Going Global

Give B of A Credit on Immigration

I know immigration is a controversial issue and I don't want it to distract from the other business issues discussed in this blog -- but as I've said before, immigration itself is a business issue.   As discussed in a different context in the last post, the free flow of labor is a key ingredient in the efficient and effective operation of markets, so it would seem only to make sense that we should reform immigration laws so that patterns of immigration can more readily reflect the economic realities of the global market place.  Indeed, I find it somewhat ironic that some of the loudest opponents of rational immigration reform that would permit greater numbers of lower skilled workers to immigrate legally otherwise identify themselves as economic conservatives -- i.e. in favor of free market economies.

Immigration and business have been back in the news together recently thanks to Bank of America's plan to offer credit cards aimed at Hispanic immigrants, including presumably illegal ones.  Not surprisingly, this has raised the hackles of the usual politicians and pundits who have shamelessly pandered to the fear of foreign cultures for their own great political and economic gain.  The fear mongering includes the suggestion that the credit card program could wind up financing terrorist cells.  As noted by Ruben Navarrette in an op ed piece in USA Today, B of A's cards will have $500 credit limits while the terrorist cells that we should be worried about are laundering thousands of dollars.  I also enjoyed Navarrette's take on the tendency of the closed-border proponents to confuse terrorists with immigrants:

Let's not confuse terrorists with immigrants.   Here's a tip on how to keep the two groups straight: One wants to do us harm; the other wants to do our cooking, gardening and child care.

What I find most interesting about the uproar over B of A's program, however, is that the bank may be the one entity actually doing one thing about immigration that I would think even the most ardent proponents of stricter control of immigration would be in favor of and something that the government seems utterly incapable of accomplishing -- i.e. issuing cards with unique numbers tied to the individual's name, address and other personal information.  If you are genuinely worried about what these people might be up to, doesn't this sound like exactly what we should be doing. 

As an added benefit, at 21% interest, the card program means that an American company will make some money on the hard work of these people whom the anti immigration folks like to claim are freeloaders.  In another irony, one of the biggest hurdles the bank is facing in launching its credit card isn't political opposition, but the cultural bias against credit.  As Javier Palomarez, B of A's former VP of marketing who came up with the idea originally, is quoted in the Navarrette op ed piece, "We were raised that, you know what, if you can't buy it with cash, you can't afford it."   Sounds like another tenet of conservative economics that one might think the pundits would hold up as a shining example of good sense.

I guess in the end all this is just another example why no one has ever said that the dogma of true believers needs to be rational.

Access to Global Capital -- Equity & Debt, Big & Small

For markets to operate efficiently, at least three things must exist:

• The free flow of goods and services
• The free flow of labor
• The free flow of capital

In a modern economy, I would add the free flow of information as well.  Ironically, this is less crucial to examine only because in the internet age, even governments that would prefer to lessen the free flow of information have a hard time interfering with this element.

The scorecard for each of the other three elements relative to the global economy is mixed.  With free trade agreements and institutions such as the WTO, in general it seems that the free flow of goods and services functions at a pretty high level with relatively few significant impediments, at least outside of industries tied to national security or critical national infrastructure.  The free flow of labor falls on the opposite end of the development spectrum as evidenced by the heated headlines on immigration policy that are part of the daily debate both in the US and elsewhere. 

Access to global capital is a much more inconsistent picture with lines divided between equity and debt and between big players and small players.  With proxy securities such as ADR's, international mutual funds, the globalization of private venture capital, and more recently, a spate of alliances among the world's stock exchanges, equity capital moves around the globe with reasonable alacrity.  Debt, however, is a different story.

When it comes to capital flows, we increasingly operate in a credit economy -- the flip side of which of course is a debt economy.  Trends from LBO's to increasing debt/equity ratios to exploding consumer credit all tell a similar story.  Whether it is a good trend, a bad trend or a benign trend, access to capital increasingly means access to credit/debt at all levels of the economy.

Debt flows freely across the globe at the level of national governments. The staggering federal deficit in the US is largely funded by foreign credit loaned to the US by foreign governments investing in US debt instruments.  In large market economies such as the US, however, government activity accounts for only 20% of GDP.  The vast majority of market activity takes place in the private sector and while inter-government debt arrangements can shore up or undermine the economy as a whole, it does very little to allow private enterprise access to global debt funding which could fuel private sector economic growth.

