Human Capital Matters

As anyone with studies in Economics know, there are 3 factors of
production: Capital, Land and Labour, in more recent versions of such concepts
the word “human capital” is included considering an upgrading labour skill able
to produce a much higher productivity, in short is a way to resume any
productive enterprise.

The concepts above returned to my mind as i talked about business with a
fashion designer, while complaining the lack of help/subsidies by the
government and how poor is the quality of the local fabrics as more designers
were betting about how advances in technology allowed creating “smart
collections”.

The flow of the conversation made me think how really is needed for any
kind of entrepreneurial project a manager or a corporate economist, as i found
lack of substance about his complains, I spent the next hour crafting several
possibilities from prices ranges for raw materials to Points Of Sales (POS).

Several successful companies appeared in the traditional clothing
sector, incredibly Inditex is one of them a company born in a country with
stiff labour laws, hungry for imports and high wages, the same could be said
about H&M or Uniqlo which boast more or less the same business model, but
also more local firms could be set as an standard.

Monster and NaCo turned in to household names when their products became
ubiquitous amongst lower and middle class in Mexico, using plain cheap bulk low
grade shirts to print original messages/graphics, this allowed the companies to
develop product rather fast with prices so low that even teens could afford a
new shirt every week, eventually this firms were able to reinvest their profits
in to building a bigger range of products.

Ironically these efforts were led by graphic designers using bulk plain
shirts as templates, as I told to my friend, unfortunately fashion designers
dream in art, a wearable art with fat price sticks, not in to developing volume
street wear with innovative twists, with a moderate prices that could be able
to sustain volumes large enough to build a profitable brand.

On that tone, Asos a British online retailer and listed on the FTSE-100
hides a very interesting business model, I could say it’s a bit like a fashion
supermarket, offers lot of well known brands both local and European such as
the Danish firm Humor, but also part of their offering comes from their own
brand delivering a good balance in quality, style and price, sometimes notably
inspired on garments several times the price, or on the styling from British
stars, Asos build a very successful business along this lines, while their own
brand supports sales volume and web traffic at the same time, distributing
brands such Alexander McQueen, Ben Sherman and Humor allows the company to
boost profitability and keep cachet.

At the end of the conversation my friend turned more upbeat about the
possibilities laying around and how is needed to balance a lot of factors
before build a clothing brand, understanding after all that not everything can
be high end and command high prices, if fashion is to be change, is the street
wear the place were more chances do exist to build a profitable business.

At the end again all comes how you mix the production factors and which
human capital mix is better to craft a viable business, in this case fashion
designing meeting financial and corporate know-how.

The Corporate Rider and Beyond

Between the Great Depression and the late 1950´s the stock market became a bit of a “no go zone” deemed to insecure and volatile, yet after the post-war bonanza and much prosperity investors began to seek higher returns in the stock market.

This is the setting of “The Mayfair Set” a British documentary in 4 parts covering from the rise of the first corporate riders in Britain back in the 1960’s, until de 80’s wall street junk bond market and 90’s British shifting politics, this series may seem to show how this events seem to be linked, but there is also a bigger
picture.

The documentary help me to expand my view over the 80’s boom, by  linking seemingly unrelated events, for example the drop on risk aversion to investment at the stock market, and how this was used to restructure full industries, as we know specialization was unheard among companies in the post war period (like
Japanese companies this days) as most of the large companies were vast industrial empires spread along several numerous industries employing large number of people mainly in manufacturing, this holdings were controlled by powerful people who allowed to direct the economy along cozy links with the government, this allowed to follow national development plans with the private sector this was true in a number of developed countries and several developing ones as the concentration of industries were much higher.

These industrial behemoths were able to reap a large amount of incomes right from the multiple products they offered and their distribution channels but were poorly managed and not quite efficient, by the late 70’s after the oil embargo this figures in the economic model began to suffer a lot this lack of efficiency
despite counting with a very successful business, the lagging ones became a drag to the financial results and restraining quality improvements, in the western world the rise of the Japanese companies didn´t helped too.

The paper of the corporate riders at their time was to inject new strength in to the industries by disposing the unprofitable areas of the companies; this allowed me to understand the real reasons of something I learned at my school classes when the companies became focused in few products or services, in this sense
the corporate rider allowed the companies to become more focused on a narrower set of good where their results and profits were better.

