The
Dollar’s Descent: Likely to Continue
By
Scott B. MacDonald
 NEW
YORK (KWR) -- Foreign exchange markets had an interesting
2003 and it appears that 2004 will perhaps be even more
challenging. The combination of U.S. economic policies
and improving European and Japanese economic performance
add up to an ongoing downward track for the U.S. Dollar.
We expect a soft landing, but clearly recognize there is
a risk of a hard landing, especially if protectionist sentiment
is not controlled. China remains a potentially disruptive
X-factor. The Bush administration’s backing down
on steel tariffs was an important step in avoiding a costly
trade war with Europe and Japan and helps to maintain a
gentle downward trajectory – at least for the short
term. Trade tensions, however, continue as reflected by
the Bush administration’s tariffs on Chinese textiles
and its search for other measures to protect the domestic
steel industry.
For the Yen/Dollar, we look to 105-108 over the next 6-8
weeks. The primary pressures on appreciating the Yen are
a weak dollar policy on the part of the Bush administration,
no increases in U.S. interest rates in the near-term, and
improved sentiment about the Japanese economy. In the recent
Tankan report, Japanese business sentiment was at its highest
level in six years, indicating a sustained improvement
in headline sentiment. At the same time, the Bank of Japan
is likely to maintain a rearguard action opposed to the
Yen rising too quickly. In 2003, the Bank of Japan sold
a record Y17.8 trillion ($165.2 billion) in an effort to
slow the Yen's appreciation. A few billion more Yen is
likely to be deployed in the weeks ahead if it appears
that the dollar is set to fall further. If these trends
continue, there is talk that the Yen could strengthen to
100 by year-end 2004.
The dollar/Euro relationship has also been one of dollar
depreciation. While the Euro was initially a weak currency
with a questionable future, it has steadily gained in strength
as the dollar declined. Thus far, the dollar has declined
17% in 2003 against the Euro (now trading around $1.23).
We think the dollar could weaken to $1.30 per Euro by mid-2004,
perhaps sooner. There is even some speculation that the
dollar could weaken to $1.40 by year-end 2004 if present
trends continue.
While a weaker dollar (pushed along by a soft landing policy)
is helpful in bringing the U.S. current account down to
more prudent levels, current trends in international currency
markets carry a number of risks. First and foremost, the
combination of a weaker dollar and no increase in interest
rates is likely to make investing in United States financial
instruments less attractive (which reinforces our earlier
view of a growing chance that the Fed will act before the
summer). The U.S. needs foreign investment flows to help
pay the current account imbalance.
Secondly and equally important, a rapid strengthening of
the Euro and Yen will not be a help to the economic recovery
of either Europe or Japan. In both cases, economic growth
is sitting heavily on the slender pillar of exports. The
Euro is more vulnerable than the Yen because the Bank of
Japan is much more willing to intervene. Hiroshi Watanabe,
head of the Ministry of Finance's international department,
stated late last week that the government is "looking
to stablize the currency in the range of 108 to 110 to
the dollar." All things considered, we look to a weaker
dollar and strong Euro and Yen in the weeks ahead.
A more medium-term concern is China. Asia’s largest
country has emerged as the workshop for the world, pegging
its currency, the Remnimbi, to the Dollar, the currency
of its major trade partner. China is clearly in a sprint
to make the transformation from a backward agricultural
economy into a modern industrial power, a process that
began in earnest in 1978 and is still continuing. While
Beijing is seeking to pull China up the economic ladder,
part of the cost is being carried by the United States,
where consumers eagerly buy cheap Chinese-made products,
pumped into retail distribution outlets, such as WalMart.
Where U.S. consumers benefit, U.S. workers in the manufacturing
sector suffer – some 2.6 million jobs have been lost
in the United States over the last three years. This loss
has been largely attributed to China’s low costs
and, increasingly, an undervalued currency. It has been
said more than once among U.S. labor unions: “Not
everyone wants to work at WalMart.” In response,
Washington has put China under pressure to appreciate the
Remnimbi by imposing tariffs on textiles and trade issues
are always a topic of conversation during high-ranking
government-to-government talks.
What complicates matters for foreign exchange markets is
that China is also a major holder of U.S. treasury bonds
and government agency paper (i.e. Fannie Mae and Freddie
Mac). If the U.S. pushes too hard, China could feel compelled
to dump these securities into the market – not a
net positive considering the Bush administration’s
reliance on deficit financing. In addition, a rapid appreciation
of the Remnimbi could brake China’s strong economic
growth (7.5% in 2003). This would ripple through commodity
markets (not good news for countries like Canada, Australia
and South Africa), slow economic expansion through the
rest of Asia and Latin America (Brazil, Chile and Peru
are big suppliers of commodities to China), and ultimately
clip U.S. exports to China (which is already one of the
world’s most significant consumer markets). What
all of this means is that the Bush administration must
carefully balance how hard its pushes for China to appreciate
the Remnimbi as it reaches out to the manufacturing heartland
of America for the 2004 election and its own medium and
long-term national interests. Pushing China into a recession
could precipitate a global economic slowdown and make it
more difficult for U.S. companies to take part in the world’s
most rapidly growing consumer market.
One of the ironic twists in the globalization process is
that the U.S. is still the global economic locomotive,
but China increasingly is emerging as an interrelated partner,
badly needed to pick up the slack left by the slower moving
European and Japanese economies. In foreign currency terms
this means that China’s undervalued currency at some
point must adjust. The trick is going to be exactly the
same issue facing the Dollar’s devaluation – how
to find a soft landing. If China is forced to appreciate
too quickly, there is a hard landing scenario that is no
one’s interest. We do not see China appreciating
the Remnimbi in 2004, but interest rates could go up, leaving
2005 as the year of foreign currency adjustment.
The dominant theme in foreign currency markets in 2004
will most likely be the ongoing depreciation of the Dollar,
the appreciation of the Euro and Yen, and ongoing pressure
on China to allow the Remnimbi to appreciate, to help reduce
Sino-American trade tensions. The key variables will U.S.
weak Dollar policy, complemented by further appreciations
in the Euro and Yen, while the Remnimbi is likely to remain
in a status quo though Chinese interest rates could go
up. If political pressures mount, which they could, the
soft landing for the Dollar could shift to a hard landing.
Does
China Represent a Threat or Opportunity for the United
States?
(This
article is adapted from comments delivered at the recent
Sino-US
Investment Summit in New York.)
By
Keith W. Rabin
NEW
YORK (KWR) -- Two years ago there was a lot of anxiety
in Asia about the emergence of China. Neighboring
countries were worried that China’s rise would
diminish their national competitiveness. During one meeting
in Tokyo I was asked by a senior official whether people
in the U.S. were also concerned. At the time people here
did not seem overly worried and I answered I did not
really think so. He was surprised and asked why not.
I answered the U.S. had already faced its China about
twenty years ago and it was called Japan.
We both laughed, however, two years later it seems
I was wrong. I go to a lot of conferences, though most
are internationally-focused
and don’t really reflect public opinion. Therefore, when
I attended a retail investment conference a few months ago,
I was amazed when person after person got up during a Q&A
session to complain with great passion about job losses and
the threat they believed that China represented. In the mid-1990s,
KWR International used to do a lot of trade issue work helping
Asian government and industry associations to communicate their
perspective on autos, semiconductors and steel. This reflected
the substantial concern that existed in the U.S. at that time
over our rising trade deficit and the loss of manufacturing
jobs overseas.
As U.S. economic performance improved during the latter half
of the decade, the environment began to change. Asian nations,
particularly after the onset of the Asian financial crisis,
were no longer seen to be a serious threat. Investor and
corporate attention shifted toward the opportunities presented
by the
dotcom and U.S. productivity “miracle”, and trade
relations became less confrontational. Now, however, we are
starting to see similar rhetoric and pressures being directed
toward China. While it is not clear how this will turn out
-- with the run-up to the presidential election before us,
it would not be surprising to see things continue to heat up
-- at least over the coming year.
Interestingly, the Asian countries now seem to have made
their peace with China. The anxiety that could be sensed
two years
ago seems to have transformed itself into a recognition of
China’s potential. While many in the U.S. complain about
an unfair trading environment, Japanese exports to China surged
27.8 percent last October. When trade with Hong Kong is figured
in, Japan registered a $778 million surplus for the month,
accounting for 63 percent of Japan's export growth in October.
In comparison, Japanese exports to the United States fell by
6.2 percent -- their 10th consecutive monthly decrease. Korea
has also begun to more fully embrace China. This year Korean
trade with China surpassed that with the U.S., and China is
now its largest trading partner.
