Business Strategy
050 322
Week 10
Instructor:
Michael Cooke
E
-
mail
Address
:
michco@kku.ac.th
Office:
IC room 817
Class hours:
Friday 09:00
-
12:00
Class Location:
IC room 822
Term Project and Final Exams
•
Term Project
–
Choose a topic and a partner by 7
-
December
–
Advise 10
-
15 minute presentation form, papers accepted
–
Look at the business using the Five Forces framework
–
Suggest and support a strategy
–
Due 1 February
•
Final Examination
–
Tuesday February 19
th
at 9:00 in room 926
–
Paper dictionaries allowed
–
30% of course grade
–
Format will be similar to the mid
-
term format
–
May include material from the first half
1: Which company is most likely to invest a lot of money in a foreign country?
A) The company has limited funds
B) A wealthy company with many products and experience in similar markets
C) The company needs a high degree of flexibility
D) When the country is politically or economically volatile, such as Pakistan
2: SWOT is an acronym for
A) Sales, Wholesalers, Operations, Treasury
B) Strengths, Weaknesses, Opportunities, Threats
C) Selling, Winning, Overcoming, Talking
D) The well known multinational tax advisory firm Strong, Woodward, Oppenheimer, and Tannenbaum
3
: A First Mover develops products or enters markets before others. Which is true:
A) Global firms always introduce products in the home market before other countries
B) Firms with limited international experience are likely to invest a lot to enter a new market
C) Small firms tend to be early entrants
D) Firms look for favorable risk dimensions when considering market entry
4
: Successfully introducing change into an organization often involves
A) Getting ideas and support from new managers and employees in the organization
B) Surprising employees with new strategies
C) Teams of high priced consultants develop generic strategies for top management
D) Very little effort
5
: During the introductory phase of product life cycle, which of the following is true
A
)
Product volume is high
B) Cost per unit of product is high
C) Manufacturing is efficient
D) Product gross margins are high
6
: When is industry profit likely to be lowest?
A
) Product introduction phase
B) Product growth phase
C) In mature product markets
D) We do not make these generalizations
Quiz:
(1)With revenue and unit volume increasing in the mature phase of the PLC,
why would firms experience margin compression?
(2) Why would HP be concerned about staff turnover at computer factories
in China?
1:
Which is a good definition of market segmentation
A) Consumer identification of products and services
B) Dividing a market into identifiable subsets of individuals to predict needs or buying habits
C) Relevance of product sub
-
categories
D) Associations between international marketing structures
2: Why is matching of supply and demand essential?
A) Factories produce products at the right level
B) Avoid inventory issues, such as write
-
offs
C) Enables service businesses to have the right capacity
D) Any of the above
3
: A key requirement for international segments is
A
) They should be easy to define and measure
B)
They should have about half men and half women
C) They should have a mix of all age groups in the country
D) Any of the above
4
: If we believe money seeks highest risk adjusted return, which of the following is true with rising interest rates?
A) Price to earnings ratios will go up
B) Price to earnings ratios will go down
C) Investors will be indifferent
D) Stock prices tend to go up when interest rates rise
Segmentation is dividing a market into identifiable subsets
(segments) of customers to predict needs or buying habits.
◦
Marketing programs are tailored to segments (potential buyers will have
similar responses)
◦
For example, one shoe company will market to runners. Another shoe
company will market to construction workers . Runners and construction
workers and will respond to different advertisements
In general segments will have the following characteristics
◦
1) Common needs within segment
2) Distinct (unique from other groups)
3) Similar responses to marketing
Segmentation is essential for matching supply with demand.
Matching supply and demand is essential for production efficiency
and inventory control.
◦
Factories produce appropriate levels
Avoid inappropriate product inventory
Produce sufficient amount of each product, without overtime or contracting
◦
Enables service businesses to have the right capacity (hotel rooms, airline
seats)
Internet has facilitated segmentation (some of it customer self
segmentation)
Segmentation
Variation in customer needs is the primary
motive for market segmentation.
Most companies will identify and target the
most attractive market segments that they can
effectively serve.
In global marketing, market segmentation
becomes especially critical because of wide
divergence in cross
-
border consumer needs and
lifestyles.
