is not the number of searches but the number of site visitors in America, Yahoo! is the clear leader, with MSN in second place, AOL in third and Google last. Terry Semel, Yahoo!'s boss, used this fact to make a barbed joke when speaking at an internet conference in San Francisco last week: Gosh, it's starting to look more and more like a portal, he said of Google, whom he is suspected of envying, and as a portal it would probably be rated number four. Yahoo!'s web mail service, he added, has ten times as many users as Google's alternative.
If instant-messaging (IM) technology is the measure, AOL is the clear leader, with Yahoo! and MSN competing for second place (and, last week, linking their technologies in a partnership), while Google is again last. Instant messaging is currently hard to make money out of, but potentially crucial since it is one vehicle for free internet telephony and tends to make its users fiercely loyal.
By the more conventional measures of advertising revenues and operating profit, Google is still the clear leader and MSN the big loser, says Henry Blodget, the president of Cherry Hill Research (Mr Blodget became notorious as an equity analyst at Merrill Lynch for his role in inflating the dotcom bubble, which led to his being banned from the securities industry for life). After making losses for about a decade, MSN is now expected to make an operating profit of about $500m this year, a sharp contrast with an estimated $2.4 billion for Google. The web war is over, argues Mr Blodget, and Microsoft lost.
This might suggest that a combination of AOL with MSN makes the most sense. Both are unhappy step-children of parents that live in other industries (Microsoft in software, Time Warner in traditionalie, offlinemedia), whereas Yahoo! and Google remain the pure internet businesses they have been since their inception. For MSN, switching AOL away from Google's search technology and towards MSN's might offer a last chance of staying in the search competition. And both MSN and AOL still have lucrative but fast-shrinking side businesses in dial-up internet access, which Google and Yahoo! scoff at as holdovers from the narrowband stone age.
By contrast, Google would at first glance seem to be the least likely partner. It is run by technology puristsproud geeks who preach that computer algorithms, not human editors, will change the world. On the other hand, as confident as Google currently is, AOL is its single largest customer, accounting for 11% of its revenues in the first half of this year. Google would prefer not to lose this to MSN, so its bid appears to be defensive. Google would probably not have done this if MSN had not made this move, says Hal Varian, an academic and adviser to Google. This would explain why its bid is intended as a joint-venture. The idea is that Comcast would bring the broadband internet access, AOL the media content and eyeballs, and Google would do the monetisation through its advertising technology. This would ensure that each partner concentrated on the bit of the business in which it really excels.
A Google-Comcast-AOL combination would also be the most effective counter to Yahoo!'s (so far) successful strategy of teaming up with broadband providers. Yahoo! has deals with SBC and Verizon, America's two largest phone companies, to give their broadband customers free Yahoo! accounts, web mail and online storage; this week Yahoo! struck a similar deal with BellSouth, the country's third-largest telephone company. Google, the only portal that does not make content of its own, and Comcast, the biggest broadband provider in America, are feeling a bit left out.
But a deal between AOL and Yahoo! might be culturally the easiest. Both are at heart media companiesYahoo!'s Mr Semel made his career in Hollywood before moving to Silicon Valley. Both see media content, whether generated by teenage bloggers or professional film studios, as their natural terrain.
Ultimately, it all comes down to the three suitors' estimates of what Mr Varian calls the power of the default. Default users are the great unwashed, says Mr Varian. They are the ones who, for instance, use MSN because it comes pre-installed in Internet Explorer, the web browser that itself comes pre-installed on new computers. By contrast, teenagers and geeks mix and match their web mail, IM, online maps, search, blogging and so on from whichever service on the internet they happen to like best. Default users are less demanding, older but nonetheless rich enough to target with small hyperlinked text advertisements. For the dealmakers, it all comes down to figuring out how much these naifs, collectively, are worth.
SOURCE : Economist
Greenspan's Rich Legacy
He nurtured booms, cushioned busts, and saw what others didn't
When Alan Greenspan took charge of the Federal Reserve in August, 1987, businesspeople and economic cognoscenti thought they knew what they were getting: a dedicated -- even obsessive -- inflation fighter who would be willing to provoke a recession to hold down prices. As one Republican told BusinessWeek at the time, Greenspan "feels in his bones that austerity is good for you."
Eighteen years later, as Greenspan comes to the end of his long tenure as Fed chairman, his rout of inflation is almost unquestioned. Taking out volatile energy and food prices, consumer inflation is still running at 2%, compared with a 3.9% rate when he came into office. By any standard, that is a splendid performance.
But history is likely to celebrate Greenspan for another achievement: his ability to steer the U.S. economy successfully through the white-water ride of the past decade. Through it all -- tech boom, Asian financial crisis, stock market bubble, tech bust, recession, Enron, terrorist attacks, and a housing boom -- Greenspan's hand guiding monetary policy was unparalleled. "Alan Greenspan has a deeper economic intuition than almost anybody I've ever met," says Glenn Hubbard, dean of the Columbia Business School and former chairman of the Council of Economic Advisers under President George W. Bush, as well as a BusinessWeek columnist. Adds Richard M. Kovacevich, chairman and CEO of Wells Fargo & Co. (WFC ): "I think he will go down as perhaps the best central banker of all time."
NEW ECONOMY VISIONARY
Based on today's economic statistics, there is little reason to doubt this evaluation. Unemployment is lower than when Greenspan became Fed chairman, productivity growth is nearly a full percentage point faster, real wages are higher, and the stock market has more than doubled, even after adjusting for inflation. "Greenspan created the environment in which business could thrive," says Charlie Giancarlo, the chief development officer at Cisco Systems Inc. (CSCO ) and a possible successor to CEO John Chambers. "We used to think that 1% to 2% was normal economic growth. Now we consider 3%-plus to be normal growth. That's a huge accomplishment."
In retrospect, Greenspan's philosophy of central banking was simple: ride the booms, cushion the busts. Belying his reputation as an austere inflation hawk, Greenspan was one of the first economists to embrace the notion of a technology-driven productivity boom in the second half of the 1990s -- the so-called New Economy. His willingness to keep rates low despite criticism from inside and outside the Fed helped fuel business investment and growth.
Then, in 2001, when the stock market tanked, the tech boom turned to bust, and terrorists attacked on September 11, Greenspan cut rates at a rocket pace, going from 6.5% to 1.75% in just one year. The result: Rather than cratering, as most economists expected, growth has averaged a solid 3.2%, and productivity has risen at an amazing 3.5% rate. Greenspan can't be given all the credit, but his willingness to slash rates aggressively may have helped the economy avoid a deep downward spiral.
There are plenty of economists who suspect that Greenspan's legacy will not be quite so positive. Some blame him for lollygagging on the sidelines during the stock market's wretched excesses of the 1990s. "He should have shot something across the bow of the bubbly crowd," says Nobel prize winner Paul A. Samuelson of the Massachusetts Institute of Technology.
Others fear that Greenspan's rate cuts may have led to a housing bubble and an excess of debt. "Investors and consumers of housing simply believe that if things get too tough and prices fall too far, the maestro will ride to the rescue once again," says William H. Gross, chief investment officer at Pacific Investment Management Co., the world's largest bond manager, with $513 billion in assets. "That approach, in the long term, is destabilizing. It promotes speculative activity." Observes Jean-Paul Betbze, chief economist at Crdit Agricole (CRARF ), the largest bank in France: "In my opinion, Greenspan's legacy is an imbalanced America -- imbalanced in terms of personal savings, in terms of national financial stability, and in terms of the housing boom."
Many Democrats criticize Greenspan's support for the Bush tax cuts. It "was completely inappropriate," says Robert B. Reich, Brandeis University professor and Labor Secretary under President Bill Clinton, noting that the tax cuts "have contributed mightily to our present mess."
Still, for all the handwringing, the national debt burden, at 204% of gross domestic product, is not very much higher than it was when Greenspan took office. The massive jumps in energy prices show no sign of spreading to the rest of the economy, and corporate profitability remains high.
DEFYING SKEPTICS
What's more, the pessimists have to contend with the simple fact that Greenspan's track record at forecasting economic performance has been consistently far better than theirs. Today it's accepted wisdom that the tech-driven acceleration of productivity growth started in 1996 or 1997. But back then, official statistics were ambiguous, and few professional economists outside or inside the Fed shared Greenspan's view that information technology had broken a two-decade productivity drought.
Indeed, the skepticism persisted for several years even as the economy grew vigorously. For example, in a forecast made at the end of 1998, economists at the Organisation for Economic Cooperation & Development predicted that U.S. productivity growth would plunge to an abysmal 0.4% in 1999. Even the respected and nonpartisan Congressional Budget Office did not start raising its long-term productivity forecasts until 1999.
Given how long it took most economists to grasp the reality of the New Economy, it's worth asking if the boom would have happened if someone other than Greenspan had been in charge of the Fed during the critical 1990s. Counterfactual history is always speculative, but it's possible that a more cautious Fed chairman would have raised rates in 1997 and 1998, as most economists advocated, and choked off the boom of the 1990s before it went into full gear.
COOL HEAD
In a world without Greenspan, much of the beneficial technology investment of the late 1990s might never have occurred, and even worthy startups might have had a harder time getting funding in a tighter credit environment. Unemployment almost certainly would not have been allowed to fall to below 4%, as it did in 2000, and real wages would probably not have risen for the broad mass of American workers -- something that hadn't happened since the early 1970s.