What does this mean in terms of China-related investment
opportunities for U.S. companies and investors? The main
point is China is
here to stay and Americans are going to have to more fully
recognize, understand and embrace China if they are to benefit
from its emergence as an economic power.
In a recent KWR International
Advisor article Marc Faber
notes statistics that China now ranks as the world’s largest
producer of cereals, meat, fruits, vegetables, rice, zinc,
tin, and cotton. It is the world’s second-largest producer
of wheat, coarse grains, tea, lead, raw wool, major oil seeds,
and coal, the world third-largest producer of aluminum and
energy (measured in million tons of coal equivalent), and ranks
between fourth and sixth in the production of sugar, copper,
precious metals, and rubber. It is also the world’s largest
manufacturer of textiles, garments, footwear, steel, refrigerators,
TVs, radios, toys, office products and motorcycles, just to
mention a few of many product lines. He goes on to note that
Asia, including China, Japan, South and South East Asian countries
have a combined PPP-adjusted GDP of $14 trillion -- 50% larger
than the US’s PPP-adjusted GDP of $9.6 trillion.
Without going into details about specific China-related companies,
ADRS and mutual funds, it should be noted there are many
interesting opportunities that allow U.S. and other foreign
investors – both
institutional and retail – to take advantage of growth
in these markets. The same is true for companies seeking to
establish new sourcing and manufacturing platforms as well
as new consumer and industrial markets.
Put another way, Asia, with China at the center,
now has a combined population of 3.6 billion. It also has
more favorable
demographics than the U.S. and Europe and one of, if not
the
most, dynamic trading environments in the world. At the same
time, Asia’s combined equity weighting now totals about
3.4% of world market capitalization excluding Japan. It seems
relatively safe to assume while there will certainly be volatility,
this will expand over time.
In terms of trade and investment from China to the United
States, the New York Times recently reported that China is
expected
to achieve a trade surplus of some $120 billion this year.
U.S. exports to China, however, are not insignificant and
during the first ten months of 2002, Chinese exports to the
United
States stood at $56.5 billion while imports from the U.S.
totaled $21.9 billion. Chinese imports include agricultural
products,
airplanes and aviation, power generation and oil equipment,
machinery and electronics, etc.
Resources are especially important. China has become the
biggest customer for U.S. soybeans with imports running at
levels equivalent
to the total production of soybeans in China. The China International
Trust and Investment Company (CITIC) has also been active.
It owns a steel mill in Delaware and a timber and has owned
a timberland company in Washington State for almost twenty
years.
U.S. and Chinese firms are also forming cooperative arrangements,
though most seem directed toward China and Asia rather than
the U.S. China’s Shanghai Automobile Company and General
Motors, for example, are working together to develop light
and heavy automobile models. This joint venture plans to export
high performance engines to Canada. Sinopec and Exxon Mobil
also formed a strategic alliance and Tsingtao Brewery signed
a strategic investment cooperation agreement with Anheuser-Busch.
In addition, China’s Shanghai Soap Group acquired the
bankrupt Moltech, which produces rechargeable batteries in
the United States.
According to the Chinese Consulate General in Houston, by
the end of 1999, Chinese entities invested in nearly 600
trade and non-trade companies in the United States, involving
total investment
of US $5.5 billion. One would imagine this figure has gone
up since that time. Chinese investments include businesses
related to garment making, appliance manufacturing, project
contracting, restaurants, transportation, resources, travel
service, banking and insurance.
Two notable transactions, which may be seen as harbingers
of the future are those by the Haier Group, China’s largest
white goods manufacturer. It plans to increase U.S. sales to
$1 billion in 2004 from $200 million in 2000. Before raising
our eyebrows and bemoaning a further loss of jobs in the U.S.,
it should be noted that Haeir plans to produce most of the
extra output from a $30 million plant it opened in South Carolina – which
employs a substantial number of local workers. In 2001 Haier
also bought a $14 million converted bank building in Manhattan
to serve as its U.S. headquarters.
Information on fixed Chinese investment into the U.S. is
not easy to come by --though it seems fair to say the total
is
currently far below that made by U.S. firms into China. Inflows
into the U.S., however, are likely to accelerate over time.
Chinese firms have become far more active overseas and Chinese
tourists represent a dramatically increasing revenue source
for many countries.
One Chinese investor Li Yuanhao, is overseeing the U.S. expansion
for Holley Group, China's largest producer of electric power
meters. He was quoted about two years ago in the L.A. Times
about the need for Chinese firms to begin moving offshore,
noting "Chinese companies have to decide whether they
want to be aggressive and come out of China to get new technologies
or sit there passively and be eaten by foreign competition".
Holley purchased three U.S.-based firms in 2001 and initiated
plans to move to larger quarters in California.
It will be interesting to see whether increased Chinese investment
in the U.S. will be seen as positive steps that strengthen
the U.S. economy in an environment where there is great concern
over plant closures and job cutbacks, or if we will see the
same kind of opposition as when Japanese entities began to
purchase assets such as Rockefeller Center, the golf course
at Pebble Beach and the Seattle Mariners.
Resources and technology, however, are not the only attractions
for Chinese companies in the U.S. Chinese executives are
seeking to learn more about Western management techniques
and to facilitate
industrial sourcing. Hangzhou Reliability Instrument Factory,
for example, was cited a few years ago for its plans to acquire
a U.S. producer of the direct current power modules used
in telecom and data transmission. Their plan was to export
these
products back to China, where a construction and communications
boom has created a huge demand for these modules. Lu Qian,
chief engineer for the 300-employee firm was also quoted
in the L.A. Times noting "The reason we are interested in
buying a company in the U.S. is the slowing economy. We think
the price of buying a U.S. company is reasonable now."
With the downturn of VC funding in the U.S. Chinese-born
Silicon Valley entrepreneurs have also begun to seek their
funding
back home. The co-founders of ServGate Technology, for example,
returned to the mainland to raise funds for their computer
network security firm. Beijing Tsinghua Unisplender Group,
a leading Chinese high-tech firm invested $500,000 and provided
the U.S. start-up with valuable contacts.
In conclusion, KWR International has been seeing more interest
in our work from U.S. firms that are seeking to better understand
and to develop strategies that will enable them to explore
and to enter the Chinese market and to address problems they
are having within their established operations. To a lesser
extent, we are also talking with Chinese entities seeking
the reverse. That is an encouraging trend, which we hope
reflects
greater interest in the market as a whole. The basic facts
dictate that China will represent an increasingly important
source of investment, growth and trade in the world economy
and any entity that wishes to benefit must adapt accordingly.
Finally, we would be remiss if we did not point out that
perhaps the most important Chinese investment in the U.S.
is in U.S.
treasury bills and other fixed income securities. This dwarfs
anything else we have mentioned by a large margin. It has
profound implications, and must be examined within the context
of global
macroeconomics, politics and exchange rates -- as well as
the tensions we now see surfacing as a result of the current
push
by Treasury Secretary Snow and other U.S. policymakers, labor
groups and corporate entities to persuade China to revalue
its currency.
Given the level of complexity and multitude of issues that
must be examined to understand this problem, however, this
is something best left for another day. It should be noted,
however, that it is far from clear whether a revaluation
of China’s currency would prove to be beneficial to the
U.S. economy and as highlighted in the previous article many
analysts and experts predict that it could have a deleterious
effect.
Part
III - “Zaibatsu” and “Keiretsu” -
Understanding Japanese Enterprise Groups
TOKYO
(KWR) -- This Article is Part III of a series that discusses
the origins of the Japanese corporate complexes and groups
that have characterized Japan’s modern economy. Part
I, explained the origins of pre-WWII zaibatsu. Part II, explained
the dissolution of the zaibatsu and the origins of current
company groups known as keiretsu. This Part III, will explain
typical structures of the current company groups.
Current Company Group Types: As explained
in earlier articles of this series, keiretsu is a vague term.
The company relationships
in Japan that we often hear referred to with this term are
probably more diverse in their structure than is generally
understood. For example, unlike the zaibatsu, current company
groups include not only vertical company relationships, but
also horizontal relationships tied together by capital, and
company groups tied by transactional rather than capital relationships.
These post-WWII intercompany relationships generally can be
categorized into three groups:
(i)
the “Big Six” enterprise
complexes (Mitsui, Mitsubishi, Sumitomo, Fuyo, Sanwa and Dai-ichi
Kangyo, known
as the Rokudai Kigyo Shudan in Japanese); provided that some
these groups have intermingled during the recent restructuring
of the banks and banking systems in Japan;
(ii) vertical company groups, which are held together by
capital ties and are typical of large manufacturer company
groups;
and
(iii) companies tied to groups by business relationships,
such as assembler - supplier relationships.
