Posted by BT Opinion on Thursday, August 16th 2012
Michael Peters
With the bank reporting season in full swing, perhaps the federal government should recommend legislation that would increase banking competition.
There has not been a greater failure of competition policy than in this sector. Both sides of the political spectrum talk about competition, however both appear to be hesitant to actually take the hard decisions.
It’s a credit to the sector to have such vibrant banks in a world littered with insolvent banks, post-GFC. However the success and the essential role played by the sector should not make it immune from competition policy – for example the recent move to create some portability of home loans and to regulate credit terms have had very little impact.
The Senate inquiry heard submissions that made it clear that Australia should not expect a return to the relatively benign credit environment that prevailed before the crisis.
The success and the essential role played by the sector should not make it immune from competition policy. The ‘too big to fail’ reason should not be the default position of any policy. Supervision of the sector should have a common objective: a viable, efficient and accessible banking sector. The Senate inquiry is an opportunity to tell us more than we know. It is a unique chance to put into place a road map towards competition we can all bank on.
As business owners will readily tell you, the cost and terms of credit are skewed by the structure rather than the dynamics of any market. With the introduction of Basel III, the mutual banking sector will once again be overshadowed by rules and regulation which are increasingly having a less than positive effect on competition within the sector.
Michael Peters is a Lecturer in Business Law and Taxation at the Australian School of Business.
Jon Huntsman, Jr., the former candidate for the Republican presidential nomination, says the ongoing European financial crisis is “deeper than we fully realize” and that no solution will work without injecting economic growth into the continent. He made the comments in an interview with Knowledge@Wharton during the recent Wharton Global Alumni Forum in Jakarta. Huntsman also discusses lessons from the Asian financial crisis that might apply to Europe and his concerns about slow economic growth in the global economy. An edited transcript of the interview appears below.
Knowledge@Wharton: How optimistic are you about the European business environment today, as compared to a year ago?
Jon Huntsman, Jr.: I’m not at all optimistic. I think it’s a lot deeper than we fully realize. You’ve got sovereign debt problems that are on top of traditional banking problems, that are on top of serious growth problems. And you’re not going to solve the former two until you figure out how to grow. And growth is not going to occur until such time as governments promulgate some pro-growth policies, which are a ways off.
So I would say this year probably is as bleak as we’ve seen in a very long time. But we’re going to have to figure out how deep the crisis is, and whether it’s Greece, or Greece and Spain, Spain and Italy, the third- and fourth-largest economies of the eurozone — whether or not that impacts France, for example. What, in other words, the metastasis is ultimately. But I think we’re a long way off from being able to make any real sense of it.
Knowledge@Wharton: You mention growth policies. Is that as opposed to the austerity policies that are going on now? How would you change the policies that are largely in effect right now?
Huntsman: I think there has to be a sense of predictability going forward, from a regulatory standpoint, from a tax policy standpoint, and from an over the long-term austerity standpoint. It’s one thing to have a certain out-of-kilter, debt-to-GDP ratio. But beyond that, what is your investment regime going to look like? Is it going to stay consistent and bankable, investable, for more than just a year? I think all these things are going to be terribly important to the investor community going forward. And with the unpredictable nature of where some of the economies are in the Eurozone, getting any of those longer term policies in place that will really give the sense of confidence to the investor community really is almost impossible.
Knowledge@Wharton: So those are longer-term fixes that you think are necessary for a sound, fundamental change. But there’s also a critical short-term problem. Are there any specific policies or changes in policy that you would recommend to help in, let’s say, the next six to 18 months?
Huntsman: How do you stimulate investment? You stimulate investment by creating an economy that is conducive to investment. Capital’s a coward, let’s face it. It’s going to flee wherever it perceives there to be risk in the marketplace and find a safe haven. So how do you make your economy a safe haven? It’s generally done by tax policy, by investment regimes that are improved, either through transparency or trade and investment facilitation measures. So all of those are things that can be looked at and implemented. But again, the market is going to say, “That may be a quick fix, and it may be something that I can’t bank on longer term.” I think that really is the problem in the eurozone right now — how do you promote enough in the way of confidence in your longer-term policy-making so that it isn’t one regime overtaken by another a year or two from now that will come in with completely different policies. That’s the fix that they’re in.
Knowledge@Wharton: Even if you were able to have a strong pro-investment policy, and even if there were confidence that it was going to be there in the medium and long term, would businesses still invest, given the lack of demand on the part of consumers that is the case right now?
Huntsman: That’s another side of the equation, the whole demand side of the economy, and the high levels of unemployment, and the missed opportunities on the human capital side. So it’s a serious, serious set of circumstances right now. I think we’re years away from any kind of settling out or ultimately calming effect that would provide enough in the way of confidence and longer-term policy-making transparency, where investment is going to be attractive in any serious way.
Knowledge@Wharton: What features of the current crisis in Europe concern you the most right now?
