The sniff dogs are on the pounce again. The venture capitalists of the Silicon Vally are busy changing their investment portfolios as the valley sees a rapid paradigm shift. Gone are the days of the Dot Com boom- hello watt com era. though many market analysts are still not ready to label it as the new boom in the valley but the word is out and seems to be spreading fast. the venture capitalists are investing the green in the new start ups that are mushrooming out throughout the valley. most of these start ups are promising the new and more.Eco friendly sources of energy in the near future like solar energy, bio fuels and other form of more. Eco friendly fuels generated form plants and other natural sources. the atmosphere is buzzing with new fervor and the start ups look to make the most of it as many dot com entrepreneurs are moving to this field . the start ups are getting their limelight moments as the venture capitalists and the young executives from the different business schools are flocking in . but some market analysts are sceptic and not yet ready to commit themselves into saying that this is the boom and THE thing to look for in the future. they try to bolster their point by saying that the new effort of coming up with renewable and more ecofriendly sources of energy is far from being abreast with the what dot com era promised. the dot com era promised that the computer should not be the child's play of a few and remain esoteric to others the Internet promised the shift of the power from the hands of a select few to the larger masses and the Internet sort of revolutionised the world by opening up and diversifying the prior to unseen sources of fact and fiction,knowledge and know hows, fun and frolic. but this is a different issue altogether - the very prospect of doing well by doing good which is the new mantra for the new boom entrepreneurs hangs on a delicate balance as the prospective product that the company eventually dishes out has to be viable form the point of view of the science and thats where lies the main difference between this so called boom and its predecessor. the total investment in this area is also smaller than the corresponding investment in the dot com boom which touched 34 billion dollars in 2000 which signify the peak of the boom. whatever the cynicism or the enthusiasm this mini boom has to deliver a lot in the future to match up to the heights crea ted by its predecessor - a matter that will take time- do good get rich but a little slowly. Read the whole article here
Nov 16, 2007
CRISIS LOOMS LARGE ON THE US MORTGAGE MARKET
Crisis looms large in the mortgage market in the US as lending firms are paniking and the stocks are at a record low and the biggest market in the states estimated at about 1.6 trillion is facing a huge debacle and the lending firms including some big ones like Merill Lynch , Duestche , Lehmann Brothers and others are in for a huge financial loss. the stocks are declining fast and there is apprehension everywhere in the Wall Street. an untimely statement by an analyst of the reputed firm provided the spark that eventually led to a huge fire and now threatens to engulf a lions share of the huge mortgage market and can very easily reveal another scandal of the likes of the Enron fiasco.
Read the whole article here
Read the whole article here
THE SLIME HAS POTENTIAL
The venture Capitalists from all over the world especially in the United States are taking interest in investing in the eco-friendly renewable sources of energy which they hope will reduce the burden or even may tekeover someday from the conventional source of energies existing today. this article published in the New York Times takes a look at the efforts of one such pair of Venture capitalists formed by Lissa Morgenthaler-Jones and her husband David Jones. they have claimed that within 3 years they will be able to produce some amount of bio-fuel from the algae and have even procured a catfish farm to this end. With more and more venture Capitalist moving into this area of alternative fuel it is believed that this field is, or in a near enough time will be, receiving the same impetus that was once given by the gruop of venture capitalists who invested in the development of the INTERNET in the mid 90's will has lead to a dot com boom in the following years.
this link is the actual article published in the NY times. Read the whole article here
this link is the actual article published in the NY times. Read the whole article here
FOCUS ON YOUR STRENGTHS NOT YOUR WAEKNESSES
Marcus Buckingham knows enough about good management to know he's not a good manager.
Before launching a career as a management consultant and author of such books as First, Break All The Rules: What the World's Greatest Managers Do Differently and The One Thing You Need to Know...About Great Managing, Great Leading and Sustained Individual Success, Buckingham served as head of The Gallup Organization's strengths management practice. He was a manager, and he didn't much care for it. "I wasn't terrible, but I had no appetite for it," said Buckingham, who spoke about management and leadership at the Wharton Leadership Conference on June 9. The conference was sponsored by Wharton's Center for Leadership and Change Management and Center for Human Resources.
According to Buckingham, the best managers share one talent -- the ability to find, and then capitalize upon, their employees' unique traits. "The guiding principle is, 'How can I take this person's talent and turn it into performance?' That's the only way success is possible." And yet not everyone has that knack, Buckingham said. If he has learned anything from his years spent interviewing the best minds of the business world, it is this: Truly great managers, and truly inspiring business leaders, are rarer than many think. "Some of you in this room may not have that talent," he said. "If not, management can become a thankless task."
Checkers vs. Chess
How to tell a good manager from a bad manager? According to Buckingham, it's simple: Bad managers play checkers. Good managers play chess. The good manager knows that not all employees work the same way. They know if they are to achieve success, they must put their employees in a position where they will be able to use their strengths. "Great managers know they don't have 10 salespeople working for them. They know they have 10 individuals working for them .... A great manager is brilliant at spotting the unique differences that separate each person and then capitalizing on them."
It may sound elementary, but a quick glance around the business world indicates that many companies have yet to grasp this simple concept of putting people's strengths to use, Buckingham said. That's because the business world -- and the world at large -- is obsessed with weaknesses and finding ways to fix them. Buckingham cited a recent poll that asked workers whether they felt they could achieve more success through improving on their weaknesses or building on their strengths. Fifty-nine percent picked the former.
