Author: Charlotte Gill

Bids for India telecom spectrum begins

Posted on by Charlotte Gill

Indian telecom firms will today begin bidding for the lucrative new 3G spectrum that they say is needed to dramatically improve the country’s mobile services. The auction could potentially raise as much as Rs800bn ($13bn), with established players like Bharti Airtel and Vodafone competing for a slice of higher speed bandwidth. A new entrant into the market, Reliance Jio, will also increase competition, thanks to backing from India’s richest man, Mukesh Ambani.

The auction could potentially raise as much as Rs800bn ($13bn)

The country’s telecom sector has the world’s second largest number of subscribers after China. However, it has not seen the levels of investment in modern technology and high speeds seen in more established markets like the US and in Europe.

The auction is likely to drag on for a number of weeks, with the three leading providers competing for bigger shares of the market. This should drive up the price to around $13bn, but some feel it could even jump to as much as $14bn. Nitin Soni, a director at ratings agency Fitch, told the FT, “It could easily hit $14bn, maybe more. Top operators such as Vodafone and Bharti will be paying anything from $2.5bn to $4.5bn each.”

The telecoms auction comes a week after the first full year budget of the new Bharatiya Janata Party (BJP) led by Prime Minister Narendra Modi. While Modi’s budget has sought to address many of the regulatory obstacles that have held back Asia’s second largest economy for the last decade, some observers feel he hasn’t gone far enough in helping businesses, especially the telecoms sector. This included a more generous reduction in corporation tax than the five percent cut to 25 percent offered to the industry.

Rajan S Matthews, Director General of industry body The Cellular Operators Association of India (COAI), told The Hindu newspaper, “While a few proposals in the Union Budget may help growth of telecom and broadband, overall, the industry’s concerns and submissions have been left unanswered. With the Government’s thrust on the Digital India initiative, a more supportive budget was expected for the telecom sector.”

Alibaba forced to exit Taiwan

Posted on by Charlotte Gill

Alibaba has been ordered to pay a fine of $3,824 and withdraw from the Taiwanese market following its alleged violation of the country’s investment regulations. The business directory website has until the end of August to close down operations and transfer its holdings from the island.

Last September, Alibaba went public in the US, leading Taiwanese authorities to review the structure of the organisation and its registration in the country. As a result, Alibaba has been deemed a mainland China firm, thereby making its listing as a Singaporean entity void.

The group will attempt to fight the decision

The company has denied any wrongdoing: “We legitimately set things up and complied with Taiwan law”, an Alibaba spokeswoman said in a company statement. As such, the group will attempt to fight the decision and meet the necessary requirements in order to continue operating in Taiwan.

Despite improved economic ties, relations between Taiwan and China remain strained, with the former enforcing strict regulations on Chinese companies, and the latter frequently attempting to assert its dominance over the island. Only in 2009 were Chinese subsidiaries permitted to operate in Taiwan; yet, Alibaba had established its branch during the previous year.

Although Alibaba will be shut out from the Taiwanese market, the implications on the company’s revenue may be negligible. “Most of the registered users and business of Alibaba are not in Taiwan, so I believe its withdrawal will have almost zero impact on Alibaba’s results”, Hong Bo, a Beijing-based independent internet analyst told the Financial Times.

The decision came shortly after the group’s founder and chairman, Jack Ma, announced that he plans to invest $316m in mobile commerce start-ups in Taiwan that use Alibaba as a platform.

The decision seems politically motivated, and one that is being used to make an example of Chinese companies circumventing Taiwan’s business regulations. With Alibaba attempting to reverse the move and its recent promise of investing in the island’s tech entrepreneurs, there are some doubts over whether the decision will stick. If, however, it is maintained, than it may be enterprises in Taiwan that lose out as a result, while Jack Ma concentrates his efforts at conquering the business world elsewhere.

Can Kraft keep up with its consumers?

Posted on by Charlotte Gill

Kraft has an impressive remit of popular brands under its belt, including Philadelphia, Kool-Aid, Maxwell House, Jell-O and Cool Whip, as well as a wide range of own-label processed cheeses. The multinational company is present in more than 150 countries around the world. Yet despite this impressive reach, Kraft’s 2014 annual report indicated a continuing pattern of disappointing sales for the multi-brand food and beverage conglomerate; net revenue had fallen again, this time by 0.1 percent from the previous year.

Kraft’s recent slowdown is not just because of rising commodity prices, but a result of changing consumer trends that encompass all consumer food brands alike. Similar to some other large corporations feeling the pressure, Kraft is largely stuck in a rut of traditional thinking that has brought success for the food group in the past. As a big company in the modern world, it has fallen behind the evolving tastes of customers, which are the result of a shrinking planet and the digital revolution. Measures taken to combat slowing sales, such as reducing manufacturing overheads and the marketing budget, overall, have been insufficient. In its latest attempt to bolster the business, Kraft has taken to a more drastic approach and announced along with its full year results, a major overhaul of the senior team.