Huntsman: I’d have to say the high levels of unemployment and the displacement on the social side. Because that leads to what I would consider to be unpredictable outcomes in terms of social unrest. It’s one thing to deal with the economic side numbers that just aren’t looking good. It’s another to look at the social implications of high unemployment like we’re seeing in Greece and Spain, and the unrest that this could very well trigger.
Knowledge@Wharton: Many people probably don’t realize that in Spain and Greece the unemployment rate is (around) 25% — around the levels that the U.S. saw during the Great Depression, and for youth unemployment, it’s above 50%. If you were in charge, is there anything you would do directly policy-wise to attack those specific problems?
Huntsman: Far be it for me to advocate anything in Europe beyond which they’re already looking at. But clearly, you’ve got to attack debt. You’ve got to figure out how to get your debt-to-GDP into some sort of manageable number that speaks to longer-term confidence. Then you’ve got to attract investment. You’ve got to have seed corn with which to build your economic base and change the fundamentals, and put people back to work. Investment isn’t coming in until there’s a clearer picture of where the economies are going longer term. Again, that gets right back to debt. With a higher debt-to-GDP ratio, the longer-term outlook is very, very bleak. So I think I would attack the debt side first, knowing full well that that could boost a little bit in the way of longer-term confidence, bringing in investment that could ultimately settle out the unemployment problem.
Knowledge@Wharton: Isn’t that what they’ve been doing? Decision-makers in Europe have advocated debt reduction, austerity and reducing budget deficits, which has made unemployment worse. Is there some way to avoid the short-term spikes in unemployment?
Huntsman: I think you’ve got a broader architectural overlay that is altogether problematic that we aren’t talking about. And that is: What about the eurozone? What about the fiscal and monetary union? What about the euro? These are all issues beyond the individual economies that have to do with the regional architecture, that have got to be resolved. And many say today, “Well, it was a failed start.” It’s okay to call it a failed start today, but what do you do about it?
So before you really start drilling down on the individual member states and some of their problems, you’ve got to deal with the problem of Europe and what it means to be managed economically within a common market or a common framework that doesn’t seem to be working out so well. So who do you call? Do you call Brussels? Do you call the nation’s capital that you have queries about? You’ve got the overlay of 27 countries in the EU, to say nothing of the 17-member eurozone, that each has bureaucrats in Brussels that handle the various aspects of economic trade and foreign policy. So it’s a top-heavy system. It’s really difficult to talk about how you bring back to life an individual nation-state when you’ve got this architectural overlay that really is failing the region in a very serious way.
Knowledge@Wharton: One of the solutions that seems to be talked about very broadly is this idea of sharing fiscal responsibility, spreading it out, approaching it as more of a whole rather than in individual parts. What do you think of fiscal union?
Huntsman: Well, to have a successful fiscal union, like the United States has a fiscal union, you have to have labor mobility, just to begin the conversation. I don’t think Europe has anywhere near the labor mobility that you need to make it work. You’ve got to have some recognition that the wealthier states are willing to somehow subsidize the weaker states. We do in the United States without really calling it that. But that’s kind of how our system of subsidies out of Washington, taxation to Washington, and then payments back to the states really works.
Knowledge@Wharton: So in your opinion, for Europe to work, they should be doing that?
Huntsman: Absolutely. And in order for all of this to work, you’ve got to have a stronger political union to back everything up. It’s as if you had a couple going out to be married, not yet finalized, yet you take out a joint checking account and you begin transacting business with all the uncertainty that this then entails. You can only go so far with a fiscal and monetary union without a strong political union to provide the cohesiveness. And that’s where the cart has been put before the horse, so to speak.
And I’m not sure, longer term, that a political union, the kind that would be necessary in terms of the innate inherent cohesiveness, is going to be there to support an economic or a fiscal union longer term.
Knowledge@Wharton: If they don’t have the cooperation to achieve that, does that mean that the alternative is some kind of a two-tier system? You would end up with a two-speed system where largely northern Europe economies and maybe the periphery operate as a separate unit. Does it seem that you either go more towards this fiscal union, towards more cooperation, or you’re going to end up being forced apart?
Huntsman: I think that’s exactly right. And I’m not sure that a 70-year experiment — let’s just take it from post-World War II, from the Bretton Woods period right through to the accords of the early 1990s, the Maastricht Treaty, and then take that through to today — I’m not sure that the leaders of Europe are going to easily dismiss what has been the most important experiment economically and politically in Europe since World War II, and maybe in 100 or 200 years.
I think they will endeavor to make it work so that you don’t end up with a two-tiered system. I think that’s terribly problematic from a currency standpoint and from a trade and investment standpoint. But then they’re going to have to deal with Greece. And in order to deal with Greece, so that they don’t fall out of the eurozone, someone’s going to have to back-stop the numbers. And there’s only one country that can do that — Germany.