It may also turn out that Greenspan's willingness to run the economy "hot," and tolerate the resulting booms and busts, is the best way a central bank can foster innovation. Risk-taking startups thrive in the hothouse atmosphere of a boom like the 1990s, when capital is relatively cheap. Then the busts, though painful to investors, knock out the losers, like thinning a garden to let the most robust plants grow.
On a visceral level, such a boom-and-bust approach appalls most economists, who have been trained since graduate school to prefer steady growth. Indeed, one of the biggest virtues of the inflation-targeting approach favored by new Fed chief Ben S. Bernanke is that it is supposed to reduce the volatility of growth, inflation, and the financial markets.
But such volatility may be an inevitable feature of an economy where growth is driven by unpredictable technological advances. Greenspan certainly understood this new world better than most economists. He showed how monetary policy can work with and fuel technological change rather than fight it -- and that may be his real legacy.
SOURCE : BusinessWeek
He nurtured booms, cushioned busts, and saw what others didn't
When Alan Greenspan took charge of the Federal Reserve in August, 1987, businesspeople and economic cognoscenti thought they knew what they were getting: a dedicated -- even obsessive -- inflation fighter who would be willing to provoke a recession to hold down prices. As one Republican told BusinessWeek at the time, Greenspan "feels in his bones that austerity is good for you."
Eighteen years later, as Greenspan comes to the end of his long tenure as Fed chairman, his rout of inflation is almost unquestioned. Taking out volatile energy and food prices, consumer inflation is still running at 2%, compared with a 3.9% rate when he came into office. By any standard, that is a splendid performance.
But history is likely to celebrate Greenspan for another achievement: his ability to steer the U.S. economy successfully through the white-water ride of the past decade. Through it all -- tech boom, Asian financial crisis, stock market bubble, tech bust, recession, Enron, terrorist attacks, and a housing boom -- Greenspan's hand guiding monetary policy was unparalleled. "Alan Greenspan has a deeper economic intuition than almost anybody I've ever met," says Glenn Hubbard, dean of the Columbia Business School and former chairman of the Council of Economic Advisers under President George W. Bush, as well as a BusinessWeek columnist. Adds Richard M. Kovacevich, chairman and CEO of Wells Fargo & Co. (WFC ): "I think he will go down as perhaps the best central banker of all time."
NEW ECONOMY VISIONARY
Based on today's economic statistics, there is little reason to doubt this evaluation. Unemployment is lower than when Greenspan became Fed chairman, productivity growth is nearly a full percentage point faster, real wages are higher, and the stock market has more than doubled, even after adjusting for inflation. "Greenspan created the environment in which business could thrive," says Charlie Giancarlo, the chief development officer at Cisco Systems Inc. (CSCO ) and a possible successor to CEO John Chambers. "We used to think that 1% to 2% was normal economic growth. Now we consider 3%-plus to be normal growth. That's a huge accomplishment."
In retrospect, Greenspan's philosophy of central banking was simple: ride the booms, cushion the busts. Belying his reputation as an austere inflation hawk, Greenspan was one of the first economists to embrace the notion of a technology-driven productivity boom in the second half of the 1990s -- the so-called New Economy. His willingness to keep rates low despite criticism from inside and outside the Fed helped fuel business investment and growth.
Then, in 2001, when the stock market tanked, the tech boom turned to bust, and terrorists attacked on September 11, Greenspan cut rates at a rocket pace, going from 6.5% to 1.75% in just one year. The result: Rather than cratering, as most economists expected, growth has averaged a solid 3.2%, and productivity has risen at an amazing 3.5% rate. Greenspan can't be given all the credit, but his willingness to slash rates aggressively may have helped the economy avoid a deep downward spiral.
There are plenty of economists who suspect that Greenspan's legacy will not be quite so positive. Some blame him for lollygagging on the sidelines during the stock market's wretched excesses of the 1990s. "He should have shot something across the bow of the bubbly crowd," says Nobel prize winner Paul A. Samuelson of the Massachusetts Institute of Technology.
Others fear that Greenspan's rate cuts may have led to a housing bubble and an excess of debt. "Investors and consumers of housing simply believe that if things get too tough and prices fall too far, the maestro will ride to the rescue once again," says William H. Gross, chief investment officer at Pacific Investment Management Co., the world's largest bond manager, with $513 billion in assets. "That approach, in the long term, is destabilizing. It promotes speculative activity." Observes Jean-Paul Betbze, chief economist at Crdit Agricole (CRARF ), the largest bank in France: "In my opinion, Greenspan's legacy is an imbalanced America -- imbalanced in terms of personal savings, in terms of national financial stability, and in terms of the housing boom."
Many Democrats criticize Greenspan's support for the Bush tax cuts. It "was completely inappropriate," says Robert B. Reich, Brandeis University professor and Labor Secretary under President Bill Clinton, noting that the tax cuts "have contributed mightily to our present mess."
Still, for all the handwringing, the national debt burden, at 204% of gross domestic product, is not very much higher than it was when Greenspan took office. The massive jumps in energy prices show no sign of spreading to the rest of the economy, and corporate profitability remains high.
DEFYING SKEPTICS
What's more, the pessimists have to contend with the simple fact that Greenspan's track record at forecasting economic performance has been consistently far better than theirs. Today it's accepted wisdom that the tech-driven acceleration of productivity growth started in 1996 or 1997. But back then, official statistics were ambiguous, and few professional economists outside or inside the Fed shared Greenspan's view that information technology had broken a two-decade productivity drought.
Indeed, the skepticism persisted for several years even as the economy grew vigorously. For example, in a forecast made at the end of 1998, economists at the Organisation for Economic Cooperation & Development predicted that U.S. productivity growth would plunge to an abysmal 0.4% in 1999. Even the respected and nonpartisan Congressional Budget Office did not start raising its long-term productivity forecasts until 1999.
Given how long it took most economists to grasp the reality of the New Economy, it's worth asking if the boom would have happened if someone other than Greenspan had been in charge of the Fed during the critical 1990s. Counterfactual history is always speculative, but it's possible that a more cautious Fed chairman would have raised rates in 1997 and 1998, as most economists advocated, and choked off the boom of the 1990s before it went into full gear.
COOL HEAD
In a world without Greenspan, much of the beneficial technology investment of the late 1990s might never have occurred, and even worthy startups might have had a harder time getting funding in a tighter credit environment. Unemployment almost certainly would not have been allowed to fall to below 4%, as it did in 2000, and real wages would probably not have risen for the broad mass of American workers -- something that hadn't happened since the early 1970s.
It may also turn out that Greenspan's willingness to run the economy "hot," and tolerate the resulting booms and busts, is the best way a central bank can foster innovation. Risk-taking startups thrive in the hothouse atmosphere of a boom like the 1990s, when capital is relatively cheap. Then the busts, though painful to investors, knock out the losers, like thinning a garden to let the most robust plants grow.
On a visceral level, such a boom-and-bust approach appalls most economists, who have been trained since graduate school to prefer steady growth. Indeed, one of the biggest virtues of the inflation-targeting approach favored by new Fed chief Ben S. Bernanke is that it is supposed to reduce the volatility of growth, inflation, and the financial markets.
But such volatility may be an inevitable feature of an economy where growth is driven by unpredictable technological advances. Greenspan certainly understood this new world better than most economists. He showed how monetary policy can work with and fuel technological change rather than fight it -- and that may be his real legacy.
SOURCE : BusinessWeek
This Week's Business Headlines
Shares in General Motors fell to their lowest level since 1992. The troubled carmaker announced that it would restate its accounts for 2001 and possibly other years. Another big company, AIG, delayed its third-quarter results. The insurer also said it would be restating already restated accounts.
---------------
Qualcomm said it had filed a lawsuit against Nokia accusing the mobile-phone manufacturer of infringing its patents on GSM technology, used in most of the world's mobile-phones. The litigation comes after Nokia and five other firms complained to the EU that Qualcomm was using unfair and anti-competitive practices when licensing patents for its chips.
-------------------
Deutsche Telekom, which last week announced a staff restructuring plan that cuts a net 19,000 jobs, posted a third-quarter profit of 2.4 billion ($2.9 billion), compared with a loss of 1.7 billion a year ago, on the back of growth in its T-Mobile unit. The firm also revealed a 1.2 billion plan to invest in new products next year.
-------------
Liberty Media appointed Greg Maffei as its new chief executive (Mr Maffei is stepping down as Oracle's chief financial officer). John Malone (who in effect controls the firm and remains chairman) also said the firm was creating tracking shares as a precursor to a possible spin-off of some units, including its QVC home-shopping business.
-------------
Guidant, a maker of medical devices, filed a lawsuit to force Johnson & Johnson to complete its $25.4 billion acquisition of the firm (agreed last December). J&J; is trying to renegotiate the terms of the deal, the largest-ever in the health-care industry, because, it argues, Guidant's market value has fallen after a series of high-profile product recalls. Guidant also said that the SEC had launched a formal inquiry into the timing of the disclosure of its problems to stockmarkets.
--------------
VNU, a Dutch business-information group, confirmed it was discussing "possible alternatives" to its $7 billion takeover offer for IMS Health, an American firm that collects information for the drugs industry. VNU, which owns the Nielsen ratings service, made the bid in July but now says key investors oppose the deal.
