Friday, 27 September 2013

One small step for Shanghai ......

........  Will it be one big leap for China ? This is the Shanghai Pilot Free Trade Zone, which is opening in Shanghai this weekend. Already it is being compared to the launch of the famous Shenzhen Special Economic Zone in the eighties that heralded the economic revolution in China. Is it economic reform 2.0 in China ? Only time will tell.

China is a strange country when it comes to economic freedom. At one level, it resembles the Wild West economically. Anything goes. You can open a business, do whatever you wish , and make tons of money (and hush hush, ignore most laws regulating business). At another level it is more akin to the Soviet Union. In industries like telecommunications or insurance or banking, you can do virtually nothing. Foreign firms are not welcome, Even Chinese firms are regulated with an iron hand. 

Conventional wisdom says China is at a major fork in its economic journey. Growth rates are slowing down. Relative to the past, that is - even though every other country in the world will give an arm and a leg to be where China is presently. The  investment and export led boom seem to be coming to  a "difficult to sustain" phase. Consumption led growth is the prescription from the economists. A second wave of reforms is prescribed - always difficult in China where politically there is always opposition to economic reforms (even Deng Xiaoping faced bitter opposition when he launched the first wave of reforms). There is also the mortal fear that more economic reforms will inevitably lead to political reforms and nothing terrifies the Communist Party of China more than that.

So a low key testing of the next phase of reform is a sensible move. And that's what the Shanghai Free Trade Zone is rumoured to be. Although there is precious little detail in the government announcement, it is widely expected that inside the zone, the financial sector will be deregulated, the yuan will be convertible and industries such as telecom will be open to foreign investment.  If that indeed proves to be the case, then this is really a big move with potentially global ramifications.

Even more tantalising is the rumour that there will be other types of freedom too inside the zone , not available in the rest of China. The Great Firewall of China will be lifted it is speculated. Currently inside China, Facebook, Twitter, You Tube, Blogger, Word Press and a host of sites we take for granted in our everyday life are all blocked. The Great Firewall also censors every social website inside China. If you post something that the censors don't like, it will be taken down. If you do it repeatedly, there will be a midnight knock on your door. The wilder speculation is that inside the Zone , censorship would be lifted. If this does come true, it would be an earth shattering development in China.

The world is watching. It could prove to be nothing more than a false hope. Or it could be epoch making. I suspect even the bosses in the Party don't know what it will be.  We shall see.

At least China is attempting something. What can I say about India ? Alas.

Monday, 23 September 2013

This is why business leaders are reviled

If you behave like this, you deserve to be cursed, reviled, and generally hated. Unfortunately many business leaders are exactly like this, which is why a business tycoon is considered by society as a figure to be loathed. The "this" I refer to is Stephen Elop, Chairman of Nokia being entitled to a $25m payout for the the sale of Nokia's handset business to Microsoft.

Nokia, as everybody knows, has been in dire straits for quite some time. In 2010, the Board fired its existing Finnish leaders and brought Stephen Elop, from Microsoft, as the CEO to "rescue" Nokia. Elop abandoned Nokia's operating system Symbian and tied its fortunes to Microsoft by adopting the Windows platform. It did not work and Nokia has continued to slide. During Mr Elop's tenure, Nokia's market capitalisation fell  by $ 14 bn - that's the amount Nokia's shareholders have lost. Finally Nokia has decided to sell its handest business to Microsoft for under $ 10 bn.

Elop's contract when he joined Nokia, had a change of control clause - that is if some company bought out Nokia, he would be entitled to a payout. This is not unusual in CEO contracts - for if the company is bought out, the first act of the new owners would be to sack the CEO. So the change of control clause and a payment is acceptable.

What is ridiculous is that Elop and Nokia are using this clause to justify the $ 25m payout to him. This is absurd. Elop came from Microsoft; within 1 year of his coming he tied Nokia's fortunes to Microsoft by adopting the Windows platform. Then he orchestrates the deal to sell the business to Microsoft; as part of this deal he returns to Microsoft and is now front runner to succeed the retiring Steve Ballmer as Chief Executive of Microsoft. For doing this he gets a payout of  $ 25 m in addition to the salary he has been drawing for the years he was in Nokia.