Once management has chosen its target
segments, management needs to determine a
competitive positioning strategy for its
products.
7
Country Screening (consideration of a market is based on initial screening criteria)
Global Market Research
◦
Cluster countries across relevant characteristics
◦
Focus research efforts on a representative sample
Market Entry Decisions
◦
Product launches based on shared relevant characteristics across countries
◦
Country differences on other dimensions can hinder success
Positioning Strategy (influencing customer perception of the product relative to
competitors)
◦
Where will marketing efforts have greatest impact?
◦
Target market segments might change due to consumer preferences or population changes
◦
How the products or service is positioned will follow the opportunity
Resource Allocation
◦
Market share clusters (increase penetration)
◦
Consumption clusters (developing the market)
Marketing Mix Policy
◦
Countries in same segment might have similar mix strategy (design, pricing, promotion,
distribution)
◦
Similarities on one dimension might be offset by differences on another (such as price
sensitivity)
Requirements for International Segments
Identifiable
Should be easy to define and measure
Values or lifestyles may be difficult to measure
Sufficient Size
Segments should be large enough to be worth pursuing
Small segments aggregated across countries might work
Accessible
Segments should be easy to reach
Infrastructure differences across regions or countries
Stability of target market behavior and composition
Responsive
–
segments have unique responses
Able to implement
–
the required marketing mix is
consistent with the company goals and competencies
9
International Market Segmentation Approaches
Country
-
as
-
segments or aggregate segmentation
(Exhibits 7
-
2)
Geographic single dimension or several dimensions
Marketing irrelevance of many country boundaries
Difficulty of determining which variables to use for geo
segments
Disaggregate international consumer segmentation
Consumer segments defined by similarities along chosen
characteristics
Consumer bases might be geographically disbursed
–
logistical
issues
Two
-
stage international segmentation
First aggregate countries (macro level) screens out countries
Second segment consumers within the country cluster (micro)
Market oriented and accessible
Copyright (c) 2009 John Wiley & Sons, Inc.
10
Exhibit 7
-
2: Nestlé’s Geographic
Segmentation of the Americas
Chapter 7
Copyright (c) 2009 John Wiley & Sons,
Inc.
11
Information filtering (sensory filtering)
◦
Occurs among even lowest organisms (react to heat, light.
Other aspects of environment ignored by primitive senses)
◦
Highest life forms still limited in gathering and processing
information from environment
We learn to filter information irrelevant to a situation
Often the most highly educated among us filter most
◦
We fail to see/hear or recall much of what is available to us
Under the right conditions (context) we might recall
what we otherwise would not
Our filtering and recall changes through life and with
circumstances
Marketers try to determine which audiences might be
receptive to the product message, and how to enable
recall
Distances between high SES among countries might
be less than between SESs within a country (life
circumstances and education factors)
International Segmentation Scenarios
Universal or global segments (go beyond boundaries)
Customers belonging to universal segments have common needs
Could be a universal niche (example: global elite, business travelers)
Common customer needs higher in some product categories (high
-
tech or travel
related)
Regional segments
Differentiated versus undifferentiated strategies apply to global segments as well
Differentiated strategy tailors marketing to local market conditions
An undifferentiated strategy is often followed by some high
-
tech companies
–
uniform worldwide marketing, scale economies
Unique (diverse) segments
Substantial differences in cross country customer preferences
Localized marketing mix programs
Food products may have country specific segments
Degrees of segmentation often follow degrees of market development (emerging
markets usually have a simple consumer market structure
–
high price or low price
only)
Regions within a country can be targeted, given differences in consumer tastes,
demographics, and income across regions in Thailand, the USA, or China.
