Klaus Meyer - Blog: Global Business and Economy in volatile times

Klaus Meyer's Blog

On Global Business and Economics in Volatile Times

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Maersk McKinney Moeller (1913-2012)

April 22, 2012

Imagine one of the world's most powerful men passes away, and noone notices it. Unimaginable? Well, it happened. The world's media are so focused on easy-to-access English language sources that they miss what is happening in small countries. Last week Maersk McKinney Moeller passed away, and I only learned about it when chatting with Danish executives a few days later - none of the English or German language business press that I regularly read mentioned him.

If you don't know him, as international business student or executive you certainly will have heard about his business, or seen his ships in port. Without container ships larger than a dozen football field, and container terminals that load and unload the containers, global trade could never have grown as fast as it did over the past half century. The Danish company Maersk is the biggest container shipping company, and the biggest operator of container terminals around the world. Building this company has been his achievement, and made him by far the richest man of Denmark.

Recently, his name came up in a completely different context. I was chatting with the head of the American Museum, which is part of the Smithsonian in Washington, DC. We were talking about how museums attract donations to manage their operations. Big donors would usually insist on large acknowledgements in form of posters displaying their brands, so donations really become advertising. Not so Herr Moeller, as he usually known in Denmark. He gave one of the biggest donations, and all you will find is a little plague in a corner of the room. Herr Moeller felt strong affections for the USA, and wanted to repay the debt he felt his country owed to the USA for the help his company and his country received from the USA during the Nazi occupation of Denmark.

The man was not without surprises. Only a week before, aged 98, he appeared at the AGM of his company, where he still was the biggest shareholder, having handed over management control only a few years ago when he was in his early 90s. When the news of his passing spread, share prices jumped upwards. What a surprising way to mourn the passing of a great leader! It seems that investors a) believed that the company put in place a strong management team to run the company without him, and b) as long as he was still around, the company did not dare divest some peripheral activities in Denmark, such as retailing and a minority stake in Danske Bank, that have no synergies with Maersk's core business in shipping, logistics and oil exploration.

Interviews in a Coffee House?

April 16, 2012

In my days as bank apprentice, in the first week at work, our head of program, Herr Fecker, shared an anecdote with us that was important to him: One day he was sitting in the bus when in front of him, but without noticing him, sat two apprentices. They were happily chatting about their work, and gossiping about a customer. The next day, he called them into his office, told them what he had heard, and gave them a thorough scolding! The message was clear: Customer data are confidential, and confidentiality is holy!

Recently, sitting and working in coffee houses across Shanghai, I often thought of Herr Fecker and this anecdote. I am surprised how many people - especially expats - conduct their business conversations in a coffee house, including job interviews. Perhaps they don't have offices in the city, and during the quiet morning hours Cafe Costa, Wagas or the Coffee Bean are convenient places for a meeting. The relaxed atmosphere may help putting to interviewee at ease, and thus help getting to know each other. But, but, but! Have you considered that the guy at the other table may be working for your competitor, or be blogging away on his computer?

Most people talking about business in a coffee house are careful not to mention names of companies - their own or their clients. So, the guy at the next table is left guessing. But sometimes a few confidential details slip out. For some reason, many people full of confidence about their business are not good at keeping their voice down either (apologies for stereotypes, but American and Germans are particular bad at that). Remember, like a mobile phone, a coffee house conversations can both annoy your neighbours and inform your competitors!

How to copy German manufacturing success?

April 10, 2012

German manufacturing is the envy of businesses worldwide. Countries with a trade deficit in manufacturing, such as the UK, wonder how they can learn from German businesses; while firms in emerging economies like China acquire German firms in search of brands and technology. Can they succeed in copying the German secret to manufacturing productivity?

The challenge is complex because the foundation of German manufacturing is in a broad qualification of the workforce, not just of the leadership but of the blue color workers who are doing the actual manual work on the shop floor. The foundation of the system of apprenticeships which are based on a combination of in-house and vocational school training for two to three years, along with further qualification to the 'Meister', a vocational qualification that used to be pre-condition to head a business in many crafts, and remains a sought after quality signal. In large businesses, it can also mark the rise through the hierarchy that eventually leads to the boardroom, past university-educated managers. In other words, the secrets to German manufacturing lie in a combination of an education system, career paths, leadership style (task delegation rather than micro-controls) and collaborative employer-employee relations (including employee representatives on boards), which together set the foundations for capabilities and incentives. (Key elements of this system, by the way, are shared with many of the smaller countries of Europe, who also continue to perform well economically)

When British discuss what to learn from the German model, they tend to focus on issues such a labour market reforms of the last decade, and perhaps mention the need for education programs, but rarely appreciating that it is not a specific qualifications, but broad based education system that would have to be copied - which required for more resources from both state and businesses than either the state or businesses are contemplating of contributing. Moreover, a major obstacle is the very hierarchical nature of British organizations with their very distinct groups of blue and white color workers. Karl Marx's concept of 'class' still applies in many British firms. I found this insightfully illustrated in research by Fiona Moore of Royal Holloway, who studied British organizations acquired by German firms. For example, she found that German expat managers were happy to participate in a 'back to the shop floor' program aimed to help building better shared understanding of the organization than their British counterparts. They likely have practical knowledge regarding the basic tasks they are supposed to supervise, and thus can earn respect with the workforce on their terms. On the other hand, despite the importance of formal titles in Germany, they have less 'us versus them' attitudes than British managers who are likely university educated and have no real shop floor experience.

When Chinese companies acquire German firms in search of technology and brand names, I have similar concerns. One underlying motive often seems to be the idea that learning from the German firm will help them raising the productivity of the Chinese operations. The obstacle that I fear many overlook is that just training a workforce for a few weeks under German supervision won't suffice to raise productivity in the long run; and if more comprehensive training is offered, then the Chinese qualified workers will find themselves quickly headhunted by other firms. The second concern is whether hierarchical models of organizations work with a highly qualified, and hence very self-confident, workforce that knows their tasks better than their leaders do, and would resent micro-management. This affects both the relations between Chinese managers and their German employees, and the future of operations in China once they move up the value chain.

