16 August 2012
Social Channel Three: Using the Social Channel to Defend Native Markets and Penetrate Foreign Markets
The global Social Channel will reintroduce “home court advantage” to national brands because those that use social business to compete globally by collaborating with users will have the cultural advantage; “foreign” firms may have better product features for the money, but they will not match home brands’ cultural fluency. Personalized service and attention are culturally specific, and deep cultural fluency directly corelates to intimacy. However, brands can only develop the home court advantage by practicing social business at an advanced level. Most have a long way to go and, meanwhile, they will get hammered when they persist in competing on product features in the Productized Channel of Value.
The blade cuts both ways: the home court advantage will make exporting to emerging markets much more difficult in the years ahead. The Social Channel will raise the bar because users in all markets will increasingly expect brands to relate to them and to solicit their input and advice. Brands will have to invest significantly in developing in-market social business teams that can build, nurture and leverage online relationships at a high level.
This is Part Three of the Social Channel Trilogy. It will help CEOs and CMOs realize how the Social Channel will transform global markets. Brand stewards will learn how to use social business to defend against foreign firms and how to penetrate foreign markets. The trilogy reveals how companies can combat commoditization and develop new markets by tapping socially-powered innovation.
Not Your Father’s Global Economy
The “global economy” of yore featured “advanced” industrialized economies that tweaked their product lines to sell in less developed markets, a reliable practice that boosted demand for these producers. Their products were more advanced than local offerings, which provided competitive advantage. “Emerging” countries were consumers of “advanced” countries. Today, however, “emerging” is as likely to denote a country whose plant production is on par or better than that of “advanced” countries, and they are exporting worldwide (Huawei is a quintessential example of a Chinese global leader). Online users everywhere openly discuss imported products’ advantages and shortcomings. Brands have historically been shoddy about doing research and design for local country user experience, and empowered users will be far less forgiving when they read frank accounts of disappointment online.
Social Channel One showed how the global economy has permanently changed as a function of Internet adoption, financial liberalization, social business and pervasive smart industrialization. All firms are competing globally whether they perceive it or not. Here is a summary of how global markets are evolving:
- Internet adoption/ecommerce—anyone with a web browser can hit your website, and online translation widgets are getting quite good for basic things; clients are regularly baffled by Asian buyers (“How did they find us; we’ve done no marketing?”). One third of Earth’s 7 billion population is online, and adoption is accelerating.
- Financial liberalization—it is increasingly seamless for people to pay for online purchases across borders. This enables global ecommerce, and adoption is accelerating.
- Social business—by finding each other online, researching and collaborating, groups of people with similar interests drastically cut the barriers to buying abroad. Let’s say I want a Chinese delivery bicycle, but I don’t know the market, all the vendors, etc. I can find a community of people, and we can use our collective networks to ferret out all the information we need; we can even try for a group buy.
- Smart industrialization/commoditization—Read Social Channel One to fully appreciate the imminent end of product feature differentiation. Due to online information, digital social collaboration, software-powered plants and smart distribution, commoditization is the rule for an increasing share of products. This state reflects the twilight of the Industrial Economy, which is fading in favor of the Knowledge Economy in which buying decisions are driven by online comments, ratings, discussions and friends/connections. Brands will be forced to engage online to influence buying decisions; product features will play a decreasing role. Globally, production is growing faster than consumption in many product categories, and emerging markets will add to the capacity. Meanwhile, “snap together” supply chains and multisourcing methodologies make firms more agile than ever.
Due to these converging market forces, commoditization will continue to accelerate globally, and most firms will find it exceedingly difficult to compete on features of mass-produced products and mass-managed services.
Firms that want to thrive will jump into the Social Channel early to work up the learning curve before their competitors realize what has hit them.
Using the Global Social Channel to Compete Within and Across Borders
“Social” business is filled with nuance and complexity—it involves interacting to build relationships and trust—and teams usually require extended mentoring to mitigate risk and boost early results. Firms that adopt early have several advantages:
- They have more time to build a solid bench of internal knowledge and expertise. For example, how to engage nuclear power engineers, mothers who sew, corporate treasury officers…
- Users’ expectations are relatively low now; next year, when they’ve experienced brands who try to fake “relationship” but expose their promotional goals, they will put up the bar. Similarly, when they experience people and firms that add value, their standards will go up.
- Social business will transform organizations, so getting the transformation process going earlier will offer cumulative benefits. As detailed in Social Channel One, most firms begin on the front end, interacting with users (erstwhile “customers” or “clients”) in relevant venues. That has little impact on the organization, but the second stage is back end, engaging users to give input into product and service delivery options and, later, product/service design itself. Key highlights:
- Firms that reach back end social business earlier will be beating competitors on the front end and the back end, so benefits accumulate.
- Firms that engage users collaboratively will confer “co-ownership” of the firm and its “products/services”; when people give important input that improves their outcomes (of using the product or service), they feel a strong sense of excitement and ownership.
- In this context, “marketing” cuts back on promoting and builds expertise in providing superior service across every interface the firm has with users.
One of the most difficult Social Channel concepts for organizations to grasp is changing their orientation—away from product features and toward user experience, as detailed in Social Channel One. Product and product feature innovation happens relatively slowly, so the market opportunity is interacting with users (of your product/service) in digital social venues to help them create better and more meaningful outcomes when they use your product/service. When you think about it, aren’t user outcomes the point, anyway? Social Channel Two details how to leverage the Social Channel to compete, step by step.
Digital social venues have several features that enable this new era in creator/user collaboration that few executives appreciate because they haven’t spent enough time online to understand the potential.
- Knowledge is social. By sharing situations, beliefs, thoughts and idea, and getting feedback from a large group, everyone who is talking or listening is getting educated, very quickly. Digital social venues make this hyper-efficient; hundreds of people can participate, and people can drop in any time, guided to the conversation by specific keyword combinations (i.e. google). The people who know the most or make the most compelling statements get the most attention.
- The more specialized the situation, the easier it is to find the conversations (attention B2B). A couple dozen passionate people discussing specific situations (“use cases”) can create very rich and valuable content, which can be reused forever because it exists online.
- The passionate and knowledgeable minority drives the conversation, assisted by a 10-fold larger group and observed by a 100-fold even larger group. Everyone in the social venue is influenced by what happens. This is the network effect: by engaging with the few, you are impacting the many, even though most are observing silently.
- Users, when they are stating problems and sharing experiences and solutions, educate each other very quickly. They are the authority of the outcomes they desire. They know more than any company. Most firms must learn how to collaborate with empowered users; they are accustomed to relatively ignorant “consumers.” Empowered users are very different; it’s a collaborative relationship.
Defending Your Home Market(s)
You can create a strong sustainable home court advantage in your home markets by developing and leveraging your home market cultural knowledge, which will help you build better relationships with users than firms without local cultural knowledge. Our context in this use case is developing relationships and trust in the service of users who want better outcomes when using your product or service. The firm that provides the best outcomes wins. The Social Channel teaches that better outcomes arise from collaborating with users, so home cultural fluency will help you do that better, faster.
This section will be especially relevant to companies in mature (erstwhile “advanced”) markets who face growing challenges from foreign manufacturing (and service) firms. Such firms often have lower cost inputs and can field better product features at significantly lower costs. That said, this section is equally useful for emerging markets that wish to defend against outside challengers.
- Social Channel Two lays out specific steps to pursue social business evolution in your front end and back end business processes, so this section adds to it with the goal of “defending” home markets against foreign firms.
- One of the key goals in front end innovation is identifying your firm’s most relevant users, noting where they prefer to discuss topics relevant to your products/services. While observing these users and interacting with them, you create models of their use cases for your products/services. A use case defines a limited range of situations in which they consider products like yours to help them achieve a desirable outcome. They evaluate options, choose one (yours, competitor’s), use it and obtain a result. For example, you sell forklifts for warehouses. You add the most value when users face certain situations. Define several use cases. With social business, you can ask clarifying questions in forums to get input very quickly to evolve your use cases.
- Now examine your use cases and apply cultural filters. For example, foreign competitors may offer longer battery life, more powerful motors, etc. They may offer superior machines for a lower cost. However, by focusing on users’ utility of the forklift, you discover that training and maintenance are higher because documentation is not as easy to understand, and communication with service organization is incrementally more difficult (even if they’ve contracted with a local service firm, that’s one step removed from the OEM).
- Take your culturally filtered use cases and enter conversations online that focus on them. Users who have tried foreign OEMs and experienced subpar results will be talking about it. Serve these users by providing helpful hints, not selling or knocking competitors. You will build an excellent reputation and communicate your message to other people in the venue/forum/conversation: “You can improve your utility and quality of outcome.”
- Foreign OEMs will find it challenging to enter such conversations because so much of detailed conversations about business challenges and solutions is between the lines; they are very difficult for people without deep cultural fluency. Some OEMs will try hiring social media firms to “communicate” on their behalf, but such efforts will only make them look worse: users don’t want to be promoted to, they want firms to relate to them, to listen and to communicate honestly. Hired hands don’t do that well. Neither do they have the domain knowledge (warehouse operations).
- Once you have established yourselves in several venues, you can start asking users for input and ideas into your service and training programs, for example. When you act on their ideas, they will turn into raving fans.
- As long as these conversations are taking place in public forums, you can quote from them on your website, etc., significantly leveraging the credibility you’ve developed in-venue.
- You will significantly increase the chance of success when you form a small social business team of people with explicit cultural experience, knowledge and awareness. Most natives are painfully unaware of culture unless they have had significant experience working and living abroad. In this case, you want natives (on your home country) with cross-cultural experience and relevant domain knowledge (warehouse operations). They need to write down (“codify”) the market cultural knowledge they identify.