13
Easy to measure
Fairly accurate and easy to obtain
The elderly are an often overlooked segment
◦
Unique needs
◦
Self perceptions (active, not old)
Global middle class family is highly sought
◦
Definition is tricky
HH income figures ignore purchasing power differences
Vast differences between countries in how income is spent
Chinese spend less than 5% on rent, transport, health
US consumers spend 50%
◦
Income distinctions ignore education and values
Demographic variables are a factor in country wealth
◦
Working age population relative to non
-
working
◦
China and Thailand will soon have shrinking % working age
◦
Often overlooked implications of large % population = elderly
Socioeconomic Variables
◦
Per Capita income
Issues in using per capita income as an indicator:
Transactions are valued in an international currency
(monetization of transactions)
Official exchange rates seldom reveal true buying power
within a country
Services are provided in
-
country using local currency
Goods not traded across borders (housing, etc)
Use Purchasing Power Parity to estimate buying power
Gray and Black Market sectors of the economy (cash or barter)
◦
Income inequality
–
Gini index
Lower number means more income equality
Scandinavian countries have least inequality
Thailand, China, USA
relatively unequal (higher index)
15
Customer as Active Partner
Such as: Patients in control of medical issues, access to
information and other customers via internet (rather
than passive targets)
Encourage Active Dialogue of Equals
Mobilize Customer Communities, perhaps via internet
Manage Customer Diversity (of sophistication) with
most sophisticated as most active partners
Co
-
creating Personalized Experiences
Beware of information overload
Determining Unmet Needs
Ethnographic Research
Directly observes customers in varying contexts
What and why customers do things
Deeper level of understanding of needs and motivations
Good at identifying breakthrough innovations
Typically customers think of current offerings
Henry Ford’s faster horses
Observations can lead to insights
Particularly useful in going beyond cultural boundaries
Can be used to improve existing products
Business insiders often can’t see past the existing
structure (HP executives said PCs were a commodity)
17
Strategy Implementation
-
Finance
Focus on
Margin compression (or expansion)
Leverage implications
P/E ratio
Value of a firm and intangible assets
Since this course has no prerequisites, students will not be
required to understand financial statements
Leverage is the use of borrowed money for an investment (ratio
of debt to equity is one measure)
Equity is owner capital
Debt is often a fixed commitment (interest must be paid)
Equity is a cushion (firm is under no obligation to repay)
Margin compression arises from increasing costs, decreasing
prices, or both
P/E ratio is a firm’s share price divided by earning per share
The value of a firm will often include ‘intangibles’ such as brand
equity
As Volume Increases
Will Apple have Margin Compression?
http://tech.fortune.cnn.com/2013/01/09/apple
-
iphone
-
sales
-
2012/
Why would Apple’s Share Price Fall with Higher Sales?
Apple reports its earnings after the markets close on Wednesday Jan. 23.
Unit sales projected to increase about 48% from year prior
Share prices have been falling (30% last four months)
P/E 11 (below industry norms, and far below norms for a growth company)
Analysts say they will pay attention to the average selling price of iPhones to determine
whether the iPhone 5 is still the hot seller or whether cheaper models are making up a
majority of sales.
The trend might help determine whether Apple will introduce a new lower
-
end iPhone.
“The people buying their first smartphones now are lower
-
income households,” an analyst
said. “They don’t have enough money to have $650 to pay for a smartphone.” (New York
Times 14
-
1
-
13)
Recall from our work with gross margins that profit falls if revenue falls and fixed costs
are a large portion of total cost
Cost of a basic iPhone 4 or 5 is $200 (iSupply estimate) with selling price $650.
Gross margin is $450/$650= 69%
Suppose selling price drops 30% ($200) and unit cost is constant
To sustain total gross profit from the iPhone, volume must increase 80%
Samsung has higher volume than Apple and lower market cap (lower gross margins)
In general,
margin compression
can come from
Competition forcing lower prices
When additional sales (and profit) can only be achieved by appealing to value segments
Cost of labor or material rise and prices can not be increased enough to offset cost
increases
Internal production problems or delays arise
When research or selling, general and administrative expense (SG&A) costs go up without
gross profit increase
Use of Leverage
In banking
From the Financial Times:
“In the run
-
up to the global financial crisis a lot of banks did more and more lending without
raising any extra equity. They were able to "game" the system, as the Basel Committee says,
either by using off
-
balance
-
sheet vehicles or through other ruses. In future, there will be global
limits on banks' leverage.”
High leverage magnified bank profit in good times (2003
-
2006)
Losses were amplified when margins were compressed by rising interest rates and increasing
defaults in 2007
-
2008
In manufacturing
Reuters (15
-
1
-
13): “Dell in talks to go private, shares surge”
Dell Inc is in talks with private equity firms on a potential buyout. The Wall Street Journal said
TPG and Silver Lake could team up on an offer, possibly with other investors such as pension
funds and JPMorgan Chase & Co.