The concerns do not invalidate efforts to learn from German manufacturing (or any other success model). However, they call for caution when it comes to expecting quick successes. It is necessary to understand how the system works as a whole, and they develop new systems integrating ideas from the role model (here Germany) with the existing work practices (here UK and China respectively.

Moore, F. 2005, Transnational Business Cultures, Ashford; Ashgate.
Moore, F. 2012, Identity, knowledge and strategy in the UK subsidiary of an Anglo-German automobile manufacturer, International Business Review 21(2): 282-292.
Taylor, M. 2012, Can German business ideas revise the UK economy? BBC Radio 4, March 6.

CSR: Whose fault are low labour standards?

April 8, 2012

When it comes to labour standards among Asian sub-suppliers to global brand names, there is usually a global blame game: Brand owners, like Nike or adidas in footwear, say hat they do what can - notable by introducing standards of engagement that suppliers are suppose to obey. Locals point to the relentless focus on costs that offers them few alternatives but cut corners. Academic economists emphasize that supply and employment contracts are entered voluntary, and hence would only be entered if they offer better opportunities than the next best offer. NGOs sometimes hold firms responsible even for remote sub-suppliers that they didn't even know existed.

In our textbook (Chapter 10), we point to the local perspective with a quote from a Wal-Mart supplier cited in the Washington Post:

“They are the rule setters. Before Wal-Mart only cared about price and quality, so that encouraged companies to race to the bottom of environmental standards. They could lose contracts because competition was so fierce on price. [Now, they changed.] Wal-Mart says if you’re over the compliance level, you’re out of business. That will set a powerful signal.”

The Economist in a recent articles provides a comprehensive update on this discussion, wondering in particular why Apple, despite consistent evidence of low labour standards by its main supplier, Foxconn, seems to be much less affected by consumer pressures than clothing and footwear brands like Nike and adidias. The article summarizes a new study on the impact of brand owners on standards in the upstream supply chain by Richard Lorke of MIT, which seems not yet published. Three of his findings seem consistent with my own reading of the literature in the field:

codes of conduct alone have negligible effect on labour practices,
helping suppliers through knowledge transfer helps,
collaborative relationships with suppliers that share any productivity gains help even more.

In our text (In Focus 10.4), we use an example from adidas to illustrate the second and third point: A study by Frenkel and Scott compared the performance of two suppliers that interacted with adidias in different ways, and the one being more cooperative also performed better on issues such as employee retention, failure rates, and financial performance.

The fourth point in Locke's study is particularly interesting. He attributes the origin of unsatisfactory labour standards are often in the manufacturers own business models, especially just-in-time delivery, minimization of inventories, short life-cycles, and last minute design changes – combined with stiff penalties on suppliers failing to deliver. In other words, the pressures created by the buyers - companies further down the value chain - combined with asymmetric bargaining power create conditions where suppliers face tough choices between substantial financial loss (loosing orders or paying penalties for late delivery) and pushing their own workforce to work at condition below minimum standards (as set by local law, ILO standards, or contractual commitments).

Looking at Apple's supply chain from this perspective, it is obvious that Foxconn is under enourmous pressure: Large volume of a new product are to be delivered by the official launch date, design changes are ongoing, and inventories are avoided at (almost) all cost because the product value depreciates sharply once the next update becomes available.

The Economist, 2012, Working conditions in factories: When the jobs inspector calls, March 31^st
Locke, R, 2012, Beyond Compliance: Promoting Labour Rights in a Global Economy, New York: Cambridge University Press, in press.
S. Mufson, 2010, In China, Wal-Mart presses suppliers on labor, environmental standards, Washington Post, February 28.
S. Frenkel & D. Scott, 2002, Compliance, Collaboration, and Codes of Labor Practice: The adidias connection”, California Management Review, 45, 29-49.

Taipei and Shanghai

March 18, 2012

At breakfast in a local hotel, I watched children quarreling at the neighboring table - just the way siblings are, nothing special you may think? Well, I come from Shanghai, and in Shanghai seeing siblings plays is rare - unless you meet Chinese Americans, or the four kids of my Korean colleague. Most youngsters in Shanghai grow up as only-children, with all their parents attention, but no siblings to play with; while kids in Taiwan are, well, just like kids everywhere - having fun, playing, arguing, fighting...

This is just one of many differences that spring into my eyes watching people in Taipei. All along the main streets - and many back alleys - are small shops selling all kinds of things, small restaurants, cafe (like the one I am sitting in this moment). In Shanghai, the shops tend to be of two kinds: either very posh with global prestige brands, or very poor serving basic needs. Most shops here are somewhere "in between" - not too posh, but not so simple and dirty that one would distrust their quality. The same difference apply to people. In Shanghai, the difference are very visible between the well-off, who display their status with make-up, their clothes, and the brands they associate with, and the poor who wear worn clothes and visibly struggle with modern life. I am sure there are rich and poor people in Taipei too - it just isn't that obviously.

Another difference is motorcycles. They are everywhere in Taipei, and they add considerably to the noise levels. With extensive traffic jams and scare parking, they are the most convenient way to get around, especially for students. In Shanghai, they are less prevalent - and often electrical and hence relatively quiet (see November 2011).

Finally, one difference with practical implications for myself: a 'zhongbei natie' (Medium Latte) costs of about half the price in Taipei!

Of course, the two cities have a lot in common too. First of all, they both are immigrant cities that attracted a lot of people from other parts of the country and even the world over the past two or three generations. Thus, neither is Shanghai representative of mainland China, nor is Taipei representative of Taiwan. Also, both cities are very crowded places, with elevated roads taking cars relatively quickly across town (though even 'up there' are often traffic jams), while the metro systems are fairly efficient and rapidly expanding - serving commuters far better than the crumbling system of London, or the tiny systems in most of North America.

Every city has its own character. That's what makes traveling and watching people so exciting. Of course, it also has practical implications for international business - and the importance of local context for strategy and of anthropological research in marketing.