You can lend money to foreign governments by investing in their bonds either directly or through an international bond mutual fund.  Borrowing foreign money is a whole other matter.  Large multinational corporations can access foreign debt through the local borrowing of their foreign based entities.  How the money is invested around the corporation once it's in the door is a matter of internal cash management. 

Small and medium size businesses without foreign operations, however, will find accessing foreign credit difficult at best.  To some extent a relationship with a large international bank provides some indirect access to foreign funds as they move through the bank's own operations, but direct foreign borrowing is either prohibited by the laws of various countries or is rendered impractical by the difficulties of cross border security interests and legal enforcement on behalf of foreign lenders. 

As evidenced by the spate of articles on "carry trades" (essentially borrowing money in a country with low interest rates and investing it in a country with higher rates of return) prompted by the recent action of the Bank of Japan in raising that country's base interest rate above 0% for the first time in quite a while, access to foreign debt may be available to hedge funds and currency traders, but these are games for the very large and very rich.  Japan has had ridiculously cheap money (ignoring for the moment the risk of currency fluctuations) for nearly 10 years, but no small or medium sized business in the US could take advantage of it. 

If we are to encourage efficient world markets and allow the benefits of the global integration of commerce to flow down stream to where it could have the greatest beneficial impact, perhaps it's time policies allowing a wider ranging access to foreign credit are addressed.

Then Again, Maybe the Government Can Screw Up the Economy

I've argued elsewhere in this blog that one of the great virtues of the global integration of commerce is that it provides some protection against a government's ability to screw up the economy whatever direction the prevailing political winds may be blowing.  It seems I may have gone too far, however, in suggesting that the democratic attitudes of the individuals who make up the consumer market in Venezuela are sufficient to mitigate the political risk to business in that country resulting from the socialist policies of the current regime.

As Hugo Chavez expands his efforts to nationalize the economy, his policies are beginning to take a real toll on the economy that I fear will get much worse.  Even in my earlier post suggesting that things might not be so bad for international trade in general, I did allow as his policies presented real risk for companies in industries directly connected to public infrastructure.  Consistent with that, Chavez's immediate efforts are in fact directed at the oil industry and public utilities.   

Also, to be fair, to this point there have been no nationalizations strictly by government fiat as the administration has negotiated buy outs of private interests that it seeks to control.  For example, the government recently bought out the interests of US power company CMS for $106 million and acquired the interests of Verizon in the country's telecom system for $572 million.  The buyout prices were described by unnamed economists in a recent Reuters story as "tough but fair".

Unfortunately the implementation of the Chavez political agenda is beginning to have serious down stream effects on the economy which could wind up crippling the country.  Inflation is already approaching 20% annually -- an extremely high figure by current global standards.  That kind of volatile pricing environment leads to inefficiencies in the price regulation mechanism.   It also discourages incoming trade as it is difficult to maintain a rational price policy when prices begin to move at such a rapid rate compared with the originating markets.  The result of these impacts is shortages in basic goods and services, something that is already beginning to show up in Venezuelan marketplaces.

A second impact beginning to emerge is a brain drain as the best talent begins to flea nationalized, or more to the point politicized, industries.  As reported in a stroy in today's Wall Street Journal (subcription required for on-line access; story on page A11 of the print edition), this is already having a measurable impact on the oil industry where the loss of key management and technical talent is leading to an increase in costs and a decrease in productivity.   This is obviously not a good trend in the industry on which Venezuela most depends as its economic driver.

It is at the intersection of the oil industry and Chavez's nationalization campaign where the ultimate death blow to the economy may be dealt.  While the government has been successful thus far at negotiating buy outs of foreign interests in lesser industries where the payouts have been in the 9 figures, the regime is having more difficulty coming to terms on a "fair" (and affordable) price for foreign interests in its oil operations owned by companies such as Exxon Mobil.  Already stretched by billions spent on social services, it is not at all clear that the government will be able to afford the cost of a negotiated buy out of these oil interests.   The result is likely to be payments that nearly bankrupt the treasury and which fuel inflation to crippling levels or a government seizure at less than fair prices or at no price at all.   Either outcome will be ugly.