- The social business team should develop explicit competencies that they can teach others to scale the effort. Since most employees in the home market are culturally fluent, increasing their awareness, so they can interact in social venues very effectively will be very straightforward when the team is identifying social business good practices and codifying them digitally. We call this a social business competency team.
Developing Foreign Markets
This use case employs many of the same principles as described in “Defending,” but the context and aim are different. Here, you want to use social business to engage users in “foreign” (to you) markets to expand your business across borders and cultures.
- No matter the market, people there are devoting their time and effort to get done the most important things in their lives. Even “social” activities like swapping sports statistics may seen inane, but people are spending the time to build their reputations, friends and networks. Their social position within the network. This is a very serious activity for humans and other primates.
- Therefore, your mission is to understand what they are trying to do and to help them in unique and memorable ways. Think of culture as a lens that can change the context of users’ activities. To succeed, you will have to build an explicit understanding of the cultural aspects of users’ behavior that are relevant to how they use your product/service. For example, culture affects how people work and use your product. Maybe the culture likes to drive forklifts faster, which affects usage and maintenance.
- The beautiful thing about social business is, you can begin your mission anywhere. You need not invest in in-market offices or teams right away, although you may want to for other reasons. Because we are constrained in this mission to online conversations, the first step is assessing online activity for use cases that are relevant to you.
- You will need to invest in hiring or contracting 1-3 people with in-market language skills (your scope team). They will also need a rigorous search and analysis approach to ensure that the assessment is accurate. Make sure you understand the difference between language proficiency and cultural fluency. They can overlap, but they are entirely different things.
- In some cases, depending on the country’s population and the users you want to engage, your home language might offer an initial proxy if it is widely spoken among the users in whom you’re interested. But you are always better off “going native” because you want to understand users’ context.
- If you establish that significant conversations are occurring in social venues in your desired market, develop formal use cases and apply cultural filters as described above. It can be useful to compare these to your home market’s use cases and cultural filters if you have done them. I recommend doing yours first because it will make your team aware of the process, goals and outcomes. But it isn’t absolutely necessary.
- You can begin interacting by asking the scope team to begin engaging in the venues you’ve been observing. As described above, you need to have them codify (write down) the market cultural knowledge they develop. You can grow your team of contractors or employees without even opening an office!
- By interacting in social venues, you can test your understanding of users’ goals and your use cases and refine them rapidly. As stated in “defending,” you will use this knowledge to scale the effort.
- I hope you can see that social business changes the economics of developing new markets for firms that understand how to do it right. Based on results, it will be to your advantage to spend time on the ground. Depending on users’ online habits, you will do best to flesh out your understanding (developed at low cost online) by getting across the table from them in-market.
- By understanding users, you can create use cases for your product/service before you invest in “bricks and mortar.” You can significantly increase your chance of success and reduce investment risk.
- Brands have bandied about the term “customer intimacy” for years, but they haven’t had to deliver in transparent social venues—until now. Users will increasingly demand it, as sure as they demanded websites of brands and firms by the early 2000s. In virtually every context, the better a brand listens to, responds to and helps people shows that it cares and wants relationship. The 20th century version was putting happy stock photos on the website accompanied by snappy copy. This is threadbare today because it is insincere, impersonal. When the brand couples listening and responding with transparency about its business, including shortcomings, intimacy goes through the roof—with users who want it.
- Culture is a critical element of intimacy, so it can serve as a barrier that firms can use to defend “home” markets, as defined in geographies in which they have significant native cultural knowledge. Firms without in-market cultural knowledge will struggle more to develop intimacy with users.
- Similarly, any firm can develop intimacy with users in any market, provided they do their homework, learn about users in that market, listen extensively and build cultural knowledge explicitly. They can build a team and scale the effort as they see business results.
- Social business can significantly reduce the time and cost of developing new markets. It can serve as a low cost “tip of the spear” since engagement is online, teams can be virtual and venues are online. It is best used in concert with on-the-ground engagement initiatives, but these can often be postponed pending social business results.
- The Social Channel can serve as an authentic bulwark against “foreign” competitors. I write “authentic” because, in this case, I’m proposing that firms use their native cultural fluency to add more value to their users; keeping “foreign” competitors out of markets as an end in itself destroys value for users.
- With multinationals, it can be difficult to ascertain what their “home country” is. The context here is economic, not political. Whereever they have significant native cultural fluency can be seen as a “home country.” Who’s Afraid of Huawei? suggests that political posturing against Huawei may be disingenuous; most “advanced” economy firms have their gear fabricated in China anyway.
- Executives and teams that lack in-depth experience developing relationships in digital social venues will likely miss the importance of intimacy and culture. This is quite understandable because firms have never had true relationships with users (erstwhile customers, clients) before. Prior to digital social venues, there has been no economic means of “connecting” with users.
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28 October 2007
Examining the Environmental Fallout of the Chinese Economic Supernova—Sibling Rivalry Rears Its Ugly Head
In 2007, nary an RSS feed or the page of a newspaper (for those still inclined ,^) does not mention China’s exploding impact on the global stage: China is truly an economic supernova, and it is breaking almost any record for development that is laid before it. However, China’s breakneck development is accompanied by grave environmental fallout: for example, as the host of the Beijing 2008 Olympic Games, the city is designing extreme measures to ensure that the air is clean enough for the athletes to breathe. The chief culprit is coal, a key source for China’s insatiable need for electric power, and a resource that the country has in abundance. For key facts on China, I suggest The Economist’s Country Briefing or Global Human Capital’s China category (in depth) or China tag (mentions).
The Economist and WBEZ 91.5 FM presented an Oxford-style debate on the effect that China’s rise would have on the environment at Millennium Park’s Harris Theater on 24 October 2007. National Public Radio’s Worldview host, Jerome McDonnell, moderated the session in which two debate teams argued their cases in front of the audience, which then voted on the debate winner. As a baseline, McDonnell polled the several hundred member audience prior to the debate, and we were evenly split and “too close to call.”
- Arguing for the proposition—that China’s rise would produce environmental calamity—were Orville Schell, Director of the Center on U.S.-China Relations at the Asia Society and Barry Weisberg, University of Illinois, Chicago.
- The panelists arguing against the proposition were Vijay Vaitheeswaran, Global Correspondent for The Economist and Kelly Sims Gallagher, Director of the Energy Technology Innovation Project.
- I will report the debate as it happened: each debater’s opening statement are followed by audience questions and the final verdict. To keep you in suspense, I will only disclose the winner after I have reported on the debate, and I’ll wrap with our famous Analysis and Conclusions.
For: Orville Schell: China is already a major environmental disaster
Schell cited a slew of statistics to make the case that an environmental disaster of unprecedented proportion already exists in China:
- China’s economy has been growing around 10% per year for the past several years.
- China’s population is difficult to fathom: it has 1.3 billion people, and its population grows by 10-15 million people per year, despite the one child per family restriction.
- It has 25% of the world’s population on 7% of the world’s arable land.
- Electricity production grows by 20% per year, and 70% of electricity is powered by coal-fired plants. On average, one new plant goes into production each week. Power plant efficiency is 20% less than U.S. efficiency.
- Carbon production increases by 10% annually.
- 10% of cropland is polluted: food is contaminated, and water is replete with pesticides and fertilizers.
- China is seriously overlogging its forests; it now depends on importing hardwoods from other Asian nations, exacerbating their logging.
- China has one fifth of the water of the U.S.; due to its growth in demand for water, the water table is being depleted rapidly. Rainfall is volatile and disturbed: it is experiencing unprecedented drought and flooding in various areas of the country.
- One third of wastewater is untreated, affecting two thirds of households.
Against: Vijay Vaitheeswaran: yes, there’s a problem, but we’ve been here before
Vaitheeswaran recently authored The Economist’s Survey on Innovation, and he countered Schell’s statistical barrage by reminding the audience that we live in the 21st century and have new solutions to the problem: do not assume that China will follow western path of the 19th and 20th centuries:
- When India was newly independent from Britain, Gandhi famously said that “We can’t follow” Britain’s model of economic development. (India was different and had to find its own way based on its beliefs, people and resources). China cannot follow the U.S., the quintessential industrial power. It cannot urbanize and motorize as the U.S. did.
- We live in an extraordinary time. One third of humanity lives in misery. China is pulling a major portion of its population out of misery, within one generation. The key challenge is learning how to do that while not doing irrevocable environmental damage.
- Western industrial cities like Pittsburgh, Los Angeles and Chicago endured severe coal-fired air pollution. Dickens chronicled British pollution and squalor; 1952′s London was similar to 2007′s Beijing, and today London has very clean air.
- China’s leaders are aware of the environmental challenge, and they are trying to optimize the environment with economic growth. They have shown that they can get fast results and put programs in place to mitigate environmental damage: for example, Buicks rolling off Chinese assembly lines now have catalytic converters with the same standards as California, which has the most stringent standards in the U.S.
- China will learn from the U.S. and Europe and implement clean cars, fuels and biofuels. The government has shown that it can make changes quickly.
- Do not assume that China will follow its current path: it will innovate and contribute much to the world. Innovation is discontinuous and will surprise. Many intelligent people have made false predictions by entertaining current assumptions that did not hold true in the future: for example, the Club of Rome predicted an cataclysmic population bomb in the 1970s.
For: Barry Weisberg: that’s fine and good, but China is locked into its economic goals and is out of control
Weisberg lived in China in 1971 and has returned many times. He finds the amount of change during that time impressive and appalling from an environmental perspective. He refined the For team’s argument that China was already well down the road to environmental catastrophe:
- 750,000 people already die in China due to environmental causes each year. Seven rivers are dead.
- China has four times the population density (of the U.S.?). Industry never stops; there are no weekends, most factories work around the clock (and pollute).
- Two new power stations come online per week.
- Shanghai has 13 of the world’s top 200 tallest buildings, and most skyscrapers have been built during the past seven years.