The rise of the digital age has put people in closer contact with producers than ever before

Reorganisation
CEO John Cahill is a newcomer to his role, having been appointed at the end of December in an earlier attempt by Kraft to boost sales. Cahill has already begun making deep-set changes in the organisation; with the new line-up being the first port-of-call in his strategy to rejuvenate the business. As part of the restructure, three senior managers have been replaced, while two senior roles have been created. George Zoghbi has been promoted from vice chairman of operations, R&D, sales and strategy, to the group’s new COO post. “George has led some of the most critical areas of our business and has a proven track record of strong execution and delivering growth. I am confident he is the right person to take on this new role”, said Cahill in a company statement. While Chris Kempczinski, formerly Kraft’s Canadian head, has been appointed in the newly-created EVP of Growth Initiatives role and will work with Zoghbi to develop more innovative strategies. According to a statement made by Kraft, “The newly created leadership positions reflect Kraft’s commitment to accelerating the pace of change and improving execution, and will support the development of a plan that puts the company on a clear path to long-term sustainable growth”. Yet, unless Kraft begins to respond more quickly and effectively to changing consumer trends, the reshuffle will do little to encourage long term revenue growth for the company.

Greater consumer engagement
The rise of the digital age has put people in closer contact with producers than ever before. “The global impact of social media on buying patterns is tremendous, so if companies like Kraft ignore the consumer sentiment that is being experienced on social media, and can’t translate that voice back into R&D, they are going to have a significant problem”, says PV Boccasam, CEO of demand analytics firm, Orchestro. Not only does social media provide a mechanism for tracking changing tastes, it allows a direct means for communication. Through digital platforms, consumers can engage instantly with their favourite, or most hated, brands. As this trend continues to unfold, people have greater expectations in terms of their interaction with producers. An active Twitter account, competitions on Facebook or interactive websites, can satisfy this new need, as well as enhance sales and customer loyalty.

Shift to value
As a result of the multiple implications of the 2008 fiscal crisis and rising costs in general, consumers are choosing better value goods. In effect, there is a smaller demand for branded products, as people are less willing to pay for expensive advertising. “The private label brands are growing three times as fast as national brands”, Boccasam tells The New Economy. “[They] have had a significant impact around how a customer thinks about their basket size or how much they are willing to pay for an overall basket.” Boccasam argues that people are spending less money on non-branded products so that they can purchase goods such as organic vegetables or dairy, thereby prioritising around their lifestyle choices.

This trend is further evidenced by the recent success of discount supermarkets such as Lidl and Aldi, both of which offer much cheaper prices for lesser-known products. The growing demand for private labels and locally sourced food is bad news for big brands, such as those under the Kraft umbrella, that rely on the notoriety of their products, as well as the influence of their marketing campaigns. “Once you get into everyday foodstuffs, you start to see a lot more competition, so the challenge is to carry on charging a premium price. They’ve got to be perceived as higher value all the time, that’s a big challenge for them. That’s even more difficult when you put that in the face of rising costs of raw materials”, says David Jago, Director of Innovation and Insight for market research firm Mintel.

Philadelphia, which is the most famous and profitable brand of cream cheese in the world, is an excellent example of Kraft successfully engaging with consumers and offering greater value. A series of recipe books and an advertising campaign that shows viewers new ways of using Philadelphia appeals to three different food trends, healthy eating, home cooking and cost-effective recipes; an extremely clever strategy. Not only does this broaden the use of the product for the customer, it adds a level of interaction that acts as a superb marketing tool. “From the social media side of things, Philadelphia really stands out as being a big success for them – and a real flagship brand”, Jago tells The New Economy. “That’s an area which doesn’t really happen with private brands and retailers’ own labels. You do see some levels of social engagement but it’s not the same emotional level – you don’t really drill into the consumer psyche and really appeal to an emotional level in the same way that a brand can”. This also explains the continued success of Kraft’s subsidiary Mondelēz, as the appeal of luxury food treats made by favourite brands, such as Cadbury’s chocolate, is psychologically ingrained in customers.

Changing tastes
Generally, shoppers are making healthier choices; there has been a significant increase in the quantity and variety of wholesome products on supermarket shelves to reflect these new preferences. “Consumers are more health literate, given the wealth of information on the internet and discussions on social media. So they are looking for foods and drinks that will optimise their health and, more importantly, make them feel good about their food choices”, says Dr Carrie Ruxton, nutrition consultant and health writer. The growing incidence of obesity and related-ailments across the US and Europe has also contributed to the rising inclination of shoppers choosing to cut back on the foods that are considered bad for them. Recent studies support this trend, such as the 2014 poll carried out by Packaged Facts, in which 39 percent of American consumers indicated that they are eating less processed food as opposed to a few years ago.