The first source told Reuters any potential deal could be structured as a management
-
led buyout
with Michael Dell at the helm (Dell owns 14% of the company
-
244 million shares)
The company has lost 40 percent of its value since last year's peak, and is trying to reinvent itself
as a seller of higher
-
margin services to corporations
-
an internal overhaul that might be
conducted away from public scrutiny.
Note that when management buys out a company’s shareholders, they have incentive to ‘talk
down’ company prospects (so share purchase comes cheap)
"The market value of Dell has come down so much that a buyout is plausible. They have about
$5 billion in net cash and also free cash flow generation that could sustain payments on debt
from a leveraged buyout," said an analyst at S&P Capital IQ
Dell’s bonds (current debt) also came under pressure over fears of a significant hike in leverage.
In general, leverage amplifies both gains and losses.
In a Leveraged Buyout the cost of servicing debt can become a burden when asset sales do not succeed as
planned or operations do not improve as assumed.
Firms that violate loan covenants may default. Debt payments are usually an obligation. Equity is a cushion.
P/E Ratio
Price refers to share price, earnings to total earnings divided by the number of
shares (EPS)
A company with $42BB earning and .94BB shares has $44 earnings per share
If share price is $500 the P/E is $500/$42=11.9
A forward P/E uses expected earnings
The earnings part of current P/E can be distorted by one time gains or losses
Companies thought to have earnings growth prospects have higher P/E ratios
Average P/E varies by industry
Computer peripherals average current P/E = 31.5
Apple’s P/E is 11.5
Lower than the average for their industry, implies investor doubt about earnings
Auto parts have P/E = 14 *
P/E ratios compete with interest rates (money seeks highest risk adjusted
return)
Think of the inverse of P/E as the alternative to interest
Current average P/E in the USA is about 15, implying 6.7% return
Would an investor prefer risky 6.7% equity return or a lower interest rate?
P/E ratios tend to be higher in periods of low interest rates
Sustained short term interest rate increases can have devastating effects on
share prices (and business activity in general)
* http://pages.stern.nyu.edu/~adamodar/New_Home_Page/datafile/pedata.html
Intangible Assets
An intangible asset is not physical
Intellectual property such as patents
Brand equity
Business methods
When a firm buys another, it will often pay more than the
underlying physical assets are worth
The difference between purchase price and net assets (excluding
intangibles) is goodwill
For some industries the ‘goodwill’ portion of purchase price can be
high (internet = 70%)
Goodwill should not be viewed as a bad thing
Under some circumstances goodwill must be written off, resulting in
loss to the firm (impairment charge) which affects EPS
Purchasers might assume synergies that do not happen
Adverse changes in the business environment
Change in strategic direction
According to Baruch Lev of NYU, overpriced shares used for stock
-
financed
acquisitions may lead to substantial goodwill write
-
offs
Note that physical assets such as inventory or factories can be written
-
off
Use of Debt Versus Equity
Our main contribution to the accounting literature is to trace
goodwill write
-
offs, a frequent and growing phenomenon, all the
way back to their root cause: the incentives of managers of
overvalued firms to acquire businesses, whether to exploit the
overpricing for shareholders’ benefit or to justify and prolong the
overpricing by maintaining the façade of
growth. (1)
Value of a firm is to some extent subjective. A buyer can assume
synergies that will not exist or will be far less than imagined. The
value of a brand or a sales force is likewise difficult to objectively
measure. A buyer with
‘easy money’ might lack motivation to
look at possible negatives.
Firms can fund investments with debt or equity or a combination
of both. Whether a firm uses debt or equity depends on the
relative cost of each and certain creditor imposed constraints on
the use of leverage. When share prices have high P/E, firms have
incentive to fund investment with shares as currency.
(1) http://people.stern.nyu.edu/blev/Documents/overpriced_shares_ill
-
advised_acquisitions,_and_goodwill_impairment.pdf
Contingency Planning
Plan for unexpected events
Enables quick and appropriate response to events
Focus on high priority aspects of the business
Firms plan for disaster
Redundant IT (and off
-
site backup of data)
Value in having multiple sources
Another type of contingency planning involves scenario
testing.