Serono's share price rose sharply after the company confirmed it was seeking advice on "strategic alternatives". Speculation has been increasing that the Swiss biotechnology firm, Europe's biggest, is looking for a buyer (Serono says there are "no assurances" of a transaction).
---------------
Vietnam said it had obtained a licence from Roche to begin local production of Tamiflu, an antiviral drug touted as the best defence against bird flu. The Swiss drugs group, which will choose the local firms involved, had said earlier that it was on track to make a tenfold increase (on 2004's levels) in Tamiflu production by 2007.
------------
In a move to comply with South Africa's new Black Economic Empowerment laws, De Beers announced that it would sell a 26% stake, worth 3.8 billion rand ($562m), in its South African diamond-mining operations to a company that will be half-owned by its employees and pensioners and half by an investment firm managed by blacks. The world's biggest producer of diamonds was established in 1888 by Cecil Rhodes.
-----------------
Amid hostile public opinion, the heads of America's oil companies were hauled in front of a Senate committee and questioned about the rise in consumer energy prices and the industry's record profits. The bosses blamed hurricanes and tight oil supplies.
Platinum prices hit $956 an ounce, their highest level since March 1980. Platinum's price is considered to be the most speculative in commodity trading, and demand has been fuelled by tougher worldwide pollution standards for vehicles: the metal is used in catalytic converters to clean exhaust fumes.
------------------
The euro fell to a two-year low against the dollar. Trading in the currency was affected by a plea from European finance ministers to the European Central Bank not to raise interest rates. But the rioting in France also knocked confidence in the euro. Some analysts suggest the events may damage Nicolas Sarkozy, the minister responsible for law and order, who is regarded as a market-friendly possible future president.
Source : Economist
Shares in General Motors fell to their lowest level since 1992. The troubled carmaker announced that it would restate its accounts for 2001 and possibly other years. Another big company, AIG, delayed its third-quarter results. The insurer also said it would be restating already restated accounts.
---------------
Qualcomm said it had filed a lawsuit against Nokia accusing the mobile-phone manufacturer of infringing its patents on GSM technology, used in most of the world's mobile-phones. The litigation comes after Nokia and five other firms complained to the EU that Qualcomm was using unfair and anti-competitive practices when licensing patents for its chips.
-------------------
Deutsche Telekom, which last week announced a staff restructuring plan that cuts a net 19,000 jobs, posted a third-quarter profit of 2.4 billion ($2.9 billion), compared with a loss of 1.7 billion a year ago, on the back of growth in its T-Mobile unit. The firm also revealed a 1.2 billion plan to invest in new products next year.
-------------
Liberty Media appointed Greg Maffei as its new chief executive (Mr Maffei is stepping down as Oracle's chief financial officer). John Malone (who in effect controls the firm and remains chairman) also said the firm was creating tracking shares as a precursor to a possible spin-off of some units, including its QVC home-shopping business.
-------------
Guidant, a maker of medical devices, filed a lawsuit to force Johnson & Johnson to complete its $25.4 billion acquisition of the firm (agreed last December). J&J; is trying to renegotiate the terms of the deal, the largest-ever in the health-care industry, because, it argues, Guidant's market value has fallen after a series of high-profile product recalls. Guidant also said that the SEC had launched a formal inquiry into the timing of the disclosure of its problems to stockmarkets.
--------------
VNU, a Dutch business-information group, confirmed it was discussing "possible alternatives" to its $7 billion takeover offer for IMS Health, an American firm that collects information for the drugs industry. VNU, which owns the Nielsen ratings service, made the bid in July but now says key investors oppose the deal.
Serono's share price rose sharply after the company confirmed it was seeking advice on "strategic alternatives". Speculation has been increasing that the Swiss biotechnology firm, Europe's biggest, is looking for a buyer (Serono says there are "no assurances" of a transaction).
---------------
Vietnam said it had obtained a licence from Roche to begin local production of Tamiflu, an antiviral drug touted as the best defence against bird flu. The Swiss drugs group, which will choose the local firms involved, had said earlier that it was on track to make a tenfold increase (on 2004's levels) in Tamiflu production by 2007.
------------
In a move to comply with South Africa's new Black Economic Empowerment laws, De Beers announced that it would sell a 26% stake, worth 3.8 billion rand ($562m), in its South African diamond-mining operations to a company that will be half-owned by its employees and pensioners and half by an investment firm managed by blacks. The world's biggest producer of diamonds was established in 1888 by Cecil Rhodes.
-----------------
Amid hostile public opinion, the heads of America's oil companies were hauled in front of a Senate committee and questioned about the rise in consumer energy prices and the industry's record profits. The bosses blamed hurricanes and tight oil supplies.
Platinum prices hit $956 an ounce, their highest level since March 1980. Platinum's price is considered to be the most speculative in commodity trading, and demand has been fuelled by tougher worldwide pollution standards for vehicles: the metal is used in catalytic converters to clean exhaust fumes.
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The euro fell to a two-year low against the dollar. Trading in the currency was affected by a plea from European finance ministers to the European Central Bank not to raise interest rates. But the rioting in France also knocked confidence in the euro. Some analysts suggest the events may damage Nicolas Sarkozy, the minister responsible for law and order, who is regarded as a market-friendly possible future president.
Source : Economist
Dark clouds over Doha
Trade negotiators have been forced to admit they are unlikely to reach substantial agreement at a supposedly crucial meeting in Hong Kong next month. The quest for liberalisation seems to be stalling everywhere, thanks largely to quarrels over sensitive areas like agriculture. But the Doha round is not dead yet
HARRY TRUMAN, an American president, wished for a one-handed economist, so that he wouldnt have to endure advisers saying On the one handbut on the other hand These days, however, there is at least one thing about which almost all dismal scientists agree: cutting barriers to trade is good for all countries involved.
Yet outside of the worlds departments of economics, trade is one of the most bitter and contentious issues around. During the 1990s, when globalisation was still spoken of with affection, it seemed that the world was headed, slowly but inevitably, towards a liberal utopia where goods and services flowed seamlessly across borders. In the six years since world trade negotiations collapsed in Seattle, however, protectionism has staged a comeback. Though negotiators finally succeeded in launching an ambitious round of talks under the auspices of the World Trade Organisation (WTO) in Doha in 2001, the subsequent negotiations have been inching along at a glacial pace. Talks this week in Geneva, which were supposed to set the stage for the crucial ministerial meeting in Hong Kong next month, ended without progress on Wednesday November 9th, as negotiators announced they had been unable to come to agreement over agriculture.
Time is running out for the Doha round. George Bushs hard-won fast track authority for trade talks, which forces Congress to vote on deals quickly and without amendment, will expire in mid-2007. By then, Mr Bush will be heading towards his final year in office, and Congress will be gearing up for the 2008 elections, making it extremely unlikely that he will be able to get fast track renewedparticularly considering the resurgence of protectionist sentiment, among both the public and politicians, since he took office. Without fast track, there is little hope of getting a deal on Doha done.
To its credit, the Bush administration has been pushing hard for trade liberalisation. Rob Portman, Americas trade representative, attempted to revitalise Doha last month by making a bold proposal on agricultural subsidies, which have been the main sticking point so far. Under the American plan, the highest tariffs would be cut by 90%, and the most trade-distorting subsidies by 60%. Though this was less than developing countries had been calling for, it was a big concession from a country where a single agricultural lobby, the sugar growers, nearly mustered the political muscle to kill off the Central America Free Trade Agreement (CAFTA) a few months ago.
But the European Union, where the common agricultural policy (CAP) accounts for nearly half of the budget, has dragged its feet. After much pressure, the EUs trade commissioner, Peter Mandelson, made an offer to cut farm tariffs by an average of 39%. This offer not only fell well short of the American one but also contained loopholes big enough to drive a combine harvester through, including a provision to allow the EU to designate up to 8% of categories as sensitive products that would be granted special protection. A World Bank report released on Wednesday says that exempting even 2% of agricultural categories from reform in rich countries would destroy nearly all the benefits of liberalisation to developing countries.
And those benefits are large. The report estimates that abolishing all kinds of tariffs, subsidies and domestic-support systems would boost global wealth by nearly $300 billion per year by 2015with almost two-thirds of that increase coming from cutting farm supports.
Agricultural subsidies are the most politically sensitive form of support; farmers are well-organised, and voters everywhere romanticise their increasingly distant pastoral past. As a result, previous rounds of liberalisation have skirted round the issue. This has denied many poor countries the benefits of freer trade, as rich-world farm protections have locked them out of the main markets where they have a comparative advantage. At WTO talks in Cancn in 2003, a group of developing countries led by Brazil and India brought the proceedings to a screeching halt by insisting that they would not discuss freeing trade in goods and services until they saw substantial progress on agriculture.
The group, known as the G20, has a point. As well as keeping poor countries out of lucrative export markets, rich-world farm supports encourage overproduction, which undercuts poor farmers in their domestic markets. While this is very nice for vegetable-buying urban workers, it can be devastating to rural communities.
But some European politicians, it seems, would rather spend billions on aid than allow poor-world farmers to sell attractively priced food to Europes consumers. Led by Jacques Chirac, the French president, they are blocking Mr Mandelson from sweetening his offer, claiming that he has already gone too far. Thanks largely to their efforts, the Geneva talks broke up with the glum recognition that it was unlikely that any substantial agreement could be reached in Hong Kong.