Another notable food trend that is causing brands to rethink their product portfolio is caused by globalisation and individuals generally being better-travelled, both of which have resulted in consumers opting for more exotic cuisines. People have become more adventurous with their food and so have their taste buds, as evidenced by the rising popularity of spicy food and condiments. According to Euromonitor, there has been a combined CAGR growth of chilli sauces of around 24 percent over the past five years in Asia Pacific, North America and Western Europe. As such, traditional foods, in particular those which are processed and have high levels or sugar, salt, fat, or all of the above, are less in demand. “Just like apparel and other products, food is now a lifestyle,” says Boccasam; the saying you are what you eat means more to consumers than ever before. With new generations growing up with these evolving trends, it is unlikely that a reversion to the former will occur. Therefore, food producers must embed such changes into the collective consciousness of their organisations, from product development right through to television advertising, so that they can offer customers what they want: more.

Looking ahead
An onerous challenge facing Kraft as a multi-national organisation is catering to the unique trends of each region in which they operate. Particularly given the context of rising commodity prices, it is extremely difficult for a global company such as Kraft to both analyse changing consumer trends and roll out corresponding initiatives across multiple countries simultaneously. “Smaller companies have often been quicker to respond [to changing trends], that’s because they are not trying to appeal to such an international audience; with a much smaller set of core consumers it’s much easier to follow them and to adapt to them”, says Jago. Kraft’s target customer base could also be another reason for its slowing revenue growth. By focusing on highly developed markets in Europe and North America, Kraft is significantly restricting its growth potential. Multinational companies such as Unilever and Nestle on the other hand have focused more so on less mature markets, and in doing so have successfully tapped into a broader customer base. This could be a key area for Kraft also; namely, exploring new markets so as to achieve faster revenue growth.

Given the impact of changing shopping behaviour, it is increasingly important for companies to carry out consumer analysis so that they are swiftly in tune with upcoming shifts and can respond to them accordingly. Social media provides the perfect platform for leading consumer brands to do so and to have a direct line with their customers. The digital revolution may have caused some teething problems for established brands in its early years, but it now being used more and more by businesses to achieve marketing schemes that were never possible before.

In order to boost its profitability to former levels, it is vital for Kraft to depart from the traditional mindset that has been successful for decades, and look to the future. Cutting costs has been successful in some areas of the business, such as refrigerated meals and cheese, but this is not enough to enhance sales and promote sustainable profit growth. Brands are now required to engage more so with customers and meet their changing needs. The approach taken with Philadelphia is an estimable example of how this can be achieved. With greater marketing creativity and a portfolio of value-added products, Kraft can re-establish itself as a leader in packaged consumer food and drinks. Perhaps the drastic reshuffle implemented by Cahill is exactly what is needed to bring a fresh outlook and new impetus to the company.

Turkey plans three-storey underwater tunnel

Posted on by Charlotte Gill

The 6.5km long tunnel will connect the two continents via the Bosphorus at 110 metres below sea level, with plans for completion by 2020. The top and bottom floors will feature highways to ease the capital’s burdening traffic jams, while the middle tier will host a railway in the hopes of boosting the use of public transportation in Istanbul.

This is the latest in a series of infrastructure projects that have been encouraged by Turkish authorities

Prime Minister Ahmet Davutoglu announced the plans in a bid to secure foreign investment, which is expected to finance the entire $3.5bn project. The tunnel will have a capacity of 6.5m passengers and aims to reduce carbon emissions by 110,000 tonnes per annum. The new route will connect the city’s three airports, as well as act as an axis for Istanbul’s nine rail systems.

This is the latest in a series of infrastructure projects that have been encouraged by Turkish authorities. For example, in October 2013, the Marmaray was opened, acting as the first underwater link across the Bosphorus. An agreement signed in 1999 with the Japanese Bank for International Cooperation had secured 35 percent of the investment needed to fund the $4.5bn project.

Given the current economic climate, it will be a sizeable task to secure the billions needed for the project’s completion, particularly as foreign investment in transportation is often difficult to obtain. It seems likely that some domestic investment will be needed to help fund the project. If the necessary financial backing is obtained, the venture could transform the largest city in Turkey. Although no longer the capital, Istanbul remains the cultural and economic epicentre for the state, as such, this latest infrastructure project acts as a beacon for continuing development and modernisation for the entire nation.

The Jack Ma formula: Be a visionary not a technocrat | The New Economy Videos

Posted on by Charlotte Gill

Executive coach Jeremy Kourdi shares insight on how Jack Ma of Alibaba’s management style can be replicated.