What if the environment changes?
Value in granularity when planning
Able to isolate deviations from plan quickly
Corrective actions appropriate to the situation
Contingency plans involve both positive and negative
events
How to meet increased demand?
What if a key distributor decides to drop my product? (Pepsi)
Contingency Planning
–
Pepsi Thailand
ThaiBev acquired Thai bottler Serm Suk PCL for US$513 million in Sep 2011
Serm Suk was established in 1952. It had been exclusive distributor of Pepsi brands in
Thailand. Contracts between the two terminated in April 2011 after they failed to agree on
terms of a new contract.
Serm Suk launched its own cola beverage, est in Nov. 2012 and set a target of making
the brand the leader of Thailand's Bt30
-
billion cola segment within three years.
The company’s bottling and distribution contract with Pepsi
-
Cola expired in November 2012
Serm Suk expects est to achieve Bt8 billion in sales in the first 12 months.
"Our strong point is our distribution system," said the marketing/sales operation director
Serm Suk has five bottling plants and 48 branch offices throughout Thailand.
The company has 1,200 sales trucks and 150,000 coolers.
In October 2012 US based PepsiCo announced investment of US$600 million (Bt18.4
billion) in the Thai market over the next three years
The $600
-
million investment includes a $170
-
million bottling plant in Rayong, bought from
San Miguel in February 2012
The company appointed the global logistics firm DHL as logistics and warehousing partner for
Thailand.
As part of the huge investment, PepsiCo will make significant marketing investments in
Thailand. This will include new marketing and consumer
-
engagement campaigns related to
music and sport platforms.
Pepsi will end its conventional system of returnable glass bottles,
There is a declining market trend for returnable bottles,
These will be replaced with non
-
returnable bottles and cans, which are growth packaging
categories.
Full production of Pepsi
-
Cola non
-
returnable bottles and cans will be achieved by June next year.
http://www.nationmultimedia.com/business/Serm
-
Suk
-
seeks
-
No
-
1
-
spot
-
for
-
est
-
cola
-
in
-
3
-
years
-
30193574.html
http://www.nationmultimedia.com/business/PepsiCo
-
unveils
-
Bt18
-
4bn
-
plan
-
for
-
Thai
-
investment
-
30193061.html
Pulling Together Some Threads
Excerpts from http://www.nytimes.com/2013/01/30/opinion/friedman
-
its
-
pq
-
and
-
cq
-
as
-
much
-
as
-
iq.html?nl=todaysheadlines&emc=edit_th_20130130&pagewanted=print
The prefix ‘hyper’ means excessive.
According to Thomas Friedman
-
In the last decade the world went from connected to
hyper
-
connected in a way that impacts every job, industry and school.
In a world connected by digital technologies, people can compete, connect and collaborate
from anywhere (The “World is Flat” was published in 2004)
Virtually everyone everywhere has access to a hand
-
held computer, connected via the cloud
to infinite applications and storage, so they can work, invent, entertain, collaborate and learn
for less money than ever before.
Every boss now also has cheap, easy, and fast access to software, automation, robotics, labor
and brains anywhere in the world.
When the world gets this hyper
-
connected, the speed of change for every job and industry
becomes hyper
-
mode.
In the past, we could assume that an educational foundation would last your whole lifetime.
Now people have to learn throughout life.
Not surprisingly, incomes around the world converge, as bright people in poor countries get
access to the same information as educated people in the developed world.
We discussed the book “
Race Against the Machine
: How the Digital Revolution Is
Accelerating Innovation, Driving Productivity, and Irreversibly Transforming Employment
and the Economy”
With the digital revolution people with more education start to earn much more than those
without it
Those with the capital to buy and use machines earn much more than those who can only
offer their labor
Superstars reach global markets and earn much more than those with slightly less talent
Which languages do people use to enter the globally connected world?
Amazon’s Warehouse in Germany
Michael Dalder/Reuters
Amazon and Apple again
After Amazon released quarterly results, the shares
immediately jumped nearly 10 percent in after
-
hours
trading, about the same amount that Apple fell after
releasing its results a few days before.