The
Big Six – Typical
of the Horizontal Type: The Big Six constitute what many people
think of when the term keiretsu
is mentioned. These company groups are said to typify the horizontal-type
keiretsu because the group’s business interests extend
into diverse fields. Over the years these groups have been
characterized by stable vertical cross-shareholding relationships,
horizontal affiliations that reach to diverse markets, and
possession of large-scale economic resources. Shareholding
and other ties of affiliation may be held together through
strategies such as cross-stockholding, the dispatch of executives
and regular meetings of the companies’ presidents (shacho
kai).
Common denominations of the Big Six include that each has
(or had) a central city bank, general trading company, and
insurance
company within the complex. It remains to be seen how the
recent consolidation of these banks, trading companies and
other institutions
will affect the longstanding ties within these complexes
going forward.
The Big Six have historically had great influence upon the
Japanese economy. A 1992 study of the Big Six indicated that
while only 0.007% of the registered corporations in Japan
were members of the Big Six, this small percentage of the
company
population controlled 19.29% of the capital, 16.56% of total
assets, and 18.37% of sales revenue among such corporations.
The typical percentage of intra-group stockholdings among
companies in the Big Six has been calculated at approximately
20%. Traditionally,
approximately one-third of the cross-shareholding relationships
have been coupled with not only capital ties but also transactional
business relations. A large number of the vertical company
groups (explained below) are also found to be aligned within
the Big Six.
Vertical Company Groups: The typical vertical company group
is held together in an umbrella-like form with a large-scale
enterprise at its apex. In contrast to the zaibatsu and Big
Six, the scope of business of these vertical company groups
tends to be more closely connected to the original industry
of the leading enterprise. Matsushita, ITOCHU, Hitachi, Toshiba,
NTT, Tokyo Electric Power and Toyota could be pointed out
as examples of this type of vertical company group.
In addition to capital ties, long-term contracts, financial
and technological support have all been more or less a part
of the foundation that holds together these company groups.
Spin-offs have in certain cases led to the expansion of these
groups whereby individual plants or divisions became separate
legal entities, which entities remained wholly-dependant
upon the leading enterprise. One study indicated that in
1995 the
largest 30 groups were comprised of approximately 12,577
subsidiaries and affiliated entities.
Overview and Summary: It has been said that the extent of
control that members of keiretsu actually hold over other
members is
difficult to quantify. Some have pointed out that the relationships
of control are not necessarily unilateral because subsidiary
companies have also been known to exercise de facto influence
over parent companies; for example, as suppliers of production
units. It may, therefore, be an over-simplification to view
the keiretsu as simply top-to-bottom relationships. There
can be no doubt, however, that the financial, technological,
transactional
and managerial ties among companies in the Big Six and the
vertical company groups have had a central role in defining
not only the economic landscape within Japan but also the
advance of Japanese interests overseas.
As a result of recent consolidation in the Japanese market,
there is some speculation that the ties that bind company
groups in Japan could be loosening. Foreign investors hope
that this
phenomenon will provide opportunities for foreign financial
investors, lenders, foreign suppliers of goods and services,
etc., to develop business relationships with companies who
previously tended to transact primarily with their corporate
groups. If these hopes become reality, the ability of foreign
investors and suppliers to offer better prices, innovative
solutions, quality, etc., will be important in markets where
relationships were once the supreme competitive advantage.
If the traditional ties among company groups continue to
weaken, the need for consolidation and rationalization of
supplier
relationships, etc., may also lead to domestic and strategic
foreign M&A opportunities as the members of corporate groups
seek to consolidate to meet the requirements of an increasingly
competitive market place.
This is the last of a three-part series that provided a summarial
overview of a topic that has filled volumes. Readers
interested in recent works on the history and function of Japanese
corporate
groups might be interested in the following books and
articles:
-
Beyond
the Firm (Business Groups in International and Historical
Perspective), edited by Takao Shiba and Masahiro
Shimotani
(Oxford 1997)
-
The
Japanese Firm (Sources of Competitive Strength), edited
by Masahiko Aoki and Ronald Dore
(Oxford 1994)
-
The
1997 Deregulation of Japanese Holding Companies, Vol.
8 Pacific Rim Law & Policy Journal,
No.2 by Andrew H. Thorson and Frank Siegfanz (1999
Pacific
Rim Law & Policy Journal
Association)
The views of the author are not necessarily the views of
the firm of Dorsey & Whitney LLP, and the author is solely
and individually responsible for the content above.
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Investing
in Mexico: Still a Bet on the United States
By
Jonathan Lemco
NEW
YORK (KWR) -- Mexico is the second largest trading partner
of the United States, after Canada. As such, its economic
future is almost entirely dependent on the fortunes of
the behemoth to the north. The relative strength of the
US economy is a necessary, but not sufficient, condition
for Mexico’s economic recovery. Not only must the
US economy be strong, but also Mexico must continue to
put its fiscal house in order.
Since Mexico’s fiscal crisis in 1994, it has demonstrated
admirable fiscal prudence. The Central Bank and various
Finance Ministers have proven capable managers of the nation’s
economy. Public debt/GDP is a low 25% of GDP, which has
not been seen since the 1970s. Further, the Mexican financial
system has been able to withstand various shocks. Not surprisingly,
the leading credit ratings agencies have rewarded Mexico
by upgrading its credit ratings to the highly desirable “investment
grade” status. In turn, Mexico’s borrowing
costs have dramatically decreased and institutional investors
have jumped at the opportunity to hold Mexican debt in
their portfolios.
This positive economic and financial evolution has been
accompanied by the emergence of a viable and competitive
multi-party political system. The judiciary is relatively
independent of political machinations as well, although
we would not push that point too far. Since 1990, a series
of major reforms affecting liberalized trade, more open
domestic capital markets, tax reform, pension reform, bankruptcy
law reform, and others have been implemented. In short,
the Mexican political and economic system has matured in
the last few years, and investors have rewarded Mexico
for that. But much remains to be done.
Mexico remains a developing country, and its infrastructure
needs are huge. To that end various structural reforms
and revenue enhancing policies are needed. This will not
be an easy matter to bring about however, because President
Fox has had difficulty passing legislation through the
divided Congress. Further, Mexico faces competitive challenges
from other developing countries, notably China. But the
first priority is to revive the economy and to attain sustained
growth.
Many Wall Street economists are forecasting Mexican GDP
growth in the 1-2% range in the fourth quarter of 2003.
This is consistent with the anemic growth of earlier this
year. Also, manufacturing production, and especially automobile
production, remains in the doldrums and is expected to
decline 0.3% in the fourth quarter. Unemployment is expected
to rise. But inflation is no longer a serious problem and
at 4% is at its lowest level in forty years.
Mexican labor markets are far too rigid and regulations
are excessive. Corruption is a factor in different aspects
of public life, although there is evidence to suggest that
this has lessened slightly in the past two years. Some
analysts question why Mexico has not grown as rapidly as
its largest trading partner, the United States. Beyond
the obvious answers relating to productivity and development
differences, it is worth noting that that which links the
two economies is concentrated in the manufacturing sector.
But this sector is one of the weakest in the US. Mexico’s
economic future should not be tied to the manufacture of
textiles, shoes, clothing etc. When Mexico emerges from
a “developing” to a “developed” status,
it will be because it has created a large, productive and
profitable service sector.
In the North American mass media, much is made of the competitive
threat to Mexico posed by China. Without dwelling too much
on this issue, we should acknowledge that the competition
is real, but it is not entirely one sided. Chinese competition
has hurt the Maquilladora sector and foreign direct investment
in general. But China also imports finished goods from
Mexico, and Mexican suppliers would be well advised to
see China as a vast and attractive market. The more interesting
question is will US manufacturing output increase in the
near term? If it does, then Mexican exporters will get
a boost.
Going forward in the next few months, a central issue from
an investor’s point of view is the likelihood of
tax and/or electricity reform passage through the Congress.
At the moment it is an even bet at best. But if these reforms
pass with most of their provisions intact, it will be a
victory for President Fox and a victory for investors in
Mexico. In the case of fiscal reform, tax collection is
a modest 12% of GDP at present. This is below most other
investment grade sovereigns. Currently oil revenues account
for about 30% of total revenues. Should oil prices fall,
the consequences for Mexico will be particularly negative.
A substantial fiscal reform package could increase tax
revenues by approximately 0.75% to 1% of GDP in the short
run, and by another 2% in the next four years. Business
and consumer sentiment would also improve.
The electricity reform effort is also important from an
investment perspective, because it could lead to an increase
in FDI of about US $2 billion per year for the next ten
years and an increase of 1.3% GDP growth, according to
the Mexican Ministry of Finance. Should the reforms pass
within the next six months, I think that the credit ratings
agencies will reward the Mexico sovereign credit.