The New Economy: Jack Ma, of course, is the face of one of the only true-blue Chinese global brands that are out there today. Can you tell me, what is the single most important management trait that he possesses?
Jeremy Kourdi: He’s a man of great vision, I would say. I love the story of him getting 18 of his friends together in his apartment, talking with them for two hours about his vision. So many executive are told it’s got to be a one-pager, it’s got to be three bullet points. His vision was flowing out of him for two hours. In the end, he got the money he needed to start Alibaba, I think that’s a great story, that says a lot about his vision.

It also makes me think actually of his openness. He’s just a very open individual. I’m reading online that he never made a sale to a customer, he discovered his first computer when he was 33 years old.

[H]e has organised his company to deliver value for customers

The New Economy: That level of humility could also be used strategically, he could be doing that to convey a certain amount of authenticity that separates him from the rest. So what is it about Jack Ma that, in a room, he can pitch you a dream and people come around him?
Jeremy Kourdi: I think he focuses on the essentials of business success. So he has organised his company to deliver value for customers. That’s really really important. It’s important in every statement I read about him. It’s important if you speak to people in his company, so that value really really matters.

Being innovative, innovating and taking this business into an area that’s under-served or poorly served, and doing it in a way that connects with people. Delivering value, innovation, and then connecting with people, building relationships. I think he does that internally with his people, I think he does it externally with his, how many is it now, 79 million members that Alibaba have worldwide.

The New Economy: Diversification is key to any company’s long-term growth, you can go from maybe a million to endless millions, right? So how does another executive learn form Alibaba in how to create complimentary ventures? I’m sure you’ve had to coach some of your executives on this issue.
Jeremy Kourdi: We have, and it’s a risky area I would haver to say. The words of Tom Peters always come to mind, which are “stick to the knitting,” stick to what you do.

I think technology enables us to understand what we do, and to look at the core of the company, what are the capabilities that we have, what are the skills our people have, what other technology we have, what are the needs that our customers have, the market opportunities. And, crucially, ask what can we grow out of that?

So all of those resources, latent within our organisation, what else can we do to better serve our customers?

The New Economy: Let’s say that a company has diversified, and there is some sort of reputational fallout from a bad decision made by one person, a company error of some sort that brings about negative publicity. How would you suggest or advise a company, then, to be able to navigate its way out of those murky waters?
Jeremy Koudi: It’s a great question isn’t it. Rule zero though, is your company will at some point be in murky waters. It’s not a guess, I’m not suggesting there’s a probability there, I’m saying it’s 100 percent certain. Every company, in the course of the life of a successful company, probably every executive, will find themselves in murky waters at some time.

Rule zero is you build those connections before you get into trouble. That has to be the most important thing, it’s often overlooked. If you’re a chief exec and you’re not doing that now, when the sun is shining and times are good, then you’re making a mistake.

The New Economy: OK, Jeremy Kourdi, thank you so much for joining me today.
Jeremy Kourdi: Thank you.

Pay-as-you-go solar power lights up Africa

Posted on by Charlotte Gill

M-KOPA Solar provides East African users with a domestic solar system that can be topped up with more than 10,000 mobile payments made via their cloud platform every day. With more than 2.4 million customers signed up to Nigeria-based mobile company Paga, M-Kopa Solar targets the booming mobile industry by offering off-grid households an affordable 12-month mobile money payment plan to provide a renewable alternative to the country’s kerosene consumption.

Speaking in a statement, Co-Founder and Managing Director, Jesse Moore described the need for healthier and safer alternatives to energy, stating that “Kenyans spend over Ksh 86bn a year on kerosene”. The lighting fuel is extremely dangerous and unhealthy but continues to be used by 92 percent of the population despite costing 25 percent to 30 percent of a family’s income.

Since its launch in 2012, M-KOPA Solar has brought energy to over 150,000 households in Kenya, Uganda and Tanzania with the aim of providing affordable energy. The company’s technology platform allows them to extend their reach to customers without formal collateral or credit histories but with approximately 110m off-grid households in Africa, the business potential of M-Kopa Solar is vast.

Moore added: “We see a massive unmet market opportunity to provide millions of off-grid households with affordable, renewable energy. We are just getting started in terms of the scale and impact of what we will achieve.”

China bans Apple and others from state-purchase lists

Posted on by Charlotte Gill

Amendments to the list began last year and include the reallocation of local producers in place of their US counterparts. Among those removed is Intel Corp’s McAfee security subsidiary, as well as anti-virus software firms, Kaspersky Lab and Symantec Corp.