What caught the eye of investors was that operating
margins as a percent of consolidated sales rose to 3.2
percent, from 2.7 percent a year ago.
“The carrot for Amazon investors is improvements to
margin over time,” an analyst said.
Apple, on the other hand, would need to build a cheap
iPhone to keep growing as fast as it has been, which
would slice into its margins.
Copyright © 2011 Pearson
Education, Inc.
Publishing as Prentice Hall
Ch 11
-
30
Advantages
of International Operations
Gain new customers
Absorb excess capacity, reduce unit costs, and spread
economic risks
Allow firms to establish low
-
cost production facilities
Competition may be less
intense
Reduced tariffs, lower taxes, and favorable political
treatment
Joint ventures can enable firms to learn new
technology, culture, and business practices
Economies of scale
Power and prestige in domestic markets may be
significantly enhanced
Copyright © 2011 Pearson Education, Inc.
Publishing as Prentice Hall
Disadvantages
of International Operations
Foreign operations could be seized
Different and often little
-
understood social, cultural,
demographic, environmental, political, governmental,
legal, technological, economic, and competitive forces
Weakness of competitors overestimated
Different language, culture, and value systems
Understanding of regional organizations needed
Dealing with two or money systems
Global Challenges
Gain
and maintain exports to other
nations
Defend
domestic markets against imported
goods
Protectionism
-
Countries imposing tariffs, taxes,
and regulations on firms outside the country to
favor their own companies and people
FCPA prevents companies from making bribes to
government officials
Private party transactions are ok (CP paid a private
group in USA to not lodge a trade complaint)
Material facilitation fees to local officials are not ok
(See Wal
-
Mart
-
Mexico)
India has laws against lobbying (viewed as a form of
bribery)
Wal
-
Mart’s FCPA Problem
Last November Wal
-
Mart said that its investigation into violations of a federal
anti
-
bribery included Mexico , China, India and Brazil, among their most
important international markets.
More than half of Wal
-
Mart’s 10,524 stores are international. Mexico has 2,230
stores. Brazil has 534, China, 384.
Wal
-
Mart found evidence of potential violations of the Foreign Corrupt
Practices Act, beginning with bribery involving the opening of stores in
Mexico
Wal
-
Mart sees the degree to which corruption may have infected its
international operations, and shows growing alarm within the company about
the problem.
In 2005, a former lawyer for Wal
-
Mart in Mexico spent hours telling company
investigators how Wal
-
Mart de Mexico’s leadership had managed a bribery
campaign to speed expansion. The lawyer said hundreds of bribes were paid for
construction permits and other licenses needed to open new stores.
Wal
-
Mart is changing as a result of investigations. Lawyers for each country
now report to the general counsel of Wal
-
Mart International . Before they
reported to the chief executives of that country
—
which could create conflicts
of interest if the chief executive was involved in corruption.
According to a lawyer, in these situations a company will report to government
agencies with “very detailed presentations about the results of the internal
investigation” in the hope of receiving lesser punishment from the agencies.
http://www.nytimes.com/
2012
/
11
/
16
/
business/
wal
-
mart
-
expands
-
foreign
-
bribery
-
investigation.html?nl
=
todaysheadlines&emc
=
edit_th
_
20121116
&_r=
0
Copyright © 2011 Pearson Education, Inc.
Publishing as Prentice Hall
Changes in the Global Economy
Corporations are obtaining customers
globally
Markets are shifting rapidly and
converging in tastes, trends, and prices
Innovative transport systems are
accelerating transfer of technology
Nature and location of production
systems are shifting
Criteria for Choosing the Mode of Entry
Entry with wholly owned subsidiaries (high control)
High R&D business
High brand equity business
The company has high foreign entry experience
Entry via partnerships
Risky country
Legal restrictions on foreign ownership of assets
The country is culturally and socially distant
The Changing Workforce in China
At a Pearl River area factory labor costs (wages plus benefits) per worker have been rising 30 percent or
more each year. Nationwide migrant worker wages are rising is 21 percent annually. The government has
mandated 13 percent annual minimum wage increases through 2015. This is about three times inflation.