- Weisberg described a “pollution complex” of interlocked features that is very difficult to dismantle. China’s top three cities (Beijing, Shanghai, Hong Kong) are megalopolises, and they produce extreme amounts of primary pollutants, and there is extreme interaction among these clusters.
- The Chinese government cannot control the economy, and the economy is driven by external market forces; therefore, the prospect of improvement is slim. China’s urbanization is the most rapid and on the grandest scale of any in human history. The biosphere cannot support this speed and scale of development.
- The government has no legal infrastructure to regulate or control environmental damage. The U.S. must pressure China to make changes more quickly. China will not act unless pressured by the U.S.
Against: Kelly Sims Gallagher: the will to change is already manifest
Gallagher authored China Shifts Gears, which presents the opportunity to help China develop its auto industry differently than western nations. Her argument picked up on Vaitheeswaran’s: China’s infrastructure is beginning to be built, and the world has the opportunity to help it develop a new model.
- There are certainly major environmental problems in China. 25% of Los Angeles’ particulate pollution is attributable to China, which recently wrested the title of the world’s biggest polluter away from the U.S. , which had held the title since (World War II).
- Many of China’s problems are shared with many other nations around the world. Pollution and, specifically, carbon (greenhouse) emissions are certainly a global problem. Many clean technologies are not used in the U.S., for example.
- There are no incentives to use clean technologies. We must help China to change its public policy and production patterns.
- The key issue is that the will to make changes must emerge in China and in other countries, notably the U.S., which flouts the Kyoto Protocol.
- The (federal) Chinese government is beginning to show the will. There are 1,000 environmentally-focused protests in China each week, and the government is feeling the pressure of its customers, the external market. Moreover, China’s southern neighbors are adding pressure, primarily South Korea. People won’t give up, and the will will emerge.
- There have been promising improvements: from 1978 to 2006, there has been a three-fold improvement in fuel efficiency; new cars are more efficient than those in the U.S. The government levies high taxes on large cars and is putting into place incentives to encourage use of renewable energy.
Question and Answer Period
- Can green model cities like Dongtan (see Pop-Up Cities: China Builds a Bright Green Metropolis) have an impact (my question): Gallagher’s assertion that China could follow a different path is appealing and logical. Weisberg reiterated his position that China was locked in. Vaitheeswaran countered that China had incredible opportunities that OECD countries do not—to develop its infrastructure to minimize environmental damage. China and India are not built yet, and much innovation will be introduced.
- Schell: if I were a U.S. presidential candidate, I would go to China to talk about these issues. The federal government officials are already quite enlightened, but the problem is local officials, who are competing and pushing for fast development.
- We must find a way to lick the coal problem. Gallagher stated that the U.S. had to go first and take serious action on its polluting coal-fired plants. China will follow the U.S.’s lead.
- How will China handle growth?
- Schell: no government can remedy; China needs peripheral organizations like an independent media. China has very fragile institutions.
- Vaitheeswaran pointed out that the Soviet block was still suffering from many of the same problems that arose from similar circumstances. He made the interesting point that, in communism, “the commons was lost”: since there were no property rights, there was no accountability or incentive to protect. You need an element of individual accountability.
- Weisberg added that in the U.S., huge lobbies prevent change. China lacks local ways to implement federal mandates. It will take decades to make things happen. Also, no one (anywhere) knows how to manage megalopolises.
- Kelly asserted that China could act decisively, but one problem was enforcement: the Chinese equivalent to the Environmental Protection Agency is staffed with 200 people!
- The West has largely solved the particulate matter problem but not the carbon dioxide problem. There are several problems that are difficult to overcome. Particulate matter is immediate and palpable, and it is therefore easier to convince people to act. The carbon problem is invisible and will manifest relatively far in the future. Debate teams were mostly pessimistic about the carbon problem; they felt that the people, in the form of a grassroots movement, would have to drive the change. There will be meaningful action in the U.S.
- Weisberg made the excellent point that the U.S. (and other rich countries) export the pollution problem to China by driving insatiable demand for its goods. In effect, we export carbon emissions to China. He attributed one fourth of China’s carbon emissions to U.S. exports.
- The issue of public vs. private industry; who is responsible for meeting (environmental) goals? Gallagher refuted the conventional wisdom that the Chinese government acts too slowly. They surprised Chinese and foreign officials by passing stringent auto emission targets. When these passed, the auto manufacturers fell into line. This give her reason for optimism. Of course, China imports almost all its oil, so economic and political motivations align with environmental to push fuel efficiency. The most severe are on heavy vehicles like trucks and SUVs. The average Chinese car is already more efficient that the average U.S. car.
- More on the U.S. role. Schell stated that the U.S. had a stake in helping China. His partner contradicted him, saying that it was dangerous to think that the U.S. could help China; it didn’t even recognize China for 30 years. The Chinese will solve the problem by themselves. They don’t need democracy; they need to balance development with environmental protection.
- There was some discussion around Europe’s system of capping emissions, which involves carbon credits. Gallagher and Vaitheeswaran posited that such a system would not work in China because it requires precise measurements and enforcement. They prescribed a system of taxes, which is far easier to implement. Gallagher predicted that the U.S. would adopt the emissions caps. It has succeeded with sulfur dioxide.
- An audience member who had just returned from living six months in Beijing shared that the sun was rarely visible, even hundreds of miles in any direction from the city. The air is very hard to breathe, and NGOs are very weak and have little support. Government initiatives are messy, such as the Three Gorges Dam.
- Vaitheeswaran suggested that concerned U.S. citizens start pushing for change in their own back yards: coal fired power plants supply 55% of U.S. electricity, and most of them are over 30 years old. They have less than 35% efficiency. There are no real incentives to change, and lobbies have been successful in maintaining the status quo. Further, we can’t expect that China will pay for R&D for environmental solutions. They will buy mature technology that doesn’t cost too much. For example, GE has bet heavily on clean coal technology.
- Vaitheeswaran pointed out that China is open to the world, which brings scrutiny. China is very invested in the global economy. He reminded the audience that the Cleveland River experienced spontaneous combustion in the 1970s, and it is very reasonable today.
- There was widespread agreement that the U.S. had lost “all moral authority” in the world—on many fronts, but on environmental issues in particular. The message that the U.S. government gives—just beat out by China as the biggest polluter—is that the U.S. will go its own way. I think it was either Schell or Weisberg that said, “We are all carbon sinners” (and we must collaborate to solve the carbon problem). The U.S. cannot expect to be listened to unless it leads—by adopting real change on its own emissions policies.
- Weisberg stressed that we had to reverse 300 years of wreaking industrial havoc on the environment; he attributed 4/10 premature deaths to pollution worldwide. He concluded by saying that China was a hope; it will be the battleground. It is clearly a master of change. The path will undoubtedly involve clean coal; China will find a way to make coal work because it has so much of it and a high demand for power.
Analysis and Conclusions
- It was a landslide: the audience unequivocally decided that the For team had carried the day. I was one of the few dissenters and remain so.
- There are several reasons why the Against team had a more difficult task. The For team was citing developments that were obvious—now—and everyone agreed that China had severe ecological problems and worrying trends. The reason I believe that China will, long-term, not be an environmental catastrophe is that it will take advantage of emerging technologies and approaches to “bake green development in” to economic development, but emerging technology is disruptive (thank goodness, we want to disrupt these trends) and discontinuous. In other words, it is difficult to build a case for it based on current facts.
- It seems certain that environmental damage will increasingly assume an obvious economic cost, and, once this is understood, people can make rapid and profound changes their behavior to mitigate it. However, many studies suggest that we are reaching a point of no return and that it may be too late to avoid global calamity.
- This U.S. audience was very concerned about environmental issues, notably carbon emissions, and their frustration with the situation was palpable. They were looking for an outlet for their concerns. Moreover, panelists and audience members were vocal in their cynicism regarding (the lack of) political leadership. At this point, the Bush Administration has caricatured itself into a position that is beyond criticism—due to its abject incompetence. Speakers were even more disheartened by the fact that no presidential candidate was seriously addressing carbon emissions.
- Given the rising awareness of the threat of carbon emissions and the lack of action in the U.S., China is a target for U.S. frustrations. Human nature holds that is is easier to blame someone else than to take accountability yourself. I wonder how many people in the audience drive SUVs.
- A serious part of the U.S.-China dynamic is sibling rivalry that the U.S. feels with respect to China, and this clearly carries over into the debate. There is a desire to maintain the upper hand, to judge China and its aspirations. I could easily imagine French, German and British citizens’ angst at U.S. missteps during the 19th century, when the U.S. was eclipsing Europe. To be most effective, U.S. diplomats, chief executives and scientists must keep this feeling explicit so that it doesn’t color our collaboration in a negative way.
- For a U.S. business executive and economist’s point of view on the U.S. position, see Caterpillar CEO Pitches Free Trade Gauntlet to Business Leaders at Executives’ Club.
- The world as we know it is undergoing an unprecedented metamorphosis—into one world. Carbon emissions are a global issue that can only be solved through global collaboration. Unilateral action is decreasingly an option. Paradoxically, the U.S. can lead by giving the most, by, well, leading.
- Panelists and audience had very low expectations of politicians and reached the conclusion that real action would have to be grassroots. I might add that all demographics were represented; this was by no means an activist or fringe-y crowd.
- China (and India) will avoid becoming environmental catastrophes by changing the model of their societies and economies. The For argument will be proven wrong because China can build its cities differently, an idea that struck me when reading the Wired article referenced above. China is currently the factory of the world and will remain so for the forseeable future; it will be an unparalleled industrial economy. However, that also means that, by changing its economic and environmental policies and practices, it can have a major impact on the global situation.