Fears regarding the level of security upheld by US tech companies began following the Edward Snowden debacle

Chinese authorities attribute the move to growing cyber security concerns, while some argue that the state is protecting the domestic market from international competition. The latter theory is supported by the growing presence of US tech firms in China in recent years, together with enhanced efforts and investment in the country’s promising tech industry.

Fears regarding the level of security upheld by US tech companies began following the Edward Snowden debacle in 2013 which revealed that the National Security Agency (NSA) was using company data for surveillance purposes. Concerns of a cyber attack on China’s government systems have subsequently mounted.

Cisco has been hit the hardest by the decision, with revenue from China falling by 33 percent in Q1 2014 compared with the previous year. “We have previously acknowledged that geopolitical concerns have impacted our business in certain emerging markets,” a Cisco spokesman told Reuters. The added pressure of faulty memory chips has caused the company’s net income to drop by 55 percent to $1.4bn in the latest quarter.

The upshot is that due to China’s inferior security software systems, Beijing remains vulnerable to cyber attacks, despite its recent measures to combat this threat. Conversely, the expected boost in sales for local firms can be invested further into R&D and used to improve Chinese software security – although being on a par with the US’ fast evolving sector is an overwhelming challenge.

Europe falls behind on digital innovation

Posted on by Charlotte Gill

The Digital Evolution Index, created by the Fletcher School at Tufts University, compared 50 countries to find the most digitally progressive. The research found that while China, Malaysia and Thailand topped the list of nations making the biggest leaps in technology between 2008 and 2013, European countries, such as the Czech Republic, Belgium and Finland, fell to the bottom three places and were classed as ‘rapidly receding countries’.

China’s progress is believed to be due to its investment in digital money and tech giants

China’s progress is believed to be due to its investment in digital money and tech giants such as Alibaba, Baidu and Tencent have enabled the country to lead the way in an increasingly competitive market with m-commerce revenue estimated at $3.7bn in the second quarter of 2014.

According to the DEI, published in a Digital Planet Report, EU countries are still out-performing many of their neighbours in terms of digital innovation, with the UK, Switzerland and Netherlands among the top 10 global countries. In terms of digital progression, Europe appears to have stagnated and lost its momentum as nations with the most negative scores hailed from the EU, with the exception of Australia.

To measure this performance, the DEI took into consideration four drivers of Internet growth: consumer demand, supply and existing infrastructure, institutional environment and innovation.

Speaking in a statement, Anabel González, Senior Director of the Trade and Global Competitiveness Practice, The World Bank, said: “The DEI illustrates how countries evolve over time through the interplay between innovation, institutional policies, and demand and supply conditions. This approach allows countries not only to benchmark against the best, but also to track their own progress and identify where policy improvements may be made.”

Obama blocks controversial Keystone XL pipeline

Posted on by Charlotte Gill

President Barack Obama has blocked the highly controversial Keystone XL pipeline that would connect tar sand oil fields in Canada to the US, despite calls from Republican politicians to finally rubberstamp the project.

The pipeline from Alberta, Canada, would have carried tar sands oil all the way south to the state of Texas. However, although it would have created a huge number of jobs along the route and provided a lucrative new source of oil to the industry, Obama used his presidential veto to stop its construction.

The President said that the Republican-led Congress was trying to bypass the national interest

Running 875 miles across the country, many supporters have claimed that it would bolster America’s energy independence at a time of considerable uncertainty within global oil markets. However, the concerns over the environmental impact of such a massive new expansion of oil use in the country have made it very difficult for Obama to support the plan, especially as he has made fighting climate change one of the cornerstones of his presidency.

Initially proposed six years ago, the Keystone XL pipeline scheme has been a constant bone of contention for Republicans and Democrats. How it impacts on the country’s oil markets is unclear, although with global oil prices dropping its necessity has become less apparent.

While this is certainly not the end of the Keystone project – an election next year of a Republican candidate could pave the way for it – Obama has been determined not to allow the decision to be taken out of his hands. In a statement announcing the veto, the President said that the Republican-led Congress was trying to bypass the national interest. “Through this bill, the United States Congress attempts to circumvent longstanding and proven processes for determining whether or not building and operating a cross-border pipeline serves the national interest.”

However, responding to the veto, Republican House Speaker John Boehner said the US was in danger of falling behind international rivals. “It’s embarrassing when Russia and China are ploughing ahead on two massive pipelines and we can’t get this one no-brainer of a project off the ground.”

Metals and mining giants announce $3.1bn merger

Posted on by Charlotte Gill

Shares of Globe Specialty, with a market value of $1.13bn, jumped 12 percent to $17.18 on the Nasdaq following the announcement of a merger between the two metals and mining firms. The combined company, of which 57 percent will be owned by FerroAtlántica with the rest owned by Globe shareholders, will capitalise on a diversified production base and a greater international reach gained from Grupo FerroAtlántica’s footprint in Europe and Globe Specialty’s presence in the North American market.