Dragon Babies!

March 15

Do you think the Chinese Zodiac is just some ancient tradition that has long past into history, and probably was killed off by Mao's cultural revolution? Think again. You probably read some statistics that hospitals across Greater Chinese report increased attendance. What are statistics? Well, this actually has some pretty real implications. In Taiwan two of my three female co-authors have given birth recently; in China, our departmental secretary is off on maternity leave and my language teacher has resigned to take more rest during her pregnancy.

The last time there was such a boom of pregnancies was the year 2000, a 'golden dragon' year. These kids are now 12 years and preparing to fight for university places in a few years. Such cyclical birth patterns may be good news for manufacturers of baby clothes, but for who can't easy increase or decrease their capacity - hospitals and schools - they create a considerable planning challenge.

Why are journals biased against qualitative research?

February 28

Qualitative researchers often complain that management journal editors and reviewers are biased against them. Recently, several journals tried to redress the issue by publishing review papers to encourage qualitative work (Bluhm et al. 2011, Welch et al. 2011). One commonly cited cause is the lack of standards against which to assess qualitative work - an argument that frankly misunderstands the source of the power of qualitative work, namely to break with the norms of 'normal science'.

Let me suggest an entirely different argument. Journal editors are concerned with short-term citation impact of the papers they publish, and qualitative papers get less cited. To test this hypothesis, I did a self-experiment and analyzed citations to my own work, and indeed I found that my quant papers get three times as many cites as my qual papers (full analysis here). Why may this be so?

I may be a lousy qual researcher. Sadly, this is a possibility, though it contrasts with my subjective perception that I in fact learned more from my qualitative work than from my quantitative work.
Authors prefer to cite methodologically-likeminded scholars, which given the dominance of quant researchers in our field leads to a strong path dependency of citation patterns.
Qualitative research by design challenges established ways of thinking, and established theories. Yet, most authors ignore recent challenges and rather stick to what they know, and thus cite 'the establishment' to strengthen their legitimacy, rather than to engage with critics and challenging new ideas.

Whatever the causes for this pattern, I guess the main lesson is to do what you are best at, and to argue your point!

Bluhm, D.J., Harman, W., Lee, T.W. & Mitchell, T.R. (2011). Qualitative research in management: a decade of progress, Journal of Management Studies, 48(8): 1866-1991.
Meyer, K.E. 2012. Are citation analyses biased against qualitative analysis? A self-experiment, web-document, www.klausmeyer.co.uk.
Welch, C., Piekkari, R., Plakoyiannaki E, & Paavalainen-Mäntymäki, E. (2011) 'Theorising from case studies: Towards a pluralist future for international business research', Journal of International Business Studies, 42(5), 740-62.

Is Shanghai more like London than like Moscow?

February 11

My co-author was in Shanghai for the first time in his life, and I took him for a walk through the city, discussing our work as we walked, and sipping coffee while digging into our papers. At the end of the day, he summed up his impressions as "Shanghai doesn't look like an emerging economy at all - it looks very Western. Shanghai is much more similar to London than to Moscow, Istanbul or Delhi". Really?

His reasoning was anthropological, even though he is trained as economist: If this was Delhi, there would be beggars everywhere, and people would be sleeping rough. If this was Moscow, there would be armed police evident at every public place, and big cars carrying loads of bodyguards. Even in Istanbul, there would be street traders buzzing everywhere. Shanghai is so clean, so orderly. Streets are so empty at night. Even during rush hour, the traffic jams seem quite tolerable. Hardly any rubbish on the streets, walkways, and shopping districts. Well maintained parks and green areas along the roads [in Pudong], you never see that in another emerging economy.

I can't compare to Moscow, Istanbul or Delhi where my colleague had recently been, and he may have seen the most tourist-friendly areas. But his observations are quite interesting: China is different from other emerging economies in that despite widespread inequality and poverty, it is a very 'orderly' society, which makes life much easier for everyone, especially foreigners. It also means that there are some forces that are just not so obvious as there are elsewhere - when he remarked about the absence of police, I could quickly point to a passing police car, a traffic warden, and a security guard lingering in the area. Order does not emerge from nowhere.

This raises interesting question as to what is an emerging economy? Should we define it by average level of income? By the rule of law or other indicators of 'institutional development? By the degree of inequality? Or by how safe it is to walk on the streets?

Cultural Identity: The Sports we Watch

January 31

On chilly rainy day, I stepped into a pub. I ordered a local Ale and a Shepherds' Pie, and watched the local football game on the large TV screen. The home team was trailing 0:4, which made people watching more interesting than the game. Yet, at the end both teams won a trip to the finals in London, so everyone was happy. All felt like I was back in god 'ol England.

But then the TV switched to another channel. It looked like a team wrestling sport with complex rules - men wearing big helmets and hugely inflated shoulder pad were wrestling each other to the ground, interspersed with the throwing of an egg-shaped ball. Well, they call that football too. Evidently I was not in England, but in an English-themed pub at the far South Western corner of Canada.

My thoughts turned back to a dinner conversation last week in Calgary with a gentlemen in his 70s who emigrated from Poland to Canada thirty years ago. Yes, he said, he made the right decision to come to Canada all those years ago. Canada more than any other country allows newcomers to fit in, at least in the second generation - his sons now both hold professorships at Canadian universities. But, most of his friends in fact were other immigrants from Europe. "In many ways we are the same with the Canadians", he said, but there are subtle differences. "This is most evident is the sports we watch."

Spectator sports as carrier of cultural identity, and of cultural affinity? Many other example come to mind. Today, the news reported Danes celebrating their European championship in handball - who in this part of the world even knows what that is? A few years ago I experienced a huge spontaneous street party in Helsinki: Finland had just beaten Russia in ice-hockey - Canadians would certainly understand, but who else? And then there is cricket, a buzzword that gets English, Indian and Australians simmering with excitement, while (almost) everyone else literally switches off. Spectator sports have become such an important part of life for people in modern societies, that they have indeed become an important part of popular culture.