Mexico continues to make strides to modernize its economy
and polity. Although a majority of Mexicans would assert
that their lives are not substantially better today than
they were when Vincente Fox was elected President three
years ago, the passage of the tax and electricity reforms,
should they occur, would go a long way to improve domestic
consumer sentiment and to promote foreign direct investment.
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Is
the Asia Bet Still On?: Some Thoughts About Putting Money
to Work in 2004
By
Scott B. MacDonald
 NEW
YORK (KWR) -- During the 1980s and 1990s up until 1997,
non-Japan Asia demonstrated dynamic growth and sucked
in billions of dollars and yen of investment. The ensuing
financial crisis, which rocked the region from 1997-1998
and threatened to pull down an already wobbly Japan,
drove many foreign investors away – both from
the equity and bond sides of the business. The investment
terrain was left to vulture investors, hardy funds
with local expertise looking at direct foreign investment
and a smattering of entrepreneurial individuals. In
2003 Asia once again beckoned for both bond and equity
investors. That trend is likely to continue in 2004.
The question is – how do investors find compelling
stories?
Although some investors look for investments by making a
bet on macroeconomic conditions, smart money usually finds
a compelling investment story based on key developments in
a particular company. What we mean by key developments can
be translated into finding a company that has a “story” to
tell. That story can be one based on restructuring, a new
product, regulatory changes, or a merger and/or acquisition.
Free cash flow is also important as well as how transparent
are a company’s financial statements. Consequently,
one is left looking for triggers – major developments
that will determine the company’s performance. Good
investment opportunities can be found even in difficult economic
and political conditions.
Consider the banking sector in Asia. Although investors have
demonstrated little interest in banks in China and Vietnam
(for good reasons), there has been and continues to be interest
in largely private sector banks in India, Thailand, Malaysia,
Hong Kong and Indonesia. The reason for this is this is that
in each case, the regulatory environment has improved and
measures have been taken which are more constructive for
banks to operate. Within these countries the bank stocks
likely to do the best are those tied into the regional dynamics
of a growing middle class (with their demands for mortgage
financing), key consumer goods, ongoing implementation of
technology (helping introduce greater cost efficiencies)
and improved transportation (which is encouraging the greater
use of autos).
Two of India’s major commercial banks, ICICI and HDFC
Bank, had a strong year in 2003 and are benefiting from important
reforms in the banking sector as well as in the rise of a
middle class, needy of mortgage loans. Last year the Indian
parliament passed a law enabling lenders to seize and sell
the assets of deadbeat borrowers to help them recoup non-performing
loans. Another law allowed the formation of asset reconstruction
companies to which the banks would be able to transfer their
bad loans, to be repackaged and sold as pools of debt-backed
securities. All of this has made Indian banks a much more
interesting play for investors. Stronger economic growth
also helped. Both banks’ stocks increased considerably
in value in 2003.
Japanese banks (we are talking about the major institutions)
are also something that investors, both for bonds and equities,
have gained more investor attention, considering that they
are on their way to their most profitable year in a long
time. The ADR for Mitsubishi Tokyo Financial Group, for example,
has more than doubled off its low earlier this year. This
is not to argue that Japanese banks are without their own
set of challenges. There remains considerable work to be
done in dealing with the legacy of bad debts and zombie companies
that still are taking bank loans but are technically bankrupt.
However, the Koizumi government is making an effort to deal
with the non-performing loan problem and the upswing in the
Nikkei during 2003 has helped the banks’ capitalization.
This was something of a worry when the Nikkei kept plunging
earlier in the year.
Another interesting stock for investors has been Korea’s
Hanaro Telecom. The company provides nationwide local telephone
communication services and high-speed Internet services.
It also offers services hosting, Internet roaming, web hosting
and mail hosting services. What makes Hanaro an interesting
prospect is that it emerged from financial distress in November
with two large foreign owners, AIG and Newbridge, which together
own close to 40% of outstanding shares. This has meant Hanaro
now has an improved balance sheet, new management, operating
leverage for rapid profit growth and am emerging cash flow
story. For Hanaro, these positive developments were enough
to capture the attention of foreign investors and lift the
stock from its lows. Although the Korean telecom market is
dominated by KT, Harano is the second largest broadband operator
in Korea and is moving to expand market-share.
What about new triggers to send Hanaro’s stock higher?
A Morgan Stanley equity report recently stated: “We
believe Hanaro’s restructuring story has a strong appeal.” The
report argues that for the stock (traded in Korea and via
an ADR on the NASDAQ) to go higher it will have to attract
Korean domestic investors. The trigger here is ”…Hanaro
will have to prove it could take local telephone market share
away from KT beyond market expectations.” Pending the
outcome of the contest to take over Thrunet, a failed Korean
Internet company, Hanaro could generate enough interest.
First, it must take on LG Group, its rival, which is also
seeking to purchase Thrunet. Thrunet holds 11.6% of the Korean
broadband market, to Hanaro’s 24.5% and KT’s
49.8%. All of this puts Hanaro stock in play and no doubt
it will be closely watched by investors, both Korean and
foreign.
While the company-by-company approach is probably the best
way to find worthwhile investments, one still must be aware
of where Asia is heading. A more positive economic environment
does not hurt anyone looking to Asia for investment possibilities.
The International Monetary Fund recently stated: “Despite
the slowdown since early 2003, the Asia-Pacific countries
are again set to be the world’s fastest growing region
this year and growth is expected to pick up further in 2004.” Japan
is expected to have grown by 2% in 2003, with 1.5-1.7% growth
expected for 2004, a far better trend than the previous decade
of relative economic stagnation. Emerging Asia is expected
to grow by 6.2% in 2004, up from the expected 5.8% in 2003.
China, which has emerged as the regional locomotive of growth,
is forecast to duplicate 2003’s 7.5% real GDP growth
in 2004, while strong performances are expected from Thailand,
Malaysia and India. Even Hong Kong, which suffered through
a difficult recession over the last couple of years, is expected
to gain momentum in 2004 (2.8% real GDP expansion). Singapore
is also expected to rebound strongly (4.2% for 2004, compared
to 0.5% for 2003). The two countries with the most uncertainty
hanging over them are the Philippines and Indonesia, both
of which will be holding presidential elections in 2004.
Another factor supportive of investment in Asia during 2004
is Asia’s growing self-reliance and interdependence.
Although the region remains very much integrated with the
global economy, regional trade and investment linkages have
expanded considerably over the last 10 years. This provides
some buffering from the economic cycles in North America
and Europe. Along these lines, many Japanese companies have
hollowed out their industrial operations in Japan and established
newer ones in China, some of which export back to the island-nation
as well as the United States and Europe. Japanese companies
are hardly alone in this – Singaporean and Taiwanese
firms have also done the same.
At the same time, the region will benefit from the U.S. economic
recovery, especially in terms of export markets. Although
the long-term prospects for strong growth in the United States
cannot be taken for granted, through most of 2004 the North
American economy will have strong enough growth to pull in
Asian exports – even with a weaker dollar.
Other factors that should make Asia an attractive place for
investment in 2004 include relative political stability.
Despite the ongoing tensions caused by North Korea’s
hermit kingdom and occasional pro-independence outbursts
in Taiwan, East Asia is not marked by any wars, regime threatening
rebellions, or restless military establishments. Southeast
Asia does have political concerns – Islamic terrorism,
upcoming presidential elections in the Philippines and Indonesia,
separatist movements in Indonesia, and Burma’s harsh
military junta. Yet, none of these political concerns are
likely to through the region into massive turmoil in 2004.
While there is a lot to recommend playing the Asian investment
card in 2004, there are potential spoilers. We see the major
risks being geopolitical disruptions potentially including
major radical Islamic terrorist attacks within the region
targeting Americans, Europeans, Japanese and Australians,
as well as North Korean and Pakistani-Indian tensions. Other
potential problems include a further rise in protectionism
(mainly from the United States), the potential for a slowdown
in U.S. economic growth in the second half of 2004, and a
higher interest rate environment (starting off in the U.S.
with an earlier than expected move by the Fed to raise rates).
At a more micro-level, bad earnings performances from companies
could also disappointment investors.
Yes, the Asia bet is still on. We believe that companies
in Asia will offer good investment opportunities for investors
during 2004. To find the best returns, investors should become
much like Sherlock Holmes, making a careful investigation
into a number of companies, looking for clues in the form
of the triggers what will make stock and bonds prices improve.
For
more information on CSFB DNA'S new SD+ Information Service
click on the banner above
VIEWPOINTS & INTERVIEWS
Interview
with William Battey, President of CSFB Data and Analytics
LLC.