- If the U.S., China and Europe were to get very aggressive with carbon emissions, the global picture could change quite rapidly. In the U.S., the problem may be the most intractable: the country is completely built on the automobile; it has a paltry collection of public transit systems, and its distances are massive. Europe is far less structured on the automobile; as Vaitheeswaran mentioned, China is beginning to build public transit systems aggressively. It doesn’t take a genius to see the need and importance of them. Finally, China has another substantial advantage: it has no oil and is thus incented to build its infrastructure to minimize its dependence on oil. The U.S. built its entire infrastructure on oil and the motorcar because oil was plentiful and cheap during its period of explosive infrastructure growth.
- Longer term, the trend in the Knowledge Economy is that work goes to where people are. In the Industrial Economy, people went to where the work was because it was at a factory that was transforming raw materials into products. They were doing “bits” work, and the Knowledge Economy focuses on “bytes” work. This will serve to centralize pollution production (factories, not cars), which can often be rectified more quickly.
- In the U.S., air pollution and carbon are decentralized in the form of inefficient automobiles. Cutting back on automobile use would have a disastrous effect on the economy since relatively few alternatives exist.
- If the U.S., Japan, Europe and other advanced economies take the lead by acting decisively in their own back yards and by transferring technology to China, India and other emerging economies, the world should be able to diminish its carbon production. The question is, how much time do we have? The devil is always in the details.
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25 October 2007
U.S. at Turning Point with Global Economy in the Balance—A Lack of Courage?
James W. Owens, Chairman & Chief Executive Officer of Caterpillar Inc., beseeched U.S. business and government leaders to find the courage to save free trade. The speaker at the Executives’ Club of Chicago’s Global Leaders Series, Owens addressed a packed house at the Hilton Chicago on 16 October 2007. His speech was immediately followed by the Club’s Technology Conference at which CIOs advised their peers on the emerging role of the CIO in the “networked economy 2.0.”
A Ph.D. economist with extensive global management experience, Owens made a very convincing argument that the U.S. and the global economy are at a turning point. It is time for the U.S. to lead by example to assure the continuance of the free trade juggernaut that has produced so much wealth in the world. If it fails, the world stands before the prospect of sharply curtailed trade.
Following a summary of his remarks, I will offer conclusions and analysis of related market developments. Although he limited his remarks to business leadership, I will also argue that the U.S.’s lack of resolve and leadership is multidimensional, notably with respect to the environment. Moreover, economic and social forces are going to confront the definition of the sovereignty of the nation state due to the collective destiny of all nations due to trade and the environment. In other words, Owens’ remarks may be far more applicable than he suggested.
Caterpillar as an Example
- Caterpillar is a poster child of free trade success that is benefiting tremendously from China’s and other emerging economies’ demand for heavy equipment with which to build infrastructure. Cat is #1 or #2 in all its markets, and services now comprise 35% of its revenue (logistics, finance). They are growing quickly as a portion of the total.
- Cat dealers are a key par of their local presence around the world. The company sees them as partners. They are crucial to Cat’s global footprint and strategy to be close to customers. This is good for relationships, and it cushions the company from exchange rate risk.
- Following the Asian crisis in 1997-1998, Cat retrenched and increased its footprint significantly. When Asian economies took off again, Cat grew explosively.
- Caterpillar’s “Vision 2020″ program is focused on operational excellence along the lines of Toyota’s vaunted Philip and approach. Specifically, Cat is focused on safety, decreased repair frequency and just in time production.
- Owens stated emphatically that Cat was a better company due to competition. Competition makes the company stronger.
Emerging Markets’ Impact
- 2004-2006 has been the best global GDP (Gross Domestic Product) growth since (the end of) World War II.
- Caterpillar’s destiny is obviously linked to emerging markets’ demand for its equipment to build roads, buildings and other infrastructure, but the demand for other companies’ goods and services are also linked to emerging markets, even if their leaders do not appreciate it yet.
- Asia has achieved escape velocity: its growth no longer depends of U.S. and European demand, although they represent large demand. Asian demand is growing fast as a percentage of the total. Asian nations no longer depend on FDI (foreign direct investment) for their growth because there is so much money in Asia itself.
- Owens believes that global growth will “probably” be strong for the next five years, although 2008-2009 will be “anemic.” If the U.S. achieves a soft landing in 2008, 2009 will accelerate.
- The U.S. only represents five percent of the world’s population, and most of U.S. GDP is earned outside the country. (He did not say that the population percentage is falling, nor that the non-U.S. percentage of GDP is falling).
The Gauntlet—The U.S. Risks Capitulation at the Crucial Moment
- Protectionism is rising to dangerous levels in the U.S. Politicians and most U.S. citizens do not understand how free trade contributes to the strength of the U.S. economy. For more on this, see The Transatlantic Partnership and Its Implications for U.S. and E.U. Economies.
- U.S. President Bush is having a very difficult time getting CAFTA (Central American Free Trade Agreement) and free trade agreements with South Korea, and this sends a terrible signal to the world: the U.S. does not want to take any risks, to open its markets or to share its destiny with friendly nations. Colombia and Peru need U.S. support to continue to pursue a free trade agenda and move toward democracy. (This against the backdrop of increasing socialism in Latin America and open hostility of Hugo Chavez).
- Owens worries that the U.S. has lost the will to compete, the courage to do the right thing and the confidence to embrace other nations. U.S. congressmen have passed 94 anti-China bills, and their constituents clamor for more. China is not perfect, but they have made tremendous progress, and their progress drives the demand for an increasing portion of U.S. companies. We are at risk of a U.S.-China trade war.
- We need to reactivate the DOHA round of trade talks; the U.S. currently collects more (trade) duties from poor countries than from wealthy countries (due to skewed bilateral agreements). That is sending an unfortunate message to the world.
- Immigration has always been a cornerstone of the U.S. success model, but we are in danger of dropping the ball at a critical time. “What kind of universities do we want?” Owens asked. Current immigration policies make the U.S. an unattractive place for the world’s best and brightest to come and study. For the few who come here to study, we make it virtually impossible for them to stay and work. We should give them green cards when they graduate. (by not doing so, the U.S. is exporting knowledge).
- There is no intelligent immigration discussion. Twelve million Mexicans are at risk of being deported because they are here illegally. If the U.S. deported them, the economy would shut down.
- The U.S. has the second highest (corporate) tax rate in the OECD. The U.S. taxes all income, no matter where earned, and this keeps jobs outside the U.S.
- The looming U.S. Social Security and health care crisis drive up U.S. employee costs, and there is no honest bi-partisan discussion about the problem or a solution. There is demagoguery, no accountability.
- From a performance perspective, the U.S. labor market is competitive, but other nations are emerging to challenge. Caterpillar workers in Brazil are top in class, and Chinese workers are incredibly motivated, hungry to succeed and willing to go the extra mile. Owens didn’t explicitly say it like this, but the flavor was, “It isn’t so much the wage differential but the motivation and determination to succeed” is where U.S. workers are losing ground. He did say, “What happened to our can-do attitude?”
- Cat has been in China since the Nixon era, and they formed JVs (joint ventures) in the 1990s. They have rapidly expanded their China operation, and ” China is the best startup we’ve ever had” due to the motivation of the workers, their openness and willingness to learn.
Analysis and Conclusions
- Owens’ simple and powerful message really resonated with me. The U.S. is a market leader in many industries, culture and global politics and, as such, is invested in the world the way it is now. The message was well suited to the audience, many of whom lead market leading companies that are the ones to beat in their markets. Owens painted a clear picture of the U.S. as a leader facing the prospect of decline, but such a decline would be voluntary. Basically, it comes down to this: does the U.S. have the will and courage to take the risks of more openness? This is a very real risk: if the U.S. is not competitive, it will be outperformed in an open market (it would be outperformed in closed markets, too, but that would be more difficult to see).
- The U.S. has much to lose if trade wars—or lack of continued liberalization—ensue. The problem is, most U.S. citizens do not understand how their destiny is being determined by global trade. U.S. workers and congressmen blame global trade for the disruption being caused by the shift to the Knowledge Economy. In fact, significant disruption to workers and markets will happen whether markets are open or closed.
- The U.S. is accustomed to being the challenger and to having the advantage in open markets. U.S. companies and workers are still competitive, according to Owens, but unless they muster the courage to compete, they will lose their leading market positions.
- Virtually all product-oriented business face commoditization because their production capacity has outstripped demand in mature markets (i.e. the U.S., Europe, Japan), where populations are declining or flat. Therefore, demand growth of most product and service businesses is linked to emerging markets, where growth will be significant for years.
- If U.S. protectionism precipitates in trade wars, the U.S. will lose far more than it will gain: it will risk being frozen out of fast-growing Asian emerging markets, which will turn to China, Japan and India for leadership.
- The shift from the Industrial Economy to the Knowledge Economy has displaced industrial workers, who are being confronted with transforming themselves into knowledge workers. An increasing portion of product value is knowledge or information around the product. Innovation will be the value-producing calling card of the Knowledge Economy, and it is knowledge work par excellence.
- A miniscule portion of U.S. congressmen have stepped outside the country. They do not understand the U.S.’s global role.
- It is a gross simplification with an element of truth that the U.S. should bear in mind that the U.S. was the economic supernova of the 20th century, and it must now share the sky with China, India and other emerging powers. What can the U.S. learn from its experience as an emerging economic colossus and apply that knowledge to China?
- The U.S. has lost its moral authority to lead on the environment. The U.S. has consumed more fossil fuels and other natural resources than any other country since the 1950s, and the country produces most of the world’s greenhouse gases and much of its air pollutants. China is rapidly developing an appetite on a U.S. scale.
- For more on China, the U.S. and the environment, see my coverage of the Economist/WBEZ debate, Will China’s Rise Lead to an Environmental Catastrophe?
- U.S. citizens have lost touch with reality, and European consumption is also high. Their consumption levels were predicated on the rest of the world consuming little, but the global consumption picture is rapidly changing. The other side of such consumption is pollution and damage to the environment. The U.S. is the world’s most profligate polluter according to almost any standard.
