Restart of industrial goods trade negotiations

The AP is reporting that there may be a switch in trade negotiation tactics by some countries — Countries propose compromise in faltering global trade talks – International Herald Tribune:

A group of Latin American and Asian members of the World Trade Organization proposed a “middle ground” Monday in talks to liberalize trade in manufactured goods, a sign that developing countries are breaking ranks with Brazil and India.
The proposal, signed by Chile, Colombia, Costa Rica, Hong Kong, Mexico, Peru, Singapore and Thailand, would open industrial markets in the developing world to more foreign competition than has been proposed by Brazil and India.

This sounds a lot like a version of the “Doha-lite” idea Pascal Lamy floated last year. That would go ahead with those sectors already agreed upon (and abandon the traditional nothing-is-decided-until-everything-is-decided approach). Essentially, this is a version of the sectoral approach I have advocated.
Interesting.

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Buy out boom . . and intangibles

Three stories today on the buy out boom and the debt market raise the issue that higher interest rate may force a slow down in the private equity market:
Has boom in going private hit its peak? | csmonitor.com
Buyout Boom Could Slow as Investors Push Back – Mergers, Acquisitions, Venture Capital, Hedge Funds — DealBook – New York Times and Private Equity Investors Hint at Cool Down – New York Times
Behind Buyout Surge, A Debt Market Booms – WSJ.com
Like the leverage buy-out boom of the 1980’s, the current boom is financed by cheap debt. Back then, it was junk bonds; today it is low interest rates. As rates go up, debt becomes more expensive – and deals become harder.
So, what has this got to do with intangibles? For the past year or so, I have been researching the monetization of intangible assets. One form of monetization is securitization — where intangible assets (such as brands) are spun off and the royalty income used to back the sale of bonds. It is exactly the same process as used for mortgage-back securities.
Up until now, intangibles have had only limited use in securitization. That might change. Last year, three private equity companies used securitization of the Dunkin’ brands to partially finance the purchase (see Caroline Salas, “LBO Firms Use Ice Cream Recipes, Toy Stores for Low-Cost Bonds,” Bloomberg, June 13 2006). Using the royalties from the brands as collateral moved the bonds to the AAA rating, dramatically lowering the cost of capital for the deal.
Whether or not this form of financing takes hold in the private equity market remains to be seen. It is a difficult transaction – with a lot of back-up mechanisms needed. And the problems in the mortgage securitization market from sub-prime loans may just scare everyone off.
But key an eye on this one — and look for our Athena Alliance paper on the subject coming out later this year.

Energy research

Many people (including myself) believe that clean energy technology is the next big thing. (See the recent Business Week story – The Business Benefits of Going Green)
Today, the Energy Department will put its oar in the water by announcing three new biofuel research centers, according to the New York Times:

One of the new bioenergy centers will be led by the Oak Ridge National Laboratory, an Energy Department lab in Tennessee. Participants include another lab, the National Renewable Energy Laboratory, Golden, Colo.; the Georgia Institute of Technology, Atlanta; the University of Georgia, Athens, and the University of Tennessee, Knoxville.
A Great Lakes center, in Madison, Wis., will be led by the University of Wisconsin, and will include Michigan State University, East Lansing; the Pacific Northwest National Laboratory, Richland, Wash.; the Lucigen Corporation, Middleton, Wis.; the University of Florida, Gainesville; Oak Ridge National Laboratory; Illinois State University, Normal; and Iowa State University, Ames.
The third, the Joint Bioenergy Institute, will be led by the Lawrence Berkeley National Laboratory in California, and will include Sandia National Laboratories; Lawrence Livermore National Laboratory; the University of California, Berkeley; the University of California, Davis; and Stanford. Dr. Orbach said that the centers’ geographic diversity would help researchers examine a wide range of plants.
The centers, each to be financed by $25 million a year, are supposed to be fully operational by the fiscal year beginning Sept. 1, 2009.

$25 million isn’t much — but it is a start.
BTW, DOE yesterday announced two wind turbine testing centers as well. Only $4 million – but again it’s a start.