William
Battey is a Managing Director of Credit Suisse First
Boston and President of CSFB Data and Analytics LLC.
This business has been set up to organize and distribute
fundamental and securities data and analytical tools
generated by CSFB. Mr. Battey joined Credit Suisse
First Boston in 1979. He was hired into the New Business
Group within the Investment Banking Division. In
1986, he was given responsibility to create a Medium-Term
Note product capability and over a three-year period
built a team that was ranked number two in the world.
From 1989 to 1992, Mr. Battey ran the Pacific Investment
Banking Unit in New York. In 1993, he was asked to
build a new business team in New York to develop
and execute all "Yankee" fixed income new
issue business for the Firm, building market share
from 7th to 3rd over a three-year period. Following
this assignment, Mr. Battey's moved to Hong Kong
to run the Firm’s Asia/Pacific debt new issue
and syndicate business. In 2000, he returned to New
York and built the Credit Research and Structured
Products teams to over 100 professionals worldwide.
Prior to assuming this position, the firm was not
ranked in the top 10 by Institutional Investor and
other relevant polling organizations, however by
2001, the Firm ranked in the top 3 worldwide. Earlier
this year, Mr. Battey established a new data and
analytics business for CSFB. Mr. Battey has been
the lead banker on "Deals of the Year" for
a range of CSFB clients including Australian Wheat
Board, Asia Pulp and Paper, General Motors Acceptance
Corp, Korea Development Bank, General Foods Corp,
Hewlett-Packard Co., PepsiCo., Petronas, People's
Republic of China and Samsung Electronics. Mr. Battey
received a B.A., cum laude, from Williams College
and an M.B.A. from Columbia University.
Hello Bill, Can you give us some background
about CSFB Data & Analytics?
(click
on thumbnail)
 In
June of this year, Credit Suisse First Boston (“CSFB”)
established a new, non-broker dealer company, called CSFB
Data & Analytics, LLC (“CSFB DNA”). This
firm will house and distribute, directly and through
third party partners, economic and company data and information
on trader priced securities combined within an integrated
analytic and technology platform. CSFB DNA will not house
or distribute any research product of CSFB and all services
will be offered on a direct cash-paying basis.
Whether you are a manager of securities, loan assets
or a direct investor -- no matter where you are situated
in
the world, CSFB DNA products will better enable your
organization to arrive at its own decisions on how best
to manage the
company’s risk position.
Could you tell us a little bit about some of CSFB
DNA’s
product offering?
The first product available is a sovereign risk management
tool called "Sovereign Data+™" (SD+™).
CSFB has combined its economists’ forecasts with
World Bank and IMF data to offer 10 years of history and
2 years of projections, covering approximately 100 countries.
CSFB's quantitative team has provided tools to interpret
country ratings and the fair value of a given country's
fixed income risk. The site provides straightforward country
reports and comparisons as well as fixed income, FX and
equity market information and major news. This service
is provided in one convenient location at roughly half
the price of the major competitors. Just this month, we
added a company website to allow customers to access an
extensive database of company level financial information.
Utilizing the judgment of CSFB's credit analysts, we offer
derived financial information, which in the analyst's opinion,
more fairly reflect the financial position of a given company
in its sector. The company website, “Company View+™" (CV+™),
is divided into 17 different major sectors, covering over
30,000 companies, located in approximately 75 counties.
We include debt maturity schedules, benchmark bond data,
equity prices, news and top holders of bonds and stocks.
We also include credit risk scores calculated every day
by CSFB’s proprietary risk model, the Credit Underlying
Securities Pricing Model (CUSP). So in one platform,
customers will have access to fundamental data and analytics
on countries
(SD+) and companies (CV+), worldwide. We see this as
a tremendous value for customers and a competitive advantage
versus other data providers in this space.
The third series of products now available provides full
access to all fixed income and convertible over the counter
securities data in 6 currencies worldwide, priced by CSFB
traders. This universe of government, credit and structured
products comprises the 25-30,000 securities that most major
investors utilize for pricing their portfolios or for use
within their quantitative analysis.
CSFB has also released our quantitative credit risk tool,
CUSP™, as a stand-alone product. Fully integrated
with our credit data (initially, High Grade and ultimately
High Yield and Emerging Markets), CUSP offers a risk
profile of each major, rated company. In addition to
the credit
risk scores available in CV+, the complete CUSP product
provides model input data, volatility sensitivity metrics,
and tools for risk reports and graphic analysis. This
will be useful for credit, equity and lending risk managers
concerned with monitoring company specific risk events
and trading opportunities.
The fifth series of products is our Global Relative Value
Calculator‰, which is a securities search engine
that fully integrates CSFB's data platform. An investor
can define the selection process by currency, credit
rating, industry sector, or maturity sector across all
of our liquid
fixed income indices in US Dollar, Euro, Sterling, Swiss
Franc, or Yen. The results page lists the bonds specified
by the selection process and provides spread to LIBOR
levels in a common chosen currency creating a basic cheap/rich
comparison. The time series for cross currency data of
individual bonds is also available and downloadable to
Excel. The Global Relative Value Calculator provides
one-stop-shopping
for comprehensive relative value analysis of the corporate
bond market.
Many
sovereign data services are geared towards equity
investors. From our discussions you have noted CSFB
DNA is gearing itself to reach out to a far wider audience.
Can you give us more details about the sovereign product?
Since CSFB’s inception, the firm has been known for
its excellence in economic analysis. This fundamental interpretation
of macroeconomic data and trends facilitate our clients’ ability
to make direct investment and portfolio management decisions.
Taking advantage of this global intellectual resource,
CSFB Data & Analytics has established the SD+ website.
(click
on thumbnail)
 SD+
covers close to 100 developed and developing countries.
We have wrapped a useable online application around
macroeconomic history from the World Bank, economic
forecasts from
CSFB’s
global economists and the IMF, current and historical equity
data from Reuters, and CSFB’s own fixed income data.
We are particularly proud of our financial market data,
which includes 10 years of history, and is current as of
the previous days close. This is true for even the most
exotic instruments being traded that nonetheless have a
significant effect on the risk profile of a country and
region. Our fixed income data, which includes emerging
market sovereign credits, is priced daily by CSFB traders
and will be of particular interest, especially given that
most vendors do not offer this type of information.
We also offer a company database where a client will
be able to directly link country economic statistics
to company
data. This back and forth capability should make access
to fundamental data - economic and company – quite
easy. All website access will also be offered jointly through
one or more of our distributors.
CSFB has also developed three major analytical tools
for sovereign risk assessment. The first tool tries
to assess
the direction of credit ratings in a given country.
This model does not try to answer what the rating is – S&P
and Moody’s already provide this view – but
rather which way the credit is going – up or down.
The second tool tries to assess the risk-adjusted cost
of fixed income in a given country by arriving at a “fair
value” spread versus LIBOR in U.S. dollars. The third
tool is an econometric FX model that forecasts the return
probabilities from going long or short local currencies
on a one-month forward exchange rate basis in the emerging
markets. None of these tools provide “the answer” but
can be used with different data assumptions to review “what
if” scenarios designed by the client.
Can you tell us a little about your target audience?
We believe any organization with international exposure
will have an interest in the Sovereign Data+ website.
Within the financial sector, this includes research
analysts, portfolio managers and economists in both
the Equity
and
Fixed Income sectors. On the corporate side, multinational
firms (CFO, CIO, Treasury Department, Credit Department,
Cash Management, FX groups, Risk Management, Corporate
Planning, Corporate and Library Department) and government
officials (Ministry of Trade, Finance, Investments,
Funding, Central Banks) can all benefit from this service
provided
at a cost effective price.
One of the interesting parts of the DNA service
is the multitude of service providers and information
sources
that can be accessed. In KWR International’s case
this includes offering commentary and consulting services
that helps subscribers to "move beyond the data" they
access through the site. Can you tell us how you went
about selecting your team and the range of information
and services
they can provide?
(click
on thumbnail)
 Yes,
in the case of the SD+ website, we purposely sought
out “best-in-class” institutions to not
only enhance our platform with alternative sources
of information
but also to include alternative points of view. Having
information and data from the World Bank, IMF, Reuters
and CSFB gives customers the ability to better make
their own decisions with respect to risk and investments.
After issuing our press release announcing KWR’s
alliance with CSFB DNA, we received several inquiries
from potential subscribers wondering whether this service
was
limited to existing CSFB banking clients. CSFB DNA’s
products are not limited to existing CSFB clients.