This raises interesting suggestions for culture research: Can we proxy cultural affinities by the spectator sports that people watch? It is far more parsimonious than the over-engineered proxies we often use in management research, yet might be highly effective.

Postscript: The game I watched in the pub was the qualifying for the London Olympics in women's football ("soccer" to Americans), Canada lost to the USA but went through as second North/Central American team.

Starbucks: Measuring and Benchmarking Performance in an MNE

January 30

A short article in a Canadian newspaper got me thinking about the merits of multinationals reporting their performance in regional segments (i.e. separated for different regions of the world0. The article reported that Starbucks was changing its reporting practice from distinguishing 'domestic' (i.e. USA) and 'international' to reporting three segments 'North America', 'Asia Pacific' and 'Europe Middle East and Africa. Academics will be pleased with such more detailed data as it allows us to do some more rigorous analysis - a lot of research on international performance of big firms stands on thin data as companies don't publish what we would need for rigorous analysis. However, what are the implications for managing subsidiaries?

The article argued that this changed reporting practice would put pressure on Canadian Starbucks to increase its profit margins: Since they are now joined accounting-wise with the US, the Canadian would be under pressure to increase its profitability to the levels achieved in the USA. The more I thought about it, the less this statement made sense to me.

In the article, executives from Starbucks attribute their lower margins to higher costs of milk (raw material for 'Latte') and barristas (low/medium skilled human capital). In other words, marginal costs are higher. In addition, we should add, the customers willingness to pay (demand curve), which in turn depends on their preferences (and hence the brand reputation) and competition, the availability of alternative providers of coffee shops - and there are plenty of other chains in Canada, such as "Tim Hortons" which people here seem quite proud of. In other words, the profitability one can achieve in a market depends on the costs and market structure in that market - and you cannot really compare profitability (in terms of return over sales) across different markets.

If Starbucks was indeed maximizing its profitability in terms of return over sales, then it would probably shrink to operating in its most profitable market only - which obviously they are not doing. Rather, they are (presumably) trying to maximize total profits - which means operations abroad - such as Canada - are making a positive contribution as long as they generate more profits than the costs of capital.

If, hypothetically, Starbucks tried to increase its profitability in Canada, it would face several options. Firstly, it could raise prices, or close down some of its least profitable branches. With competitors all around, the main winners of such a strategy would be Tim Hortons, Blenz and other local coffee shops who would happily increase their market share. Secondly, it could take over a competitor to increase market share. This may be an option that consumers are unlikely to appreciate, and that may face obstacles from the competition authorities. Third, they could use their bargaining power to lower the costs of milk and or staff costs. Yet, this will limit their ability to attract quality inputs and people to work for them - apart from conflicts with labour laws. Either way, singular focus on profitability can seriously harm long-term market positions.

The bottom line is this: You need to be very careful when to use 'profitability' (as a ratio) or 'profits' (as an absolute value) as a performance criterion. As rules of thumb, for existing operations, when benchmarking against a direct competitor, profitability may be appropriate. When considering operations in an additional market, it is the absolute contribution to profits that matters.

Strauss, M. 2012, Starbucks' Northern Grind, Globe and Mail, Page B1&B4.

DOWN: Blackberry, Nokia; UP: Apple, Samsung, HTC

January 29

The morning newspapers I have been reading while traveling in Canada, had one big business story throughout the week: the decline and uncertain future of Research in Motion (RIM), until recently the pride of Canadian technophiles. As a start-up company of the 1980s, RIM led innovation of mobile phone and its 'Blackberry' became the favorite toy of business folks in financial centres around the world. Yet, this week, the founders and co-CEOs resigned and handed over the leadership after months of losing the buzz of a leading technology brand, and market share, and consequently losing three quarters of its share value.

The story reminds me of the competition between Nokia and Eriksson in the 1990s. Nokia was first to realize that phones were becoming fashion items, while Ericsson focused on technology. Eventually, Ericsson formed a JV with Sony to create a joint brand ... but I have not seen a phone of either brand for quite a while.

Now the next generation of technology has pushed past Nokia and RIM. Apple's iPhone and iPad have become not only the most fashionable brand in the sector, but have created an entirely new way of using phones - as a platform for a wide range of applications few inventors even thought about a few years ago. They have been joined by Android phones based on a open software created by Google, with handsets provided by Samsung, HTC and others. The buzz among technophiles has moved on - the places where the best software engineers go to work are no longer Nokia or RIM, but Google, Apple, and (in Asia) HTC and Samsung.

The shift is evident in the ranking of the most valuable brands published by www.interbrand.com. From 2009 to 2011, Apple has been rising from 20th to 8th, Samsung from 19th to 17th, while HTC as the first ever brand from Greater China joined the list at rank 98. At the same time Nokia dropped from 5th to 14th. Blackberry has been rising from 73rd in 2008 to 54th in 2010, but dropped two places in 2011. Yet, technological hick-ups and slacking sales suggest they probably had fallen further by the end of the year.

The competition has shifted every few years. Initially, it was about building technology making phone smaller, then about fashion brands, and now it is about standards. It is no longer individual brands competing, but different systems and their software platforms. The more and better the applications running on a standards, the better the business for everyone operating on that standard. Apple has its own standard, and controls it firmly. Android is a shared standard backed by Google. Nokia joined forces with Microsoft to develop a Window's based standard. RIM still believes in its own blackberry software, even though the release of the latest version had to be postponed.

When competition turns into 'standard wars', usually only one or two survive. It just not practicable for all developers of 'apps' to develop four different versions. If RIM wants to persist with its Blackberry software, it will need a miracle by RIM's new leadership to play in the same league as Apple and Google. And in the lower league, there is not much money to be made.

Postscript (January 30): the following articles in the New York Times analyzes the competitive challenge of RIM quite succinctly: Chen, B.X., 2012, BlackBerry under Siege in Europe, January 29.

Happy New Year 2012!!!

January 1

Economists usually get their forecasts wrong, and journalists are even further off the mark. Many economists predict a serious recession in 2012, and journalists, especially the British press, expect an Armageddon. So, is that actually good news because it won't happen? I actually think so.