And then, in Germany, you have to conclude that what is an economic problem for most others becomes a political problem for Angela Merkel. She can’t very well make the sale on the streets of Berlin when they say, “Well, gee, in 2000, we were the problem economy, and we did what was needed to be done in the interim in terms of austerity, in terms of getting our balances back in working order. And you want us to do what? You want us to subsidize those who aren’t willing to step up and embrace those difficult measures that are needed, as we did?” That becomes politically untenable. And so that’s kind of where we find ourselves today [with] an economic problem that fundamentally becomes a political problem for Germany, and a relative stalemate. The European Central Bank is trying to create a wall, a backstop, to the best of its ability, with certain member states playing a supporting role to insure that, trying to keep contagion from breaking out.
Knowledge@Wharton: Asia suffered a financial meltdown in the late 1990s and took certain measures to recover, relatively speaking, fairly quickly. Are there lesson from the Asian financial crisis that are relevant to Europe’s current economic woes?
Huntsman: Maybe some. The Asian crisis was followed by some serious austerity and getting their balances back in working order — very aggressively, I might add, to the point where, for example, the South Koreans were very angry at the IMF and the United States for the tough medicine that they advocated. But they got through it.
They probably got through it better because, relatively speaking, many affected were smaller economies. They’re also newer economies. They didn’t have as much drag in their systems as you find over in Europe. It’s also a more buoyant region in terms of inter-Asian trade and investment flows. So to some extent, I think you could say they had imbalances. They addressed the imbalances. They took some really tough steps that were advocated by the IMF, the United States and others. And they got back in the game. But there were also some factors that would have made them a different set of circumstances in Europe.
Knowledge@Wharton: Probably the biggest being the fact that they could devalue their currency, which Greece cannot. For example, Thailand, which actually kicked off that crisis and probably suffered some of the worst effects — devalued by about 80% against the dollar. There’s Greece, stuck, unable to do that.
Huntsman: Ramping up exports is a way of getting back on their feet again.
Knowledge@Wharton: China and India both helped to prevent the global financial crisis from becoming much worse. Now both are slowing down. So on top of the crisis in the eurozone, things seem to be going in a negative direction in a lot of regions. What do you see for the next year or so in the global economy, given where the momentum’s heading?
Huntsman: Well, you have to ask yourself the question, “Where are the engines of growth?” The global economy has had, in recent years, some reliable engines of growth to pull those economies that were performing at lesser levels along. But you’re hard pressed to see any engines of growth today. China will remain reasonably strong. They may not put in an 8% number or a 9%, but certainly probably a 7% or 7%-plus number, which is way down historically from where they’ve been over the last 30 years. India’s down probably by a factor of 30% to 40% in terms of their own growth numbers.
So where are the engines of growth? And I think that’s bad news for the global economy. You may get by with 1.5%, maybe 2% [global economic growth] if you’re lucky, waiting for the traditional engines of growth to re-fire themselves and get moving again. But I think the next year or two are going to be very tough for the global economy. I think that a lot of it will depend on how quickly the United States gets back in the game.
Knowledge@Wharton: Not that the folks in Western economies are in a good position to give advice to Asia, but if you were going to suggest some policy changes for Asia, let’s say for China or India, what might they do?
Huntsman: I would say streamline investment regimes, introduce greater transparency into the system, open financial services markets, insurance markets, do a better job protecting intellectual property rights, and quit manipulating your currency to the extent that you do.
These are all probably steps that would enhance the prospects of both countries, China and India, longer- term. They’re hard to do, particularly during periods of uncertainty, when your export markets are less reliant today than they were just a few short months ago, even. You’re going to think inward. And you’re going to resort more to protectionist measures. You’re going to be more inclined to manipulate your currency and to keep closed some of those markets that, even under WTO agreements, you agreed to open at some point. So we’re at an important time in terms of whether or not some of the newer emerging economies are really willing to step up and show their commitment to growth and to reform and to economic openness.
Knowledge@Wharton: So one might expect you can look forward probably to increasing trade frictions as a result of the slowing global economy in general?
Huntsman: That generally follows.
Knowledge@Wharton: And what do you think the odds are that China will try to rebalance its economy somewhat, as many people say is the way for them to get to the next level, to a more consumer-oriented economy, as opposed to export-led?
Huntsman: Well, the evidence is there that they’re in that transition, to some degree. When they announce stimulus measures as they did about three weeks ago to incentivize consumers to buy more in the way of household appliances, televisions, big screens, consumer goods you know they’re taking this transition seriously. And they have to, because the math just doesn’t work for them any other way. You can’t maintain their current trajectory as just an export power and expect to deal with the demographic changes that lie on the horizon.
When you’ve got more people leaving the workforce than you have entering the workforce, your costs are going to increase. And labor rates, indeed, in the southern manufacturing zones around Guangdong and beyond were seeing prices escalate. I think that’s because of the upside-down demographics that China is just on the front end of experiencing. So you’ve got longer-term four grandparents, two parents, one wage earner. You’ve got an upside-down pyramid, essentially. How do you make the numbers work longer term? And how do you deal with health care costs and Social Security costs, and affordable housing costs when you’ve got real estate bubbles every now and again? They want certainty, which is tough to achieve once you’ve started that transition from an export-led economy to more of a consumption economy. But they’ve taken that risk.