Grupo FerroAtlántica produces silicon metal, silicon alloys and ferroalloys with Globe Specialty producing silicon metal and silicon-based alloys. While solar panel fabrication used to account for one percent of global silicon, this figure is now estimated to be between 10 percent and 15 percent. According to a joint statement, the company will focus on becoming a “premier global player” in the growing silicon metal industry and will be “strategically positioned to benefit from fast-growing demand for solar, automotive, consumer products (silicones), construction and energy”.

The combined company will employ 4,700 people globally and will operate 26 production facilities and five mining sites. The deal is expected to close in the fourth quarter and will add earnings on a per share basis in the first year after closing. Speaking of the merger in a statement, Alan Kestenbaum, Globe’s Executive Chairman, said: “It will also provide exposure to new markets, positioning the new company to take advantage of both accelerated organic growth and growth through acquisition.”

Blyth: The destruction of economics | Video

Posted on by Charlotte Gill

Economics and our rendering of capitalist theory is inherently broken. That’s the argument of many economists, including Mark Blyth, Professor of international Political Economy at Brown University.

The New Economy: Mark, you’ve suggested a blind fixation on austerity, but that’s not quite accurate is it? With continued phases of QE pumping cash into the economy.
Mark Blyth: What’s the point of quantitative easing? Well you can go through the whole thing about boosting asset prices and trickle down growth, but the point of it really is it’s the sterilisation of government debt. That’s really what it does.

Now, if you’re already making sure that your debt’s not getting any bigger because you’re quantitatively easing to equivalent of the rate of growth in the debt, which is what Britain has been doing since it started QE, which is why its debt profile is flat, why then do you need to do tight fiscal at the same time?

So if I have a choice between the IMF and markets, I’ll go
with markets

If the whole argument for tight fiscal policy, austerity, is that you need to reduce the debt, and QE has basically made your debt flat, then it becomes redundant. The only reason you’re doing it is what we used to call class warfare. You want to kill the welfare budget.

The New Economy: You’ve queried economic models, quite rightly so, but this is a young human science, what are your thoughts on behavioural economics?
Mark Blyth: I think it’s a very very good idea, but the problem is it’s basically turning economics into psychology. Economics’ claim to fame is that it has a general theory and very special theories coming from that, based from Arrow-Debreu general equilibrium, macro, and so on.

There’s no such thing as adding up all the error rates that you get when people don’t conform to the model, which is kind of what behaviourism does, and then you get to a kind of behavioural Debreu or general set of equations that you can work from, in the way that economics currently does.

So I like behavioural economics because if it succeeds it will probably end up destroying economics.

The New Economy: You’ve rightly identified many austerity plans have been imposed by foreigners. Let’s look at the IMF for a moment, an organisation that travels the world, offering refinancing plans, and procedures for recovery. But to me there’s an element of almost colonialism about it. What are your thoughts on the way the IMF conducts itself?
Mark Blyth: When it became the modern IMF in 1974, when Bretton Woods ended and its original mission to basically police the set of fixed exchange rates ended, it turned itself into if you will the information policeman and then creditor to the developing world.

Has it done a great job? No. Would private markets have done a better job? Well one way to look at it is the largest developmental project in the world that’s ever been successful has been China, and simply opening up and then allowing cheap labour into the global economy has turned them into the largest economy in the world and has taken 400 million people out of poverty.

So if I have a choice between the IMF and markets, I’ll go with markets.

The New Economy: You’ve made reference to a number of historical crises, but Kenneth Rogoff has quite famously argued this time is different. Can we really learn so much from history, or collectively are we at a new debt level and structurally unique as Rogoff suggests?
Mark Blyth: Well remember that his point in the book is to say ‘this time is different’ is a fallacy, that this time it never is different. So basically what he’s saying is, these things are hardy perennials or constant features, and they are.

What’s unprecedented this time is the way that over the past 30 years, finance has been allowed to build itself into if you will a volatility machine whose insurance policy is the taxpayer. I think that’s the unprecedented part, and we still haven’t got to grips with that with any of the post-crisis reforms.

The New Economy: I should argue the problem perhaps you’re alluding to is one of a failing of the distribution and redistribution of wealth. How do we fix that?
Mark Blyth: You actually read Piketty, who put this back on the agenda, yes the numbers are shocking and we’re back to the 1920s and all the rest of it, but to me it’s better thinking about this in terms of long-term growth, and that’s what his book’s really about.

What he speaks to is the fact that developed economies such as the US and particularly Europe, are now older societies with lower growth profiles that have done their period of technological catch-up. The problem there is you’ve got ageing populations that want to consume huge amount of resources, for example, on healthcare, and you don’t have the young demographic behind it to support it.