There is a huge uproar and even the Prime Minister of Finland has weighed in. No doubt, as the outrage spreads, Nokia will be forced to reconsider and Elop himself might be pressured by public opinion to forgo this payout.

Why do business leaders and companies do such stupid things. Elop is a very bright man by any account. But what he clearly lacks is grace and a sense of right and wrong. He is a rich man and does not "need" this $ 25 m. Wouldn't he have liked to have gone down as a saviour of Nokia - he found a home for its business which otherwise might simply have had to go into bankruptcy. Beyond a point is money so important, or would you like to leave a legacy, earn respect and go down in history as a "good man".

Instead Elop will be remembered as a greedy , money grabbing, no scruples carpetbagger. Whatever he does in Microsoft in the future will forever be tainted. Did not Elop, a career Microsoft veteran learn anything from Bill Gates,a stellar example of how to be rich ?

Why are business leaders like this ? Does greed overwhelm all virtues ?

Wednesday, 18 September 2013

Who has jurisdiction over me ?

The principle of jurisdiction is a basic tenet in law. Jurisdiction refers to the  law, the court, the authority that is applicable to you . You are then required to follow that law and be subject to  oversight by that authority and that court. In the good old days, jurisdiction was simple - where you were decided who had jurisdiction over you.  I live in India and so the laws of India apply to me. The government of India is the authority that has jurisdiction over me and the courts in India  are the forum I can go to. Simple.

As the world started to globalise, the issue of jurisdiction started to become more complicated. If I did a commercial transaction with say an Australian company - who would have jurisdiction ?  Australia ? India ? That is why in contracts involving multiple countries it is always stated which law would apply and which courts would have jurisdiction. But physical presence or assets always enables that country to have jurisdiction . Although I am an Indian citizen, when I travel to say Burkina Faso, the laws of that country shall prevail - If the law there says that I have to yell Abracadabra loudly three times at 4.27 AM, I better do so.

The arrival of the internet completely destroyed the fundamental principles of jurisdiction and unfortunately there are no legal treaties or conventions that seem to have decided this. Which is why jurisdiction has been "usurped" by the country that is powerful - the US of A. I am an unapologetic Americophile and have great admiration for that country;  yet I find the behaviour of the United States utterly deplorable and downright repulsive in this matter.

I am referring to the famous NSA and the spying it is doing on the world. All the hullabaloo in the US has been about spying on American citizens. But what about foreigners like me - the US has no jurisdiction over me and yet it intercepts every email of mine and reads it, if it wishes to. Forget a non entity like me; the US has been hacking   Dilma Rousseff, the President of Brazil. Now, it is fairly certain that she is no security threat to the US and yet the NSA has hacked her, simply because it could. Brazil is furious and she has cancelled her visit to the US triggering a diplomatic row.

It all boils down to jurisdiction. Google, Microsoft, et al - virtually every internet company of any note is headquartered in the United States and its servers where data is stored is physically based in the United States.  The NSA is therefore claiming jurisdiction and forcing these companies to turn over every data to it - of you and me as well, although we may have nothing to do with the United States.

The danger of balkanisation of the internet is obvious. Brazil is the first to respond (it is really pissed off that they hacked Dilma Rousseff). Brazil is contemplating a law that will force the likes of Google and Microsoft to store any data that originates from Brazil in servers in Brazil itself. Then the likes of the NSA have no jurisdiction and can be told loudly to %$#^ off.

It is easy to turn a blind eye to the NSA's shenanigans and argue that they are welcome to pore every inch over my boring life and inane communication. But that misses the point on civil liberties - a prize that over the centuries, generations have fought and guarded zealously.  If I decide to post my mug shot publicly on Facebook, then I have no right to claim privacy. But if I send a private email to a friend in India, then it is none of the NSA's business to snoop into it. I have no problems if the government of India wants to read it (although I would vigorously oppose that without a court warrant), but I will not tolerate the government of the United States reading it under any circumstance.