Wages at the factory are rising fast because it is in an area that was slower to develop. Five years ago, the
factory paid $90 to
$120
a month to new workers. Workers gave $13 to $40 of their monthly pay for six
months to their foreman for training. Now the factory offers new employees 2,500 renminbi a month,
about
$395
, before overtime *. Six
-
person dorm rooms have been replaced with two
-
person apartments.
Workers no longer have to give part of their wages to the foreman.
Foremen now get an $8 to $16 bonus for each month that a new blue
-
collar employee stays on the job.
The factory struggles to find workers.
An outcome of China’s one
-
child policy is that many college graduates are only children with parents and
grandparents who continue to support them into adulthood. Those children do not want factory work.
A factory manager said: “Their parents, their grandparents give them money; they have six people to
support them. They say, Why do I need to work? I can stay home and get 2,000 renminbi a month, why
should I get on a bus every day to earn 2,500 a month?”
China’s vocational schools and training programs are unpopular. They are seen as dead
-
ends. They are also
seen as schools for people from peasant backgrounds. “The more educated people are, the less they want to
work in a factory.”
The number getting vocational training is about half that of students taking academic courses.
The combination of the one
-
child policy and rising rates of college education is starting to hit the core of
China’s factory work force: 18
-
to 21
-
year
-
olds not in college. Their numbers are on track to plunge by 29
percent from 2010 to 2020 even if enrollments in higher education hold steady.
“We have jobs and positions for which skilled workers cannot be found, and on the other hand, we have
talented people who cannot find jobs; technical and vocational education and training is the answer,” the
vice minister of education said at a conference last June.
* Note that in dollar terms wages have risen even faster than in renminbi due to exchange rates.
http://www.nytimes.com/
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What Strategists are Thinking About*
China’s large pool of surplus rural labor has played a key role in maintaining low inflation
and supporting China’s growth model.
As agriculture surplus labor is exhausted, industrial wages rise faster, industrial profits
are squeezed, and investment falls.
Rebalancing China’s growth pattern would produce significant positive external
spillovers and potentially raise output in those countries within the supply chain (mainly
emerging Asia) and commodity exporters.
Demographics strongly suggest an imminent transition to a labor
-
shortage economy.
China will have a profound demographic shift within the next decade
The UN projects that growth of the working age (15
–
64) population will turn negative
around 2020.
This forecast potentially understates prospects of a labor shortage:
Industry employees are predominantly young.
The growth rate of the core 20
-
39 subpopulation, shrank to zero in 2010 and will decline faster than
the overall working age population.
After a long period of “demographic dividends,” the share of dependents (those aged 0
–
14 and > 64
years of age) was lowest in 2010 and will rise (see next slide)
Raising
agricultural productivity by raising mechanization could result in a sizable
release of rural workers that could partially offset labor shortfalls in urban
areas.
Scenario analysis shows that higher fertility through relaxation of the one
-
child policy
will delay depletion of excess labor (slightly). Financial reform will accelerate the
transition to a labor shortage economy, through wealth effects
.
Very low fertility rates still prevail, especially in the richest parts of the country. Shanghai
reported fertility of just 0.6 in 2010
—
probably the lowest level anywhere in the world.
According to the UN's population division, the nationwide fertility rate will continue to
decline, reaching 1.51 in 2015
-
20 (http://www.economist.com/node/21553056)
* From an IMF working paper.
Effects of The Shrinking Labor Pool*
Industry’s relocation
to the interior provinces
—
where
wages are lower and the large reserve of rural labor
resides
—
has gathered pace since the global financial
crisis.
Parallel developments, such as an uptick in labor
activism since the financial crisis is also consistent
with strengthened bargaining power that accompanies
a shrinking pool of labor.
* From an IMF working paper.
Other Points of View
China’s demographic challenge may not be the disaster people are
thinking about (A).
China’s industries are not very automated compared to developed
countries.
China’s capital efficiency is poor. (Where, for example, does all that steel
actually go? Think of the old Soviet Union’s steel and concrete
production.)
If
China’s capital efficiency rose to match Japan’s, China’s growth prospects
could theoretically remain high.