Knowledge@Wharton: It sounds as if you see them as having a reasonable amount of flexibility, which maybe wasn’t there a couple of years ago.
Huntsman: Flexibility is driven by necessity, because they can’t go back to their old form of managing the economy and expect to survive longer-term. They’re in uncharted territory right now. But that’s also by necessity.
There was a time when Netflix could seemingly do no wrong: Movie lovers would wait anxiously for their next iconic red envelope containing yet another DVD to enjoy. But times have certainly changed. Today, the reviews of Netflix’s services — both its DVD-by-mail and online streaming video — are mixed at best. The company became the subject of consumer ire after separating both services last year and raising subscription prices — and it has yet to recover from that. “Netflix lost a lot of momentum when it went to two-tiered pricing, and it did little to regain that momentum,” notes Wharton marketing professor Eric Bradlow.
Meanwhile, competition is intensifying as Hulu, DirecTV, Amazon and others are racing to offer exclusive content that Netflix subscribers don’t have access to. “There is tremendous competition out there for ‘digital eyes,’ and it really is about who has the best content,” Bradlow says.
According to an article in The Wall Street Journal, the company’s DVD service — which is three times more profitable than its online subscriptions — has been losing close to one million subscribers per quarter. In the most recent quarter, the company lost 850,000 DVD subscribers, while only adding 530,000 to its online streaming service. Factor in the cost of acquiring new subscribers overseas (the company is focusing on expanding globally) and the need to source expensive new content to keep its online subscribers engaged, then it’s no surprise that the firm reported a 91% decline in net income in late July.
Many observers agree with Bradlow that if Netflix is to survive, content will be key. Wharton marketing professor Jehoshua (Josh) Eliashberg, for example, suggests that the firm could begin developing original content — similar to HBO — “based on its subscribers’ demonstrated preferences, which is a treasure.” (In fact, Netflix has already begun exploring this path: Its first original series, “Lilyhammer” — about a New York mob boss beginning a new life in Lillehammer, Norway — debuted in early 2012.)
Wharton management professor David Hsu says that although bolstering its media offerings will be critical for Netflix, this will be difficult to do. While the cost of acquiring or developing new content is not fixed and will most likely increase, “consumers have become accustomed to the ‘all you can eat’ streaming video revenue model for a low fixed price each month.” One solution, he suggests, could be found in Netflix’s DVD-by-mail service, for which subscriptions are priced based on the number of DVDs out at a time. “I think the company should try to develop an analogous tiered pricing scheme on the streaming side of their business. This could involve rights to certain premium titles, or perhaps [be] segmented by … the number of watching hours, etc. This will not be easy, however, as we witnessed when Netflix moved to reform its pricing structure in the past.”
There is a critical lesson here for anyone looking to launch a new business, Hsu adds. “Entrepreneurs, particularly in new industries, should think carefully about the importance of getting the initial revenue model ‘right’ — versus to what extent the market will be more forgiving if the company pivots from its initial revenue model.”
US Airways in recent weeks has set an aggressive flight path for its plan to merge with bankrupt American Airlines. Indeed, US Airways CEO Doug Parker has stated that the merger is the only way to effectively compete against United and Delta, its two bigger rivals.
US Airways has taken a number of steps to help push American – which would just as soon emerge from bankruptcy as a standalone company – into a merger. For example, it has already secured tentative contract agreements with American’s three biggest unions — The Transport Workers’ Union, The Allied Pilots Association and The Association of Professional Flight Attendants. In addition, US Airways bought a sliver of American’s debt, which means it will be treated as a creditor in American’s bankruptcy hearings and be able to gain valuable information about the company’s operations.
We asked two Wharton professors – one an expert on strategy and the other on unions – for their analysis of this possible merger.
Emeritus management professor Lawrence G. Hrebiniak notes that “US Airways desperately wants the merger with American Airlines. A merger of numbers 3 and 4 would add size, scale economies and an ability to compete better with United and Delta.”
He points out that Philadelphia, a US Airways hub, is the largest metropolitan city in the country that does not operate flights to Asian markets, including China and Japan. “American has the flights and planes, so the merger would immediately add to US Airways’ presence in Asia,” he says, noting that US Airways has ordered airplanes that would allow flights to Asia, but “delivery is years away.”
The merger looks good for both airlines, suggests Hrebiniak, but not for consumers. Reduced capacity or fewer flights with the same or increased demand “will result in higher prices, fewer seats, longer lines and more disgruntled customers, the airline’s statements to the contrary notwithstanding…. Also, consumers should use their frequent flyer miles soon; I have a feeling they will disappear quickly after a merger.”
So, why is American’s management team hesitating to jump on US Airways’ offer? “Could it be due to the big bonuses they will receive if American successfully emerges from bankruptcy?” he asks.
According to Janice Bellace, professor of legal studies and business ethics, “a big problem that crops up in airline mergers is the difficulty realizing the expected gains from integrating the two airlines. The main reason for that is that the main occupational groupings — the pilots, the flight attendants, the mechanics, in other words, the people who can stop an airline from flying — are unionized. In this industry, seniority is extremely important because it affects the individual’s ability to have some control over route selection and scheduling. When there’s a merger of two airlines, the new airline has to integrate two lists of employees – pilots, for example — with different seniority rules.” There are other differences in the contracts for the two sets of employees, she notes, “but how seniority will be treated is often the huge stumbling block.”