What about the NSA argument that this is necessary to combat terrorism and is for security considerations. Bullshit. That may have been how it started, but it has gone way beyond that now. Is Dilma Rousseff or the German embassy in Brussels remotely connected with terrorism - and yet both have been hacked into.  The sanctimonious nonsense of the US objecting to organised Chinese hacking is now exposed - they are no better than the Chinese and even the Chinese did not go far enough to hack Dilma Rousseff.

Why this post in a politics free business blog ? Simply because I am amazed that the fury over the NSA actions is not greater around the world. I may be an insignificant individual but I must speak my mind that the US has absolutely no jurisdiction over me.

Thursday, 12 September 2013

When you pay to sell a business

Mergers & Acquisitions are often the glamorous side of business. CEOs love  them - you go through the excitement of doing a deal, get on to the papers and TV, become famous etc etc. Most of the haggling on the deal is on the price - how much the buyer is willing to pay the seller. But how about a M&A transaction where the seller has to pay the buyer in order for the buyer to buy the business !! Fanciful ? Well, that's exactly what has happened with the sale of Fresh & Easy by Tesco to Ron Burkle.

Tesco is an UK based grocery retail giant; it is the third largest retailer in the world. From the UK, where it is a household name, it has expanded in Europe and Asia. But in the US, the largest retail market in the world, Tesco was non existent. In 2006, it decided to foray in to the US with the branding  of Fresh & Easy - in small store grocery format, primarily in the Western states. It never took off and Tesco faced mounting losses despite opening some 200 stores. Its investment and trading losses cumulatively mounted to some £ 1.8 bn. Something had to give.

Tesco tried to sell, but there was no buyer. Finally it found a buyer willing to take it on, but only if Tesco lent him £ 150 m in loans. This is unusual - we have heard of companies being sold for $1, but for something to be sold at negative value is rather unique. The reason why Tesco was willing to do this was simply that the cost of closing the stores and making all the employees redundant would have been far greater than what they were able to finally strike in the deal.

Why is Ron Burkle doing this deal. Evidently he believes he can make a success of this business. You have to be somewhat sceptical about this - If Tesco, a great company, could not succeed, could he ? But then in the retailing world, the US is for Americans and Europe is for Europeans. Even Walmart has not succeeded in creating a great business in Europe despite acquisitions. And no European retailer has really succeeded in the US.  Not sure why this is so, for you would expect retailing to be a pretty similar business anywhere, but that's the way it is.

It must have been extremely humiliating for Tesco to do this deal. Quite apart from paying somebody to take away a business, it represents a failure of their strategy to enter the US. They are admitting defeat and walking away, perhaps not to enter back for a long time, if at all. Its actually a more far reaching retreat for Tesco - they recently announced that they were in negotiations to put their Chinese business in a joint venture with a Chinese company. Retailing is a pretty brutal business.

I'm sure Tesco's boss Philip Clarke is not going to be on TV or on the newspapers for this one.

Tuesday, 10 September 2013

From Draught to Craft

This blogger is not a beer drinker.. He is therefore completely ignorant of the niceties of beer and therefore eminently qualified to comment on developments in the beer industry.

In many countries in the world, people, especially men, gulp down enormous quantities of beer. Most of it is mass produced by the beer giants of the world - Diageo, Anheuser Busch, SAB Miller, Heineken and the like, including our own home grown United Breweries. Bottled or canned beer is by far the largest selling channel for beer - the one that keeps afloat the likes of Diageo, et al. But nuanced beer drinkers consider this somewhat of a travesty in beer drinking - apparently they have no taste. Hence the onset of draught beer which is served out of cask or a keg. Go to a pub  and barmaid will pour out a pint of draught, topped with a nice head. This blogger has a partiality to buying rounds for whoever he is with - not to taste the subtleties of the draught but to ogle at the barmaid - who is invariably pretty and used to men ogling !!!