Mr Mandelson, whose hands seem to be tied, gamely tried to pin the blame for the setbacks on developing countries, saying they were unwilling to discuss opening their markets to goods and services in exchange for European concessions on agriculture. But in an interview with the New York Times, Celso Amorim, the Brazilian foreign minister, said that his countrys attempts to discuss such a quid pro quo had met with the cold shoulder. What we heard yesterdayled me to the conclusion that are setting the bar very high on industrial goods because they dont even want to talk about agriculture.
Nothing is better than something
Yet there is still hope for Doha. Negotiators are talking about using Hong Kong to set up talks in the spring, giving them time, just, to find enough common ground for a substantial agreement. This is disappointing, but not nearly as disappointing as it would have been if negotiators had simply scaled back the ambitions for the Doha round to the sorts of modest tinkering on which they could readily agree. Both the EU and the G20 have much to gain from a trade deal, which makes it possible that their brinkmanship will soften as the talks go down to the wire.
If Doha collapses, there will be bitter times ahead for free-traders the world over. Deeper regional trade integration has, like the WTO talks, fallen victim to voter backlash. While Congress passed CAFTA by the slimmest of margins, Mr Bushs other big regional push, the Free Trade Area of the Americas, ran aground at a summit last weekend in Argentina, thanks to opposition from Latin Americas largest economies. And Chinas booming export industriesits trade surplus hit a record $12 billion in Octoberhave provoked harsh reactions in the EU and America. Both have slapped restrictive quotas on textile imports from China, and American politicians have been making loud noises about severe retaliation unless China lets its currency rise against the dollar (making its goods more expensive for American consumers). The quotas are temporary, but the sentiment behind them seems more enduring. Perhaps there is a reason why those economists are so often dismal.
Source : Economist
Trade negotiators have been forced to admit they are unlikely to reach substantial agreement at a supposedly crucial meeting in Hong Kong next month. The quest for liberalisation seems to be stalling everywhere, thanks largely to quarrels over sensitive areas like agriculture. But the Doha round is not dead yet
HARRY TRUMAN, an American president, wished for a one-handed economist, so that he wouldnt have to endure advisers saying On the one handbut on the other hand These days, however, there is at least one thing about which almost all dismal scientists agree: cutting barriers to trade is good for all countries involved.
Yet outside of the worlds departments of economics, trade is one of the most bitter and contentious issues around. During the 1990s, when globalisation was still spoken of with affection, it seemed that the world was headed, slowly but inevitably, towards a liberal utopia where goods and services flowed seamlessly across borders. In the six years since world trade negotiations collapsed in Seattle, however, protectionism has staged a comeback. Though negotiators finally succeeded in launching an ambitious round of talks under the auspices of the World Trade Organisation (WTO) in Doha in 2001, the subsequent negotiations have been inching along at a glacial pace. Talks this week in Geneva, which were supposed to set the stage for the crucial ministerial meeting in Hong Kong next month, ended without progress on Wednesday November 9th, as negotiators announced they had been unable to come to agreement over agriculture.
Time is running out for the Doha round. George Bushs hard-won fast track authority for trade talks, which forces Congress to vote on deals quickly and without amendment, will expire in mid-2007. By then, Mr Bush will be heading towards his final year in office, and Congress will be gearing up for the 2008 elections, making it extremely unlikely that he will be able to get fast track renewedparticularly considering the resurgence of protectionist sentiment, among both the public and politicians, since he took office. Without fast track, there is little hope of getting a deal on Doha done.
To its credit, the Bush administration has been pushing hard for trade liberalisation. Rob Portman, Americas trade representative, attempted to revitalise Doha last month by making a bold proposal on agricultural subsidies, which have been the main sticking point so far. Under the American plan, the highest tariffs would be cut by 90%, and the most trade-distorting subsidies by 60%. Though this was less than developing countries had been calling for, it was a big concession from a country where a single agricultural lobby, the sugar growers, nearly mustered the political muscle to kill off the Central America Free Trade Agreement (CAFTA) a few months ago.
But the European Union, where the common agricultural policy (CAP) accounts for nearly half of the budget, has dragged its feet. After much pressure, the EUs trade commissioner, Peter Mandelson, made an offer to cut farm tariffs by an average of 39%. This offer not only fell well short of the American one but also contained loopholes big enough to drive a combine harvester through, including a provision to allow the EU to designate up to 8% of categories as sensitive products that would be granted special protection. A World Bank report released on Wednesday says that exempting even 2% of agricultural categories from reform in rich countries would destroy nearly all the benefits of liberalisation to developing countries.
And those benefits are large. The report estimates that abolishing all kinds of tariffs, subsidies and domestic-support systems would boost global wealth by nearly $300 billion per year by 2015with almost two-thirds of that increase coming from cutting farm supports.
Agricultural subsidies are the most politically sensitive form of support; farmers are well-organised, and voters everywhere romanticise their increasingly distant pastoral past. As a result, previous rounds of liberalisation have skirted round the issue. This has denied many poor countries the benefits of freer trade, as rich-world farm protections have locked them out of the main markets where they have a comparative advantage. At WTO talks in Cancn in 2003, a group of developing countries led by Brazil and India brought the proceedings to a screeching halt by insisting that they would not discuss freeing trade in goods and services until they saw substantial progress on agriculture.
The group, known as the G20, has a point. As well as keeping poor countries out of lucrative export markets, rich-world farm supports encourage overproduction, which undercuts poor farmers in their domestic markets. While this is very nice for vegetable-buying urban workers, it can be devastating to rural communities.
But some European politicians, it seems, would rather spend billions on aid than allow poor-world farmers to sell attractively priced food to Europes consumers. Led by Jacques Chirac, the French president, they are blocking Mr Mandelson from sweetening his offer, claiming that he has already gone too far. Thanks largely to their efforts, the Geneva talks broke up with the glum recognition that it was unlikely that any substantial agreement could be reached in Hong Kong.
Mr Mandelson, whose hands seem to be tied, gamely tried to pin the blame for the setbacks on developing countries, saying they were unwilling to discuss opening their markets to goods and services in exchange for European concessions on agriculture. But in an interview with the New York Times, Celso Amorim, the Brazilian foreign minister, said that his countrys attempts to discuss such a quid pro quo had met with the cold shoulder. What we heard yesterdayled me to the conclusion that are setting the bar very high on industrial goods because they dont even want to talk about agriculture.
Nothing is better than something
Yet there is still hope for Doha. Negotiators are talking about using Hong Kong to set up talks in the spring, giving them time, just, to find enough common ground for a substantial agreement. This is disappointing, but not nearly as disappointing as it would have been if negotiators had simply scaled back the ambitions for the Doha round to the sorts of modest tinkering on which they could readily agree. Both the EU and the G20 have much to gain from a trade deal, which makes it possible that their brinkmanship will soften as the talks go down to the wire.
If Doha collapses, there will be bitter times ahead for free-traders the world over. Deeper regional trade integration has, like the WTO talks, fallen victim to voter backlash. While Congress passed CAFTA by the slimmest of margins, Mr Bushs other big regional push, the Free Trade Area of the Americas, ran aground at a summit last weekend in Argentina, thanks to opposition from Latin Americas largest economies. And Chinas booming export industriesits trade surplus hit a record $12 billion in Octoberhave provoked harsh reactions in the EU and America. Both have slapped restrictive quotas on textile imports from China, and American politicians have been making loud noises about severe retaliation unless China lets its currency rise against the dollar (making its goods more expensive for American consumers). The quotas are temporary, but the sentiment behind them seems more enduring. Perhaps there is a reason why those economists are so often dismal.
Source : Economist
This Week's Business Headlines
After reporting dismal sales figures for October and seeing its market share in the United States and Europe slip even further, General Motors began a new consumer discount plan on many of its models. Ford, which faces similar problems, also announced a scheme. Both carmakers (and DaimlerChrysler) offered huge discounts during the summer that increased sales but hurt profit margins.
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Peter Drucker, hailed as the world's most important thinker on management and the role of corporations, died in California on November 11th, at the age of 95. Mr Drucker, who left Austria in his youth, was given the epithets of "guru" and "sage", though he thought of himself chiefly as a writer and teacher.
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Koch Industries, a privately held conglomerate, agreed to buy Georgia-Pacific, a paper and packaging company, for $13.2 billion (including debt, the deal is worth $21 billion). The acquisition will create America's biggest private company by revenues.
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Johnson & Johnson and Guidant patched up their recent differences and agreed to move ahead with their merger. J&J; will now pay $21.5 billion for the maker of medical devices, $4 billion less than was agreed last December. Since then, Guidant has seen a series of product recalls and related investigations.
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Under pressure from unhappy shareholders, Knight Ridder confirmed it was seeking advice on "strategic alternatives", such as a possible sale of the company. The publisher of 32 American city newspapers, including the Miami Herald, is suffering, like other newspaper publishers, a decrease in both circulation and advertising revenue.
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Google unveiled a prototype of Google Base, its new search facility that allows users to post their own information. Analysts viewed the move both as a foray into the lucrative classified advertising market and as a potential challenge to online auctioneers, such as eBay.
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Vodafone's share price fell by almost 11% in London on November 15th after the mobile-phone group said that fierce competition in Europe and heavy investment in its struggling Japanese unit could hurt profit margins over the next 18 months.
Telstra unveiled a A$10 billion ($7.3 billion) five-year strategic review that includes up to 12,000 job cuts. Australia's largest telecoms firm has seen revenue decline in its fixed-line services and is attempting to cut costs ahead of the government's sale of its 52% stake.