The world economy is volatile. It always is. Emerging economies have known that for a long time having frequently experienced financial crisis (e.g. Asia 1997), health scares (SARS, bird flu etc) and natural disasters (earthquakes, monsoon, tsunamis). Consequently, business have realize that flexibility and adaptability are essential to prosper under such circumstances, and they developed their capabilities accordingly.

In contrast Western Europe has seen three decades of relative stability, even the unification in 1990 did little to disrupt business; it rather offered easy opportunities to extend business. However, the financial and housing market crisis of 2007 - along with the Icelandic volcano and some minor health scares made clear to business leaders that Europe is not living on an island of stability. Hence, many businesses in the real economy (i.e. outside the financial sector) rediscovered the importance of flexibility and adaptability, and developed their capabilities accordingly. As 2011 drew to a close. consumers defy scaremongering in the media and keep consumer spending high, while manufacturing enterprises across Northern Europe (not just Germany!) report full order books (references below). Businesses - and to some extent consumers - have learned to live with higher uncertainty.

Meanwhile, we have over the past decade learned about the power of self-reinforcing bubbles in financial markets, and in some other markets like real estate. One excessively large forecasts chases another, people make investment decisions based on the forecasts, until they have collectively created a lot of overcapacity. Hence, the positive trend is accelerated until the bubble burst. Likewise, negative bubbles reinforce themselves - notably the activities of short-sellers. But the financial markets can't go against the real economy for ever. So, the short-selling bubble will burst eventually.

Hence, the global economy in 2012 faces a lot of uncertainty. However, businesses in many countries are much better prepared to handle such uncertainty than the popular press would make you believe! Welcome to 2012, a year of fresh opportunities!

Financial Times, 2011, Crisis fails to dent German optimism, December 20.
Frankfurther Allgemeine, 2011, 2012 fallt der Weltuntergang wieder aus, December 26.
Sueddeutsche Zeitung, 2011, Neue Jobs im Mittelstand, December 28.
Wirtschaftswoche, 2011, Deutsche denken positiv, December 27.

Taking risks, making predictions for 2012

December 31

It is a popular past time on news years eve - not only among journalists - to try and predict what will happen in the new year. Here are a few offers of my own. Will any of them come true?

Germany: After further defeats in regional elections, the F.D.P. party self-dissolves as most of its MPs join other parties - just enough to enable to Merkel government to muddle through. Meanwhile, the pirate party enters further regional and local parliaments, but is hit by a series of scandals as its inexperienced politicians say outrageous things, and by the end of 2012 it disappears into the insignificance it came from.
Denmark: The new government stumbles a bit while it learns how to govern the country, but apart from that nothing special happens, and the country stays out of (international) headlines.
UK/EU: After a referendum in the UK, followed by a referendum in Scotland, the UK government negotiates its exit from the EU (surprised that noone else actually cares), while newly independent Scotland becomes the new 27th member. Scotland prepares to introduce the euro by 2016. Subsequently, with the British veto gone, the EU Parliament is strengthened to provide stronger democratic control over the EU Commission.
Eurozone: After Greece defaults on part of its government debt, but continues to use the euro (perhaps in a similar fashion as Montenegro and Kosovo), financial markets calm down in view of quite different economic situations in other countries under pressure in the eurozone, and serious cuts in deficits across member countries.
USA: I do NOT venture to predict who will be the next president of the USA. However, due to even larger polarization of the candidates than at the last election, most voters actually support neither candidate, and demonstrations against 'the banks' and 'the system' will spread from the anti-Wallstreet movement of 2011. For foreign observers, it is obvious that changing the election system to proportional representation would solve the national governance crisis, but no major politician in the USA will support that idea for fear of dislodging their own power base.
France: Francois Hollande will become the next president of France, beating the National Front candidate in a run-off election. The most left-wing candidate in a generation will benefit from a wave of anti-banking - and by implication anti-Anglo-Saxon - popular sentiment.
China: XI Jinping will become next president of China. The government will be increasingly assertive in a nationalist sense: firstly, rejecting foreign "interference" about Chinese policies alleged to create trade barriers, or to violate human rights; secondly, imposing central control over wayward provincial leaders pushing their own pursuit of capitalism too far, and/or being entangled in corruption or other scandals highlighted by local protests.

Amsterdam to Berlin! and London?

December 17

Sitting on Amsterdam to Berlin train, I am reflecting over the state of the European Union. Overall my travels have been smooth and having just one currency in my wallet is just one of the little benefits that European integration has brought for businesses and travelers.

In fact, at dinner in Rotterdam, my hosts kept pointing out the "ships bound for Germany" passing on the river, heading up (!) the river to German river ports such as Duisburg. Rotterdam is an one of the most important seaports serving German industry, and the integration with German industrial base in the Ruhr area is a major strength of the Southern Netherlands region. No-one here would want to get back to the system of small nation states, each with its own currency, and causing each other headaches with their diverse regulations for about everything.

The view looks so much difference from headquarters of the Conservative party in London. The English in their mind have a much greater 'psychic distance' to the rest of Europe, not only they travel much less to their neighboring countries, but because their mindset is informed by the history of their empire, and a supposedly glorious economic past that somehow prevents many opinion leaders to critically engage with the social and economic challenges England faces today (I don't want to repeat myself, so read my earlier blogs).

In our textbook, I had included a discussion point on the relationship between the UK and the EU (chapter 8, p.252), offering the following statements:

"to understanding the ambivalent relationship of the British, or more precisely their political leaders, towards Europe is to understand that most British politicians of the 20th century never appreciated the EU as a political project, but rather focused on the economic benefits."

"Psychologically, many people of Britain see themselves as an independent nation with a major role on the world stage rather than a part of Europe, to which they geographically belong."

I don't really have much to add to that now.