In the bigger picture these leaner, meaner companies boosted results, profits thus lifting price shares making attractive to invest on shares, deregulation played it´s part to make more attractive the selloff of  unprofitable assets further acquired from other firms seeking value from distressed assets, this kind of
transactions changed the industrial landscape, but also explain why the tight knit  stock ownership between companies actually protecting the firms from takeovers, this business model is more or less the rule across Asia, this kind of structure have been more suited to the economic “dirigisme” followed in Asia and being kept to sustain a domestic led industrialization.

At the end this documentary allowed me to link the dots and understand more broadly from the industrial-financial sense, and how the actual globalization phenomenon began to develop, also draws clearer path of where it´s going.

Not Quite There: The Unlikely Case of a Depresion 2.0

On my daily basis news update from time to time, I find myself reading about a line of economist very worry about a relapse of the recession, a double dip or a very “gloomish” view of the future, while my feet is firmly set on the ground i need to point several critical differences between 1937 and 2010, while a do agree in the common view, that like during the depression, a large banking crisis derailed the financial system, household struggling with a mixture of large unemployment and a languishing recovery, but this line of economist are relying much more in the history book rather than reviewing the current global situation, my duty is to dispel few myths and unfounded fears arising from the media from time to time.


- It’s a depression like feeling: Yes the recession was awful and the effects may linger around the economic climate for several years, the economy has been expanding at feeble pace for over a year, people returned to spend albeit at more picky ways, and industrial production have been consistently picking up so far the recovery pace proves to be between the average recovery of a financial crisis and the historical average recovery from the typical recession.

- This recovery is very fragile: Well that depends vastly of where your head is looking, during the Great Depression, policy mistakes piled up one against another all around the world, by then only U.S and Europe had enough economic clout and weight to matter, the developing nations were agrarian and commodity exporters, with a large peasant population and thinly populated cities.

Now emerging nations proves to have a large urban population, growing services sectors and deepening domestic markets, booming China now is 2nd largest economy in the world and emerging countries middle class it’s already consuming from domestic and foreign companies, this broad set of countries with healthy financial systems and growing GDP and demand are a floating saviour that during the 30’s was inexistent

- This is a gloomy world and set to be sluggish for years: Yes and no, while most of the western world keep licking the wounds generated by excesses and poor management, most of the emerging world have already been growing as fast as ever, with low debt and healthy macro economy, this is more the picture of a 2 speed economy, thus duality is nearly everywhere, in U.S the lees indebted counties are already lifting their spending rapidly.

- Europe will disappoint: Everyone seems to say this except only by a smallish group of Euro fans, but reviewing raw data people tend to forget that Europe population it’s stagnant vs the 1% growth of U.S, in other terms, when it comes to GDP per capita, EU have been on par or outpacing U.S most of the decade, also EU have a more trade dependent industry network, a German industrial hinterland (with pan-european suppliers) and very good diplomatic-business relations abroad, helping the EU to tap growth with emerging nations, this proves a big leverage to keep boosting growth and confidence to the region, also the EU is very sensitive to devaluations, any big drop end up boosting growth like in the late 90’s.

- New protectionism will hinder trade growth: If during the worse part of the recession, little barriers were erected, it’s not likely that in the near futures will, as trade improved the variety of products and lowered prices across the world, protectionism may fail to take root in the current world.

- Fiscal hawks will push the economy to a double dip: Years from the behavioural economics helped to understand the decision making process of the companies, when it comes to taxes and interest rates the more certain about the future, the better, U.S business community lacks from this, even for economist the scenario it´s like trying to see thru thick fog, Europe instead took a giant step by setting a credible plan to cut deficit this is in fact helping the business to forecast, plan and using this blueprint for the future, the key in here is, clear out the expectations of the market, no matter if the deficit will persist or not, but the importance is to have a blueprint towards a sustained path, showing if taxes will be higher or not, large decisions depend on this government blueprints.

This is not a depression indeed and the elements of it are missing, every recession and depression have it´s similarities and differences, how to analyze and planning for a recovery must come from a deeper review of such diagnosis, so far i see we are not quite there in the same depression like scenario, now the trade is deeper, there are much more goods and manufacturing is more evenly spread across the world, services weigh in the GDP surpass more than 50% in the OCDE countries, and knowledge economy, and tertiary education is rising, this new setting could hold the key to a more sustainable recovery.

A Roadmap to Stop Bleeding and Start Healing (Part 2)

In my previous post i talked a bit of the current situation in America, and the difference it makes for the economic agents to boost demand and in fact sustain the recovery.


Now as America faced large deficits twin deficits (trade and fiscal) thru the 2000’s, is time to redefine the policies to change such disbalances.

On the fiscal side U.S need urgently a consumption side taxes (VAT), this may not like the overall population but may help to restrain conspicuous consumption, and contain the trade deficit from the demand side.