Those types of long-term growth problems are, to me, far more important than these short-term inequality effects. The two of them compound each other, but I think in the long run it’s the other ones who are going to be more important.

Global weapons industry struggles for sales

Posted on by Charlotte Gill

The Sipri annual report published last December revealed that the global arms industry has declined for the third year in a row. Progressively slowing demand for weaponry has ensued following the end of the Cold War, and dropped further as a result of NATO’s shrinking world budget since the onset of the 2008 financial crisis. Amid this disappointing backdrop, one market stands out in terms of achieving revenue growth in recent years: Russia. 

The defence budget
The US is the most prolific in terms of weapons manufacturing and sales, with a defence budget that is bigger than the next fifteen countries combined; an incredible ranking for any industry. While the US will continue to dictate the global industry by means of is sheer size, this formidable market is now under pressure. “The decline in arms sales in the US, in our analysis, is mostly due to the decrease in the operations budget, so that directly affects the industry because these budgets also buy weapons and services,” says Dr Aude Fleurant, Programme Director at Sipri, a research centre specialising in arms and the military. Namely, the 2011 Budget Control Act that was introduced in order to reduce the budget deficit of $2.1trn by 2021 has had a detrimental impact on arms sales in the US.

While revenue in the US has fallen, Russia’s arms industry is doing increasingly well. Despite its increase of the global market share, Russian producers now face a possible hindrance as a result of the country’s recent economic woes. Currently, the state budget is experiencing considerable pressure due to Western sanctions and the drastic fall of the rouble. The implications for the arms industry are yet to be seen, but perhaps they will not even come about. “There might be ring fencing of the defence investment in order to pursue the effort in modernising the Russian defence industry, because the Russian objective is to upgrade and update the defence industry so that it can become more competitive in the international stage and more efficient – but they have not actually met these objectives yet,” explains Dr Fleurant. Tensions with Ukraine and last year’s annexation of Crimea give further validation for Moscow to maintain its current defence strategy and continue to bolster its capabilities, in spite of the state’s fiscal crisis.

There is another new challenge facing the saturated market; competition from the ever-growing and increasingly influential tech industry

Sales in Western Europe on the other hand have been mixed, largely as a result of the varying defence programmes and budgets of each state. Furthermore, unlike the collaborative efforts made towards economic integration, the same has not been achieved for security. The UK, the world’s second largest producer, like the US, has experienced a drop in sales. While French firms, Dassault and DCNS, have climbed the ranks of Sipri’s top 100 arms-producing companies report for 2013. Further reflecting the heterogeneous nature of the European market are Spain’s Navantia and Italy’s Finmeccanica, which have both fallen in Sipri’s rankings. The performance of Navantia and Finmeccanica correlates with the mounting fiscal debt inflicting their respective states and indicates the vulnerability of a country’s defence industry to national economic pressures.

Domestic demand
The US Department of Defence has enforced a number of changes that have considerably reduced domestic demand. First, it has implemented a policy of upgrading weaponry as opposed to frequent replacements. In addition, according to the Performance of the Defence Acquisition System 2014 Annual Report, the Pentagon is attempting to administer more sophisticated and individually tailored contracts, as the traditional format is known for encouraging overspending. Furthermore, the withdrawal from Iraq and Afghanistan has also reduced the weaponry requirements of the US government drastically. Public outrage and global pressures have influenced this radical change in foreign policy, thereby highlighting the susceptibility of the industry to the political paradigm. As demonstrated in this case, foreign policies can change suddenly and drastically; the direct impact on arms manufacturers is immediate. As such, US producers must now await another “peace-keeping excursion” in order to significantly bolster their sales again.

Despite the general downturn in the global weapons market largely resulting from economic pressures, Russia’s gains are the result of an investment strategy that was administered in the 2000s. Funding was increased furthered when the State Armaments Programme was implemented in 2008 and instigated the radical renovation of the Russian Ministry of Defence. The transformation began with the reorganisation of the military’s structure from divisions to brigades and was then followed by the armament of the newly-formed contingents. Reflecting this change in policy is the state’s three most prolific firms which have had a combined revenue growth of 172 percent in 2013 from the previous year. What is striking about the recent success of Russian arms producers is the timescale required to turn investment into profit, a standard protocol for the industry. In order to advance revenue growth, heavy investment and a long term strategy is required, both of which can be interrupted if domestic or global political circumstances interfere; making the nature of this industry more precarious and protracted than most.

