A house divided against itself cannot stand…

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Even though these words were said in 1858 regarding the deepening division between North and the South, Abraham Lincoln’s timeless words hold true for a great many set of circumstances and situations. And if you stop to think about what I’m alluding to in saying that, it really is true that nothing cuts as deeply as division from within.

In applying his words to the present state of the European Union, it is important to look back to the end of WWII.  With the United States becoming the new global powerhouse coming fresh off its victories in WWII, European leaders wanted to make sure that their countries would remain strong and relevant in the global economy.    From just after the end of WWII up till recent years, a large number of treaties, agreements, and trade deals have been made between its members, some with much wrangling and negotiation involved, at times it has been at a pace of two steps taken forward and one step backward.  And it is easy to see why the work to this point has been difficult at times, some of the nations have wanted full economic and political integration and they have been countered by nations  and leaders that have not wanted to give up their status in the world as sovereign nations to a board of politicians and bureaucrats in a different country.

And through all of this over the years, these various agreements and landmark treaties; (the treaty of Paris, the treaty of Rome, Single European Act (SEA), and the Maastricht Treaty) have all been created with the focal points of unity, fair trade, and equality at their core.  They have worked as the drivers that have caused the European Union to ultimately work together to have one collective voice that represented Europe in the global economy.  The creation of a single currency, the euro, represents a cap that signifies the unity of all of these countries.

This brings us to now, and quite frankly, there is an ever-growing divide between the strong countries (led by France, Germany) in the EU and the ones that are requiring assistance (like Greece, , Portugal, Spain, and Ireland).  This division cuts to the core of what these countries have worked so hard to forge together, and I liken it to a situation where it is easy to smile when times are good, but when it’s raining and things look dark and murky, that is when your true character comes out.

It has all culminated to now when some are in their proverbial hour of need.  Consequently the solidarity and unity of the EU are going through their toughest test, and quite frankly if they are to not able come together and back these fellow EU nations when they need it financially, the euro and the EU that created it will fall.  So it’s a gut check time for all of Europe, and the global economy and stock markets are looking to see if it really is as unified as it said it was going into the creation of the single currency and moreover, the European  Union as a whole, because a house divided against itself cannot stand.

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Opportunity for US companies: Exporting business services

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In the new book, “Global Trade in service: Fear, Fact, and Offshoring” published by The Peterson Institute for International Economics 2011, Bradford Jensen discussed new opportunity for US companies on the global market in the 21 century.  The author’s argument is that US companies, instead of competing with developing countries in exporting goods, should utilize their competitive advantage to export services.

Apparently, there is a large and growing service sector in the developing world. Countries like China, India, and Brazil will spend enormous of money in infrastructure for the next 20 years. Accordingly, there will be the need for engineering, technology and business services. Good news, there were not many big players, who are ready to grasp the opportunity.

So what is the competitive advantage of US companies that can make them stand out in the exporting services competition? The US competitive advantage roots from its human resource. According to the statistic, business services sector in US (including information, financial, scientific and managerial services) accounts for 25% of all employment. During the period 1997-2007, employment in business services increased 30% while employment in manufacturing sector dropped 20%. More importantly, the quality of high-skill labor in US is among the best in the world. Business service jobs require high-skill and high-wage labors, which often mean higher education attainment. Because US education system is far more advanced than other countries, it can supply more qualified high-skill labors. Finally, thousands of researches from top universities are other sources of competitive advantage for US companies.

Some people may argue that more and more business services are transferred to low wage country like India. In fact, most of those jobs require very low skill labor and pay very low wage. According to statistic, low-skill jobs accounts for only 1/3 total jobs of the services sector. The other 2/3 of the business sector requires very high skill and high wage labors.

Taking the opportunity is without challenges for US companies. They will encounter language and cultural differences; regulation and technological barriers. Many developing countries are less open to services trade than US.  Many spending in infrastructure is controlled and financed by the government. These governments tend to protect their domestic producers and prefer to grant contracts to local contractors. Although the WTO organization was established with the intention to reduce member countries’ preference to domestic firms in public procurement and open public works spending to international trade, not many developing countries are members of WTO yet. Therefore, to win in this game, US companies need the support from US government. US government has to coordinate with other developed countries in the effort to persuade developing countries to join the WTO and follow the rules.

To sum up, with the inherit strength in business services and the opening door for exporting services, US companies are in a good position to be the first mover and become dominant player in the near future. If you are interesting in this opportunity, I would recommend you to read this book to have a perspective about exporting services.


“Global Trade in service: Fear, Fact, and Offshoring” published by The Peterson Institute for International Economics, 2011

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A German Hangover…

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It is once again Oktoberfest in Deutschland, that season where the people get together and raise a glass (or for some many) of good German beer and celebrate in the traditional fashion with German food, music, and traditions. It is a celebration deeply ingrained in the German culture, originally started in 1810 to celebrate a royal marriage between Prince Ludwig and Therese of Saxe-Hildburghausen.
Typically, Oktoberfest one of the best times to be in Germany as the place is alive and everyone is intent on having a good time. This popular tradition is also widely appreciated here in the United States. And of course, when lots of drinking and merrymaking occurs, this equals hangovers the next day.
The hangover I am referring to however is German certain post-war financial policies and what it means for them today. It is summed up quite nicely by a member of German parliament: “We Germans don’t look to see what’s in our own national interest, we’re drunk with Europe.”
Germany is the strongest member of the European Union and constant breadwinner for maintaining the value of the Euro. To get in that position, German policies have been open door and they really have profited nicely from the policies that have made German industry strong. When the idea of a unified currency came about, Germany led the charge for it, thinking it would continue building on the several decades of good business and by eliminating the hassle of monetary differences between the countries; it would increase their market share both continentally and globally.
Which brings us to now, and because Germany and German banks have drank the Kool-Aid and are holding bonds from Ireland, Spain, Greece, and Portugal thinking they were just enhancing and building trade and financial ties between business partners in a union. Now that these countries are needing bailouts, markdowns on their debt, and other financial easing measures, Germany finds itself very exposed to the underside of having a unified currency and they aren’t too happy about it.
German governments and central banks simply got drunk on Europe and building their economy at all costs without weighing all of the potential ramifications. Consequently, they are presently experiencing what I did the day after my visit to an Oktoberfest celebration last weekend in San Diego, which is a massive hangover.