Retail innovation

The last “big thing” is retailing was the big box shop – taken to its logical point by Wal-Mart. But economies of scale were not their only competitive edge. Wal-Mart’s logistical system (supply chain management) was what made it all possible. One of the other rules of thumb in retailing has been differentiation: either you go cheap (Wal-Mart) or upscale (Whole Foods). Supermarkets caught in the middle run the risk of being roadkill.
Now, according to a report in the latest Economist (Fresh, but far from easy), America should be prepared for a new British invasion that will change that American icon, the supermarket. The British company Tesco will soon be opening stores here under the brand Fresh & Easy. The company has a twist on the normal differentiation and big box story:

Tesco’s offering in America will swim against this tide. It is aiming Fresh & Easy squarely at the middle market. The firm is hoping to repeat its success in attracting shoppers from all the main social groups in Britain, where social class until recently played at least as big a role in determining where people shopped as price and convenience did. Tesco will also be a pioneer in two other important ways: the size of its stores and their range of goods.
Most Fresh & Easy outlets will be relatively small, at about 10,000 square feet. Although about the same sales-floor size as the average Walgreen’s, a chain of drugstores, most food retailers in America are either much bigger (six Fresh & Easy’s would fit into a typical supermarket and ten into the average Wal-Mart), or much smaller (each is about three times the size of a 7-Eleven convenience store).
Does size matter? In America’s lightly regulated supermarket industry, most shoppers in all but the deepest backwoods live just a few minutes’ drive from a large supermarket. The chances are the store has acres of parking, is open all night and has a good selection of whatever you might need: prescription medicines, dog food and piping-hot meals that have been cooked in the store.
Convenience, however, has many dimensions. Tesco is betting that there is demand for smaller stores closer to home with fewer products, making it easier to find things. People in too much of a rush to stop at a supermarket use tiny outlets such as 7-Eleven, of which there are close to 1,200 in California alone. But their range is limited. Retail Forward, an American consultancy, reckons nearly 40% of convenience sales come from cigarettes and tobacco, followed closely by beer and wine. As for nutrition, most offer little more than snacks and frozen pizza. “The typical American convenience-store consumer would be Homer Simpson,” says Ira Kalish, a retailing expert at Deloitte, an accounting firm. “No one has done convenience and quality food together.”
As for products, Tesco’s second innovation will be a range of preservative-free “ready meals” that are familiar to British consumers yet barely exist in large parts of America. “There’s a big hole in the American market,” says Rajiv Lal, of Harvard Business School. “American supermarkets have not been innovative with prepared foods. You can’t eat them more than three days in the week without eating the same stuff. But I suspect there are people in Britain who live off prepared meals from Marks & Spencer for three weeks on end.”

Key to making this work is supply chain management:

Whereas American stores are good at moving goods hundreds of miles and keeping them cheap, British retailers specialise in regular, frequent deliveries to heaving city-centre stores. Their supply chains are more sophisticated because they have to be. Stores can be so small that they have to switch from selling sandwiches at lunchtime to selling ready-made suppers in the afternoon.
Expensive labour and a shortage of space have encouraged British retailers to seek economies of scale from centralised food preparation. Rather than cooking on site, they make a wide range of meals that can last for a couple of days. These are not just staples such as macaroni cheese or lasagne. A typical London supermarket now stocks more than 50 different meals, including treats such as organic beef in wine, Keralan prawn curry and Asian noodles with vegetables.

And this system is also flexible, allowing for micro-differentiation:

But Tesco’s biggest innovation has been in the way it collects and uses customer data from its Clubcard, a loyalty programme. Many retailers use clubs to provide nothing more sophisticated than a discount to customers as they pay for their goods. Because rivals can easily match this, it reduces profit margins for all, says Deloitte’s Mr Kalish.
The Tesco scheme mails discount vouchers to customers to encourage them to return. More importantly, it tracks every purchase to build one of the world’s largest databases. This finds correlations between purchases, allowing Tesco to finely tune the product range in each store. Sales of pickled vegetables, for instance, may suggest Polish immigrants have moved in, prompting it to stock barszcz, meatballs and sauerkraut.
As a result, its stores in Asian areas of Britain offer Bollywood movies, curry spices and large sacks of rice and flour. Its stores in London’s wealthiest parts, meanwhile, are stocked with ripe organic avocados, dainty packs of mange tout and steaks in fancy sauces.

It is unclear whether Tesco will be able to pull this off. As the story points out, the US market has its own characteristics. But the smaller, urban market that is bigger and better than a convenience store is an idea that just may catch on. As the story also points out, Warren Buffet has become one of Tesco’s largest shareholders. That is a pretty good endorsement.