Aware of how hard it is in an airline industry merger to reap cost savings, “analysts reacted very positively to US Airways’ April 20 announcement that it had reached an agreement with American Airlines’ three largest unions to support a AA-US Air merger,” she says, adding that unionized employees often resist a merger, but in this case, 55,000 of American’s 80,000 employees were supporting one.
It’s also important to note, Bellace states, that the nine-member unsecured creditors’ committee of AMR (American’s parent company) “must approve the company’s restructuring plan and that American’s three largest unions each have a seat on that committee.” Why three unions agreed to support US Airways is “a more complex question. It could be to gain leverage in their negotiations with American, or to throw support to their preferred merger partner at a critical time.”
In February, American announced it was seeking a 20% reduction in employee costs and 13,000 job cuts. As expected, Bellace says, “the specific proposals made by American to each of the three unions received a stony reception.” American on March 27 then asked the bankruptcy judge to let it void its existing collective agreements, which “put immense pressure on the three unions to engage in serious concession bargaining and to reach a new agreement that they could tolerate and that their membership would vote to approve.” The judge said he would issue a ruling June 27.
In such tough negotiations, Bellace adds, “it would not be surprising if the unions sought some leverage – and making an agreement to support a merger with US Airways certainly gave them that leverage. They were demonstrating to American Airlines that they had an alternative to caving in to American’s demands.” American then modified its bargaining demands, and negotiations on new collective agreements took place. “Right at the June 27 deadline, the bargaining committees of the three unions agreed to take American’s last, best offer to a vote. The [bankruptcy judge] has agreed to postpone his ruling until August 8, at which time the results of the balloting will be known.”
Each of the three unions had different issues, Bellace notes. “The contract with the 10,000 member Allied Pilots Association (APA) has received the most attention, in part because this is the most expensive employee group and also the one most critical to the future of American Airlines. The proposed agreement with the APA contains some major concessions, but it freezes the pilots’ pension plan instead of terminating it, gives a 14.8% pay increase over the six years of the agreement and has a no-furlough pledge.” Finally, if the agreement is approved, the pilots will get an equity stake of 13.5% in the company that emerges from bankruptcy.
Assuming the three unions vote to accept the new agreements, and assuming that the bankruptcy judge approves these agreements, “the question remains whether US Airways’ bid to merge with American will continue to merit serious attention from the unsecured creditors’ committee,” Bellace says. “The position taken by the three members from unions on that committee will likely decide the question. US Airways has not hammered out any specific agreement with any one of the three unions, so it is not known how the terms and conditions of employment of these employees in a merged airline would compare with those they will have under the new agreements.”
Hrebiniak adds that “US Airways’ longing for American is clearly suggested by its deals with American’s unions, which are taking a ‘less bad’ offer over a ‘much worse’ offer. American will surely lay off a bunch of people if it remains independent after emerging from bankruptcy. US Airlines has promised to hurt the unions less, thus gaining their support.
The Reserve Bank of India (RBI) has left interest rates unchanged in its 2012-2013 first-quarter monetary policy review. The review was a marking-time operation that was expected. The previous day, the bank had released the latest edition of its “Macroeconomic and Monetary Developments” report, which held out little hope for a cut in rates.
Starved for funds, India’s industrial sector seems to be shifting gear. After months of sitting on the cash, firms are now looking to move overseas with their investments. According to RBI data, foreign investments by Indian companies in June rose by just over 50% to $3.53 billion from $2.35 billion in May. The absolute numbers show that this is in no way a huge trend — a single deal, like the Tata Group purchase of Jaguar Land Rover in 2008, was for $2.4 billion. Bharti Airtel acquired Zain Telecom’s Africa business for $10.7 billion in 2010.
But the domestic market is looking more and more unattractive to Indian firms. The RBI has its hands tied because inflation is too high. “Inflation remains well above the comfort zone of the RBI,” says Governor D. Subbarao. The monsoons so far this year have been very poor; rainfall up to July 25 was 22% below its long period average (LPA). The distribution has been uneven. In the Northwest, rainfall is 39% below its LPA. Lower rainfall affects crops and, consequently, food price inflation.
GDP growth has decelerated four quarters in a row, from 9.2% in the last quarter of 2010-2011 to 5.3% in the corresponding period of 2011-2012. Growth for 2011-2012 is now down to 6.5%. At one time, analysts were projecting growth of 8% or more. The RBI has also reduced its 2012-2013 GDP growth projection from 8% to 7.5%, a figure that some still consider very optimistic. The RBI admits as much, but says that growth will pick up.
The RBI made only one concession to industry’s clamor for a cut in rates: It reduced the statutory liquidity ratio (SLR) from 24% to 23%. SLR is the percentage of deposits that a bank must keep in cash or liquid assets. Lowering the SLR theoretically gives financial institutions more money to lend.