The challenge thus is that the British (or perhaps more precisely the majority of the English) feel that there already is too much integration, while this integration is essential to most other Europeans. Based on this public (or media) opinion, the British government uses its veto to bloc core EU members from developing solutions to their problem. This obviously is highly unsatisfactory. The logical solution seems to be a 'multi-speed' Europe where those who want more integration, and others stay in the outer circle of the European Free Trade area. This is idea isn't popular either because those in the outer circle loose some of their privileges in the single market, and have no influence on regulation that eventually they may have to adapt anyway.

From an economic perspective, the UK leaving the EU would cause more harm than good (especially to the UK). But given the political obstacles in the UK to constructively working with the rest of Europe, it is an option that may serve many interests best.

27 minus 1: Why the UK exit might be good for Europe

December 14

At the conference I was attending, the British colleagues had to endure a fair bit of jokes. Or they took it proactively: The host of the 2012 conference offered the prospect of a European on conference held outside the EU - in Brighton. With the repeated statements from the current British government in their domestic communications that they wouldn't lift a small finger to help their neighbours (friends is obviously not the right word here), it should have come little surprise to find the rest of the EU proceeding without the UK.

At the same time, conservative backbenchers 'threatened' to call for a referendum on EU membership. Let me make a prediction: If the UK went ahead with the referendum, I suspect the yes-to-exit campaign will be in for a surprise: They would receive from massive support from across Europe. Despite broad appreciation of many aspects of British culture, language, etc, many people across Europe are getting fed up with British politicians enjoying their 'pain in the neck' role. Obviously, many people will see the UK exit as a failure, which it probably is. But there are positive sides for the EU too:

The EU will be able to strengthen the European Parliament, which is directly elected, vis-a-vis the European Council, which is essentially the heads of the national governments. Such strengthening has long been opposed by the UK fearful of loosing their national veto on key EU initiatives.
The EU will not longer have a member that receives an extra discount in terms of the taxes it transfers to the EU (negotiated famously by Maggie Thatcher), an issue strongly resented by other net contributors such as Netherlands, Germany and the Nordic countries.
The EU will be able to move forward with its revision of the regulation of the banking sector, another area currently held back by British opposition.
The EU will have one strong-willed partner less at the table when it comes to negotiations over any other issues, such as product standards. Even so, if the UK was still in the European Free Trade Area, it would have to implement many rules even though they were not at the table when they were negotiated - or face trade barriers.
The EU will no longer be the scapegoat for everything that goes wrong in Britain, the Brits will finally have to realize that most of their problems (a fragile yet overblown banking sector, a weak education system outside the elite, a squeaking infrastructure, and large and growing inequalities and the resulting social tensions) are home-made and can only be addressed in at home.
The EU will not be drawn into political conflicts at the other end of the world, out on the frontiers of the former British empire (or commonwealth), where the British feel they ought to send an army.
The EU can appoint someone as foreign affairs representative (one of the highest offices in the EU, currently held by a Brit) who someone who actually has experience in international politics and diplomacy and does need to learn the basics on the job.

Among the disadvantages from the EU perspective three are important ones:

An important lobbyist for free markets, less government intervention, and simpler regulation would no longer be at the table (though in current years this influence seems to have been weak anyway as British governments focused on getting exemptions rather than making the rules better).
An important trade partner is likely to be separated by some barriers to the free flow of goods, investments, services and people. If we assume the UK remains in the European Free Trade Area it would become like Norway now. That means that most of these four freedoms would remain - as long as the UK adopts the relevant EU regulation. But, over time regulations are likely to diverge, standards are no longer mutual, and hence trade would decline. As the UK is less important to the EU than vice-versa these losses will fall mainly on the UK.
One country in the EU would probably be a second looser: Ireland exports a lot to the UK. But then, Ireland may be able to compensate for that by presenting itself as the most important English speaking location within the EU!

It seems, overall, 27 minus 1 is a formula that "Europe" (in the usage of the word common in England) could live with quite well. Charles de Gaulle would not be surprised.

No alternative!

December 12

As I spend a day traveling I ended up reading a lot of newspaper columns on the EU summit - lots of people being unhappy with the solution put on the table (especially British newspapers) but no-one seems to know any viable alternative. I have spend the weekend at a conference with academics from across Europe - and I can tell that none of my colleagues from across Europe is happy with the solution. But noone could provide a solid suggestion what to do instead.

Doing nothing - apparently preferred by the British government and the British media - is certain to make things worse. Sometimes I really wonder what the critics of the euro really want: braking up the euro will make a lot of things a lot worse for about everyone. For some mysterious reasons a lot of journalists and politicians in Britain seem to think it is not theirs to worry about. Actually, as the British economy is more dependent on the financial sector (as % contribution to GDP) than most other countries in Europe, and the British private sector has a high net foreign debt, the British economy is going to suffer more than most if we have a new financial crisis.

It is obvious that mistakes have been made in the past - see yesterday's blog. But 'what would have been if' does not help us forward. Nor does 'I told you so' - because I certainly can't recall anyone warning of a bank bail-out of the scale that happened. May be, letting Greece go bust right at the beginning of the crisis would have been better - but even that seems now unrealistic speculation.

So, what are the alternatives? After reading a lot of newspaper space, I can see a lot of opinions, but no solution that is better than the one on the table.

What went wrong with the Euro?

December 11

Twenty years after the Maastricht treaty was signed, the mood in Europe is rather somber. As everyone seems to be concerned about the future of the Euro, let's step back an analyze what went wrong.

The first set of reasons relates to the budget deficits run by the governments of the eurozone. The Maastricht clearly stated a limit of 3% of GDP in any year - along with a maximum level of inflation, and a maximum level of debt. However,

Greece was admitted to the euro despite unsustainably high levels of debt, and budget deficit data that turned out to be incorrect (some say, deliberately misleading).
the treaty was not clear on how to enforce that 3% limit: Would countries be punished, and how? As it happened the European Commission tried to enforce the criterion and penalize the first offenders, some smaller countries. But then both Germany and France broke the and were granted exemptions, which made the rule rather soft, to say the least.
the fixed 3% limit does not allow budget deficits to be adjusted to business cycles, as most macro-economist suggest they should be. In other words, 3% in a recession is OK if the money is paid back in a boom period.
the decision making process in the EU implied that major decisions concerning to the eurozone, such as the negotiations last weekend, still need approval of all EU members, even those that are not member (and even those who have a contractual exemption meaning they are not committed to ever joining: the UK and Denmark).