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America's Pension Benefit Guaranty Corporation reported a deficit of $22.8 billion for the year ending September 30th. However, the federal agency, which insures private pensions, said its outlook had worsened due to recent "events" and now estimates it is exposed to $108 billion in pension losses. The Senate attempted to address the deficit by passing a bill that, among other things, requires employers to pay higher premiums to the agency.
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The New York Stock Exchange reached a settlement with a group of dissident "seat holders" (owners) who claimed that not enough information was provided to members about an impending merger with Archipelago Holdings, an electronic exchange. Both sides agreed to a review of the dealwhich will turn the NYSE into a public companyahead of a vote by members on December 6th.
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Germany's Commerzbank said it would buy stakes in Eurohypo, Europe's biggest mortgage bank, from its neighbours, Deutsche Bank and Dresdner Bank, for a total of euro4.6 billion ($5.6 billion). The deal will give Commerzbank 98% of Eurohypo's shares.
-----------
A fresh round of "open skies" talks aimed at liberalising the transatlantic market began in Washington, DC. The United States and the European Union have spent over a decade seeking an agreement that provides airlines with unrestricted access between the two continents.
----------
Copper prices reached record highs amid market speculation that the Chinese government will struggle to cover a short position of up to 200,000 tonnes apparently amassed by a Chinese trader. It seems that Liu Qibing bet that prices would fall, but they have actually risen by more than 30% this year.
----------------
The euro area's GDP grew by 0.6% in the third quarter compared with the previous quarter. The figure was driven by a surge in German exports, but the data revealed a patchy economic recovery in the currency bloc. The European Commission forecast that growth would accelerate in 2006 and 2007. But some countries' budget deficits will stay above EU limits.
Source : Economist
After reporting dismal sales figures for October and seeing its market share in the United States and Europe slip even further, General Motors began a new consumer discount plan on many of its models. Ford, which faces similar problems, also announced a scheme. Both carmakers (and DaimlerChrysler) offered huge discounts during the summer that increased sales but hurt profit margins.
----------
Peter Drucker, hailed as the world's most important thinker on management and the role of corporations, died in California on November 11th, at the age of 95. Mr Drucker, who left Austria in his youth, was given the epithets of "guru" and "sage", though he thought of himself chiefly as a writer and teacher.
-------------
Koch Industries, a privately held conglomerate, agreed to buy Georgia-Pacific, a paper and packaging company, for $13.2 billion (including debt, the deal is worth $21 billion). The acquisition will create America's biggest private company by revenues.
---------------
Johnson & Johnson and Guidant patched up their recent differences and agreed to move ahead with their merger. J&J; will now pay $21.5 billion for the maker of medical devices, $4 billion less than was agreed last December. Since then, Guidant has seen a series of product recalls and related investigations.
-------------
Under pressure from unhappy shareholders, Knight Ridder confirmed it was seeking advice on "strategic alternatives", such as a possible sale of the company. The publisher of 32 American city newspapers, including the Miami Herald, is suffering, like other newspaper publishers, a decrease in both circulation and advertising revenue.
-------------
Google unveiled a prototype of Google Base, its new search facility that allows users to post their own information. Analysts viewed the move both as a foray into the lucrative classified advertising market and as a potential challenge to online auctioneers, such as eBay.
-------------
Vodafone's share price fell by almost 11% in London on November 15th after the mobile-phone group said that fierce competition in Europe and heavy investment in its struggling Japanese unit could hurt profit margins over the next 18 months.
Telstra unveiled a A$10 billion ($7.3 billion) five-year strategic review that includes up to 12,000 job cuts. Australia's largest telecoms firm has seen revenue decline in its fixed-line services and is attempting to cut costs ahead of the government's sale of its 52% stake.
-------------
America's Pension Benefit Guaranty Corporation reported a deficit of $22.8 billion for the year ending September 30th. However, the federal agency, which insures private pensions, said its outlook had worsened due to recent "events" and now estimates it is exposed to $108 billion in pension losses. The Senate attempted to address the deficit by passing a bill that, among other things, requires employers to pay higher premiums to the agency.
--------------
The New York Stock Exchange reached a settlement with a group of dissident "seat holders" (owners) who claimed that not enough information was provided to members about an impending merger with Archipelago Holdings, an electronic exchange. Both sides agreed to a review of the dealwhich will turn the NYSE into a public companyahead of a vote by members on December 6th.
------------
Germany's Commerzbank said it would buy stakes in Eurohypo, Europe's biggest mortgage bank, from its neighbours, Deutsche Bank and Dresdner Bank, for a total of euro4.6 billion ($5.6 billion). The deal will give Commerzbank 98% of Eurohypo's shares.
-----------
A fresh round of "open skies" talks aimed at liberalising the transatlantic market began in Washington, DC. The United States and the European Union have spent over a decade seeking an agreement that provides airlines with unrestricted access between the two continents.
----------
Copper prices reached record highs amid market speculation that the Chinese government will struggle to cover a short position of up to 200,000 tonnes apparently amassed by a Chinese trader. It seems that Liu Qibing bet that prices would fall, but they have actually risen by more than 30% this year.
----------------
The euro area's GDP grew by 0.6% in the third quarter compared with the previous quarter. The figure was driven by a surge in German exports, but the data revealed a patchy economic recovery in the currency bloc. The European Commission forecast that growth would accelerate in 2006 and 2007. But some countries' budget deficits will stay above EU limits.
Source : Economist
1.
The Ordeal and Spectacular death of King Kong, the giant ape, undoubtadly have been witnessed by more Americans than have ever seen a performance of Hamlet,Iphigenia at Aulis,or even Tabacco Road.Since RKO - Radio Pictures
first released King Kong, a quarter- century has gone by; yet year after year from prints that grow more rain-beaten, from sound tracks that grow more tinny,ticket buyers by thousands still pursue Kong's luckless fight against the
forces of technology and tabloid journalism. They see him chloroformed to sleep, see him whisked from his jungle isle to New york and placed on show, see him burst his chains to roam the city at last to plunge from the spire of the Empire State Building, machine -gunned by model aspirants.
GERMANS vote against economic reform; France's young unemployed riot; and the European Central Bank (ECB) seems to be itching for an excuse to raise interest rates and strangle the euro area's feeble economic growth. For sceptics, nothing has changed: the single currency zone's economies are a miserable sight and will remain so. But if they took a careful look from another angle, they might see an altogether happier picture.
At the very least, European economies are picking up speed. Figures published this week showed that the euro area's GDP grew by 0.6% in the third quarter (2.6% at an annual rate), the fastest for a year and a half. Germany, France and Spain all managed 0.6% or better; Italy and the Netherlands reported growth of only 0.3%.
By American standards this looks sluggish: America's GDP grew at an annual rate of 3.8% in the same quarter. Even so, euro-area growth is now above its supposed potential rate of around 1.8%. This is below the American trend of perhaps 3% partly because of Europe's slower productivity growth. The main reason, though, is that America's population is increasing much faster than the euro zone's.
The composition of the whole zone's third-quarter growth is not yet known, but Germany's official statisticians have ascribed almost all of their country's GDP growth to net exports and investment. Economists at HVB, a big German bank, reckon that private consumption probably shrank for the third quarter running, for the first time on record.
Elsewhere, the pattern is reversed, with consumer spending contributing far more and exports far less. The idea that growth in the euro zone depends almost entirely on external demand, while domestic demand stagnates, is a myth. Morgan Stanley calculates that for the zone as a whole, net exports have contributed only 0.1% of the 1.9% average growth in GDP since 1999.
Even in Germany there are now signs that domestic demand is stirring. Bank lending to firms and households has started to rise after falling for most of the past three years. The latest survey of business confidence by Ifo, a Munich research institute, showed a strong uptick in retailing, suggesting that consumers are opening their wallets. And throughout the euro area, surveys of business and consumer confidence continued to rise in October, which bodes well for the current quarter. The Economist's most recent poll of forecasters still predicts average growth in the zone of only 1.6% next year, but this could prove too pessimistic.
Whether the recovery lasts depends on the labour market. In Germany intensive corporate restructuring has depressed jobs and wages for several years. Only if more jobs are created will consumers spend more. There are some hopeful signs. The euro area's unemployment rate has fallen by more than expected in recent months, from 8.8% in April to 8.4% in September.
Several countries' jobless figures may be distorted by special employment measures and changes in rules for claiming benefits, but surveys point to an improvement in underlying conditions. This is the result of various labour-market reforms as well as a cyclical upturn. Though labour markets remain stiff, they are not as rigid as they were. Indeed, the unemployment figures may understate the overall gains: employment has risen by far more than unemployment has fallen as reforms have dragged previously discouraged workers back into the labour market.
Spain has enjoyed the fastest expansion in jobs, 4% a year since 2000. And Italian employment has risen by an annual average of 1.4% in the past six years. This partly reflects the emergence of workers from the black economy into the official realm, but some of the increase is real, thanks to new, more flexible types of job contract. Italy's jobless rate, almost 12% in 1998, is now 7.7%. Germany is the only big euro-zone country whose unemployment rate has not fallen in the past decade.