- As I have written for years, China’s growth gives leading nations an opportunity to transform their roles from adversaries to collaborators. China’s growth and the growing scarcities of natural resources will force consumptive countries to become more adversarial or collaborative. The world is becoming smaller, resources are finite, and all people increasingly share a collective future. Our only choice is how we deal with that reality. More on this here.
- The U.S. can reassume moral authority by taking the lead on adopting stringent environmental steps and sharing technology and approaches with China to alleviate its catastrophic environmental problems. No major resource consuming country can “make its own way” anymore—the earth is too small.
- Mankind will be forced to approach its stewardship of the earth as a collaborative activity, and free market ideas can help. One of the most fruitful areas of collaboration will be crossing economics with environmental science. For example, many citizens of rich countries are angry and frustrated at the deforestation of the Amazon and in many parts of Asia. They correctly understand that this risks impoverishing the land and destroying huge carbon processing factories. But they have no moral authority to determine other countries’ affairs because they are wealthy and consume a huge portion of the earth’s resources and contribute to its carbon pollution. Why not make it economically attractive for nations with lush forests to keep them? As inhabitants of the earth who love fossil fuels, we depend on carbon processing factories, so why not pay for them and issue lucrative carbon payments to forested countries for their carbon processing services?
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23 January 2007
2007 Pockets of Opportunity Revealed—Plus Political Handicapping
The Executives’ Club of Chicago assembled an all-star panel to give Midwest business leaders their guidance for various aspects of the U.S. economy in 2007. Diane Swonk, Chief Economist of Mesirow Financial, Alan Murray, Assistant Managing Editor of The Wall Street Journal and Robert “Bob” Froehlich, Chairman of the Investment Strategy Committee, Deutsche Asset Management broke out their respective crystal balls for 2007, and the audience was not disappointed for lack of insight or wit. The session was scintillatingly moderated by Terry Savage, Financial Columnist of the Chicago Sun-Times.
The consensus was that the U.S. economy would have a relatively benign year in 2007. All panelists predicted a higher Dow, and their predictions concurred with Wall Street’s most accurate ,^) indicator, the Super Bowl Predictor. Little of import will happen on the political front, the U.S. economy will grow at a slower pace, and investment returns will be generally highest outside the U.S. Elsewhere, consumer empowerment reared its head in the executive pay issue, Apple will remain an enigma for investors who don’t understand customer experience, and the U.S. will have to get over itself in order to realize its potential in the Knowledge Economy.
Diane Swonk, Chief Economist, Mesirow Financial
Diane is a widely quoted economist who is sought out for advice worldwide and serving on committees to the Federal Reserve Board and the (U.S.) Congressional Budget Office, among others. Overall, Diane sees smooth sailing for 2007:
- Housing and automotive challenges dissipating: the much ballyhooed housing bust has largely proven to be a paper tiger at the national level, and regional corrections have been orderly and will remain so. Long-term bonds will be at less than 4.5%. The automotive industry has been an engine of the hot U.S. economy until recently. The travails of the Big Three have made headlines, but management has been able to contain the damage, and contract negotiations this summer with the United Auto Workers should provide more relief. These orderly corrections bode well for the economy in 2007.
- Oil prices: 2007 will see increasing stability in crude oil prices. Iran is gaining in political power, both within the Middle East and OPEC. They are pushing for higher oil prices, but Saudi Arabia is targeting lower oil prices. The “fear premium” has been pushing oil prices and will continue to do so unless diplomatic approaches are used with Iran. If oil falls lower than $50, it could decline significantly more. It should remain in the $50-60 range during 2007.
- Consumer spending: has been driving the U.S. economy for the past several years. During 2007, consumers will continue to be price sensitive, but they will continue to spend. 2006 saw record Wall Street bonuses, and the wealthy class continues to grow. The top 1% of earners now account for 20% of the wealth, approximately what we saw in 2000. As one indicator, Rolls Royce has a two-year backlog of orders for its new $406,000 Drophead Coupé. They aren’t in China yet but are considering it.
- Business investment: will be the tailwind of the U.S. economy in 2007. Commercial real estate (office), oil-related infrastructure and hospitality will drive construction, partially dampening the slowdown in residential construction.
- U.S. deficit: the deficit decreased in 2006, and the trend should continue in 2007. Increased revenue has increased tax revenue, and taxes on capital gains and corporate profits are higher than income taxes. U.S. companies have seen 19 consecutive quarters in corporate profits.
- Dynamic shift in trade: U.S. exports have continued to increase, and imports from China decreased in 2006. The improving trade balance will add 1% to growth in 2007. The U.S. economy is slowing, but the rest of the world—notably Japan, Germany and the E.U.—is growing. The relatively low dollar encourages them to buy U.S. products. Continued European infrastructure investments helped to brighten the picture, as well as demand for equipment in developing countries and aircraft. Of late, imports have slowed, helped in part by a warm winter thus far. The Midwest is in the process of decoupling its fortunes from the automotive sector (as its factories turn to equipment exports).
- The Federal Reserve: since Ben Bernanke succeeded Alan Greenspan as Fed Chairman in 2006, the Fed has assumed a less interventionist stance toward monetary policy. In 2007, we should see 2.75-3.00% growth, a veritable “perfection economy” in which growth is solid and steady. The Greenspan Fed was much more aggressive, tending to overshoot and compensate afterward. The Fed will maintain a wait and see approach unless unexpected catastrophic developments unfold in the housing sector, when it would ease. Notably, the bond markets don’t fully appreciate this change.
- Markets: by year end 2007, we should see: The Dow at 13,400, the S&P at 1560, Fed Funds Rate at 5.5% and 5.1% for long-term bond rates.
- If she were a retail investor with $100,000…: she would allocate the investment thus: 50% in international (highlight Japanese stocks), 25% in U.S. stocks and 25% in stocks involved with treating diabetes.
Alan Murray, Assistant Managing Editor, The Wall Street Journal
Alan Murray authors the Business column for The Wall Street Journal and contributes regularly to CNBC. As the former Washington, D.C. bureau chief for both CNBC and The Wall Street Journal, Alan has significant insight into business and politics. He reserved “political handicapping” for the Q&A and spoke about three business trends that will continue to affect markets in 2007.
- The changed role of the public company CEO: recent developments at Home Depot and GE show that there has been a sea change in shareholder attitude toward CEO pay.
- During the 1990s, CEOs were revered and given much latitude with how they ran their companies. Three CEOs were Time Magazine’s “Person of the Year.” They sat on the top of large hierarchies, and few people questioned it.
- The stock market crash and Enron was the spark that began to change public expectations. During the Enron and MCI debacles, many publications pointed out that CEOs were vilified and regulation enacted after past stock market plunges, only to have business as usual subsequently return. However, in the most recent case, the change is profound, which Immelt understands (and has been restraining his pay) and Nardelli didn’t. The CEO’s close to absolute power is continuing to unravel.
- The role of private equity has vastly increased: private equity has continued to grow in scale and scope, as holdings amount to hundreds of billions of dollars today.
- Public companies like GE often sell their underperforming businesses to private equity, which hires new management teams and tries to make the company more valuable.
- Private equity investors generally want high returns, but they load the acquired company with debt. The open question is, “Can they run the businesses they buy better (than GE)?”
- The world is awash with liquidity: related to the private equity trend is that high liquidity makes many things possible—including many that should not be.
- There was minimal credit correction in the housing market, and the U.S. government borrows infinitely with no apparent consequences.
- Will the sea of liquidity go on forever? When it stops, everything will reverse, and something will stop it eventually. Today, stupid business decisions are being made because excess liquidity is chasing returns.
- Politics: the 2006 election was the nastiest yet, and Washington will be in gridlock throughout 2007. The stakes of the 2008 presidential election are huge, and no one will take any chances. Republicans worry that Bush is killing their chances by prolonging the Iraq War.
- The Republican race will probably be fairly orderly, with the candidate emerging early. He wouldn’t be surprised to see John McCain. Giuliani will not be a factor.
- Democrats are always more dynamic (Alan may have said “disorganized”), but he wouldn’t be surprised to see Hillary Clinton. Obama will inject dynamism into the race, but he won’t be a serious contender. “The White House isn’t an entry-level job,” he commented wryly. However, he also cited “the Lou Dobbs factor,” concern about the ever-increasing disparity of wealth and stagnating wages. If that issue emerges strong during the campaign, he could see Edwards as the Democratic candidate, as he has a strong middle class message.
- 2007 predictions: continued changes in executive compensation. fewer employment contracts for CEOs; Congress considering changes affecting corporate bylaws.
- If he were a retail investor with $100,000…: he would short Apple in 2007, recounting how he had recommended a buy for 2005 and a sell in 2006 because the stock price was wildly out of line (for my comment, see below). Alan declined to give other investment advice.
Dr. Robert “Bob” Froehlich, Chairman, Investment Strategy Committee, Deutsche Asset Management
Widely quoted on CNBC, CNN, Bloomberg, Fox News and other financial programs, Bob Froehlich boiled his far-reaching comments down to a simple statement for U.S. investors: “invest international.”
- 2007 headwinds will turn out to be tailwinds:
two supposed challenges for the U.S. economy are the housing bubble and rising interest rates, but they will not have an adverse impact in 2007:
- The “housing bubble” is a myth that never existed because there is no (national) “housing market.” Markets for housing are local, and certain housing values have seen significant change, but they do not affect each other enough to create a national bubble or bust. They have already corrected themselves.
- Interest rates will be stable because we no longer have a Greenspan Fed.