The saddest part of all this is that Venezuela is a country which has the potential to be the leading economy in South America.   Nationalization was a disruptive agenda to pursue when economies and markets were predominantly national in scope.  With the global realities of today's integrated international economies, I am afraid that the nationalization of whole industries, particularly in a smaller country which does not have a sufficiently broad local market to support self-sustained growth and development, will be suicidal.

What We Need to Learn from Global Competition

Usually when global business gets bad press in the U.S., the focus is on alleged unfair competition from foreign companies and its detrimental impact in weakening established American companies.  For years, the front line of this battleground has been the automotive industry and particularly the steady march of the Japanese car companies into a position of market leadership.

When management at GM and Ford aren't blaming it on unfair competition (which is getting harder and harder to do as more and more "foreign" cars are made in automobile factories right here in the United States) they like to blame their financial challenges on other forces which they contend are beyond their control like spiraling health care costs and difficult embedded union contracts.

One of the biggest causes of the steady decline of the big U.S. automakers even in their home markets, however, has been an unchanging business model centered around pushing what they want to build into the market place rather than listening to and responding to customer desires.  I used to work for an individual who had been a senior executive at one of the large car manufacturers before he decided to move on to more progressive change oriented industries.  In order to get his people to understand the importance of the voice of the customer, he used to tell a great story about how he and other executives in Detroit laughed with derision at how idiotic Toyota was for sending high priced auto design engineers into the field to stand in shopping mall parking lots to watch and record how consumers actually used their cars.  Of course out of this process emerged innovations like the remote key door and trunk opener and trunks with cargo nets.   Japan's ensuing march to ever increasing market share also rose out of this process and Detroit has been playing catch up ever since -- although they still haven't changed their fundamental view toward building what the customer wants.

Historically, they might have claimed that the problem was getting good data on customer preferences when the customer experience took place at thousands of small independent dealerships (which of course is why Toyota sent its people out to shopping malls to observe the real customer experience in the first place).  With the emergence of the large national/regional multi-brand dealership chain, however, even this dynamic has changed.

An article in Friday's Wall Street Journal entitled  "Big Dealer to Detroit: Fix How You Make Cars" (subscription needed for the on-line edition -- article starts on page A1 of the print edition) profiled the efforts of AutoNation CEO Michael Jackson to supply the big auto companies with market data from its national customer database so that they can determine more accurately what models, features and extras the car buyer really wants so that they can produce those cars rather than thousands of vehicles that will sit on a lot until there is a sufficiently rich incentive program that pays the customer to take the excess inventory off the dealer's hands.

The problem Detroit faces with excess inventory of cars that are manufactured but that consumers don't want is significant and extremely expensive.   As detailed in a bar chart accompanying the WSJ article, at the end of 2006, GM had an inventory of over 1 million unsold vehicles while Toyota's was only 320,000.   Even adjusted for market share, GM had over 41,000 unsold vehicles per 1% of market share while Toyota's excess inventory per 1% of market share was less than half that number.  At $20,000 per vehicle, GM's unsold inventory represents $20 billion tied up in working capital and places the company at a $14 billion disadvantage to Toyota.

Now I don't know what world management in Detroit inhabits, but if I were at a company with that magnitude of a working capital disadvantage at the same time that market share trends were heading in a starkly opposite direction as our competitor's while we were losing $9.5 billion on $206 billion in sales and a competitor was able to earn $13.2 billion on $193 billion in sales in the same market and economic climate, I'd be very very worried.  So here is the most amazing part of the WSJ article -- a succinct but telling quote attrubted by the WSJ to Mark LaNeve, GM's head of North American Sales and Marketing: "It's not like we have some crisis." 

Let those words settle in for a moment.  Imagine what a crisis in Detroit must look like.  I would suggest that management at GM and Ford should be running not walking to AutoNation's offices to get hold of their market data on what customers want.  Maybe even it's not too late to send some high priced design engineers out to some shopping mall parking lots to observe what potential customers want in a car.

What Business Is Your Company In?

