Ireland: from boom to bust and bailout

Some years ago I had been researching  the great outsourcing work being done out of  Ireland. Being culturally closer to the US, it was easier though costlier to work with Irish providers. Ireland had beaten unemployment  from 16% down to 3.9% and Government incentives  including low taxes had major companies like Pfizer, Dell, Microsoft, Google doing a lot of work from Ireland. In fact, with no tigers in Ireland it came to be known as “Celtic Tiger” given its huge growth and success like the South East Asian “Tiger” countries in early nineties.

[Note: This post is originally published Nov 22, 2010 updated for formatting only May 18, 2021]

All the economic boom apparently resulted in a housing bubble that burst alongwith the mortgage meltdown in the US and the Lehman collapse. What exactly happened is not entirely clear but it is clear that the IMF and the European Union are trying to bail out the Irish banks and trying to shore up confidence. Things seem to be working but the lessons from Ireland’s boom to bust story need to come out really clearly. This would help many countries and industry sectors to avoid similar problems.

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Microfinance problems in the developing world – let’s look at the math

Last month (in 2010) this blog had reported about the microfinance industry problems  and  now there is a story in the NY Times . Let’s get the math straight- if you hire a CEO at a salary of 0.5 Million $/year   and the the typical loan you give out is $200 at let us say 10 %  ( rates for microfinance loans are reported at 30-70%)  you make 20 $ a customer on interest. Just to make up the CEO salary you need 25,000 good microloans and this number would be  about 10 thousand loans if you went up on the interest rate. If you counted the whole other administrative costs of putting loan officers in  every village the  number of loanees  needed to break even would sky-rocket.That’s hard (find “good” loans to give out) for a populous country like India, very hard for less populated Latin America and truly difficult in many sparsely populated parts of Africa.

[Note: This post from November 19, 2010 was updated on May 31, 2021 for formatting issues]

The microfinance logic for lending is that the developing country poor ,including much of Asia,Africa and Latin America i.e. 80 % of the world’s population, are not able to really come up with a business plan and a credit report. Folks don’t have a bank account-let alone a credit score. Sort of similar to unqualified US home loan receipients before the mortgage meltdown.

Since there is no or minimal paperwork what’s happening is that the loanee takes one loan , can’t pay and takes another one from a competing micro-finance organization and so on till the loans snowball to ten times of  $200 i.e. $2000.  This is “re-finance” without paying off the first loan ! After this the loanee absconds- or stops paying and so do other friends of the loanee who are at various stages of what can be understood as bankruptcy in the developed world.

It’s really important to sort this one out before,yes, billions of people get affected.

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As US auto starts booming again time to bailout weaker Tier 1 Tier 2 suppliers who could not globalize

When US auto sales declined from 17 million in 2005  to a low of 10.5 milliom in 2009 the suppliers whether Tier 1 or Tier 2 got squeezed. The demand for lower costs and market contraction meant that  weaker auto suppliers barely stayed alive and certainly could not globalize into low-cost locations. There was neither hope nor cash to expand globally.

The top quartile (25%) of suppliers to auto industry were strong and continued their low-cost global expansion and they are fine as auto recovers in the US. The average age of  a car is at an unprecedented 10 years – unthinkable  in the US where 4% of the GDP  was spent on auto which declined to about 2.5% of GDP .  Auto sales  are expected  to pick up from 10.5 million to  between 13-15 million autos in 2011 and auto companies are smiling. Ford has record profits while GM is on course for an IPO that will repay the bailout money. But what happens to the lower 75% suppliers ?

The top 25% suppliers have become stronger with global low-cost operations and the  bottom 75% are floundering. If these weaker auto suppliers close – there would be more US job losses and the good news of  auto sales pick up will not extend to the  auto supply chain jobs.

Is it time to bailout/support  the weaker auto suppliers ? Something to look at.

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Thanksgiving holiday travel expected to rise by 11 % as consumer spending takes economy to stable ground

The American automobile association (AAA) is reporting that holiday travel (November 2010) will improve by 11% over last year as Americans travel at least 50 miles during the Thanksgiving break. The big spike will be in driving which is expected to go up over 12% while air travel is likely to increase by a more modest 3.5%.

The massive 12% increase expected in driving probably indicates the adjustment that Americans are making in this new economy. The recessionary mood has gone long enough and people are ready to make the most of what is economically possible. This despite a sharp rise in gas prices to over 3$ a gallon.

The American consumer is also likely to spend more in retail and this augurs well for the US economy. As folks drive around there should be more optimism and energy in the marketplace . Consumers will take charge and while their overall holiday budget is under pressure, consumer optimism  should spread to businesses as they become more confident. The  question who will spend first  between consumers and businesses is getting answered. It’s consumers who have started spending in retail,travel and a repeat consumer spending out of recession is probably the  way forward in the upcoming holiday break.

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Warm weather helps US shoppers go out to malls and auto sales are up

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The relatively warm weather  in October-November has helped in people being out and about  including at least going to the malls. The auto dealers are reporting a 5% increase in auto sales in October and all the great auto deals has helped.The October retail numbers are at 1.2% up and you will see far more people in the US malls compared to last year- so the November numbers should be better. Excluding auto sales, the retail sector is up 0.4% for October.

Although unemployment is stuck at 9.6 %  mass layoffs are not expected and private sector employment has gone up by 0.3% the first increase since 2008.

Consumer confidence is definitely up in that people are at least going out to the malls . The National Retail Federation has predicted higher sales this holiday season and all this means that there should be some pull on the supply chain and businesses should hire more and the unemployment rate might just come down.