The resolutions of last weekend aim to address the above issues by creating and enforcing new rules on budget deficits. This is clearly important. Yet, it addresses only part of the problem. In fact, it assumes that the budget deficits are the outcome of unsustainable government spending in the past. This, however, is true really only in the case of Greece. In other countries - notably Ireland and the UK - the budget deficit is primarily a consequence of the bank bail-out of the years 2007/08. Politicians rarely tell you that because that would severely inhibit their ability to enforce expenditure cuts or tax rises on their distrusting populations. Thus, there is a different way to interpret the current crisis:

The Maastricht treaty did not consider the possibility of a massive crisis such as that of 2007/08, and the consequences it had for government budgets. Even with a different set of rules, they would probably have done those bail-outs.
As a consequence of the bank bail outs, governments issued large volume of debt now held by banks. Hence the default of some countries would affect banks across Europe, reportedly especially French banks, but also German banks and various other countries - with the UK banks heavy exposed to Irish debt. It is this fear for their banks and the possibility of a domino effect that drives governments not to allow default of any country.

This analysis suggest that reform of the banking sector should be the first priority. It would include making the banks - and their leaders - pay for the benefits they received from taxpayers in 2007/08/09 would be the appropriate approach to the crisis. But few in power seem to take any serious steps in that direction - perhaps unsurprising given the close ties between Wallstreet and Washington, and even more so between the city of London and the Conservative party of Britain (who receives reportedly half its donation from the financial sector).

European Brand Value in China

December 7

Chinese consumers love European brands. It must be like paradise for the brand manufacturers of French cosmetics, German engineering, Swiss watches and Italian fashion! All the the big name brands have not just one, but loads of sales outlet in the fashionable districts of Shanghai. And many more, that I have never heard about!

The love for European brands brings fore some very peculiar effects. For example, Chinese companies buy up German companies not because they are interested to selling to Germany, but because the German affiliation and brand names helps them sell their produce in the world largest domestic market, China. An interesting example is Pearl River Piano. My co-author had written up the case, and mentioned their acquisition of the German piano maker Ritmuller as key strategic move to build an international premium brand. Problem was, I had never heard of the brand. So, I called up an expert on German musical instruments industry (my dad) to ask him, and he had never heard about them either. So, I got surfing. Yes, the brand existed - but mainly in the sales catalogues of antique dealers. For all I could find out, the company went bankrupt in the word financial crisis. That was in was the crisis of 1928. Ever since it has only been a retailer of pianos. Yet, for Pearl River the brand name was still a desirable asset to acquire to help building a brand associated with the German piano-making tradition.

For another example, try to google my name when you are in China. You are likely to come to the website www.klausmeyer.cn, which belongs to a knife maker in central China. As far as I could infer, they acquired a small company (or only the rights to the name?) established in the 1920s in Solingen, the centre of German knife making craftsmanship. I could not find any contemporary linkages between the company and Germany. (and, to be sure, I have no relation to them).

Some go even further, and simply invent a European brand name and association. Using a foreign sounding brand name is of course not new, US-firm Haagan Dasz does it, many aspiring entrepreneurs in China follow the idea. But some go as far as claiming to be imported from Europe. They earned themselves a not very flattering article in the China Daily, the Chinese government's newspaper. One company even went as far as feature a picture of the Italian trade representative in the publications. In fact, he was visiting to investigate the firm's fraudulent claim of being 'made in Italy'.

Why do European brands sell so well in China - real or fake? I believe there are two reasons. Firstly, association with brand names are a very important means for Chinese to express status and self-esteem, and "imported" conveys higher status than "local". In addition, "imported from Europe" also conveys a higher product quality as Chinese consumers still distrust their home made produce in many sectors, there just is too much sloppy produce around. Chinese entrepreneurs are slowly starting to build their own brands, but even in their home market they face an uphill struggle in terms of challenging into the premium segment.

China Daily, 2022, Faux 'imported' brands that are made in China, December 7, page 17.

The World's Coffee Shops

December 1, 2011

A fascinating aspect of globalization is the spread of coffee shop chains around the world. While coffee shops have been around for decades - especially Vienna once was famous for them - an American entrepreneur popularized the concept, created a franchise concept and took it around the world. Soon, Starbucks, Costa Coffee and The Coffee Bean started popping up around in virtually every town and city around the world. Indeed, Shanghai is said to have more Starbuck's than New York of London. Does that imply the world will soon resemble Seattle, Washington?

In fact, this globalization of the coffee shop is more in appearance (and profits) than in substance. While coffee is consumed in all these shops (or should I say bars), they actually play a very different role in different societies. In Shanghai, where quite space is scarce, offices are cramped and homes are small and shared, the coffee shops provide peaceful atmosphere - not really quite except early in the morning - that serves many social purposes. Today, while working quietly on a paper, I have been observing in the same shop a group of business people negotiating, a group of young women preparing for a fashion photo-shooting, a young couple on a date, two different business persons working on their Laptop, and a couple having, well, a 'difficult conversation' (she was crying, I was glad NOT to understand Chinese...). Last week I was witness to two different job interviews - in both cases Westerners - in addition to the usual crowd of housewives chatting, students flirting, and tourists munching a convenience lunch.

Coffee shops must be a dream research field for cultural anthropologists, different people using very similar spaces in so widely different ways is telling a lot about the societies in which we life.

Why are the Rating Agencies so Powerful?

November 11, 2011

In summer of 2002, I was attending a comparative economics (EACES) conference in the medieval Italian City of Forli near Bologna. One of the key note speakers - my memory tells me John Eatwell, but apologies if I got the name wrong - delivered a key note address in which he attacked the (then) new banking regulation known as Basle II. Essentially, he argued that this regulation forced all banks to use the same formal models to model the risk of their investment portfolio - and in classifying the risk of individual assets they would henceforth all use a small set of external indices. These models using those external indices thus are critical for key performance variables of the banks, notably the equity that they have to hold. In simple laymen's terms, the more risky investments they have, the more own capital they need.