- China: while the Dow will be over 14,000 in 2007, that will represent a modest gain. Meanwhile, the Chinese stock market will rise at least 50% in value in 2007. Bob explained the political and economic impact of the 2008 Olympic Games (Beijing) and the 2010 World’s Fair
- In a message that was especially prescient to the Chicago audience, Bob pointed out that the Olympics provides much less brute economic value to the host city than one would expect. There are huge infrastructure investments, and tourist-related revenues are captured over a short period (say, two weeks). According to this logic, many investors are shorting Chinese stocks because their direct economic impact of the Beijing Olympics will be insignificant.
- However, the Olympics is the overture, and the three act opera will be the World’s Fair, which will produce tourist-related revenue over a period of 184 days. Every global business will be represented, and huge deals will be done, with no expense spared to facilitate deal making.
- The financial services industry has significant upside in 2007: M&A will set records:
- The M&A market was interrupted for much of 2006 due to the uncertainty around the Iraq War, and this has produced a backlog of deals. Since investment bankers only get paid when deals are done, the pressure is on to consummate those deals this year.
- But there’s more: the 2008 presidential election will produce significant uncertainty in the markets, and bankers will point out to their clients that they should do 2008 deals in 2007.
- International investment:
is the way to go for 2007 (and beyond):
- If U.S. investors want to maximize their investment returns, they have to get over the longstanding assumption that investing abroad is “un-american.” He pointed out that investment managers who obtain mediocre results from investing in GE won’t be blamed. International investments are held to a different standard, and if they go badly, the manager is blamed.
- He urged investors to wake up, pointing out that what is *not* U.S.: 98% of the world’s land mass, 94% of the world ‘s population, 93% of the world’s jobs, 72% of the world’s economy and 65% of the world’s resources.
- “We’re a rounding error,” he quipped. “There’s nothing un-american about making money.”
- Other 2007 Predictions: oil will remain in the $60-65 range.
- If he were a retail investor with $100,000…: he would allocate the investment thus: 60% stocks (67% non-U.S.), 10% bonds, no cash, 15% commodities, 15% real estate—and 90% non-U.S. More specifically, $25,000 in each of the following: China Mobile, China Petroleum (China’s Exxon), Morgan Stanley and the Chicago Mercantile Exchange. The Chinese stocks are available to U.S. investors as ADRs (American Depositary Receipts).
Analysis and Conclusions
- Bob Froehlich’s comments reflected a fundamental weakness among U.S. leaders and citizens: a lack of appreciation for the world “out there.” However, this is by no means a U.S. phenomenon (although the U.S. currently exemplifies it well): any market that is overwhelmingly dominant for a prolonged period will fall prey to it. Markets tend to be customer-focused, and the U.S. has represented an enormous portion of the global economy since the 1950s. Other countries focused on their U.S. customers, and U.S. companies focused on their U.S. customers. The rest of the world was less important. Obviously, that era is a relic: China is rapidly emerging as a huge customer for the world’s products, and it manufacturers a growing portion of the world’s products. It will continue to grow in stature, as will India and other countries that mobilize around the Knowledge Economy.
- International investment is a tremendous opportunity: generally, there is considerable economic dynamism outside the U.S. That said, China specifically presents political risk in that it is not a democracy and could abruptly change its policy toward foreign investors.
- Alan Murray may be even more disappointed in his “sell Apple” advice this year, and he won’t be alone. I agree with him that Apple’s stock is grossly overvalued—when you regard Apple as a hardware and software company. However, most people do not yet understand that Apple is neither a computer company, nor a software company nor a device company. It is a customer experience company. Apple’s DNA has always been design, which is ultimately experience-focused; moreover, (Steve) Jobs’ insights gained from his his role at Pixar and focus on music and film is helping to give the company a real edge. I speculate that the concept behind iLife is “make and share your own life experience” with pictures, music and video. Due to Apple’s creative focus, the vision focuses on customer-creativity and sharing. The U.S. culture is very entertainment-focused, and Apple enables customers to actively create and share entertainment. Therefore, the consumer empowerment experience is a critical part of the value proposition, and the stock can go far higher. It also makes it far more difficult for computer or device companies to compete with Apple on the customer experience terrain.
- The executive compensation issue is even more interesting when examined from a consumer empowerment viewpoint. It is a truism that “information is power,” and we are emerging from an era in which relatively few people were privy to “sensitive” information (say, about compensation). This is the larger issue, and I venture that there is no way back. This will increasingly inconvenience leaders that are accustomed to acting without facing their stakeholders’ visibility into everything.”
- If anyone needs any other reason to be bullish on 2007, consider Wall Street’s most accurate indicator, the Super Bowl Predictor, which has an 80% success rate for predicting the direction for the Dow since the advent of the game in 1967. As reported by The Wall Street Journal, it holds that whenever an “original” National Football League team wins the game, the Dow goes up that year. Since both playoff finalists, the Chicago Bears and the Indianapolis Colts, are original members, there’s your answer!
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17 January 2007
Political Insight into the Global Knowledge Market
The Strategic Management Association, the Harvard Business School and the CDMA sponsored the 2007 China Outlook, which was given by Lyric Hughes-Hale, Founder China Online in Chicago 9 January 2007. Her presentation was preceded by David Hale’s 2007 Economic Forecast. As a long-time China watcher and analyst, Lyric has rare and unusual insights to which I’ll try to do justice before giving my observations. The Global Human Capital Journal also covered the 2006 China Outlook.
Lyric’s China Outlook reflected global political transformation and how yesterday’s Cold War politics are becoming more outmoded with each passing quarter. She didn’t say it directly, but her comment about increasingly irrelevant organizations like the World Bank could easily apply to governments as well. Democracies and legal agreements increasingly lag technology development, and the gulf between them is accelerating. Are they becoming less relevant or effective? China is not burdened by dissent, which currently seems to add to its competitive advantage because it can move quickly and decisively.
Refreshingly, Lyric sees that the biggest threat to the U.S. is its leaders’ own limited thinking, which is causing them to lose tremendous opportunities to engage the world. Here are her remarks, from my notes:
- Climate for global trade: 2006 continued to see the rise of regionalism as the dream of international institutions faded.
- The Doha Round is failing, and international organizations like the World Bank and the World Trade Organization are falling apart. They cannot reform themselves fast enough to keep up with globalization and remain effective. New institutions will emerge.
- Bilateral trade agreements are inefficient creators of economic value (when compared to global agreements), but they are increasingly being done as global initiatives fail (Doha). In North America, NAFTA will grow. The European Union is growing in scope. Tremendous regional growth in Asia will continue, and an Asian trade block will emerge (like the E.U.).
- Technology is far ahead of legal consideration, and it is accelerating, so the gap between them is widening. Intellectual property rights and digital rights are two battleground. This affects the value of all kinds of goods.
- National resource-based economies always struggle because power is always concentrated in the hands of the few, and corruption is rampant. Current examples are Russia, Nigeria and Sudan. Benefits do not trickle down to create wealth among all classes, causing political instability.
- World leadership: times are changing:
- As a world leader, the U.S. has lost a tremendous degree of respect in the world, and we will increasingly be stymied in achieving our initiatives due to increased suspicion and objection. Bush has lost credibility, and most U.S. leaders do not fully appreciate this.
- Surprisingly, China is seen as a more moderate, rational power by many. The U.S. is increasingly perceived as revolutionary, not rational or impartial.
- This situation is reflected by the weak U.S. Dollar, which will lose its status as a reserve currency. Politics trumps economics.
- U.S. quick takes: the Democrats are more sophisticated today and will not be as anti-trade as David fears. With respect to the dollar’s value relative to other currencies, U.S. buying habits are more relevant than the fundamentals.
- The new Asia: look beyond yesterday’s paradigm: the two fastest-growing economies in Asia are “Communist” regimes that are mandating economic “experimentation” to achieve their political ends, China and Vietnam. The rest of the world needs to reexamine its pre-conceived notions to understand this shift. The U.S. and other democracies are stratified and cannot keep pace.
- China-U.S. dynamics:
the U.S. and China are increasingly interdependent:
- U.S. companies’ profitability and stock prices are driven by ever-higher levels of dependency on Chinese workers to keep prices low. Chinese serve as “shadow employees”; they are largely invisible to consumers.
- Shadow workers have contributed to wage stagnation in the U.S., Japan and Europe for the past several years.
- Competition to keep prices low (and market share up) is relentless. Chinese wages are increasing, and productivity increases will fail to maintain the price/quality ceiling, and we will see widespread quality issues.
- China will increase its competitiveness by launching global brands and selling direct to consumers worldwide, bypassing multinationals. They will take out U.S. companies and maintain their profits.
- Middle East: this is another area in which the U.S. must change its perspective:
- U.S. leadership has tended to demonize people and governments that do not agree with its initiatives. Iran, along with North Korea and Iraq, was branded as the “Axis of Evil.” Iran has been shunned. But if one regards Iran as a nation with its self-interest like any other, it has withstood significant pressure from the international community and the U.S. Iran’s leaders are smart.
- Ahmadinejad and Chavez are given extensive negative press in U.S. news media, but they could be seen differently, as “a new kind of leader” willing to stand up to established interests. The point is not whether they are “good” or “bad”; what is important is that the U.S. lose its outdated (Cold War) world view to regain its relevance.
- Syria has likewise been consistently rebuffed by the U.S., and we are losing opportunities there. Assad and his wife are also smart leaders, if the U.S. would bother to really look at them. Assad is a physician, and his wife worked at Morgan Stanley. They want to reposition Syria in the world as an “emerging country.” They have launched a stock exchange and liberalized the banking system. In 2003, Syria warned the U.S. against attacking Iraq, to no avail.
- Ironically, the U.S. has accomplished in Iraq what Iran only dreamed of, and Iran is increasing its influence due to Iraq’s collapse and the changed balance of power.