On the supply side the corporate rate at nearly 40% remains terribly high, (and the OECD second highest), this at the time where revenues fail to hit 2% of the GDP in good times, but nations with lower nominal rates, also fetch more income from their corporations while the higher nominal tax, the less receipts (companies cut their tax bill thru several loopholes, high taxes are an incentive to such distortion) as the graphs show below

Also the countries with higher corporate taxes are more likely to show lower output growth, so higher output gain, less companies cutting artificially their tax bill added to the fiscal incentive to hire and build in America, are strong reasons to slash those rates and bring them in par with the EU at least.

Fiscal simplification could do a lot too, as easier tax fillings could fill the coffers with fresh resources.

All this new money raised from a lighter, simpler tax structure could be used to plug the deficit, improve infrastructure and finally boosting the goods producing industries, a bit like cutting trade deficit cutting demand, and increasing supply by turning more attractive America as a production site, and helping the companies to keep prices of their wares by paying less taxes thus able to absorb partially or totally the VAT, an act that importers wouldn’t be so eager to do.

¿Isn´t this look like a coherent way to raise tax revenue while stimulating production?

http://money.usnews.com/money/blogs/capital-commerce/2008/8/15/us-corporate-taxes-still-second-highest-on-planet-earth.html

A Roadmap to Stop Bleeding and Start Healing (Part 1)

Right now the American economy is sputtering, losing momentum just in the most needed time, with exports failing to propel the way the did early in the year, and jobs hard to come by, pretty much this is how a recovery works.




Either way consumer led or export led kicks (both a source of demand), the spare capacity begin to shrink (from factories to offices and retail), but not until business think they need to, so a sustained rhythm seems necessary, in factories this is pending orders or unfilled orders, and in retail means dropping inventories + more and constantly increasing traffic in store turning in to sales, after the current number of employees begin to seem unable to fulfill upcoming demand, is when the magic happens and hiring unwind, unfolding a virtuous cycle when increasing hiring, led to increasing demand, to increasing investment to expand capacity and so demand keep rising, etc.



In the current recession, few have been able to consolidate a robust demand from exports or consumers, Asia thru a mix of both, as governments help to reassure confidence and opening the grid of credit.

Europe seems to be quickening before and during the debt crisis, and such event sparked a temporary stimulus by making the euro cheaper, the European GDP data proved that PIIGS remain weak, but a lot stronger than consensus, and improving German fortunes may actually send demand shockwaves across the mainland, while at the same time government have been sending confidence to the economic agents thru tightening fiscal policy with still loose monetary one, as well a big 1 trillion dollar support to states in need have quite shored up confidence along the way, even in the current state Europeans are likely to begin to spend a bit more, companies keep tapping Asian demand and even after the budget cuts, mostly because they are not so harsh in most of the nations and spread out across a span of several years.



Meanwhile U.S economic policy remains quite dovish about how to mend the country, the real worry (the same from companies and consumers) is about the sustainability of the country current economic structure, lack of reforms, overspending, and not foreseeable credible plan to return to a more normal path, the current lack of confidence, is denting the ability of the economic agents to take decisions to invest, spend and thus they rather save (¿have everyone seen how much cash is kept by companies and how consumers are saving?) , U.S need reform to strengthen real income grow, a credible plan to restore confidence in the public finances and a way to pave a true recovery road, while at the same time cutting trade deficit and raising competitivity

Why is the keyword “confidence” in this comment? because economic agents will hold their decisions until the future seems more clear, this is keeping most of Americans guessing “what’s next for us” and “in this current environment im unable to spend”

Location, Location, Location

When it comes about SME’s particularly those from trade, catering and services, location is the single and most important raison d´etre when you are about to set a startup or expanding an existing business



¿Why is this so critically important?


Well mostly because the market you aim to cater is located within a radius of mile or two so this will be called our local market, in which existing business coexist with new ones forming a “business fauna” thus, there lays the importance of actually know the area supply (name it competition), and measure an approximate figure for demand is very helpful, another key fact to examine is whether your product is about to get a good reception, it’s like aiming to sell polish food products in a mostly Afro-American district or vegetarian meals in a rural district where meat is seen as a staple, first at all is trying to offer goods and services that can be assimilated in the local markets, ensuring a constant flow of customers while pocketing a profit from the trade, always remembering a constant flow of customers means a good product acceptance and the decisions mention before where taken correctly

Location is critical before you set up a shop or a service provider, when it comes to CBD location while costs may increase, also the potential impact from the floating population, higher education, constant demand for food, beverages, entertainment and also as corporate support and services provide (ranging from small office supplies stores to accounting and consulting services), and can in fact turn in to profitable trades, but the same kind of business in a lightly populated commuter town at the outskirts of a large metropolitan area, would hardly raise profits at all.