Germany's new grand coalition government has eschewed further structural reform and is focusing instead on reducing the budget deficit. It plans to lift the rate of value-added tax from 16% to 19%, but not until 2007. This could boost spending next year if it encourages consumers to bring purchases forwardbut clobber it when the tax increase takes effect. Some economists also worry that the ECB will throttle the euro area's recovery by raising interest rates too soon. Comments after the central bank's policy meeting on November 3rd suggest that rates could rise as early as the next one, on December 1st. A quarter-point rise is unlikely to do much harm, however, because real interest rates would still be negative.
Europe's surprising secret
Yes, yes, sceptics might say, but one quarter's decent growth and a few reforms here and there don't alter the unprepossessing long-term picture. In fact, Europe's performance has been better than the conventional wisdom says. Although America has outpaced Europe this year, over the past five years GDP per head, the best single measure of economic performance, grew at an average rate of 1.4% in the euro area, just behind America's 1.5%. Ah, but America is better at creating jobs, isn't it? Actually, no. Employment has grown a tad faster in the euro area than in America whether one looks at the past five years or the past tena striking improvement on the decade to the mid-1990s (see chart).
Since 1996 the proportion of the population of working age with jobs has fallen from 73% to 71% in America; in the euro area it has risen from 59% to 65%. The fact that the euro area has achieved its growth without enormous increases in its current-account and budget deficits might also indicate that its record is more sustainable than America's.
This is not to say that everything is rosy in euroland. Far from it. Europe has to cope with a shrinking workforce and an ageing population, as well as fiercer global competition. Europe's markets will have to become more flexible, its people will need to work for longer and its productivity growth must improve. Yet, given that Europe's unhappy economies have not been doing so badly compared with America's jollier one, the rewards from further reform might be all the greater.
FINANCIAL crises have a cruel way of revealing what an economy lacks. When many emerging markets suffered a sudden outflow of capital in the late 1990s, one painful lesson was that their financial systems had relied too heavily on bank lending and paid too little attention to developing other forms of finance. The lack of a spare tyre, said Alan Greenspan, chairman of America's Federal Reserve, in 1999, is of no concern if you do not get a flat. East Asia had no spare tyres. If a functioning capital market had existed, remarked Mr Greenspan, the East Asian crisis might have been less severe.
Developing deep and liquid corporate-bond markets, in particular, could make emerging economies less vulnerable. Companies wanting, say, to finance an expensive investment would ideally want to borrow long-term in local currency. However, local banks will frequently offer only short-term loans. Loans of longer maturities may be obtained abroad, but the spectre of original sin, or a country's inability to borrow funds in its own currency, means that such loans are likely to be in foreign money. An active local corporate-bond market would allow firms to issue debt securities that are a better match for the timing and currency of their cash flows.
Making progress, but could do better
In the past few years, the expansion of corporate-bond markets in emerging economies has been encouraging. Emerging Asia's corporate-bond markets were worth 7.1% of GDP last year, up from 4.3% in 1997. The relative value of Latin America's rose from 1.0% to 2.8%. This reflects the growth of firms' funding needs after the financial crisis, the increase in institutional investors' assets under management, declining interest rates and market reforms. Bank lending, still worth around 50% of GDP in Asia, remains dominant, but bonds have grown in importance.
However, progress has varied widely across countries. For instance, in Malaysia (38.2%) and South Korea (23.4%), the value of outstanding corporate bonds is bigger, relative to GDP, than in America (22%). The ratios in Chile (12.3%) and Thailand (12.2%) are not much below Japan's 16.9%. Elsewhere, the numbers are much smaller: 0.7% in Brazil and China; 0.4% in India. A study, published last month, for the Futures and Options Association, a British trade body, lists several barriers to the development of the corporate-bond market in China, perhaps the place with the greatest potential. These include authorisation of bond issues by merit and mandatory quasi-governmental guarantees, which hinder the development of a risk-based market.
Indeed, according to the International Monetary Fund's latest Global Financial Stability Report (from which the above data are taken) the growth of local corporate-bond markets slowed last year: as firms' profits fattened, their financing needs lessened; and interest rates began to rise. So it may be that much recent growth was cyclical, and will be reversed.
One problem highlighted by the IMF is the growing gap between the demand for and supply of corporate bonds. Institutional investors' demand for investible securities has outpaced supply, which in most emerging economies is limited to bonds issued by a couple of dozen big firms. If the corporate-bond market is to grow further, medium-sized companies will have to issue securities; but for these to be acceptable to investors, corporate governance and transparency will have to improve.
The cost of issuing bonds is another obstacle. These take many forms: underwriting and registration fees, credit-rating costs, taxes and the time it takes to bring a bond to the market. One study found that the cost of issuing a bond in Mexico was about half as much as in Brazil or Chile, owing to expensive disclosure requirements in Brazil and a stamp tax in Chile, which makes issuing bonds dearer at home than abroad. That said, a reform of Chile's stamp tax in 2002, which allowed the cost to be spread over several issues, appears to have given the commercial-paper market a healthy fillip.
Secondary-market liquidity is critical, since it allows investors to buy and sell whenever they want at an observable, market-set price. However, in most emerging economies corporate bonds are concentrated in the hands of a few institutional investors that buy and hold these assets to maturity. Not only does this limit active trading but it also results in a one-sided market. Another problem is that corporate-bond issues tend to be small. Size does matter for liquidity, because when issues are large, big transactions are much less likely to move the price.
The availability of trading information is also important for improving liquidity and price discovery. Most bonds are traded not on exchanges but over-the-counter, and data on such transactions are not always available. Some bonds are traded only infrequently. The absence of price data creates particular difficulty for institutional investors that are required to mark their portfolios to market: investors in Mexico and South Korea have got around this by purchasing price quotes from independent vendors. A lack of hedging instruments also hinders liquidity by making investors shy of the underlying securities.
Finally, bondholders need adequate investor protection, probably more so than banks, since these dispersed individuals tend to have less bargaining power. Bankruptcy laws, corporate governance standards, and timely and sufficient disclosure of information are also important supports for confidence.
This list is by no means complete nor the set of prescriptions entirely new. But the message of the IMF's report does bear repeating. Developing corporate-bond markets is important for financial stability, both as a buffer when other funding sources run dry and to reduce mismatches in a firm's balance sheet. And the overall economy prospers too, as savings can find their way towards more productive investments.
Fat Times for Fast Food
Forget all that talk about healthy eating: Americans are back to chowing down on giant burgers and fried chicken
If you think that all the talk about obesity is scaring people away from fatty food, think again. Americans are eating hamburgers, doughnuts, French fries, and fried chicken like never before.
Yes, fried chicken: KFC has been going gangbusters this year. In October, sales at stores open for a year or more soared 6%, vs. a 3% drop in the year-ago period. This comes after a total 6% increase in the previous three months combined. In fact, fried chicken has become so popular that KFC is considering bringing back the name "Kentucky Fried Chicken" in its full form.
"Kentucky Fried Chicken is the one big trend that's going on in the world today," says David Novak, chief executive of Louisville-based Yum! Brands (YUM ), KFC's parent. "We're the chicken capital of the USA."
HEAVY SNACKING. What's going on? Apparently, all the talk about obesity causing clogged hearts, hypertension, high blood pressure, and even diabetes is falling on deaf ears (see BW Online, 1/11/05, "Ready for a Fast-Food Workout?").
"What can I say? Americans love fried chicken," says Harry Balzer, renowned food expert and vice-president of researcher The NPD Group. He says fried chicken is the fastest-growing fast-food menu item in the last decade. In every food survey conducted over the last 25 years, Balzer points out, three common themes emerge in terms of what Americans want: taste, price, and convenience.
If that mantra really works, KFC certainly found its sweet spot in March, when it introduced the Snacker, a 99-cent chicken sandwich that proved to be a runaway bestseller. The 5,525 KFC restaurant outlets in the U.S. sold 100 million Snackers in the past seven months, making it one of the most successful product launches in KFC history.
A GROWING POPULATION. But while Americans are digging in to the fried chicken, they're certainly not eschewing other fatty foods. Hamburger outlets served over 500 million more customers in 2004 than in the previous year, according to NPD. And doughnut shops served about 150 million more people last year than in 2003 (see BW Online, 6/3/05, "Salad Days for Burger Joints").
Plus, research has shown that Americans currently eat out, or order in, more than ever before -- fueling the trend toward weight gain. Food-market researcher Technomic found in a 2005 survey that 69% of consumers described their diets when eating out as "fair to poor," compared to 39% who said they eat "fair to poor" diets at home (see BW Online, 4/22/04, "Restaurants are Cooking Again").
Not suprisingly, a new study that followed Americans for three decades suggests that, over the long haul, 9 out of 10 men and 7 out of 10 women will become overweight. Published in the Oct. 4 issue of the Annals of Internal Medicine, the report shows obesity may be an even greater problem than indicated by other studies demonstrating that two-thirds of the U.S. population is already overweight or obese. "The health implications for the country are enormous," says Ramachandran Vasan, an associate professor of medicine at Boston University and the new study's lead author.
MORE THAN A MOUTHFUL. The fact that a majority of the U.S. population is overweight could be one explanation why Americans are so blas about the subject. "Fat is mainstream, which is why everyone has become complacent," muses Marion Nestle, professor of nutrition, food studies, and public health at New York University and author of Food Politics. "What used to considered pudgy before isn't even worthy of a comment today."
Junk-food chains are now catering to people who have ignored the healthy-food movement of the last few years, and in fact have gotten sick of the focus on healthy living. "There are those, especially the younger people, who shun the health and nutrition talk and throw caution to the winds," says Bob Sandelman, president of market researcher Sandelman & Associates. "When they go out, they go way over the other end, and want the thickest burger they can find."