I understand that you are offering no obligation trial
subscriptions to the CSFB DNA service for potential subscribers
who want to try out the system and determine whether
it meets their specific needs and requirements. Can you
tell
us a little more about this offer and how our readers
might take you up on this offer?
For qualified purchasers, we are offering a two-week
free trial for all of our products. Please go to www.csfbdna.com
to register.
Thank
you Bill for your taking this time to
speak with our readers.
KWR International is distribution partner for the
CSFB DNA SD+ information service. For more information
on
KWR’s
alliance with CSFB DNA, please click
here:
The
Steel Tariffs and U.S. Trade Negotiations: Reasons
for Hope and Despair
by
Russell L. Smith, Willkie Farr & Gallagher
 WASHINGTON (KWR) -- In June 2001 the Bush Administration
set in motion a sweeping and politically-charged
trade investigation by the U.S. International Trade
Commission under Section 201 of U.S. trade law
concerning virtually all steel imports entering
the United States. The result was a March 2002
decision by President Bush to impose prohibitive
tariffs and other trade restraints on billions
of dollars of steel imports from a wide range of
U.S. trading partners. It was one of the most significant
acts of trade protection undertaken by a U.S. President
since the last major round of comprehensive steel
protection was effected almost two decades ago.
Twenty-one months later, this episode in U.S. protectionism
came to an abrupt end. On December 4, 2003, President
Bush proclaimed that the steel tariffs would be
terminated immediately. The decision was no doubt
facilitated by a finding of the World Trade Organization
Appellate Body that the U.S. steel measure was
inconsistent with U.S. international obligations,
threats of WTO-sanctioned retaliation by key U.S.
trading partners and, more cynically, a change
in the White House political calculus ahead of
the 2004 elections. The White House would only
state that the last twenty-one months had provided
the breathing space needed for the U.S. steel industry
to adjust to import competition, and that the decision
to terminate the steel tariffs was not founded
on these other considerations.
Is there a deeper significance to the termination
of steel safeguard tariffs? Where does the Bush
Administration go from here on trade? To the former
question the answer is probably “maybe,” and
to the latter perhaps “from the frying pan
into the fire.” The termination of the steel
tariffs, with no other concrete assistance of any
kind to replace them save an administrative import
monitoring system, appears to be a dramatic repudiation
of the political power of “Big Steel,” that
army of executives, lobbyists, lawyers, and their
political allies in Congress and the bureaucracy
that speak for the U.S. domestic steel industry
and the steelworkers unions. The history of Big
Steel in Washington over the last-quarter century
has been one of virtually uninterrupted success
in obtaining import protection in one form or another.
The apex of that power was the 2002 steel safeguards.
The domestic industry worked for months to define
imports as the sole cause of their financial and
operational problems, and import protection as
the key to solving those problems. Once the Administration
initiated the steel safeguards investigation, the
industry and the Congressional Steel Caucus brought
enormous pressure to bear on the International
Trade Commission to ignore the facts, the basic
requirements of U.S. law, and the WTO rules to
produce a finding of injury. This created a drumbeat
for protection that resulted in a determination
by the President to embrace a remedy at the extreme
end of the spectrum.
At that point, Big Steel claimed that the 30 percent
tariffs were insufficient to revive the industry.
The domestic industry complained that the exceptions
granted to exports from developing countries and
the exemptions for products in short supply would
undermine the tariffs. They demanded that the Federal
government finance the medical insurance coverage
of all troubled steel companies, at an estimated
cost of $12 billion. This latter demand came at
the same time the U.S. Pension Benefit Guaranty
Corporation was reporting that steel companies’ abandonment
of their pension plans had drained its multi-billion
dollar reserves. Big Steel also sought extensions
and expansions of the steel loan guarantee program.
When it came time for the statutory mid-term review
of the tariffs, and the International Trade Commission
report assessing whether the tariffs had helped
achieve industry restructuring, Big Steel threw
itself into a new frenzy of letters, speeches,
press conferences, meetings with the Administration
and Congressional hearings to condemn even the
hint that the tariffs might be adjusted at the
mid-term. It is this author’s opinion that
the unrelenting post-safeguard demands of the U.S.
steel industry and labor unions ultimately produced
the fabled syndrome of “steel fatigue.” In
short, key opinion leaders and decision makers
in Washington came to understand that the United
States was risking a trade war over steel, coupled
with continuing adverse economic effects of import
restrictions in the United States. When this situation
was coupled with the realization that no amount
of trade protection and economic assistance would
satisfy Big Steel the political impetus to do so
vanished.
This is the deeper significance of the end of the
steel tariffs--that powerful sectoral interests
may finally be wearing out their welcome in Washington.
As a further example, while many observers regarded
the announcement of the Bush Administration of
its intention to limit exports of certain textile
and apparel products from China as a negative development,
they failed to take into account that the domestic
textile industry demanded such protection many
months before the Administration took action, and
that the demand was for much broader import restrictions
than those finally proposed. China had a significant
period in which to increase its exports, and at
this writing is still in negotiation with the United
States as to the terms of any import quotas. This
is a far cry from the automatic quota system that
has been in place for textiles and apparel for
decades and is now being phased out pursuant to
the Uruguay Round agreements. While these sectoral-specific
developments are certainly not definitive, they
present a hopeful prospect that the United States
is emerging for the syndrome of preaching free
trade in theory and embracing sectoral protection
in reality whenever the political pressure becomes
too great.
If the United States now may have lost its stomach
aggressive sectoral / unilateral trade actions,
where is the trade issue headed? Unfortunately
this potentially positive development is now being
overwhelmed by a set of adverse circumstances.
In recent months, the Bush Administration’s
initiatives for reaching multilateral and bilateral
trade liberalization have come upon extraordinarily
hard times. The Cancun Ministerial a few months
ago demonstrated that the United States is no longer
in a position to move the international community
to accept its trade positions, and that many countries,
particularly those in the developing world, are
willing to walk away from multilateral negotiations
that they perceive as inadequately protecting their
interests. While U.S. negotiations on a free trade
agreement with Australia seem to be progressing,
the outcome is not certain. Other FTA negotiations,
particularly those with Central and South American
nations, are not going well, and U.S. trading partners
in these regions have also become bolder and more
demanding with regard to U.S. market access issues.
At home, the deterioration of the broad national
consensus that supported free trade in the past
has continued and has accelerated. The claim is
now that international trade is to blame for changes
in the overall U.S. manufacturing sector. This
attack incorporates a variety of allegations, including
currency manipulation, labor and environmental
issues, and lack of reciprocal market access. No
amount of empirical analysis of the conditions
that have resulted in a loss of U.S. manufacturing
jobs (increased productivity through technology,
domestic price pressures from customers, recession,
etc.) has so far changed the minds of those who
have seized on this issue as a basis for attacking
any new U.S. trade agreement.
The reasons for this are far more complex than
the factors that led to the imposition of steel
tariffs and to their removal. Decades of attacks
on open trade, U.S. losses in the WTO, and certainly
competitive pressures from imports have cumulatively
soured U.S. policymakers, especially those in Congress,
on the idea that open trade is beneficial for the
overall United States economy, despite the temporary
dislocations it may cause in some discrete cases.
The prevailing point of view is now highly suspicious
of trade liberalization, and extremely reluctant
to accept regional and bilateral free trade agreements,
and certainly multilateral agreements, as inherently “good” for
the United States.
The steel tariffs have highlighted just how detrimental
unilateral trade protectionism can be, but if some
key politicians are turning away from this approach,
they are instead turning to a form of economic
isolationism that is more subtle, but ultimately
just as harmful, as product-specific trade restrictions.
It may require a long period of strong economic
performance, nationally and globally, before the
national consensus again supports multilateral,
regional and bilateral free trade.
By
Scott B. MacDonald
 Azerbaijan – Changing
of the Guard: OChange in leadership of the former
Soviet republics is gradually occurring as reflected by
the early December ouster of the president of Georgia.
Now Azerbaijan's former President, Heydar Aliyev, has died
at the age of 80 in a US hospital in Cleveland, Ohio, where
he was being treated for heart and kidney problems. Aliyez
had stepped down as president of Azerbaijan in October,
being succeeded by his son Ilham Aliyev, following elections
that were widely regarded as questionable. Aliyev was a
former Soviet Communist leader who reinvented himself in
the 1990s as a post-independence political strongman. His
record on human rights and media freedom was frequently
criticized in the West. At the same time he was credited
with bringing stability to the oil-rich country, and helping
to attract foreign investment.
Brazil – Lula Wins One on Pension Reform: On December
12th, President Luiz Inacio Lula da Silva won an important
legislative victory after the Senate approved controversial
pension system reforms. Reforming the pension system was
discussed in the early 1990s, but various attempts to pass
legislation were defeated. This time around, the reforms
sparked large protests. However, Lula stood by his pledge
to reform the pension system. The new measures include
raising the age of retirement and limiting civil servants'
pensions, all of which should help the government to reduce
the huge deficit in Brazil's pension system.