The central bankers and financial sector regulators - and in fact most commentators at the time - thought that is a good idea, because it provides some sort of objective criterion to assess how risky a bank is - and weather our savings with the bank are save. Eatwell dared to disagree. He argued that the new rules would increase the systemic risk in the banking sector. Basically, if everyone was using the same risk models and the same external indicators - those provided by the rating agencies - then a small change in any of the indices would result in all the banks having to make adjustments in their investment portfolio - in other words they have to rebalance the risk-profile of their portfolio quickly to prevent their own rating to be affected. Hence, a downgrading of an asset will trigger a lot of sales of that asset in a short time, resulting in a substantive change in the price of the asset, and consequently increased volatility of the price of those assets. If all banks then have to revalue this particular asset at the same time, this would increase the systemic risk - i.e. the chance that many banks experience financial difficulties at the same time.

Of the audience, few appreciated Eatwell's argument, and I suspect many did not even understand his arguments as most were general economists, not banking specialists. Yet, in recent weeks, I often had to think of that talk in Italy as politicians were lambasting the rating agencies as being too powerful. Actually, they are powerful because the legislation that followed Basel II made them so powerful.

The reliance on indices by rating agencies exposed its first flaw when the financial crisis of 2008 broke because the agencies obviously did not rate certain complex assets correctly, keyword mortgage backed deposit certificates. Their own models (as far as I understand) considered each asset in isolation, and insuffuciently (or not at all) considered the interdependence of different assets.

The second flaw became apparent throughout the spring and summer of 2011 when each blink from a rating agency triggered a flurry of real trading activity in government bonds of various countries. Essentially, even the expectation of a change in a rating makes it more expensive for a borrower to get money from the banks, to roll over credits, and in worst case can case default. The rating agencies are private, US-based financial institutions that produce the indices for their clients, who pay for the privilege; they (may) know how financial markets work in the USA, but their understanding of financial instruments used elsewhere is sometimes limited.

To change the system, legislators would have to re-think their banking regulation and supervision - which is tricky because it is embedded in international agreements of Basle II and now Basle III. However, to take that systematic risk and the increased volatility out of the markets again, regulators need to allow for (and encourage) a greater diversity of risk models and indices. If everyone is forced to act in the same way, systemic risk will continue to create bubbles and crises on a global scale.

Quietly Overtaking? Chinese Motorcycles

November 8, 2011

Walking the streets of Pudong - the modern side of Shanghai - during rush hour, one has to pay attention not only to cars that seem to know few traffic rules but to motor cycles zooming along the slow lane. What makes those motor cycles tricky for pedestrians is that they come quietly. How can they be sooo quiet? The answer is down the road in the department store, right next to the teddy bears. Here at Carrefour, they are for sale for 2,000 to 3,500 RMB (about €300 to €400): electrical motorcycles! That's about half the price I paid for my bicycle in Denmark - a really nice one though.

Meanwhile, in Europe the politicians are quibbling about the appropriate standards, and about loads of health and safety rules that electrical vehicles will have to fulfill. Everyone seems to expect miracles of energy conservation from them, but only few rather expensive electrical vehicles make it on the roads, and mostly in the luxury segment.

I just wonder who, once the standards have been approved, will be best positioned to produce an affordable electrical bike? The Chinese are rapidly sliding down the learning curve, moving up the standards curve may take them a bit longer, but not that much longer.

However, there still is a little problem. Many drivers, in the true spirit of energy conservation, seem to switch of their lights, making them tricky to spot for pedestrians or cars to spot in good time. That shouldn't be a problem though in countries like Denmark or Germany where the police happily fines even cyclists for not using proper lights.

Welcome to Growth, Chinese Style

October 30

A few weeks ago, I moved to China. The country is challenging and perplexing, yet exciting in many ways, and thus I have taken a 'time-out' on my blog to digest my impressions before sharing them with the world. There are a lots of first impressions, that on second sight tell a very different story.

The question that has been most occupying me in the last days is the "insane" growth expectations that entrepreneurs and business leaders are chasing. If I say "insane" I mean that from a European perspective where we might see high growth in some niche technology markets, but generally consumer market or GDP growth are in single digits - if they grow at all. Yet, here annual growth expectations for entire industries are rarely in the single digits. Yesterday, I spend the day listening to car executives - both Chinese and foreign investors - discussing the car industry in China. Their growth ambitions are huge, both in terms of getting a share of the domestic market, and (for domestic firms) to bring Chinese cars to world markets. In line with this, huge investments are made in both R&D and in production capacities.

The (apparently shared) baseline expectation on which these strategies are build are annual growth rates of car sales in China in the magnitude of 20%, with China accounting for one third of the global car market in 2016. China is already the largest car market by units sold - way ahead of the US and Japan. But 1 in 3 cars sold in China? China counts for one fifth of the world's population - so this one-fifth is going to buy one-third of all cars? How realistic is that?

Forecasting is always a dangerous business, and I suspect that some of these forecasts are simply extrapolating growth rates of early industry growth not taking into account saturation effects. Actually, according to numbers I picked up from a magazine distributed at the conference suggest growth in 2011 of about 5% - and mainly for foreign brands with on average zero growth for domestic brands. Yes, there are still lots of people without a car, but where are they going to put their cars - the roads are already congested and parking spaces scarce. Moreover, with a few years lag after the initial surge in car ownership, and new competitor to the car industry will enter the market, the 'used car industry'. That will change the dynamics of the industry again.

So, the real question is, is the investment in car industry manufacturing capacity soon doomed to create overcapacity and sharp price competition, or am I just a pessimistic European who just doesn't understand China?

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Note: C-numbers relate to chapters in: M.W. Peng & K.E. Meyer, 2011 International Business, London: Cengage.

April 2012