- The Middle East’s instability is driven less by religion and more by economics, and leaders are starting to recognize that regional instability is an excuse for not pursuing economic changes. In many countries, 30-40% of the people are unemployed. Malaysia, with a large muslim population, has an unemployment level of between 3-4%, and it is very peaceful.
- India: India is already 15-20 years behind China, and the gap is widening. Its infrastructure is a drag on economic development, and 55% of its women are illiterate. Mobile phone penetration is relatively low. These weaknesses will continue to compromise its ability to realize its potential.
- Concluding points:
- The current U.S. leadership is a problem, and the U.S. is already far less relevant in much of the world’s eyes than it was several years ago. Its current world view is limited and compromises its leadership.
- The U.S. needs to experiment more by engaging leaders with new ideas. For example, it continually spurns Vietnam, which is very open to it. There are opportunities to open dialogs with Iran and Syria.
- Globalization is an environment in which U.S. leadership would be very natural, as the country has traditionally been diverse, flexible and open to change. It is an ideal, not a place.
- Unfortunately, the U.S. has a militaristic viewpoint that will probably result in a war with Iran before the end of Bush’s presidency.
Analysis and Conclusions
- Like many other transformations, globalization can be deceptive—not because deception is inherent to it, but because the observer is limited in his understanding. We humans learn by experience, and we find it difficult to “unlearn” lessons of the past that are either untrue in the new environment or are true in a different way. As I have written elsewhere, leaders have sung the praises of globalization so long that it seems a familiar tune, but that leads to problems when additional verses are in different languages. For example, captains of industry and government began talking about it within the Industrial Economy paradigm, and that still colors their thoughts. It used to carry an imperialist flavor.
- As I wrote in The TransAtlantic Partnership and Its Implications for U.S. and E.U. Economies (see World Turning), the terms “first world” and “third world” are trappings of the Industrial Economy, where political and industrial power was determined by countries’ ability to exploit their natural resources. In the Industrial Economy, geographical position (geopolitics) was held to be of paramount import; in the Knowledge Economy, geopolitics warms the bench in favor of regulatory environment (witness the continued rise of London as a financial center at the expense of New York; London uses [less] regulation as a competitive weapon). Because people, education and knowledge work produce most value-add, economic development can be much faster and the balance of power changed. This shift will catch many leaders flat-footed. In the Knowledge Economy, traditional levers of power are not as relevant, and new ones emerge.
- In a sense, the U.S. “won” the Cold War, but this has led to serious lock-in in which leaders want to remain in the past in which they prevailed rather than embracing the present. Today, “Communist” is increasingly out of the context in which it was born.
- Of course, oil is very zero sum. Finding alternative energy is far more important than going to the moon ever was. There should be nothing less than a no-holds-barred effort to develop other energy sources.
- Lyric’s mention of technology and digital rights reflected the Knowledge Economy shift. The Industrial Economy was a zero sum game because it was built on transforming raw materials into goods as efficiently as possible. Conversely, the Knowledge Economy creates value from information, which is far less zero sum. This will undoubtedly change the context around ownership. In a raw materials context, exclusive use was extremely important. In the new environment, it is less so.
- The conventional view recognizes that China is a tremendous industrial power, but its rapid progress on the banking system and the torrid development in Asia will rapidly transform it into a banking powerhouse and financial center.
- The Knowledge Economy offers a fundamentally different way to create wealth, which is not based on raw materials. As cities look to Silicon Valley as the paragon for technology innovation, countries look to India and China as examples: they are “third world” countries rapidly ascending to first world rank.
- Lyric implied that democracy was a competitive disadvantage (from a strictly economic point of view) because it leads to extensive discussion and lack of action. An interesting idea to ponder.
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This post originated at CSRA's blog. Please share your thoughts and comments here. Thank you.
17 January 2007
Economic Insight Behind the Global Knowledge Market
The Strategic Management Association, the Harvard Business School and the CDMA sponsored the 2007 Economic Forecast featuring David Hale, Chairman of Prince Street Capital Management and Lyric Hughes-Hale, Founder China Online. David has international renown as an international economist, and he presented his encyclopedic knowledge and perspective on global economic trends in Chicago on 9 January 2007. Afterward, Lyric shared her insights on China in Part II of the evening. The Global Human Capital Journal also covered the 2006 Economic Forecast.
David’s forecast was global in scope but adapted to his U.S. audience. It reflected many of the numbers behind the global shift to the Knowledge Economy, and how this is driving global prosperity:
In 2006, we saw all-encompassing prosperity with no major globally significant financial shock since the 2001 Argentina crisis. Prosperity has been broadly based, which has partially been due to the end of the Cold War, and high commodity prices have extended prosperity to developing countries in Latin America, Africa and Central Asia. Stock market capitalization reflects the prosperity. For example, in 2000, Microsoft’s market capitalization was triple that of all commodities of the world: $600 billion versus $200 billion. In 2006, Microsoft market capitalization $250 billion, that of global commodities $800 billion.
Here are his specific remarks, from my notes. All references to “dollars” are U.S. Dollars unless noted:
- U.S. economy: in 2007, the U.S. economic growth will slow to about 2.5%, where it has been 3.5-4.5% during the past 3-4 years. Highlights:
- Housing market: during the past 4 years, the U.S. has seen the greatest housing boom in history in which the average home value increased by 65%. The spillover effects have been broad, driving consumer spending. At the same time, the household savings rate has diminished 1.5%. There was no housing growth in 2006, when housing prices dropped 4-5% in the Chicago area and 7% in Las Vegas. We haven’t seen such price drops since 1933. This decreased consumer borrowing against housing.
- Corporate profits: U.S. corporations have seen 17 consecutive quarters of increases in profits, and there is more liquidity than we have seen since the mid sixties. This has been partially due to restrained pay increases and cautious capital investment. Since 2002, this has sharply contrasted with the situation during the IT spending boom from 1995-2001, when corporations borrowed heavily to invest in IT and remediate perceived Y2K issues. During 2007, corporate profits will lead to increasing investment that will serve to partially compensate for the slowdown in consumer spending.
- The Federal Reserve is cautious: there will be little/no change in rates for six months or more. Inflation is 2.7%. Rents had inflated, but significant increases in supply will moderate. Oil and copper price drops will help to keep inflation low.
- The dollar: the dollar would fall significantly, even 30-40%, but for foreign intervention. The China and Japan have huge dollar reserves and trade with the U.S., and they stabilize the dollar. No one wants his currency to appreciate against the dollar.
- U.S. politics:
November elections gave us the first Democratic Congress since 1994, which will change the picture, but gradually:
- Tax impasse: in 2010 the Bush tax cuts expire, and there will be a series of negotiations and compromises until then; even if we have a Democrat in the White House, it’s unlikely that Congress will allow the massive tax increase that would otherwise be invoked. Speculating, in the near term, we could see the top marginal income tax go back to 40% and capital gains back to 35%. Trade policy is already problematic but will only be more so with the new Congress. Labor laws are already bogging down negotiations. Of nine treaties on the table, the U.S. has signed two. Current Democrat initiatives are in the areas of drug/pharma pricing and oil taxes. They are aiming to roll back oil credits, and the minimum wage hike has already passed, although its impact will be limited, as many states have already increased state minimum wages. Obviously, the 2008 election will be key.
had another banner year in 2006 and is set for another in 2007, although growth should slow from 10-11% to 9-9.5%:
- China continues to attract multifaceted foreign investment, to the tune of $700 billion in 2006. Sixty percent of China’s exports are manufactured by foreign-owned companies. Meanwhile, capital spending was 48% of GDP last year, unprecedented in Chinese history.
- Wage growth was 15-16% in 2006, driving consumption. Thirty years ago, major purchases were sewing machines and television sets; in the 1990s, mobile phones were the most desired consumer product; today it’s the motorcar. In fact, Goldman Sachems projects that there will be 500 million motorcars in China by 2050.
- China’s progress in reforming its banking system is extraordinary. Its banks are cleaning up their books by disposing of bad debts, and several are going private. The market capitalization of China’s four largest banks stands at $635 billion. The ICBC (Industrial and Commercial Bank of China) has a market capitalization of $260 billion, closely behind Citibank, which is at $275 billion.
- Trade continues to grow, and trading partners continue to put pressure on China to ease its trade surplus, which was $160 billion in 2006. The government has slowly been letting the exchange rate appreciate gradually since July 2005, as it went from 8.27 to 7.8 CNY to the U.S. Dollar. It is averaging 5% appreciation per year, and this will continue: one strong motivator is protecting Chinese farmers, who increasingly compete with foreign competitors. The slowing U.S. economy will diminish exports to the U.S. Thirty percent of China’s exports currently go to the U.S., 10% of China’s GDP.
- The government is concerned about the speculative nature of capital spending, and it is increasing reserves.
- There will be a “surprise” rapprochement with Taiwan in 2008. They countries will eventually unify.
- The global economy: we will have a relatively benign period for the next 12-18 months, although there are several exogenous factors that could disturb the trend (more below).
- European Union: growth for 2007 should be in the 2.6-2.7% range, driven by exports, investment and moderate consumption. Germany, Europe’s biggest economy, is cutting wages and easing restrictions on the working week, so workers can increase productivity. This is gradually improving, after five years of stagnant wages and weak consumer spending. Spain, France and Italy have seen relatively good growth due to real estate appreciation and related wealth and consumption. This said, 2007 will see several sizable tax increases in Europe: Italy increases its income tax, Germany’s value-added tax (VAT) goes to 19% from 16%. The European Central Bank has been increasing interest rates, now at 3.5%, and they will be at 4% by summer 2007. Germany should see about 2.2% growth for 2007.
- Japan: is a bright spot, after a seemingly terminal slowdown. Its banks are now in largely good shape, having disposed of most of their problem loans, which now stand at 2-3% of their portfolios, where they were 8-9% before. Corporate profits are increasing, and corporations are beginning to hire permanent workers again. Exports are gaining, however, consumer spending is still relatively weak. Japan should see 2-2.5% growth for 2007.