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Leverage your strength in a new dimension

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Last week, Baruch introduced an interesting definition of “haircut” in the financial market. It seems that the current crisis in Greece will not only affect the European economy, but will also have a prolonged impact on the global economy. I believe Baruch will bring you more insightful information in the coming weeks about the Greek crisis . 

Today, I would like to share with you some of my thought about the global SWOT analysis topic. Sure enough, you are all familiar with SWOT, which stands for Strength-Weakness-Opportunity-Threat. Any company, when entering a new market or making important strategic decisions, must implement the SWOT analysis. This blog will focus on the application of SWOT analysis for companies, who want to enter the international market. This post will discuss the first element of the SWOT analysis: strength.

For years, companies have spent a great amount of time and effort to discover and develop their strength in the domestic market. Their strength maybe excellent customer service, high quality of food, low cost advantage, or supply chain management etc. If lucky enough, they can gain competitive advantage in the domestic market. When entering the international market, however, there is one question the company’s manager must answer: how are they going to leverage that strength and be as successful as they were in the domestic market.  More often than not, international market conditions will not allow companies to utilize their strength initially. Culture, economics, and consumer behavior difference are some factors that make it difficult for companies to do so. McDonald, for instant, was popular for the Mac in the late 1990’s in US. One of McDonald’s strengths was consistent quality of food. However, when McDonald entered the Indian market, they encountered an unique challenge. First of all, the majority of Indian are Hindu, and see the cows are the gift of the gods. On the other hand, there were also many Muslim in India, who do not eat pork. Facing a challenge like this, many companies would decide not to enter the market at all. Other companies would ignore the fact, and bring a successful receipe from domestic market with the hope that customers will like it eventually.  Only a few companies have the ability to address the challenge successful. In late 1990’s, McDonald decided to create the Indian versions of the Mac, which is make from mutton and chicken. McDonald also strictly separated section for vegetarian and nonvegetarian, to respect the Hindus’ belief. Today, McDonald has more than 235 stores in India, and Indian consumers still love McDonald for their consistency in food quality. What made McDonald successful is their ability to reinvent and leverage their strength in a new way. They proved that they could not only make a good American Mac but also good Indian Mac. Today there are different version of Macs depend on the local preference accross the country.

To leave you with something to think about, I will give you one challenge. Assume that you are a good sale manager for a US company. Your ability to understand customer need and close the sale quickly has brought much success for your company. Unfortunately, your company is not doing well in the US market anymore. Your company wants to enter the Vietnam market. Your boss has put you in charge to oversee the sale activity in Vietnam. The problem is that your sale experiences and techniques may not be applicable for the Vietnam market. In Vietnam business practice, to win customers sometimes you need to spend extra amount of time with customers in social setting, for example: going out for drink. Customers need to trust you first before they can consider buying your products. In some scenarios, the person who is in charge to buying of his/her company may want unofficial commission. How are you going to leverage your sale strength to win customer in Vietnam?

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Evaluating the price of a haircut…

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Beginning with the title, when I think of haircuts in the traditional sense, I think of barbershops, clean styles, and sometime light conversations. It evokes a feeling of nostalgia, and I am sure we all have had an older family member reminisce about going to the local barber at one time or another or walked by the old barbershop on Glassell St. here in Orange. But this haircut has taken on a new meaning and for many countries and banks around the world, this definition has nothing to do with hair out of place and everything to do with finances being out of place.

My present focus for this week’s blog is centered around the financial turmoil in Greece and what it will mean for them and the rest of the world when their sovereign bonds and securities go under the scissors.  The term ‘haircut’ in this sense means a reduction of debt. Used in this context, the value of these securities which are being held and traded by many of the major European banks needs to be adjusted downward in order for Greek to not go into complete default.  Greece’s finance minister just yesterday laid out three possible scenarios he sees will be prevailing the short term fate of Greece in a grading from best case to worst because basically they’ve got debt that they can’t pay.

    • A 20% haircut of all bonds, plus the bailout monies from the EU nations needed for the next tranche of bills owed by Greece.
    • A 50% haircut for all bondholders, which will gravely devalue the assets and initiate orderly default of the country’s finances.
    • The bailout accords fall apart and Greece begins a disorderly default on all of its financial obligations.

If any of these scenarios happen, what it will mean to everyone else is that most of Greece’s debt is with foreign creditors, and so foreign banks and governments would have to take massive hits over the loans that the Greek financial system is unable to repay in full.  This will have ripple effects that will affect market conditions on a global level as lending and credit issued will become more scarce, and trading of international bonds and securities will also take a decrease as more and more banks become wary of the ramifications of Greece and its financial woes.

Obviously, time will tell what direction these predictions truly end up taking, but on a surface level, it is discomforting to say the least in knowing that many poor choices by a certain few will have a negative effect on a very large group of people that were completely uninvolved in the creating of this mess.

In taking this whole situation and having just emerged from our own form of financial restructuring and bailout here in the United States, how do you feel this will play out?

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