China invests a higher percentage of GDP, but invests less efficiently than
Japan, South Korea and Taiwan during their rapid expansions. (A)
In 2012 the working
-
age population in China decreased 3.45 million. It is
937.27 million according to the director of the National Bureau of
Statistics. (B)
The director said that China should work to boost labor productivity, as
well as improve people's education and adjust types of employment to
extend the dividend. (B)
An economist at the China Center for International Economic Exchanges
in Beijing says that the fading of China's demographic dividend has
required China to increase spending on education and culture to boost
the quality of the country's human resources, said (B)
A)
FT.com 6 Feb 2013
B) http://news.xinhuanet.com/english/indepth/2013
-
01/18/c_132112584.htm
Changing Dependency Ratios
Graph on the Left Includes Under 16 and Over 65
http://www.economist.com/node/13611235
right side, and
http://www.investmentu.com/2010/January/the
-
dependency
-
ratio.html
FT.com 6 Feb 2013
An Article by Michael Lewis
In 2005 the investment bank Goldman Sachs changed the way it paid its
employees:
Before 2005 managers made assessed employees based not just on how much
business you’d brought in, but also on how good you were for the organization.
These two factors combined indicated your true economic value to the
company.
After 2005 the system has become largely mathematical: employee bonuses
were a percentage of the amount of revenue the employee brought to the firm.
In some years, the bonus would be 5 percent of that revenue; in better years, it
would be 7 percent.
“The problem with the new system was that people would do anything they
could
—
anything
—
to pump up the number next to their name.”
The incentives changed, the behavior followed.
According to Lewis: “Goldman now rewarded its people for advancing their
narrow interests at the expense of their customers, the wider society, and even
the firm's own long
-
term interests. “
“The change in incentives almost certainly can be traced back to Goldman's
decision, in the late 1990s, to go public. “
The firm ceased to be a partnership (with partners having unlimited personal
liability) and became a public corporation.
The people who ran it ceased to have a long
-
term interest in Goldman's
reputation and ceased to have a long
-
term exposure to its losses.
http://www.newrepublic.com/article/112209/michael
-
lewis
-
goldman
-
sachs#
Patent Infringement and Innovation
Carnegie Mellon University said it was awarded $1.17 billion
by a federal jury in Pittsburgh last December in
Marvell Technology Group had used technology developed at
the university without a license.
The patents were developed by a professor and a former Ph.D.
student in the department of electrical and computer
engineering.
Their work was supported by Carnegie’s Data Storage Systems
Center, a university research organization
CMU said Marvell had infringed on patents relating to
technology for increasing the accuracy of reading data
from high
-
speed magnetic disks used in hard drives.
The university said “Protection of the discoveries of our
faculty and students is very important to us.”
http://www.nytimes.com/2012/12/27/technology/marvell
-
ordered
-
to
-
pay
-
1
-
17
-
billion
-
in
-
patent
-
case.html?nl=todaysheadlines&emc=edit_th_20121227&pagewanted=print
Thai Companies Invest Abroad
Thai companies are going where the money is. They're going to countries with
large natural resources and markets (A).
PTT Exploration & Production (PTT) has been expanding abroad aggressively.
In November 2010 it purchased 40 per cent of Statoil ASA's oil sands project in
Canada for $2.28 billion.
In August 2012, PTT made a $959
-
million offer to buy out a Singaporean coal
miner Sakari Resources
July 2012 PTT purchased UK
-
listed Cove Energy for $1.9 billion, with assets in
Africa.
PTT has invested more than $6BB in Myanmar.
Charoen Pokphand Group in December purchased a 15.5
-
per
-
cent stake in
China's second largest insurance company from HSBC for $9.39 billion
With a market cap of about US$13.79 billion and over $864 million in profits
Siam Cement Group has been very actively investing in Indonesia. (A)
Thai Beverage, makers of Chang Beer made an $11BB bid for the Singapore
based
Fraser and Neave Ltd.
ThaiBev said the deal brings exposure to high
-
growth Southeast Asian markets
with attractive demographics and consumer
-
spending trends. (WSJ)
Fraser & Neave has a portfolio of soft
-
drink brands and properties in the region.
Central Retail Corp. spent
€
260 million, or about US$320 million, to acquire
the entire stake in La Rinascente in Milan in May last year. (WSJ)
(A)
Karim
Raslan The Star Kuala Lumpur January 4, 2013
WSJ.com 18
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