John Hagel had a post on his Edge Perspectives blog a couple of weeks ago that got me thinking further about a point I make in one of the classes I teach in international market selection and development, i.e. the relationship between understanding what competency is critical to your company's success and executing a plan that will optimize your chances of successfully entering a new foreign market.  John's posts tend to be longer and pithier than your average blog -- he's one of the few bloggers whose posts I wind up printing out and reading over a few times, sometimes with a pen in hand.

This particular post entitled "Retailers and Customers" examines whether the recent financial challenges encountered by The Gap (the clothing retailer once known as the principal purveyor of Levi jeans) affirms one of John's main theories, that growth and profitability are frequently inhibited by a company's loss of focus on a single core business model.  Building off some thinking first explored by Ted Levitt in his seminal HBR article "Marketing Myopia", Hagel asserts that there are three essential and very different core businesses that a company might be in -- infrastructure management, product innovation and commercialization, or customer relationships (I would add cash flow management as an additional unique core business).  Historically, large corporate organizations have tended to bundle two or more of these businesses into one organization.  John argues that these companies need to begin unbundling these businesses, focusing on the core business that drives their profits, if they are to create a platform for sustainable growth going forward.

The first key to expanding into global markets is to identify countries in which your business has the greatest probability of success.  One of the main challenges is that execution of your business model can be impacted by differing cultural norms, as well as different political, financial, management and infrastructure environments than the company is used to encountering in its existing markets.  In developing a plan that can be well executed, it's an advantage to be able to focus on a couple of things that must be done flawlessly in order to succeed.  It is in this sense that understanding what business your company is in along the lines used in John Hagel's paradigm can be extremely useful. 

It is difficult to master all aspects of a foreign market in the time permitted in today's fast paced strategic business environment.  Knowing going in whether your business model's success is most dependent on creating customer relationships on the one hand or on managing the flow of goods and services across a complex infrastructure on the other can go a long way toward narrowing your focus to those critical aspects of a new foreign market about which you need a profound understanding.

Business or Politics? I'll take business.

Left to the devices of political passions that inform much of government policy (not just in the United States but everywhere at every time), the world would be a mess.  It's for that reason that I cringe when nationalistic passions grab ahold of a commercial event, whether good or bad, to make a political statement.

Anyone who regularly follows international M&A activity knows by now that the Indian conglomerate Tata recently won its takeover bid for the British-Dutch steelmaker The Corus Group.  As the economy in India has begun to thrive over the past decade, spurred on by substantial economic reforms intended to set the dynamics of commerce free, Indian based companies have begun to acquire foreign based companies.   Tata's takeover of Corus is the largest to date at $11.3 billion.

Sadly, the press in India, not satisfied to herald these commercial successes for the business achievements that they represent, has taken to fanning the flames of nationalistic passions to make a political statement -- and to sell newspapers, of course.  Last month the Economic Times of India published a front page illustration of what Times Square in New York might look like after Indian corporations acquire the iconic western companies whose logos currently populate the heart of Manhattan.  In today's New York Times, Rahul Kansal, brand director for The Times of India is quoted as saying "We were eclipsed for a while, overtaken by foreigners and foreign rule for a few centuries, and this is a comeuppance that is deserved -- the need for retribution." 

I understand the post-colonial pride in one's country becoming an international economic player, but I fear the world is in trouble when corporate acquisitions get touted as the tools of global retribution.  The reaction is of course the other side of the same coin that produces ill informed calls for protectionism in the U.S. in the face of global competition.

Fortunately the market has an immediate feedback mechanism sorely lacking in the political arena.  In order to beat out Brazilian steel manufacturer Companhia Sidurgencia Nacional in the bidding for Corus, Tata probably overpaid for the prize.  As a result, while the political pundits hale the victory, the markets have slashed 13% off Tata Group's market capitalization since the announcement of its intention to go after Corus.  Accordingly, in addition to the $11.3 billion purchase price, Tata has had to give up about $6.6 billion in market cap to buy Corus's $900 million in post tax earnings.

I have commented elsewhere in this blog on the differences between political "realities" and commercial "realities" in various countries.  Hopefully the commercial reality that India's economy has progressed to the point that its companies have become genuine players in the international arena is a manifestation of the benefits of free market development and the global integration of commerce rather than an act of retribution as the political pundits would paint it.