Rolls Royce engine troubles: why aviation industry closes ranks on safety but pharma can’t

You might have heard (November 10, 2010) about the Qantas plane to Sydney whose engine parts blew out  part of  the fuselage and  the plane luckily made it back to Singapore. Since then several airlines with the Rolls Royce engines have been grounded for checks and verification.

[Note: This post from November 10, 2010 was updated for formatting issues on May 31, 2021]

It’s interesting that competitors like GE and Pratt and Whitney are not gloating on the misfortune of  Rolls but rather are emphasizing that everyone in aviation is focussed on safety first.  Industry members tend to show solidarity in these things particularly when risk is contained in time.  Australian carrier Qantas is also unlikely to go outside the buyer-seller relationship via law courts to fix problems but  settle matters bilaterally with Rolls.

The aviation industry has  very long order and delivery times for aircraft and engines and it requires years of huge expenses and focus to get things right. Coupled with these long time-huge investment  on the supply side is the final thrifty consumer on the demand side who travels less in a slow economy. The industry as a whole needs to stay together on fundamental questions like safety. Keeping  the discourse civil is also  facilitated with  fewer customers  and a smaller and cohesive sales force.

In contrast, consider product recalls in pharmaceuticals where although top management might empathize with a competitor’s woes the sales rep at the doctor’s office might be less careful in criticizing the competitor. Just too many contact points including pharmacies I guess.

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Global organizations think local in India – GE,UTC ,Pepsi – the US small business “global” ecosystem?

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The Obama India visit has to be called a great success on five counts. First for theidealistic Gandhi connection, second for successful geopolitical de-hyphenating    of  India-Pakistan or Chindia, third for a cultural connect with Michelle and Barrack Obama dancing with kids  fourthly on  international politics with US  suppport  for India's quest for a permanent seat on the UN Security Council. But it is in the fifth  area of business that the Obama visit has been remarkable not only for the deals and US Jobs announced but sort of helping understand how exactly the US jobs will be created.

For the business part  I'll focus on the "think local" view of global companies like Pepsi, UTc and GE and why there  is huge opportunity for the US small business in global ecosystems. Here is  how big organizations are acting globally and how they think that small companies can fit in:

  • Indra Nooyi the Pepsi CEO calls the small industry -big company partnership an "ecosystem" which Jeff Immelt of GE identifies as small and big business tends to "hang out" together.
  • Thus UTC has established  a UTC India operation that focusses locally on the local  India market.
  • Similarly GE  has also gone local with a President who decides for every product line  locally. No product adaptation but a direct fresh look at the needs of this exploding market . The India market will report to the emerging markets Vice Chairman Rice in Hong Kong.

So if you  are a small business creating employment in the US – you tend to "hang out" or are part of the big company "ecosystem" in the US.  For growing foreign markets you have to think local for India and every market these big businesses are going out to develop. If you do, you'll benefit from globalization and also create more  high end jobs  in the US.

Obama in India : deals yield over 50,000 new US Jobs- first day orders for Boeing and GE

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As expected the Obama India visit is shaping up wonderfully. There are 20 big business deals  expected to be announced.  Orders for Boeing and GE herald the  good news for US jobs. As of now  the deals announced  are :

  •  33 Boeng 737 aircraft being ordered by low cost India air carrier Spicejet worth    2.7B $ .
  • 107 light combat aircraft engines will be supplied by GE and will result in 4400 US jobts.                                               

 

 

 

India lights up on Diwali to welcome President Obama

Tomorrow is Diwali in the US when President Obama sets out with Michelle Obama and 200 US CEO’s to India as India literally lights up for Diwali ! Ahead of the visit President Obama has sent greetings to India and the visit dates alone  are right out of the culture “textbook.”

The Obama team will be reaching Mumbai ( Bombay) on Saturday and will be staying at the Taj Hotel which was attacked by terrorists  in 2008.  Security is intense  both from the US and India side and shopkeepers around the itenerary are making noises that they’ll loose business at this peak festival time. But you can bet that they’ll talk about the Obama visit for years to come and more than make up the few hours of lost sales.

President Obama will visit Mahatma Gandhi’s home in Mumbai and also the Mahatma’s memorial in Rajghat in Delhi apart from the usual Taj Mahal in Agra. Michelle Obama is scheduled to visit a school where orphans are being taught english by Mumbai college students.

President Obama will also address both houses of Indian Parliament and the visit is  expected to create stronger ties between the US and India and more jobs in the US. More posts to follow.

Healthcare – avoiding Washington gridlock and growing jobs

Americans are sagacious and have given an electoral verdict and its really important for Congress to understand the mandate. Consider healthcare reform. The time has come to spell out what the details of healthcare reform will look like. If there are differences between the political parties – they need to sort it out between the Congress,Senate and the White House so that :

  • The doctor and hospital end knows what they’ll be paid for work they do- and by whom
  • The insurance companies and medicare know exactly how everything willl work
  • The liability end of the business understands about liability, malpractice limits and malpractice insurance costs
  • Defensive medicine costs go down as the above become clearer
  • The patient is treated wholistically by the medical system and for example is not thrown out of post-operative recovery just because insurance will not pay !

Just by being clear and unified on the points above – would result in jobs relating to  each part of the healthcare system. This is a situation where both overall costs can come down and jobs can go  up   by implementing an acceptable version of healthcare as :

  • Doctor’s would seriously adopt electronic records
  • Labs will share results electronically
  • Digital low cost health data sharing via platforms like Google Health will take off
  • The diagnostic industry will make money through more patients than repeating “defensive” tests

Avoiding gridlock in Washington on healthcare alone will help in creating thousands of jobs in the implementation of healthcare.

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