Kishore Bang, vice chairman and managing director of equity research house Nirmal Bang Group, doubts whether this move will help. “Banks have started deploying more funds in government securities and are maintaining SLR greater than the required limit,” he notes. “Therefore, even though the SLR cut provides more leeway to banks to disburse funds to productive sectors, it may not provide any short-term stimulus to India’s economy.”
For a short-term stimulus, businesses are now looking to Delhi and the resumption of the reform process. Union Home Minister P. Chidambaram has just been appointed the new finance minister and he is unlikely to start making radical moves overnight. Under Prime Minister Manmohan Singh, who held the finance portfolio that he took over when former finance minister Pranab Mukherjee became president, very little happened. There was some noise over an opening of foreign direct investment (FDI) in retail. But allies in the Congress-led government shot down the proposal. Plans have been announced for further public sector disinvestment. That measure still has to run the opposition gauntlet, however.
Thus, many firms are opting to take their money abroad. A study by Apex Chamber of Commerce Assocham points out that in May, 68 domestic firms invested abroad in sectors such as wholesale, retail, hotels and restaurants. “It will not be possible for India to keep its doors shut for FDI in retail,” predicts Assocham president Rajkumar Dhoot.
India’s largest carmaker Maruti Suzuki, a subsidiary of Japan’s Suzuki Motor, is in the midst of its biggest ever labor unrest. The company’s plant in Manesar in the North Indian state of Haryana was recently the site of one of India’s worst labor altercations: A senior executive was killed brutally and nearly 100 managers and supervisors were injured by a mob of more than 3,000 workers. The mob also set fire to the office wing and the main gate. Investigations are ongoing and the company has declared a lock-out at the facility. The apparent issue: reinstatement of a worker who was suspended for misbehaving with a supervisor.
A company statement noted: “By any account, this is not an ‘industrial relations’ problem in the nature of management-worker differences over issues of wages or working conditions.” After meeting with the state chief minister, Maruti Suzuki chairman R.C. Bhargava told the media: “We have requested the government to speed up the investigation and treat the matter as a criminal case and not as one of industrial dispute.”
But Maruti is no stranger to labor trouble. In June 2011, there was a 13-day strike at the same plant over the formation of a second trade union with external affiliations. A month later, there was a 33-day standoff between management and workers at the plant. Last October, workers once again went on strike, demanding the reinstatement of employees who were suspended during previous agitations. They also raised the issue of establishing an independent workers’ union. While the management managed to end the strike, its modus operandi raised questions of corporate governance: There were allegations of a payout.
The violence at Manesar needs to be condemned unequivocally, observers say, adding that India needs more sensible labor laws and effective implementation of those policies. One area of major concern is the condition of contract workers: They are often not paid fair wages or treated equitably. The Maruti incident is also being seen as a reflection of growing social unrest due to an increasing mismatch between India’s economic aspirations and reality.
At the same time, Manesar has once again put the spotlight on how multinationals engage with their teams in India. Maruti, for instance, has been in India for almost 30 years, but in the past few years the top management seems to be getting increasingly disconnected with the ground realities. Industry observers point out that ever since expat Shinzo Nakanishi, the current managing director at Maruti Suzuki, took over from Jagdish Khattar in 2007 — Khattar was at the top job since 1999 — it is the Japanese voice that counts more in crucial decisions. Cultural differences by way of sense of discipline and employee engagements have also played a role in increasing the gap.
In another development, Korean firm LG Electronics has seen an exodus of 15 senior executives at its India operations over the past six months. The provocation for this was reportedly the restructuring of the organization and entry of Korean expats in key positions, thereby reducing the role of the Indian executives. Earlier this year, the firm abolished the post of the chief operating officer and created four director-level posts. Three of these new positions are being held by Koreans.
In an earlier interview with India Knowledge@Wharton, Manish Sabharwal, chairman of Bangalore-based staffing services firm TeamLease Services, observed that, unlike in most American and European companies, “in most Korean and Japanese companies, the power tends to reside heavily in the head office. I heard a quip about Toyota that they don’t globalize but colonize. Obviously, these structures have important implications for how labor engagement and negotiations are handled.”
People are reportedly “outraged” about the social networking conditions imposed on athletes, officials and ticketholders at the London Olympics. For example, ticketholders are prohibited from uploading images, video and sound recordings taken at the Games to social networking sites. Athletes are allowed to blog and may upload pictures of themselves but not video; all blogging must be done in a “diary” format (presumably so that it can be characterised as personal opinion). They are only allowed to comment on their own performances and other athletes included in photos must have agreed to do so. Stricter rules apply to the Olympic Village. None of these pictures may be linked to commercial parties. Criticisms of the limitations on use of Olympic words and insignia by small commercial entities, enforcement of the general “clean zone” provisions around venues, enforcement of sponsorship categories in food supply, and restrictions on athlete endorsement have also been rife.
People should get used to restrictions in an Olympic context. The restrictions noted are really designed to support three things: rights of broadcasters, the reputation of the Olympics itself and the rights of the sponsors.