No wonder the fast-food giants are fighting over who can come up with the most fattening food. Last year, Hardee's and Carl's Jr., units of CKE Restaurants (CKR ), created quite a stir with the Monster Thickburger, which has two 1/3-pound slabs of Angus beef, four strips of bacon, three slices of cheese, and mayonnaise on a buttered sesame-seed bun -- totaling 1,420 calories and 107 grams of fat. Hardee's proudly proclaimed the sandwich "a monument to decadence."
And, earlier this year, Burger King introduced the Enormous Omelet Sandwich, comprising one sausage patty, two eggs, two slices of American cheese, and three strips of bacon, which translates to 730 calories and 47 grams of fat.
HAVE YOUR CAKE. Americans needn't worry that they're getting fat alone. The fast-food giants are aggressively moving into Asia. KFC, for instance, expects to open more than 375 new restaurants in China in 2005 and 400 in 2006, and targets sales growth of at least 22%. Sales in China are sizzling: They're up 11% year-to-date, after soaring 24% in 2004.
Back in the U.S., Yum's Novak points out that, besides the 99-cent Snacker, KFC's $9.99 bucket of chicken was also a fast seller. Just in case that's not enticement enough, KFC recently started offering free cakes to families to increase store traffic.
Clearly, the philosophy today is "obesity be damned." Let the feasting begin.
SOURCE : BusinessWeek
Forget all that talk about healthy eating: Americans are back to chowing down on giant burgers and fried chicken
If you think that all the talk about obesity is scaring people away from fatty food, think again. Americans are eating hamburgers, doughnuts, French fries, and fried chicken like never before.
Yes, fried chicken: KFC has been going gangbusters this year. In October, sales at stores open for a year or more soared 6%, vs. a 3% drop in the year-ago period. This comes after a total 6% increase in the previous three months combined. In fact, fried chicken has become so popular that KFC is considering bringing back the name "Kentucky Fried Chicken" in its full form.
"Kentucky Fried Chicken is the one big trend that's going on in the world today," says David Novak, chief executive of Louisville-based Yum! Brands (YUM ), KFC's parent. "We're the chicken capital of the USA."
HEAVY SNACKING. What's going on? Apparently, all the talk about obesity causing clogged hearts, hypertension, high blood pressure, and even diabetes is falling on deaf ears (see BW Online, 1/11/05, "Ready for a Fast-Food Workout?").
"What can I say? Americans love fried chicken," says Harry Balzer, renowned food expert and vice-president of researcher The NPD Group. He says fried chicken is the fastest-growing fast-food menu item in the last decade. In every food survey conducted over the last 25 years, Balzer points out, three common themes emerge in terms of what Americans want: taste, price, and convenience.
If that mantra really works, KFC certainly found its sweet spot in March, when it introduced the Snacker, a 99-cent chicken sandwich that proved to be a runaway bestseller. The 5,525 KFC restaurant outlets in the U.S. sold 100 million Snackers in the past seven months, making it one of the most successful product launches in KFC history.
A GROWING POPULATION. But while Americans are digging in to the fried chicken, they're certainly not eschewing other fatty foods. Hamburger outlets served over 500 million more customers in 2004 than in the previous year, according to NPD. And doughnut shops served about 150 million more people last year than in 2003 (see BW Online, 6/3/05, "Salad Days for Burger Joints").
Plus, research has shown that Americans currently eat out, or order in, more than ever before -- fueling the trend toward weight gain. Food-market researcher Technomic found in a 2005 survey that 69% of consumers described their diets when eating out as "fair to poor," compared to 39% who said they eat "fair to poor" diets at home (see BW Online, 4/22/04, "Restaurants are Cooking Again").
Not suprisingly, a new study that followed Americans for three decades suggests that, over the long haul, 9 out of 10 men and 7 out of 10 women will become overweight. Published in the Oct. 4 issue of the Annals of Internal Medicine, the report shows obesity may be an even greater problem than indicated by other studies demonstrating that two-thirds of the U.S. population is already overweight or obese. "The health implications for the country are enormous," says Ramachandran Vasan, an associate professor of medicine at Boston University and the new study's lead author.
MORE THAN A MOUTHFUL. The fact that a majority of the U.S. population is overweight could be one explanation why Americans are so blas about the subject. "Fat is mainstream, which is why everyone has become complacent," muses Marion Nestle, professor of nutrition, food studies, and public health at New York University and author of Food Politics. "What used to considered pudgy before isn't even worthy of a comment today."
Junk-food chains are now catering to people who have ignored the healthy-food movement of the last few years, and in fact have gotten sick of the focus on healthy living. "There are those, especially the younger people, who shun the health and nutrition talk and throw caution to the winds," says Bob Sandelman, president of market researcher Sandelman & Associates. "When they go out, they go way over the other end, and want the thickest burger they can find."
No wonder the fast-food giants are fighting over who can come up with the most fattening food. Last year, Hardee's and Carl's Jr., units of CKE Restaurants (CKR ), created quite a stir with the Monster Thickburger, which has two 1/3-pound slabs of Angus beef, four strips of bacon, three slices of cheese, and mayonnaise on a buttered sesame-seed bun -- totaling 1,420 calories and 107 grams of fat. Hardee's proudly proclaimed the sandwich "a monument to decadence."
And, earlier this year, Burger King introduced the Enormous Omelet Sandwich, comprising one sausage patty, two eggs, two slices of American cheese, and three strips of bacon, which translates to 730 calories and 47 grams of fat.
HAVE YOUR CAKE. Americans needn't worry that they're getting fat alone. The fast-food giants are aggressively moving into Asia. KFC, for instance, expects to open more than 375 new restaurants in China in 2005 and 400 in 2006, and targets sales growth of at least 22%. Sales in China are sizzling: They're up 11% year-to-date, after soaring 24% in 2004.
Back in the U.S., Yum's Novak points out that, besides the 99-cent Snacker, KFC's $9.99 bucket of chicken was also a fast seller. Just in case that's not enticement enough, KFC recently started offering free cakes to families to increase store traffic.
Clearly, the philosophy today is "obesity be damned." Let the feasting begin.
SOURCE : BusinessWeek
Steelmakers on a roll, until the next glut
Chinas appetite for steel has provided the rest of the worlds big producers with a rare period of boom and helped to finance a buying spree, of which the past week's bids for Dofasco are just the latest example. But burgeoning Chinese steel production threatens to flood the market and test whether sheer size will offer any protection to the worlds steel giants
AS RECENTLY as six years ago, while investors were still in thrall to a dotcom bubble that had yet to burst, steel was derided as one of the last bastions of the old economy. Many firms in the industry were state-owned or heavily protected by governments keen to preserve assets deemed vital to national interests. Globalisation had left the steel business behind. It is a measure of the changes that have swept the business since the internet bubble popped that last week Arcelor, a company created through a 2001 merger of the top French, Spanish and Luxembourg steelmakers, made a hostile bid of C$4.4 billion ($3.8 billion), in cash, for Dofasco, Canadas leading steel firm. This week, Arcelor's offer was trumped by a friendly bid of 3.5 billion ($4.1 billion) by Germany's ThyssenKrupp. Arcelor says it is reviewing its options; it may yet weigh in with another offer.
There are further signs that the industry has changed. Arcelors reasons for going hostile are partly ascribed to pique that its lost out earlier this year to Mittal, the worlds leading steel company, in a bid for control of Kryvorizhstal, Ukraines former state-owned steel firm. Mittal prevailed with an offer of $4.8 billion. And both Arcelor and Mittal recently lost out to a domestic bidder for a slice of Erdemir, a Turkish state-owned steel firm. The past year has also seen a host of smaller deals, such as that announced by Mittal last week to acquire some assets from Stelco, a bankrupt Canadian steel producer.
This wave of mergers, acquisitions and asset sales has helped to revive the fortunes of the worlds steelmakers by reducing the chronic overcapacity that had troubled the industry for decades. This has brought new and more effective leadership into a business that was a byword for bad management. The privatisation of assets in former Communist countries in Eastern Europe and other developing economies has boosted the opportunity for consolidation.
By far the most important factor behind steels revival, however, is Chinas booming economy. Chinas soaring demand for steel sent prices spiralling upwards until recently: benchmark hot-rolled coil, which sold for as little as $200 a tonne in 2001, broke the $600 barrier in 2004, though prices have since fallen back (see chart). The boom in prices ushered in a time of profits and high valuations in a business where bail-out and bankruptcy had previously been the norm. But two problems still confront steelmakers.
The first is that their improving lot has not gone unnoticed by those who sell the raw materials that feed the worlds steel mills. Suppliers of iron ore grouped together to demand hefty price rises of 72% for their products in March this year, even after obtaining a 19% rise last year. Suppliers of coking coal, also vital to the steelmaking process, insisted on even greater hikes. Early forecasts suggest that iron-ore suppliers could want another big price riseperhaps as much as 20%next year. This years rise is likely to add $40-60 to the price of producing a tonne of steel, just as prices for end users are falling.
The second, and potentially much bigger, concern is that Chinas vast appetite for the metalit accounts for 30% of global consumptioncould begin to wane. This would prove particularly painful for the industry if Chinese production were to continue rising. In 2004, Chinese mills rolled out 273m tonnes of steel, according to the International Iron and Steel Institute. In the first ten months of this year, they produced 287m tonnes.