- India: should see 7-8% growth in 2007. FDI (foreign direct investment) is high, and the software and services sector remains a bright spot. However, India continues to be plagued by high bureaucracy and 14 political parties. Many oppose liberalization, infrastructure investments and deregulation, which muddies India’s popularity for foreign investors. This situation should be relatively unchanged for the next 2-3 years.
- Africa: should average 6% growth in 2007, helped considerably by continued high commodity prices. For example, the Zambia Kwacha has appreciated 30% against the U.S. Dollar due to high copper prices.
- Latin America: should grow by an average of 5-6% in 2007, and Peru by 6-7%. However, politics burdens the region by adding uncertainty. Venezuela’s Chavez was reelected by a strong margin and is proceeding with increasing the state’s role in the economy. In Bolivia, Ecuador and Nicaragua, populists were elected in 2006, and Chavez backs his offers to help them adopt his economic ideas with aid. Brazil is a bright spot Da Silva is a good president for foreign investors, and Brazil has no deficits. Mexico had a photo finish presidential election this summer in which Felipe Calderón eventually triumphed, which bodes well for foreign investors. Is is pro-business, and FDI should be strong in 2007. The vision is that Mexico should compete with China as a supplier of manufacturing expertise. This should produce strong synergies with the U.S.
- Oil-producing countries: will post solid gains in 2007, but these will be moderated by the slowdown
in U.S. growth, which will also dampen inflation possibilities.
- Russia: has a budget surplus of $100 billion.
- The (Persian) Gulf Region: should grow at 5-6% in 2007, with a trade surplus of $250 billion, all of which will drive stock market growth. Politics is the real story here: obviously, Iraq is a mess with no end in sight, and Iran’s influence in the region is growing significantly. Depending on whom one believes, Iran is one (Israel), two (U.S.) or three (E.U.) years away from having nuclear weapons. Given this, the pressure will mount on the U.S. to strike in the absence of diplomatic breakthrough. There is a significant chance that Bush will react before the end of his presidency. Given that Iran is the Shiite (muslim) powerhouse, and its increasing power is threatening Sunni muslim regimes elsewhere in the Gulf. If Iran succeeds in developing nuclear weapons, the region will see heated proliferation. If Bush strikes Iran, the price of oil will likely double, shipping will be disturbed, negatively impacting trade. That said, moderates did well in Iranian elections two months ago, and its current government may be losing popular support. Meanwhile, Iraq now has a full-blown civil war in everything but name. If the U.S. were to pull out as some advocate, that would produce a regional catastrophe and oil market crisis.
- Financial market threat: a significant emerging threat is surplus liquidity, which is leading to increasing levels of speculation and the risk of a significant financial crisis.
- The Middle East and China continue to finance the U.S.’s persistent deficits by buying treasuries.
- Worldwide, mergers and acquisitions amounted to $3.8 trillion in 2006. Private equity holdings are in the hundreds of billions (U.S. dollars). Hedge funds have $2 trillion under management, and they are very aggressive.
- Odds are high that there will be a major financial trading accident during the next 2-3 years, which will have significant spillover throughout the global financial system. It’s impossible to say when it will happen with any precision.
- Auto industry: Detroit has been making the wrong products for the market—emphasizing trucks and SUVs in an era of high petrol prices—and Japanese companies have been making consistent gains in the U.S. market. This summer will see a major contract renegotiation with the United Auto Workers union, which will focus on health care costs. Both GM and Ford now have more retired workers than working workers. Health care cost accounts for an average of $2,000 per vehicle. Japan and Canada have nationalized health care, so their industries have a significant cost advantage. However, the days of the internal combustion engine are numbered, given the number of motorcars projected for emerging markets, and continued rises in developed economies.
- 2007 Predictions:
- U.S. stock market growth: 5-10%, profits 6-7%.
- Oil price/barrel: $55-65, if there is war with Iran, $120.
- Interest rates: 4.25-4.75%.
- Concluding points: the world will continue to enjoy a broadly based prosperity in 2007. However, this benign economic climate is endangered by political struggles, with the Middle East being the most obvious.
Analysis and Conclusions
- The widespread wealth we are seeing reflects the shift from the Industrial Economy to the Knowledge Economy. In the latter, many agricultural and industrial goods—although vital—are non-production inputs (like office supplies to a manufacturing company), but demand increases in step with economic activity. India’s growth has largely been in knowledge-based activity, but the increased wealth drives demand for manufactured goods and inputs. This increases their value and spreads wealth to commodity-based economies.
- Stated another way, the Knowledge Economy creates “pull-through” for industrial and agricultural products, which should continue to drive global prosperity.
- Even thirty short years ago, the manufactured goods represented the highest value-add an economy could create, and creating economic value from industry was daunting: bits-products by nature impose all kinds of constraints in their manufacture and transport, and a region’s location and possession of natural resources locked it into its position in the world. This is much less true today.
- In the Knowledge Economy, a country with enlightened leadership can build a knowledge infrastructure (education, technical infrastructure) and move to compete in the global market for knowledge and service.
- Sustained increasing wealth across the spectrum will represent mankind’s most crucial challenge to date: it is precisely the zero sum natural resources that will produce the most friction. Limited supply in the face of increased demand will eventually confront leaders to choose between collaboration or aggression.
- Most poignantly, fossil fuels are an untenable power source as we use them today. Their cost will continue to increase, and evidence is mounting to the point of irrefutability that their use drives global warming, threatening our planet. Leaders need to think beyond next quarter’s numbers (whether stocks or elections ,^) to solve the problem. There is no time to lose.
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4 January 2007
In an example which I’ll prophecy will become increasingly commonplace, China is showing itself to be very innovative in health care by implementing market-based offerings. The TEDA International Cardiovascular Hospital, just outside Beijing, offers six levels of service, ranging from $6.70 to $3,200 per night, as reported in “Hospital Caters to China’s Wealthy and Poor” in The Wall Street Journal or the hospital website. The lowest class of service has patients sharing a small room with other patients while “first class” includes a suite with a private gym, a garden, massage chair and other amenities.
China has an aging population of 1.3 billion to whom the government is struggling to provide health care. It regulates the prices of medicine and subsidizes basic services at public hospitals, but most people do not have western-type insurance and end up paying a major portion of their health care. The stakes are high today to solve the health care problem, and they are getting higher as the population ages.
This experiment is enlightening for what may be possible in western countries if they can improve pricing transparency and digitize work processes.
Market-style Experiment: The Wealthy Subsidize Treatment for the Poor
Liu Xiaocheng, the hospital’s president, studied medicine in Australia for several years, and he returned to China specifically to help reform the healthcare system. Dr. Liu’s experiment is seen as a new model for health care that attempts to deliver on Communist ideals while using market-based methods. For example, the TEDA International Cardiovascular Hospital is sleek and ultra-modern, and it outsources cleaning, food, laundry and security and has dispensed with lifetime contracts that are common with state-run hospitals. It also fires people when necessary.
Thus far, Dr. Liu has been able to get support for the model because the core resources are excellent, and they are available to all patients. People travel from all over China for treatment, and Canadian and U.S. Chinese also seek treatment there. The hospital can deliver care much more cheaply than state-run hospitals due to its efficiency and the fact that wealthy patients pay far more.
“It’s just like an airplane,” says Dr. Liu. “In the front of the plane, they have the first class.. and in the end they have economy class. But they’re all going to the same destination. It’s the market!”
Analysis and Conclusions
- The article implies that the quality of the core services provided is high for all classes of service, but the hospital delivers the ancillary services in much different ways. If true, the approach is very interesting—and applicable in the U.S., which is slowly moving toward “consumer-directed healthcare,” which seeks to give patients choice and accountability for making decisions about their health care.
- The hospital’s ability to pursue this model successfully largely depends on relatively transparent costs, which are critical in creating the different classes of service. It is a strong argument for increasing price and process transparency.
- Legacy health care in western countries struggle with price transparency due to the oft-antagonistic nature of providers, payors (whether government or private) and consumers. No party has been directly accountable for the cost of health care, which is one reason why costs have been spiraling out of control and show no signs of stopping.
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This post originated at CSRA's blog. Please share your thoughts and comments here. Thank you.
12 August 2006
India is often described as a mixed proposition with respect to its future promise. Although few would question its brilliance as a “burgeoning technology economy,” most people temper this with somber remarks about its lack of “infrastructure.” However, I will argue that India’s limitations with physical infrastructure will actually help India get further ahead than if it didn’t have such problems.
In the popular view (see Indian Raj and its quote of The Houston Chronicle), India’s technology expertise, language skills and legal sensibilities are its trump cards, but this is compromised by its lack of roads, transportation of all kinds, network infrastructure, electricity, and so on. High tech companies have to build their own generators and network infrastructure, and leading providers have created islands of world class capability to assure their global clients that they don’t depend on the country’s infrastructure. China, on the other hand, is generally seen as a paragon of world-class infrastructure, especially physical infrastructure. Woe is India.
Continue reading The Silver Lining in India’s “Infrastructure” Gap
19 March 2006
Emerging Opportunity to Rebalance Economic and Political Influence
Part II of the 2006 Economic Forecast featuring David Hale (presented Part I) and Lyric Hughes-Hale. Here, I present my notes of Lyric’s talk, followed by my observations.
- Background: China’s development and situation are far more complex than U.S. news sources report. It has seen significant economic liberalization during the past 25 years, and it shows every sign of continuing on that trajectory. However, the country is politically conservative. There is no freedom of the press. That said, the authoritarian government may produce reform much more quickly than if China had been democratic because the democratic process often slows reform. China is far more open and engaged on the world stage than it has been in many years.
- Continue reading China Analysis and Outlook 2006