How Big Is the "Real" Market in China - Redux

In a post some time ago I raised the question as to the size of the real consumer market in China.  I think this is relevant to companies looking to China as a potential market because I see many companies heading off to China with stars in their eyes -- or more accurately, the idea of 1.3 billion people in their business plan.  The reality, of course, is that while China is unquestionably a very large market and growing at a rapid pace, the majority of China's citizens live at a level where they are not participants in the consumer market for foreign goods and services.  Whether it's because the government launders most official statistics or because China is such a moving target (mostly moving forward), it seems difficult to get a handle on data that could better calibrate the real size of the consumer market.

I was prompted to raise this question again after reading an article in today's New York Times entitled "Internet Boom in China Is Built on Virtual Fun" (subscription may be required for the on-line version; the article appeared on p. 1, col. 5 in the February 5, 2007 print edition).  The article profiles Pony Ma, who is described as "China's closest approximation to Sergey Brin and Larry Paige" of Google, and his booming internet company Tencent.  Positing that Tencent dominates its market like "no other internet company in the world -- not even Google", the article states that since its IPO in Hong Kong, Tencent "has grown into a powerhouse that has crushed everyone else in the field."  To emphasize the point, Deutsche Bank internet analyst William Bo Bean is quoted as saying "everyone talks about eyeballs.  Well, they've got all the eyeballs in China."

With that effusive background, here is the data point I'm trying to get my arms around -- the article states that Tencent "has reached more than 100 million [internet] users, or nearly 80 percent of the market."  If "more than 100 million" means, say 120 million or so, then the 80 percent figure would imply a market size of about 150 million internet users.   That number is much much lower than what I think most people would use for the consumer market in China, and certainly pales in comparison to other proxy numbers such as the more than 400 million cell phone users.

In general given that fact that the internet is becoming more and more part of the essential fabric of consumerism in an information driven economy and also given the relatively modest cost of gaining access to the internet, I would have expected the number of users in China to be much higher.  As noted in my recent post on NationMaster.com, it seems that good data on internet users is hard to come by -- and maybe its more so in China.  I am also wondering whether the government's concern with the connection between the free flow of information across the internet and political freedom might in fact have dampened the number of internet users in China relative to the number of consumers there.

Maybe I should just give up this quest and go with the fact that China is really really big and growing bigger all the time -- but that seems like a bit of a loosey-goosey data point on which to base the analysis of a potential foreign market.

Don't Get Scammed by a Would-Be Partner

We've all received the spam e-mail from some Nigerian barrister letting us know that we could earn a sizable commission just by allowing them to move some recently discovered funds through our bank account.   All the better of course if the funds were left by a wealthy official who was allegedly a distant but heir-less relative of ours -- we might even be in for a piece of the inheritance.  As savvy business people we see right through these laughable scams wondering who could be so naive.

Targets for the "I just need an advance up front to make the deal go" scheme are not limited to the individual e-mail account, however.  These scams can be and are aimed at businesses seeking to gain an edge in dealing in foreign countries where our unfamiliarity with customs and the challenges of getting straight answers in due diligence create enough disorientation to make these cons effective even when played on otherwise sophisticated business people.

In an excellent post entitled "Avoiding the China Buyer Scam" from a couple of weeks ago, the China Law Blog provided an excellent recap of just such a business scam with currency in China.   More importantly, the post, which expands on an earlier article on these scams from the China Business Services Blog, contains some sage advice on how to spot and avoid these black holes for the unsuspecting business.

Don't shrug this off as something that could never happen to you.   As the China Law Blog notes from direct experience with clients who have been had or nearly had, it's surprising how many businesses get sucked in.  To reiterate a constant theme here, have the patience and take the time to develop relationships and understand the business environment in a new foreign market -- or hire the expertise from a trusted source.  As with any business deal, the aim is to maximize the probability of a positive return on your investment.  To do that, you should do what is necessary to mitigate the risks imposed by unfamiliarity.      

[Note:  The facsimile of the fake Nigerian certificate of deposit is found on the jw Spam Spy site in an article on what's known as the "419 scam" or "the dead foreigner scam"].