Chinas government, fearful that its rip-roaring growth could lead to overheating, has introduced measures to cool the economy. The effects could soon be felt in China and beyond. Baosteel, the countrys biggest producer, has said it will cut prices for its main products by 10% in the first quarter of 2006, because of a nationwide glut. Though the economy continues to grow at rates not far short of 10% a year, even a modest slowdown could result in the steel surplus having an impact on world markets.
The worlds big steelmakers are hoping that, by getting bigger, they can reap the rewards in the good times and insulate themselves if things turn nasty. Lakshmi Mittal, head of the eponymous steelmaker, and Guy Doll, the boss of Arcelor, both agree that the industry will be dominated by a few big firms, each producing over 100m tonnes annually, in the coming years. Mittal, a private London-based company that gained control of Americas International Steel Group earlier this year, is set to boost annual output to over 65m tonnes with the Ukrainian acquisition. Even if it were to win Dofascos hand, Arcelor would lag some way behind. But both are expanding where they can, snapping up small and medium-sized producers as they become available.
More consolidation would certainly give steel firms extra clout when negotiating ore and coke prices. The worlds top five steelmakers still command only around one-fifth of the global market, whereas the three leading ore firms control 70% of supplies. The level of consolidation that would confer significant market power on the largest mills still seems a long way off.
If you cant beat them
One way to shift the balance of power is to encroach on the suppliers turf, and a few big steel firms have been doing just that, buying into ore and coke operations. Dofasco is a tempting target partly because it has its own ore business. South Koreas POSCO, the worlds fifth-largest steel firm, has sought stakes in ore mines in Brazil and Australia. Mittals thirst for raw materials has even led it to make approaches to an ore producer in Liberia, despite the political uncertainty there.
The big steelmakers hope that further consolidation will help to shift the balance of power in their favour, and they appear convinced that sheer bulk will help them to ride out any future slackening of demand. But size in the steel business does not, in itself, bring great rewards in terms of economies of scaleespecially if, as many suspect, predators are overpaying for assets. If world markets are about to experience another serious glut, all producers, big and small, will feel the heat.
Source : Economist
Chinas appetite for steel has provided the rest of the worlds big producers with a rare period of boom and helped to finance a buying spree, of which the past week's bids for Dofasco are just the latest example. But burgeoning Chinese steel production threatens to flood the market and test whether sheer size will offer any protection to the worlds steel giants
AS RECENTLY as six years ago, while investors were still in thrall to a dotcom bubble that had yet to burst, steel was derided as one of the last bastions of the old economy. Many firms in the industry were state-owned or heavily protected by governments keen to preserve assets deemed vital to national interests. Globalisation had left the steel business behind. It is a measure of the changes that have swept the business since the internet bubble popped that last week Arcelor, a company created through a 2001 merger of the top French, Spanish and Luxembourg steelmakers, made a hostile bid of C$4.4 billion ($3.8 billion), in cash, for Dofasco, Canadas leading steel firm. This week, Arcelor's offer was trumped by a friendly bid of 3.5 billion ($4.1 billion) by Germany's ThyssenKrupp. Arcelor says it is reviewing its options; it may yet weigh in with another offer.
There are further signs that the industry has changed. Arcelors reasons for going hostile are partly ascribed to pique that its lost out earlier this year to Mittal, the worlds leading steel company, in a bid for control of Kryvorizhstal, Ukraines former state-owned steel firm. Mittal prevailed with an offer of $4.8 billion. And both Arcelor and Mittal recently lost out to a domestic bidder for a slice of Erdemir, a Turkish state-owned steel firm. The past year has also seen a host of smaller deals, such as that announced by Mittal last week to acquire some assets from Stelco, a bankrupt Canadian steel producer.
This wave of mergers, acquisitions and asset sales has helped to revive the fortunes of the worlds steelmakers by reducing the chronic overcapacity that had troubled the industry for decades. This has brought new and more effective leadership into a business that was a byword for bad management. The privatisation of assets in former Communist countries in Eastern Europe and other developing economies has boosted the opportunity for consolidation.
By far the most important factor behind steels revival, however, is Chinas booming economy. Chinas soaring demand for steel sent prices spiralling upwards until recently: benchmark hot-rolled coil, which sold for as little as $200 a tonne in 2001, broke the $600 barrier in 2004, though prices have since fallen back (see chart). The boom in prices ushered in a time of profits and high valuations in a business where bail-out and bankruptcy had previously been the norm. But two problems still confront steelmakers.
The first is that their improving lot has not gone unnoticed by those who sell the raw materials that feed the worlds steel mills. Suppliers of iron ore grouped together to demand hefty price rises of 72% for their products in March this year, even after obtaining a 19% rise last year. Suppliers of coking coal, also vital to the steelmaking process, insisted on even greater hikes. Early forecasts suggest that iron-ore suppliers could want another big price riseperhaps as much as 20%next year. This years rise is likely to add $40-60 to the price of producing a tonne of steel, just as prices for end users are falling.
The second, and potentially much bigger, concern is that Chinas vast appetite for the metalit accounts for 30% of global consumptioncould begin to wane. This would prove particularly painful for the industry if Chinese production were to continue rising. In 2004, Chinese mills rolled out 273m tonnes of steel, according to the International Iron and Steel Institute. In the first ten months of this year, they produced 287m tonnes.
Chinas government, fearful that its rip-roaring growth could lead to overheating, has introduced measures to cool the economy. The effects could soon be felt in China and beyond. Baosteel, the countrys biggest producer, has said it will cut prices for its main products by 10% in the first quarter of 2006, because of a nationwide glut. Though the economy continues to grow at rates not far short of 10% a year, even a modest slowdown could result in the steel surplus having an impact on world markets.
The worlds big steelmakers are hoping that, by getting bigger, they can reap the rewards in the good times and insulate themselves if things turn nasty. Lakshmi Mittal, head of the eponymous steelmaker, and Guy Doll, the boss of Arcelor, both agree that the industry will be dominated by a few big firms, each producing over 100m tonnes annually, in the coming years. Mittal, a private London-based company that gained control of Americas International Steel Group earlier this year, is set to boost annual output to over 65m tonnes with the Ukrainian acquisition. Even if it were to win Dofascos hand, Arcelor would lag some way behind. But both are expanding where they can, snapping up small and medium-sized producers as they become available.
More consolidation would certainly give steel firms extra clout when negotiating ore and coke prices. The worlds top five steelmakers still command only around one-fifth of the global market, whereas the three leading ore firms control 70% of supplies. The level of consolidation that would confer significant market power on the largest mills still seems a long way off.
If you cant beat them
One way to shift the balance of power is to encroach on the suppliers turf, and a few big steel firms have been doing just that, buying into ore and coke operations. Dofasco is a tempting target partly because it has its own ore business. South Koreas POSCO, the worlds fifth-largest steel firm, has sought stakes in ore mines in Brazil and Australia. Mittals thirst for raw materials has even led it to make approaches to an ore producer in Liberia, despite the political uncertainty there.
The big steelmakers hope that further consolidation will help to shift the balance of power in their favour, and they appear convinced that sheer bulk will help them to ride out any future slackening of demand. But size in the steel business does not, in itself, bring great rewards in terms of economies of scaleespecially if, as many suspect, predators are overpaying for assets. If world markets are about to experience another serious glut, all producers, big and small, will feel the heat.
Source : Economist
are we allowed to copy-paste... wudnt it be better if we came up with our own analysis ?
vaguefunda Saysare we allowed to copy-paste... wudnt it be better if we came up with our own analysis ?
Buddy !!! Just coz u hv visited this thread doesnt make it imperative for you to reply for the sake of replying.
As for "copy-pasting" : The objective of this is thread is to make all good articles available at single place. Since everybody cant visit every site and read, people can post artciles here so that others can read them and gain from them....
And as for "own analysis" :
Merck is undergoing some restructuring after landing up in financial trouble.
So PLEASE post ur analysis on "Merck's Restructuring"
And if you want a easy one...take "Kyoto Protocol"
Waiting for your analysis....
if tht was meant to scare me away then i m TOTALLY scared.......
it was jus a small question, and u cud have answered it without gettin workd up (but then i am pretty sure tht in ur sad life u dont get too many channces to actually raise ur voice etc etc)
P.S.: boss.... i am a consultant.... the "analysis" u r talkin abt, i do them day in and day out... maybe nt the same sectors, maybe nt the same cos. ..... but lets nt get into this.... if u have taken the mantle of copy pasting, keep them flowing....
PPS: and this is nt the forum where i wud like a personal spat.... so over and out
if tht was meant to scare me away then i m TOTALLY scared.......
it was jus a small question, and u cud have answered it without gettin workd up (but then i am pretty sure tht in ur sad life u dont get too many channces to actually raise ur voice etc etc)
P.S.: boss.... i am a consultant.... the "analysis" u r talkin abt, i do them day in and day out... maybe nt the same sectors, maybe nt the same cos. ..... but lets nt get into this.... if u have taken the mantle of copy pasting, keep them flowing....
PPS: and this is nt the forum where i wud like a personal spat.... so over and out
this is one thread that i follow closely though i dont really post is a different story. The article that come up are preety nice and full of knowledge. Despite the good work done by Teesra_Banda it is quite sad to see people commenting negatively than appreciating the efforts.
PS : @vaguefunda .. i wonder if u r a consultant.