Immigration update

As the Senate resumes debate on the immigration bill, keep an eye on two amendments, according to a story in today’s New York Times (High-Tech Titans Strike Out on Immigration Bill). A Kyl-Cantwell amendment would increase the number of green cards for “immigrants of extraordinary ability, outstanding professors and researchers and certain managers and executives of multinational corporations.” The tech companies have been pushing this. The other is a Durbin-Grassley proposal that gives priority to American workers over H-1-B visas and specifies the wages that must be paid to workers who have H-1B visas. Needless to say, the tech companies oppose this.

More on “experience”

Last week, I posted a story on moving from a technology strategy to an experience strategy. Now comes this story in Business Week — Experience Is the Product:

At some point, product categories require a quantum evolution—beyond technology and features—to the satisfaction of a customer experience. The VCR begat the DVR, and TiVo, the leading DVR brand, is successful because they began with an experience mindset, and developed the product to suit that.
In some ways, it’s unfair to compare TiVo with earlier VCRs, because the underlying technology is fundamentally different. But, like George Eastman did with his roll film, TiVo took a new technology (hard drive-based digital video recording) and didn’t simply copy prior models, but applied an experience mindset that lead to a fundamental rethinking of people’s relationship to television.
. . .
At best, most product organizations have a list of requirements to meet, and, more typically, they simply have a set of features to develop. Designing and developing to requirements and feature lists leads to unsatisfactory experiences, because you’re no longer oriented to the perspective of the user. As you make decisions along the way, your concerns for features, data, and technology trumps serving the customer. This is in large part because you have those requirements and feature lists in front of you, but nothing to represent the experiential point of view.
This is where experience strategy comes into play. As my colleague Jesse James Garrett has commented, experience strategy serves as “a star to sail your ship by.” An experience strategy is a clearly articulated touchstone that influences all the decisions made about technology, features, and interfaces. Whether in the initial design process, or as the product is being developed, such a strategy guides the team and ensures that the customer’s perspective is maintained throughout.
An experience strategy can take many forms. At heart it is a vision, an expression of the experience you hope customers will have. The ur-experience strategy is George Eastman’s slogan for Kodak, “You press the button, we do the rest.” As a description of the desired experience, it’s not particularly soulful or nuanced—nothing poetic about capturing memories. But it oriented Eastman’s delivery for an entire photographic system that supported this simple experiential goal.

Very good advice for succeeding in the I-Cubed Economy.

On tax cuts

From the Christian Science Monitor, Commentary — Still waiting for the tax-cut boost:

Economist Paul Kasriel is still twiddling his thumbs, waiting for the predicted good results in the economy from the major tax cuts of 2001 and 2003.
In an analysis a month ago for his bank, Northern Trust Co. in Chicago, he referred to the famous Samuel Beckett play, “Waiting for Godot,” in which Godot never shows up.
Last week, Mr. Kasriel said he still can’t detect the promised big boost in national output, investment, and savings from what economists call “supply side” tax cuts made by a GOP-led Congress and approved by President Bush.
“The data don’t seem to support the hypothesis,” he said in an interview.
Kasriel will be watching Friday’s gross domestic product (GDP) report to see if the nation’s output of goods and services in the first quarter is revised upward. In May, the Commerce Department reported that GDP rose at an annual rate of 0.6 percent after inflation, the worst three-month showing in more than four years.
With a recession under way at the start of this decade, the Republican leadership cut taxes in an attempt to get the economy moving ahead. The cuts were structured to lower marginal tax rates (the rate on the last dollars earned) on wage and salary income, and especially the tax rates on capital income, including capital gains and dividends.
“I don’t think you could have ever seen a more scripted supply-side tax cut than under the Bush administration,” says Kasriel.
Maybe, he adds, the economy would have performed worse if taxes hadn’t been cut. But so far, GDP growth in the current economic recovery has been the slowest of any expansion since 1961. It is even slightly slower than the record-long expansion that began in 1991, during which presidents George H.W. Bush and Bill Clinton raised taxes.

I’m sure that there are a lot of people who would dispute this analysis. There is some evidence, I believe, that some of the individual tax cuts, especially in the lower and middle income levels help spur growth (or at least consumer spending) in the early part of the decade.
But, the effect of supply side tax cuts on the economy is still a debated proposition. For more, I would suggest Rob Atkinson’s new book, Supply-Side Follies: Why Conservative Economics Fails, Liberal Economics Falters, and Innovation Economics is the Answer. I think their may be more to “liberal economics” than Rob give it credit, but I generally agree “innovation economics is the answer.”