But apparently even draught is "rubbish" to a true connoisseur (can such a specimen exist ?) Enter craft beer., something this blogger had not heard of before and hence this post. Craft beer is apparently produced by microbreweries -  small independent breweries and supposedly offer great quality, taste and variety. They have to be small - no giant multinational can qualify to make and sell craft beer. Craft beers have evidently loyal clientele and apparently possess great virtues of taste and subtlety.

If this is so, then this blogger was surprised to read that Jim Koch , the owner of Boston Beer with the famous Sameul Admas brand has become a billionaire. Good to see an entrepreneur succeed and become a billionaire, but since when has a billion been "small".  Apparently craft beer has been taking the American beer market by storm. Considering that every individual who can, does drink beer by copious quantities in that country (remember six pack was originally a concept of a carton of beer, before abdominal muscles usurped the term), you would expect the market to be flat, if you will pardon the pun. The overall beer market indeed is, declining by some 2%. But craft beers are growing by 15%. Thank you very much.

Perhaps there is a growing consumer fatigue with mass produced, similarly bland tasting food that the large food and drinks behemoths make. For improving margins, they have continued to chip away at quality and ingredients. That food is cheap, but perhaps far too much liberties have been taken in terms of customisation and taste. In many segments, the small food maker has started to grow. Just goes to show that the food industry is one of the most difficult to standardise and globaliise, for we will always have different tastes and demands. Even Nestle, the world's largest food company has a market share of less than 5% of the overall food market.

So craft beer it is. If you are in the US, go for Sam Adams. If in the UK, try BrewDog's fancifully named Hello, My Name Is Beastie. There are a couple of beer connoisseurs amongst this blog's readership. Learned comments and sneers are welcomed. This blogger is happy to buy them a round, for he rather fancies the barmaid !

Tuesday, 3 September 2013

The pressures of being a business leader

On hindsight, the surprise is that it hasn't happened more often. Last week Pierre Wauthier, the Chief Financial Officer of Zurich Insurance, tragically committed suicide. This starkly illustrates the unbelievable pressures top business executives function under.

Zurich Insurance is one of the top insurance companies in the world. Recently, it has been going through a bad patch, although by no means disastrous. The CFO is often the one required to stand up before investors to explain results and is invariably the target of criticism and calls to be sacked. The circumstances behind Mr Wauthier's unfortunate demise are not fully clear, but it is inconceivable that work pressures did not play a part. His widow has certainly hinted that Josef Ackermann, the Chairman of Zurich bore some responsibility. Ackermann denied any such thing but promptly resigned as Chairman.

Only a certain breed of individuals reach the top of the business world. A masochist streak, politely termed as "the killer instinct" is one of the pre requisite qualities. Perhaps such individuals also possess tremendous resilience - maybe one of the reasons why we don't witness such unfortunate events more often. Otherwise the tremendous pressures exerted on those  who have a Chief prefixed to their title can drive more normal human beings around the bend.

Take the case of a CFO. He has some (maybe even a lot) of influence on the company, but doesn't really run it. The CEO and the heads of the component businesses are the ones who really run the company and whose actions determine the financial results. And yet it is the CFO who is the public face of the company to the financial community - investors, lenders, markets and the like. Every quarter he has to forecast and deliver results - for which I would argue that he has only limited influence. The average tenure of a CFO has come down to between 4 and 5 years.

You may argue that he (it is rarely a she) is paid handsomely for all this, but trust me, after a point money s not the chief motivator. Despite the greed, many of this lot do this for the fame , prestige, power and the like. We must remember that they are also human beings like you and me. Sometimes you have to wonder if the pressure is worth it.

The issue of pressure is , of course, applicable at all levels in an organisation. The insane hours, the 24 hours work day demanded by globalisation, the physical exhaustion of travel all contribute to a different work spot than what it was even 20 years ago.  In this forum , we have talked often of the social contract of organisations with society. There is also the familial contract and the personal contract which is under immense strain. Something for sociologists to ponder about.

Meanwhile a moment in mourning for Wauthier and words of condolence to the family would be appropriate.

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