Pension system reform has been the hardest challenge facing
Lula since he assumed office last year. Brazil's Senate
voted by 51-24 to give final approval to proposals to raise
the retirement age to 60 for men and 55 for women, phased
in over seven years. Civil service pensions will also be
capped and subject to taxes. The aim is to bring pensions
for government workers into line with those in the private
sector, and reduce a system which last year cost 4.3% of
gross domestic product, or 56bn reais ($19bn; £12bn).
The Lula administration’s next major reform is to
overhaul the tax system.
Egypt – After Mubarak?: In mid-November the issue
of political succession unexpectedly came into the living
rooms of Egyptians as President Hosni Mubarak was noticeably
ill during a televised broadcast while addressing a new
parliamentary session. One moment the president was seen
at the podium, sweating and looking unwell. The next moment
the camera of the state-owned television zoomed out as
Mubarak stood at the podium, and seconds later, it tilted
to show the fixed picture of the Egyptian flag. Ten minutes
later, Egyptian television resumed its live broadcast,
showing the country's highest Islamic religious authority,
Sheikh Mohamed Sayed Tantawi, the Grand Imam of Al-Azhar,
and Pope Shenouda, Patriarch of the Coptic Christian church,
praying to God to "save Mubarak". Although the
Egyptian leader was to return to the podium and was given
a long applause by the parliament, the incident underscored
the issue that Mubarak has long been in power, and while
healthy he is aging and no one stands out immediately as
the heir apparent. The government comment that he had the “flu” did
little to stop speculation about the arcane world of Egyptian
politics and who will head it.
During his time in power, Mubarak has survived at least
six assassination attempts. Since he took over power in
1970, he has refused to appoint a vice president. In recent
years, the Egyptian leader has reportedly been grooming
his son, Gamal, to take over power. The 40-year-old graduate
of an American university, suddenly rose to high ranks
within the ruling party, and now accompanies his father
on all his external official trips. Although President
Mubarak denies he wants his son to inherit his power, many
Egyptians have their doubts. Traditionally political successors
have come from the army, which remains the most powerful
institution in Egypt. This has been the custom since the
army overthrew the monarchy in 1952. Although few fear
chaos in Egypt once Mubarak's rule ends, the incident in
parliament has also renewed demands by opposition parties
to press for democratic reforms. After all, Mubarak has
run unopposed in four referendums to renew his presidency.
Each time he has won with at least a 96% majority. Opposition
parties have been pressing to change the system, demanding
multi-presidential elections. Thus far, Mubarak has resisted.
After Mubarak maybe the political system will open.
Indonesia – International
Assistance Please: IThe Consultative Group
on Indonesia (CGI), the Asian country’s longstanding
donor country group, pledged in mid-December to provide
$2.8 billion in loans and grants, most of which will
be used for Indonesia’s government budget in 2004.
The international donor group also renewed calls to accelerate
reform measures and to improve the investment climate.
The amount was higher than the $2.7 billion promised
for the current 2003 state budget, partly due to higher
spending for debt repayment, as the expiration of the
International Monetary Fund program later this month
deprives the country of a debt relief facility from the
Paris Club of creditor nations. In addition to the $2.8
billion, donors set aside $600 million in the form of
credit exports and technical assistance to regional governments
and non-governmental organizations (NGOs), bringing the
total loan pledge from the CGI to $3.4 billion.
During the CGI meeting, while praising the country's
macroeconomic and monetary stability, donors emphasized
the need for Indonesia to address corruption, which retards
the inflow of investment, slows economic growth and puts
a brake on poverty eradication drives. "If the government
can deliver on the commitments it has made ... then growth
in Indonesia is set to take off," World Bank East
Asia and the Pacific vice president Jemal-ud-in Kassum
said in a written statement. To this he added: "But
significant slippage, especially in improving the investment
climate and governance, would put emerging gains in market
confidence at risk.”
The Asian Development Bank (ADB), which provided around
$900 million of the loan pledges, also urged intensified
action to reduce corruption to boost investment. The
ADB’s Southeast Asia deputy director Shamshad Akhtar
stated: “Weak governance has acted as a major barrier
to sound development in Indonesia, nurturing corruption
and rent-seeking and weakening the impact and effectiveness
of development projects." This message has resonance
as foreign direct investment approvals are currently
at only a quarter of the pre-economic crisis levels.
The Japanese government contributed $660 million in the
CGI loan pledge. In addition, Tokyo also set aside $220
million in export credit, bringing the total lending
from Japan to $880 million.
Mexico – One More Time!: In mid-December, Guillermo
Ortiz was approved by the Mexican Senate by a vote of
84-17 for a second six-year term as the governor of the
central bank of Mexico. There was some concern that his
re-appointment would be held back by political infighting
between Mexico’s major political parties, who have
been more interested in blocking each others legislative
agenda than advancing any meaningful reform for the country.
Ortiz’s reappointment was a positive development
as he is widely respected as one of the key forces behind
Mexico’s fall in inflation (below 4%). If his re-appointment
had failed, it would have sent a very negative signal
to domestic and international investors.
Nauru – Back to Being In the Club: In early December
2003, the Organization for Economic Co-operation
and Development (OECD) acknowledged that the government
of Nauru is improving transparency and has established
effective
exchange of information for tax matters with OECD
countries
which will be fully effective by December 31, 2005.
Consequentially, Nauru becomes the second country
to be removed from the
OECD's list of uncooperative tax havens (frequently
referred to as a black list) published in April 2002.
Along these lines, Nauru joins OECD countries and
more than 30 other jurisdictions in working toward
implementing
international standards and achieving a level playing
field in the areas of transparency and international
co-operation in tax matters. In addition, Nauru will
be invited to join OECD member countries and other
participating countries in meetings of the OECD's
Global Forum to discuss
the design of standards related to its commitment.
Only 5 jurisdictions remain on the OECD’s list
of uncooperative tax havens: Andorra, Liberia, Liechtenstein,
the Marshall
Islands and Monaco.
Book
Reviews:
The End of Detroit:
 Michelle
Maynard, The
End of Detroit: How the Big
Three Lost Their Grip on the American Car Market (New
York; Doubleday; 2003) ; $24.95; 314 pps.
Reviewed
by Jamie Smiles (Mr. Smiles is the auto analyst
for Aladdin Capital Management LLC in Stamford,
Connecticut).
 Click
here to purchase Michelle Maynard’s
book, The End of Detroit: How the Big Three Lost Their Grip
on the American Car Market (New York; Doubleday; 2003) ;
$24.95; 314 pps.
Michell
Maynard’s The End of Detroit is an account of the
American loss of market share to Japanese and German
automakers. The author is a reporter for the New York
Times, who follows the airline and automobile industries.
She has also written for Fortune, USA TODAY, Newsday,
and U.S. News & World Report. Her book argues that
GM, Ford, and Chrysler have lost their influence over
American consumers because of a lack of quality, misunderstanding
of customer needs, and a high cost structure. Ms. Maynard
documents how Toyota and Honda grew from offering cheap,
energy efficient cars in the 1970s to becoming full-line
automobile manufacturers. Her writing style is readable,
yet it lacks in-depth research as it pertains to the
US automakers. Maynard may be correct in attributing
significant market share losses to US hubris, but she
fails to recognize Detroit’s history of financial
and industrial innovation. The End of Detroit is a worthwhile
read, but Ms. Maynard’s strong anti-US bias is
underscored by the books title, and makes any reader
question her objectivity.
Maynard’s anti-domestic bias is not subtle, and it
detracts from the overall enjoyment of the book. She invites
reader skepticism by mentioning that BMW's CEO served her
chocolate cake and champagne in his hotel room, and that
Japan's Big Three granted her top management interviews (in
the case of Toyota, both CEO and COO, as well as top US officers).
She criticizes Detroit as being unresponsive to globalization
and changing trends, and presents a stark picture of the
culture of arrogance and insularity that led American car
manufacturers astray. Nor does she give any credit to prior
American industrial or financial innovation.
Ms. Maynard’s case would have been bolstered had she
focused more on the importance of legacy costs such as pension
and health care retirement benefits and how these high costs
are making the US uncompetitive. Recently, Gary Laepidus,
a Goldman II ranked analyst was quoted as saying, “there
is more health expense in an automobile than there is steel.” By
not spending more time focusing on crucial non-operating
expenses such as health care and pensions, Ms. Maynard detracts
from the importance of the subject.