Japan is another market in which domestic demand is on the rise as its defence policy, which has been notoriously subdued for decades, begins to change. Threats from ISIS insurgents, including the recent beheading of two Japanese citizens, has brought into focus the country’s legal obstruction of deploying troops abroad. In addition, verbal clashes with China regarding territorial waters and provocation by North Korea as they test rockets near the Japanese border have given Prime Minister Abe a strong pretext to drastically shift this aspect of the country’s foreign policy. As a result, Japan augmented its defence budget to a record 4.98trn yen in January, according to Bloomberg – in spite of the economic challenges currently facing the state. Not only will increased power overseas bring Japan in closer alignment with the security strategy of other nations, it will also have a positive impact for the country’s arms industry.

Exporting weaponry
There are further hopes of bolstering the revenue of Japanese products through the overseas market. Since 1967, the state’s ban on the export of almost all weaponry had restricted its arms industry to domestic sales. In another bold move made by Abe, the once strict regulations were eased last year. Mitsubishi Heavy Industries was the first to be awarded with an arms export licence and has signed agreements to sell its sensors for US missiles and propulsion technology for Australian submarines. Opening up Japanese producers to foreign markets can allow economies of scale to be achieved, a significant factor when considering that for the past five decades the customer base has consisted of just one patron. Despite a great deal of anticipation from Japanese manufacturers, a significant increase of exports is doubtful due to the nature of the global arms industry. “We don’t actually see drastic changes because the Japanese companies, especially the bigger conglomerates, such as Mitsubishi, Kawasaki, have been involved in defence production for a while; mostly through licence production – they are pretty technologically advanced, they are known to be expensive though”, Dr Fleurant tells The New Economy. International competition is greater than ever, therefore, the gap available in the market for expensive Japanese products may only be marginal.

There is also a group of newcomers to the industry that have begun to increase their respective sales and attract attention: India, Brazil and Turkey. South Korea is a notable case as a rising player on the international scene, with sales of fighter jets to the Philippines, Indonesia and Iraq. Despite relative success of emerging producers in recent years, their profit growth is capped by the fierce level of competition for exports. In addition, achieving long-term projects is an extremely complex and costly business and so presents another limitation to emerging economies. Furthermore, Dr Fleurant argues that the success of these new suppliers has been overstated, “In truly quantitative terms, their place as arms producers is not that important, but they attract a lot of attention from traditional suppliers”.

Tech takeover
There is another new challenge facing the saturated market; competition from the ever-growing and increasingly influential tech industry. As a by-product of greater investment and research capabilities, tech companies are currently exploring the field of innovative weaponry, such as robotics and exoskeletons. There has been considerable media attention about this overlap of the two spheres, most likely because it appears to be a logical convergence of the two industries. Yet, the reality of this trend is yet to transpire as there are a series of inhibitive factors which prevent the tech industry from supplying weaponry. The extremely long lead times for development and commercialisation in the defence industry are a far cry from those in the tech sector. This is largely due to military standards and export controls, which are far more rigorous and demanding than those required for commercial products.

The drastically different nature of the two markets raises further doubts; with the civilian consumer base being so much wider, varied and more profitable, the hurdles affiliated with the defence industry may make the much-talked-about endeavours of tech companies unviable. “There are inherent structural difficulties in linking the two industries together, and so I must say that although it seems to make sense because of the locomotive, or driving effect, of the dynamism of the general tech industry on the defence industry – how and to what extent can this happen? It has not been demonstrated very clearly so far,” Dr Fleurant tells The New Economy.

Market prospects
Unlike other industries, the arms market is impossible to forecast. As customers are governments, and defence budgets are determined both by a state’s economic success and the geopolitical climate, industry experts cannot predict how markets will evolve in the coming years. With that being said, it is likely that the fierce competition prevalent in the export market will continue. Global economic growth continues at a slow rate, thereby constricting defence spending in general. Furthermore, sales are tied into the long-standing relations between states which make it extremely difficult for a new supplier to make headway into an established buyer-seller relationship, particularly as politics are principally at play. For example, a number of countries prefer to purchase Russian or Chinese equipment over US counterparts, not only due to much lower prices, but also because of traditional alliances.

Sluggish GDP growth means that a state’s defence budget is a popular target for cuts, particularly in light of growing social and political pressures. Therefore, in consideration of such a restrictive client base and flagging domestic demand, it is increasingly necessary for arms manufacturers to evolve. Their strategy and product line are in much-need of diversification in order to reverse the current trend of falling profits and vast job cuts. Although some firms are reluctant to expand into the civilian sphere, the scope for modifying products exists, and has potential; examples include vehicle components and high tech systems. Of course, there are challenges inherent to this kind of adaptation for any industry, in addition to those attached specifically to weapon manufacturers, which include public disapproval and reluctance from potential business partners. Yet even for those who are against the industry as whole, this is a logical step, and one that should be encouraged both internally and externally.