The restrictions placed on blogging merely extend the kinds of rules which applied prior to the digital and social networking age- you were not allowed to use photographs commercially unless you were accredited as media; you weren’t allowed to disparage other competitors or comment on events other than your own; you were not allowed to bring your sport or the Olympics into disrepute. Recent examples of athlete comment and photos on social media suggest that they do not always think through their posts!
Complaints about sponsorship restrictions do not fully understand that they are not a new development at these Games. Similar restrictions existed back in Sydney, although in a different digital media environment. The reality of the Olympics is that sponsors and broadcasters pay huge amounts for exclusive rights which allow the Olympics to exist. Many of these issues have to be agreed by competing Host Nations before they are awarded their Hosting Agreements. The scope for clever ambush marketing is substantially reduced by these restrictions.
Many complaints in London were raised in the lead up to competition and since the Games themselves have commenced they have almost disappeared, overtaken by the Olympic behemoth and the sheer excitement of one of the World’s largest and slickest sporting events.
Deborah Healey is a Senior Lecturer in the Faculty of Law at the University of New South Wales.
Posted by BT Opinion on Wednesday, August 1st 2012
Professor Peter Swan
The prospective entry of the London-based LCH Clearnet to break ASX’s monopoly of clearing house activities is great news for Australian investors and brokers alike. It seems likely that the bid to break the ASX monopoly will be approved by the Australian Securities and Investments Commission (ASIC) and the Australian Treasurer (see Bianca Hartge-Hazelman’s AFR story). The clearing and settlement process for derivatives, cash and shares is a crucial component of trading activity. Clearing provides the critical assurance that trades will settle, removing the counterparty risk via a third-party guarantee in exchange for a fee.
Incumbency of the clearing and settlement process, like incumbency in terms of the trading mechanism, confers considerable advantage to the Australian Securities Exchange (ASX). The much heralded entry of Chi-X, providing competition in trading, has resulted in negligible loss of market share to ASX. This is testimony to ASX’s preparedness for Chi-X entry, reflected in lower fees and revamping of ASX’s trading system, as well as natural monopoly advantages.
In contrast, entry into the London market imposed serious market share losses to the London Stock Exchange (LSE) even though the incumbent’s loss of profits was far less than its market share loss with competition increasing the overall size of the market.
Clearing and settlement, as embodied in the ASX CHESS system, probably has some natural monopoly elements, although not as much as in the trading system. Hence, entry of competitive clearing house providers is unlikely to lead to any catastrophic loss of ASX market share in the short-run but will put considerable downward pressure on ASX fees in a business segment generating 15% or more of ASX revenue. Lower fees will encourage greater trading volume and liquidity.
As the ASX loses more statutory protection against entry in different areas of its business, it is going to be forced to become more innovative and competitive if it is to survive as other than a target for predators.
Its business model in recent years has been to give in to major brokers demanding less transparency and openness. Thus, in November 2005, the ASX decided to conceal broker identities in the limit order book, making it far harder for traders to find suitable counter-parties. I believe that such opacity is one of the reasons that some brokers describe the current ASX market as ‘dead’ with much less willingness for parties to trade.
Similarly, in the area of corporate governance recommendation for listed companies, the ASX has looked after the bid end of town via promotion of the rather strange idea that companies should be run with boards dominated by a majority of ‘independent’ non-executive directors (NEDs).
In practise, this means that companies are ‘monitored’ by part-timers largely ignorant of company affairs and typically recruited from outside the industry with little if any ‘skin in the game’ or alignment with shareholders. No wonder the performance of many large companies with large boards (Rio is an example) has been exceedingly poor in recent years.
Under the ASX’s non-binding governance rules, Gina Rinehart would not qualify as an ‘independent’ director if she were to join the Fairfax board as she owns more than 5% of the stock. Whatever one thinks of Gina Rinehart, rules that discourage incentivised board members are a national disgrace.
Within the top ASX 200 companies, firms with above average sized boards have on average a 50% lower market to book ratio than do firms with below average sized boards. Hence, it would seem that management is far less constrained and need not act in shareholder interests when boards are large and consist of part-timers with only weak alignment with shareholders.
The raison d’etre of the ASX board in recent years has been to try to sell itself to the highest bidder, even when that bidder, the Singapore Stock Exchange, has a dismal record in comparison with its peers, rather than trying to improve its own performance.
Clearing and settlement, and in particular, the ASX dominance of this activity, is one of those issues that led the Foreign Investment Review Board to reject the Singapore bid last year. I am sceptical that one or two entrants into clearing activity would of itself lead to a change of heart by the regulator. However, if there were to be thriving competition in clearing and settlement, together with a lot more competition in trading, and an overseas bid without close foreign government ties (unlike the Singapore bid), then the regulator is likely to be much more forthcoming.
Professor Peter Swan is the Professor of Finance at the Australian School of Business. This article first appeared in the Australian Financial Review.