On the positive side, Ms. Maynard’s book does provide
an overview of the last two decades, commenting on which
vehicles have been top sellers and why. Her journalistic
style makes it easy to track the transition from larger,
gas-guzzling automobiles in the ‘70’s to the
more energy efficient, compact cars of the mid-to-late eighties.
It also provides other interesting facts. For instance, foreign-owned
companies have built 17 plants in the United States and currently
employ 85,000 people to produce cars and trucks many Americans
assume to be "imports."
That the US has been losing market share for the last 10
years is a well-known fact. According to Ward’s Automotive,
the US market share for the Big 3 in 1980 was 73%, vs. 57%
last September. There is no denying that loss of market share
is a serious issue for the US automobile manufacturers. The
growing number of vehicles sold in the US, however, has significantly
mitigated its effect on the Big 3’s profitability.
In 2002, there were 15.8mm cars sold in the US, far more
than the 9.8mm that were sold in 1980. Analysts are expecting
16.8mm in ’03 and 17.2mm in ’04. Also, Ms. Maynard
does not mention the awesome cash cushion the Big 3 have
amassed in case the US faces a difficult recession. Combined,
the Big 3 have on balance sheet cash positions of more than
$35B, enabling them to endure several years of operating
losses in excess of those experienced in the ‘90-91
recession.
Ms. Maynard provides impressive examples of Japanese innovation,
but fails to mention past US successes. Toyota, for example,
built car plants in the U.S. and trained local employees,
including Spanish-speaking workers, who would later be able
to work in Toyota plants in Mexico, South America and elsewhere.
Yet there is no comment on the introduction of the SUV or
the advent of the Ford Taurus, two important US innovations.
Someone needs to remind Ms. Maynard that within two and half
years of its introduction, the Taurus was the US’s
best-selling vehicle and brought record profitability to
the Ford Corporation. Also, the introduction of the minivan
and the SUV revitalized the industry, leading to continued
American dominance.
Many insiders believe the real battle in the future will
revolve around technological innovation, and Ms. Maynard’s
failure to cover this topic is a disappointment. Hybrids,
electronic and fuel-efficient cars will be the key to winning
future battles in Detroit, especially if the price of gasoline
climbs above $2 a gallon. The players who can fully understand
and exploit their full potential hold the key to long-term
survival in the new paradigm. For this important future battle,
Detroit is positioned well.
Her book does serve as an important reminder that American
car manufacturers have seen their market share erode due
to a ceaseless flood of import vehicles, mostly from Japan,
Germany, and South Korea. At first, the Big 3 ignored the
competitors, as they operated in what Detroit considered
fringe markets (e.g. low-cost, high fuel mileage compacts
and high end luxury models). The Big 3 mistakenly maintained
a firm hold on the cars they considered most important, specifically
the gas guzzling, V-8 powered, family car. But, Detroit has
responded, announcing major restructurings that are likely
to result in improved financial performance.
Maynard begrudgingly admits that there is still hope for
American auto companies, but she refuses to discuss possibilities
for American improvement. In the wake of 9/11 and unparalleled
patriotic feelings, US consumers are likely to respond positively
to reliable and inexpensive American products. The Big 3
have generated particularly strong loyalty among US construction
workers. Building or renovation sites are full of GMC, FORD,
and Dodge trucks, and US “light trucks” are generally
considered to be more reliable than Asian imports. Importantly,
these light trucks tend to be more profitable than regular
cars, providing a benefit to Detroit’s profitability.
The End of Detroit is a worthwhile read for anyone who follows
the auto industry closely. It is concise, journalistic, and
full of amusing anecdotes. Unfortunately, Ms. Maynard’s
anti-US bias is fully apparent, and her title choice immediately
calls into question her objectivity. Indeed the US auto industry
is challenged on many fronts. Its cost structure is far higher
than its international competitors; non-operating costs,
including pension and health expenses have grown rapidly;
and a dearth of new products has resulted in a loss of market
share. But the big three have faced adversity before, and
foreign dominance in the US car market is not a foregone
conclusion. Her method of extrapolating current conditions
and predicting a financial restructuring by at least one
of the Big 3 is naïve. US carmakers realize that regaining
their customers will be a struggle, but they appear up to
the challenge. In fact, it is quite possible that readers
will look back on the publication date of this book with
amusement. Since the publication of her book, the share prices
Ford and GM have risen by 17% and 14% respectively, in anticipation
of an improved earnings profile and innovative products.
Richard
Katz, Japanese
Phoenix: The Long Road to Economic
Revival (Armonk, New York: M.E. Sharpe, 2003). 351
pages.
Reviewed
by Scott B. MacDonald
 Click
here to purchase Richard
Katz’s
book, The Long Road to Economic Revival directly
from Amazon
Richard
Katz, the author Japan: The System that Soured, has
written an excellent new book on Japan tackling the
nagging question about whether Asia’s largest
economy will recover from the legacy of problems caused
during the 1980s. The short answer to that question
is yes, but he admits that the process will be long
and painful and will require a transformation of the
Japanese political landscape. The core problem is as
follows: “Japan’s economic crisis is basically
a crisis of governance – in both government and
corporations. And so revival requires a fundamental
overhaul.” In addition: “There is now an
unprecedented gap between the interests of the party
and the nation. In a democracy, that gap cannot be
sustained indefinitely.”
According to Katz, a major part of the problem is the Liberal
Democratic Party (LDP), which has overstayed its welcome
in history. As he states: “Once a regime, no matter
how seemingly strong loses its raison d’etre, it
sooner or later loses its etre. So it was with the Communist
Party of the Soviet Union, the Christian Democratic Party
of Italy, dictatorships in Taiwan and South Korea, and
single-party rule by the Labor Party of Sweden. So it will
be with Japan’s single-party democracy.” Katz
argues that the LDP began with good intentions, helped
rebuild Japan into an economic powerhouse and long rules
as a catchall coalition. Over time, however, the system
soured as “the system that allows all the special
interest Lilliputians – from gas station owners and
construction firms to small retailers and even veterinarians – to
hog-tie the national interest in millions of tiny threads.”
In a sense, the system soured in the early 1990s when it
was unable to effectively respond to changing international
economic conditions due to strong and binding domestic
interests that reinforced an earlier tendency for a dual
economy. On one side was a highly competitive export-oriented
economic sector and on the other, hiding behind tariff
and non-tariff barriers and supplied with more than ample
credit, was a poorly competitive domestic sector. What
complicated making any meaningful adjustment was that the
domestic sector had strong political ties to the ruling
LDP, which in turn worked closely with a national bureaucracy
oriented toward maintaining the status quo. Consequently,
Japan has ended up with a political landscape in which
the reformers are confronted by an opposition that firmly
believes that adjustment is not necessary as the economy
will eventually right itself. The solution is to keep injecting
credit into the system, either through the banking system
or government spending. Both have had a highly negative
impact on the country’s economy.
Enter Junichiro Koizumi, Japan’s current prime minister
and leader of the reform wing of the LDP. Katz comments: “Koizumi’s
entire appeal, and the way he came to power, was based
on the population’s yearning and hope for reform.” Indeed,
popular support for Koizumi reflects the public’s
keen interest in reform – the pressing need to overhaul
the state and make things work again.
While Koizumi is clearly important in moving Japan in the
right direction, Katz ultimately regards the Japanese leader
much like Mikhail Gorbachev, the failed last leader of
the Soviet Union, who was able to unleash the forces of
change, but unable to ride the course, eventually being
swept aside as one of the history’s critical, yet
bypassed transitional figures. The author reflects that “…like
his Soviet counterpart, Koizumi is a sincere reformer who
faces two very large obstacles: his own political party
and a tragically self-defeating economic strategy.”
Katz expects that Koizumi will eventually be bypassed by
some else, but that he will contribute to death of the
LDP and its system. What this leads us to is that the “death
throes of LDP rule will continue for several more years,
passing through several episodes of political realignment,
with a series of new parties and new personalities rising
and falling.”
Katz is confident that Japan is changing and that “we
have little doubt that the era from 1990 to 2010 will be
seen as one of the country’s major turning points,
not the beginning of is demise.” The bottom line
in all of this is that the pain of muddling through will
eventually provoke action, some of which is already occurred.
As Katz states, “Japan is a great nation currently
trapped in obsolete institutions.” It has a well-educated
population, which only needs a program and institutional
vehicle to coalesce around in order to replace the failed
state. After finishing Japanese Phoenix, one can almost
hear Katz whisper, “Don’t count Japan out.” Japanese
Phoenix is critical reading for anyone interested in Japan.
Recent
Media Highlights
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pictures and updates of our recent Japan Small Company
Investment Conference, click above
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