¿How to define business strategies from such several factors?

Always information is the prime tool to attack a market, approach a customer or tailor made a product/customer service strategy to appeal shoppers and clients, if trying to settle to a somewhat large mall with certain traffic, you should be aware of the kind of shopper that flocks to the mall, if setting up in a suburb, at least knowing their habitants profile, income and education levels, if are you planning to setting up nestled between corporate titans in the CBD aiming to capture a slice of their budget or trying to fulfill their employees demand from food, dry cleaning and lattes, it all comes first to know your environment, and the people that flock around this environment.

The Globalizing SME

Right now as I type, probably there’s a bunch of small business chatting with similar companies facing similar problems across the pond, others are closing business online and picking up orders, and probably a smaller crowd is looking for partnerships to tap new markets abroad or gain experience from foreign firms.




Name it as you like it, but globalization has hit many sme’s in several ways, as a light google search to improve their ability to manage their staff, to building a global client network, carefully linked thru laptops and smartphones, while this synergies are being well exploited, several other sme’s are missing the chance.



Could be demographics, could be technophobia, or simply a taste for good old fashion in management, but internet and social networks also do their share when it comes to handle customers and picking up orders.



Handy & Useful



The recent communications advances could be exploited by those less eager to exploit the latest technologies, a few clicks and you may find foreign companies in distress on sale for a bargain, others looking for partnerships, and other as well aiming to raise capital to reboot their business, for sme’s now it´s easier track regional and foreign affairs, sales and orders, also business software manager is also more freely available and so sme’s can take advantage from it.



The bottom line is next: Going global while remaining a nimble and nifty sme, can trutly pay off, if your company already have export experience, partnerships and product development for several kind of customers, turning in to a mini multinational company should come next.

Industrialization by Diktat

The New Russian Industrial Policies


During the noughties the Russian economy boomed pretty much like most of the BRICS, led by resources such metals, oil and consumer spending, but after the crisis what could turn on the economic engine?

In the recent months Russian authorities have targeted several fields to further develop the economy, this aiming toward sectors such Technology, Aircrafts and Construction, all this after the image of the proud country was tarnished by the dependence of commodities, such initiatives aimed to attract new investment from multinational companies in several fields or aiming to modernize the most backwards sectors of the economy, but this renewed interest to attract money, improve its economic status and enhance it’s competitiveness just come up partially as several reforms are still pending.

Technology: In this field going directly pledging for investment to the new area soon-to-be a silicon-valley-like area sounds interesting, but so far reforms are lagging on intellectual property, investor protection and less government raids to companies and harassing, investors keep asking whether the current president is able to push a broader reform, or if the current talk from the highest circles of the government are just picking global winner from which national companies can gain technology and know-how, while already some Russian companies and investors are playing tough, like buying slowly social networks such Facebook and developing local search companies, they still look like laggards in top of the line hardware and software.

Aircraft: With a reforming Aeroflot Airline turning in to a business class carrier and gaining market share from titans such British Airways and Air France, on routes to Russia, but not until the WTO accession Aeroflot will be able to regain on routes and enlarge the passengers, but also again the high circles from the government come orders to buy local, and avoid buying from Airbus and Boeing as the local aircraft builder Sukhoi needs clients for their passengers jets, again while building a world class airline, as a tool to fuel demand from local producers, in other fields seem to develop more technology rather than appeal foreign investors as the lack of producers for larger jets, turn the idea of moving facilities in to a very politicised subject.

Construction: The soviet legacy on the cities formerly under the rule behind the iron curtain, is about large apartment complexes with little architecture features and lack of colour, according to the president Dmitry Medvedev as many as 77% of the Russian population lives in this kind of crowded spaces, whoever in this field Russia it’s playing with local developers and easing large lands to turn it in to low density housing, the barrier to achieve such goal, is the largely private banking system, Russians already suffer from high interest rates and a timid mortgage market that doesn’t match the economic size and disposable incomes of Russians, but while unable to lend by direct government orders like in the previous 2 cases, probably this will be the area most likely to look like a market led sector.