Analysts are taking another look at the online social games industry after Zynga missed the mark in its second-quarter earnings report. The San Francisco-based creator of such popular online games as FarmVille and Mafia Wars had a dizzying market capitalization of $8.5 billion after its IPO last December. That has fallen to $2.21 billion following its latest results and outlook announcement last Wednesday. The firm’s second-quarter revenues were $332 million, lower than analysts’ expectations of $343 million.
The company, which claims 60 million daily active users, also lowered projected bookings for the year (the amount users pay up front for virtual goods they consume while playing) to between $1.15 billion and $1.23 billion from an earlier forecast of $1.47 billion. Zynga blamed its setbacks principally on “delays in launching new games [and] a faster decline in existing web games due in part to a more challenging environment on the Facebook web platform.” The firm’s share price has plummeted from about $15 in early March to about $3 at Friday’s close.
Zynga mainly hosts its games on Facebook, although recently the company began offering games on its own site to reduce its dependence on the social network giant. “Zynga can’t afford to put all its eggs in Facebook’s basket, but neither can it live without the enormous push that it gets from its Facebook relationship,” said Wharton professor of legal studies and business ethics Kevin Werbach in a previous Knowledge@Wharton article about the game developer’s prospects.
According to Eric Clemons, a Wharton professor of operations and information management, Zynga’s real problem is the lack of staying power that its products seem to have. He compares social games by Zynga and others to a fad like pet rocks — plain rocks that were sold by the millions in 1975 as “pets” in boxes before they quickly faded from view. In a bid to boost revenues, Zynga recently partnered with toy maker Hasbro to merchandise its games, but Clemons isn’t impressed by that, either. “Pet rocks were not followed by pet erasers” or other merchandising that were able to extend their lifecycle in any way, he notes.
Clemons points out what he sees as another shortcoming in Zynga’s business model: FarmVille players have to pay for plants, livestock or tractors to cultivate their virtual farms. “FarmVille never made any sense to me,” he says. “I have no use for games where you pay to improve your performance.” It could serve its purpose as a transient distraction from boredom, he concedes, but predicts that fickle users will require new distractions to keep them engaged. In fact, CityVille, which was launched after FarmVille, has already eclipsed FarmVille’s popularity, and the firm launched six new games last quarter.
In the previous Knowledge@Wharton article on Zynga, Wharton emeritus management professor Lawrence Hrebiniak warned of that very challenge. “Zynga’s business model depends on developing cool games and new titles to replace older ones,” he noted. “How long can Zynga do that? By the time [its] Facebook deal expires, Zynga may not be viable.”
Thanks in part to the growth of mobile technology, it’s no secret that work is starting to seep into people’s home lives. But life is also seeping into the office, with an increasing number of employees setting aside a few minutes — or longer — during the workday to send personal e-mails, run errands or take a coffee break.
Those tasks were among the most mentioned in a recent survey by data protection firm Mozy. Other activities that respondents said they felt comfortable doing on company time included leaving early for doctors’ appointments or for a child’s performance at school.
The study of 1,000 employees and employers from the United States, Great Britain, Germany, France and Ireland also found that many managers are taking an increasingly relaxed attitude toward how workers structure their days, in part because the bosses assume — correctly, according to the study results — that many are putting in time outside the office to finish work tasks.
As the workday strays further from the traditional 9 a.m. to 5 p.m. structure, how do employees figure out when it’s permissible to slip in time for personal business — and determine what types of “life-related” tasks are acceptable?
“It’s a combination of factors,” says Wharton practice professor of management Stewart Friedman. “You’ve got to consider the work culture [and] the personal ethical standards and conscientiousness of the employee. The age of the employee probably has an effect as well.” But the most critical factor is the “social and political environment at work, what the expectations and assumptions are about how people are supposed to operate, and whether the emphasis is on results as opposed to how those results are achieved,” he adds.
Workers on an assembly line or in similarly regimented and location-dependent positions are limited in the amount of flexibility they have. “In the pre-Internet world and in the manufacturing-based economy, your physical presence was really the thing that mattered,” Friedman notes. “Performance management systems were created around the idea of time as the essential metric.”
That remains the traditional model and mode of thinking for many organizations, Friedman says. But he adds that managers should consider that it’s just as important for employees to be psychologically present. “It’s harder to be psychologically present when you’re distracted by the demands of other parts of your life. I think the principle to go by is that if [time for personal tasks on the job] helps you take care of things that matter to you – and that you are responsible for in other parts of your life — an employer is going to want you to do that so long as you meet performance standards and deliver results in ways that create value for the company.”
Friedman knows of a company where employees have even been put in charge of their vacation time. Instead of earning a set number of days, “you take vacation when you need to, just in the way they trust [employees] on a daily basis to figure out when they need to check out to do other stuff.”
Moving toward a more flexible, less location-dependent method of accounting for a worker’s time requires a certain level of trust on both sides, in addition to a transparent, results-focused system to evaluate employee performance, Friedman says. “What you want are people who have a sense of responsibility for the outcomes that matter, and you engender that when you give people the authority to make decisions about when they get things done.”