Sources:

http://www.cbsnews.com/stories/2010/06/23/tech/main6610878.shtml?source=related_story

http://www.businessweek.com/magazine/content/10_19/b4177036186682.htm

http://www.businessweek.com/magazine/content/10_27/b4185007612464.htm

http://www.themoscowtimes.com/news/article/putin-tells-aeroflot-to-buy-russian-planes/410154.html

Hot Money for a Hotter Economy

This represent the first comment over BRIC Economies, analyzing large chunks of their economy, and comparing them among development and emerging nations, with the intention of giving snapshots of the economies, proving their pros and cons, and shedding some light towards potential distortion issues along the real economy.



Brazil it’s poised to take the Latin America light spot, yes, I know that it actually did already, but this is only the beginning as oil investment begins to be poured in the economy and all this during an election year.



Recent Background



Brazil economy soared in 2010, as a relative high taxed economy with lot of financial muscle thru development banks, allow it to use Chinese-like command over loans, to achieve Chinese-like economic growth, while notably constrained due choked port and clogged airports, a sharp rise in it’s currency, the real and some spare capacity in the economy thanks to 2009 slowdown, inflation remained under control in a somewhat high level.



While all this are good news in a crisis frightened world and let investors reap profits from an almost loss-proof market, on the real macroeconomy this it’s worrying.



So far given the point in which the recovery cycle encounters this easy growth did required much less investment and capital, and more re-hiring from the companies boosting consumption and enabling employees to take consumer loans and mortgages, but what about new investment in equipment and machinery and due a high consumption growth imports began to soar, in recents months Brazilian trade balanced shifted towards a deficit again, with commodities prices collapsed from a record high 2008, Commodities makes the bulk of Brazilian exports and a sizable share of the GDP compared with other economies of such size, other disadvantage of Brazil when reviewing the data it’s a low participation of trade as % GDP, this data intrigues me and a lot, as large economies with large populations tend to go a bit closed, to remark my point net exports to Japan are a real engine of growth, but exports remain about 15% of the economy, and remains far below from the German exports amounts, U.S is a well know exporter, but at 1.5 trillion dollars of imports pale in front a total economy of over 14 trillions, on the other had exports remain in the low 10’s compared with the overall economy, Germany remains awfully dependent from the European market, whom sucks the lion share of their sales, and Brazil seem to go the same road.



Seems yesterday when Brazil took a more export like approach, it’s volatile domestic market and cheap currency allowed it’s manufacturers to try out in the international field, while taking over shoes market share in Europe and assaulting the car market in Latin America with a focus on cheap prices and relative good quality, but as the decade past advanced and the commodity cycle progressed, exports zoomed, allowing a change in terms of trade, boosting growth and allowing a revaluation of the Real, this have been deadly to exporters.



“Sir, I see Un-Real prices on my Big Mac¡¡”



The current value of the Brazilian Real, it’s at spitting distance from the 2002-2003 levels, but what this seem like returning to the previous level and so, leaving the sensation that the currency it’s at a fair value, economist may remember if a currency fair value is defined for the inflation differential, such differential remain rather large with it’s main trade partners, Europe, U.S and more recently China, so in fact the currency boomerang-like swing, represents a sharp overvaluation of the currency, this contrast with the Mexican case, which remained more or less trailing the American inflation rate, as result the peso fair value (or PPP), remained rather steady along the decade, and by the time of the Great Recession, actually pushed the peso to subvaluation levels, another hint of this lies in the trade balance, rather small and stable for the Mexican case, while for the Brazilian the sharp rise in prices, allow it to control inflation and help to boost consumption, this actually helped to cut all incentives toward a diverse exports portafolio, and make exporters more likely to boost production at home to met consumption, also less incentives to exports means less pressure to boost technologic content and reach higher quality to be competitive in the markets abroad.



Unfortunately Brazilian policy makers don’t have any pressure to boost reform packages, as long as the economy sustains it’s robust economic path and inflation along the lines the central bank tolerance levels, this kind of reform fatigue may coause economic constraints in a few years, and the real fear is if Brazil can really mimic the oil fund scheme created by Norway, this scheme allows Norway to sterilize the money coming from oil sales, shielding the country from ageing population and financial crisis, Brazil potential fail to build such structure may lead the country towards the so called “Dutch Disease” and leave the nation crimpled by high inflation and deeper dependence on commodity prices.







Sources:

http://ragingdebate.com/economy/big-mac-index-highlights-chromic-under-valuation-of-chinese-currency http://ipsnews.net/news.asp?idnews=50401

http://seekingalpha.com/article/36488-currency-commodities-boost-brazil-s-bovespa-index

http://nationalaglawcenter.org/assets/crs/RL33699.pdf

http://www.indexmundi.com/blog/wp-content/uploads/2009/08/image2.png