"A great manager sees the folly in this," said Buckingham, who has interviewed some of the business world's most successful leaders for his books. "A great manager knows he or she will get the most return on investment by working on strengths." Buckingham has seen this management style work. He just doesn't see it often enough, and he believes too many workers spend too much of their time doing things they don't like to do or simply aren't good at doing.
Buckingham co-authored his book, Now, Discover Your Strengths, in hopes of kick-starting a management revolution that will push mangers to focus on strength. In the book, Buckingham and co-author Donald O. Clifton describe 34 distinct worker profiles -- "Learner," "Achiever" and "Developer," among others -- and offer advice on how those personalities can best be put to use. "Most people are not using their talent at work at all," Buckingham said.
So how can managers tap into the talent they have in their organizations? Buckingham said a good first step is to determine what employees are good at. The tasks they learn quickly, the talents they naturally exhibit and the jobs they feel good about doing are hints about their inherent strengths. Once those strengths are uncovered, a good manager will put them to use. "You can only win as a company when you get your people into positive numbers," Buckingham said.
Optimism and Ego
Managing employees successfully is a rare talent. Even rarer, Buckingham said, is the ability to lead. And all good managers are not necessarily good leaders.
"I do think there is a rather keen and distinct difference between managing and leading," Buckingham said. The chief responsibility of a leader, for example, "is to rally people for a better future. If you are a leader, you better be unflinchingly, unfailingly optimistic. No matter how bleak his or her mood, nothing can undermine a leader's belief that things can get better, and must get better. I believe you either bring this to the table or you don't."
Along with that optimism, great leaders can also bring big egos -- and that's not a bad thing. While some have blamed the business world's recent string of scandals -- Enron, WorldCom and others -- on bloated executive egos, Buckingham disagrees. It's not ego that ruined Ken Lay, but rather a lack of ethics. There's a big difference, Buckingham said. And considering the responsibility facing business leaders to build a future for their companies, a big ego might be what is needed.
"If you are going to lead, you better have a deep-seated belief that you should be at the helm, dragging everyone into that better future," he said. "Virtually nothing about a leader is humble. I'm not saying they are arrogant, but their claims are big." Buckingham said successful leaders must find a "universal truth" to rally their followers. These universal truths stem from the basic human needs, fears and desires that unite all people, across all cultures. They also happen to be great tools for leadership.
Take, for example, one of the great human fears -- fear of the future. "We all share a fear of the unknown," Buckingham said. "The problem for the modern-day leader, of course, is that you traffic in the future." Buckingham says some the best leaders can overcome this fear -- and build confidence among their followers -- with a weapon of their own: clarity.
By presenting a clear message, and backing up their message with actions that support it, top managers of such companies as Tesco, Best Buy and Wal-Mart have rallied employees to their cause and enjoyed bottom-line success as a result, Buckingham noted. "The best way to turn anxiety into confidence is this: Be clear. Clarity is the antidote to anxiety. If you do nothing else as a leader, be clear." Former New York City Mayor Giuliani provided a good example of effective leadership through clarity, Buckingham said. When Giuliani took office in 1993, he could have turned his attentions just about anywhere; America's largest city certainly had its share of problems.
But Giuliani set one specific, clear and focused goal for his administration. He would reduce crime and improve quality of life for residents. Then he laid out three simple ways he was going to start making that happen: He announced he would get rid of the window washers who pestered New York City drivers; clean subways of graffiti and then keep the vandals away; and make all cab drivers wear collared shirts. The issues were, on their surface, minor. But they were relevant to his citizens. And by setting three immediate goals -- and then achieving them -- Giuliani was able to build trust among residents and respect among his workers. That trust carried over as he tackled larger challenges, and within a few years of his arrival, the FBI named New York the safest big city in America. "You can do a lot worse than pick just a few areas you want to take action on right now," Buckingham said.
Clarity of purpose has also been a driving factor in the success of Tesco, the British food giant that has more than 2,000 stores and 360,000 employees worldwide. When Terry Leahy took over as CEO in 1997, he decreed the company's focus would be, from that point forward, to serve the housewives of the world. Then he went out and did something to prove he believed in his focus: He added more checkout lines in all his stores, a move that led to significantly higher labor costs but also won over his customers and sent a message to his employees that they were there, as Leahy had proclaimed, to provide courteous, efficient service.
"That kind of clarity builds confidence in people," Buckingham said. Today, Tesco is one of the three largest retailers in the world, and Leahy's success provides a handy leadership lesson. "When you want to lead, start with the future." Buckingham said. "Get specific. And get vivid."IN INDIA GRANDMA COOKS, THEY DELIVER
The New York Time takes a closer look into the dabbawala system so popular in Mumbai.
Read the New York Times article here
Read the New York Times article here
WHO MAKES THE APPLE IPD: ITS NOT THE APPLE FOR A START
Who makes the Apple iPod? Here’s a hint: It is not Apple. The company outsources the entire manufacture of the device to a number of Asian enterprises, among them Asustek, Inventec Appliances and Foxconn.
But this list of companies isn’t a satisfactory answer either: They only do final assembly. What about the 451 parts that go into the iPod? Where are they made and by whom?
Three researchers at the University of California, Irvine — Greg Linden, Kenneth L. Kraemer and Jason Dedrick — applied some investigative cost accounting to this question, using a report from Portelligent Inc. that examined all the parts that went into the iPod.
Their study, sponsored by the Sloan Foundation, offers a fascinating illustration of the complexity of the global economy, and how difficult it is to understand that complexity by using only conventional trade statistics.
The retail value of the 30-gigabyte video iPod that the authors examined was $299. The most expensive component in it was the hard drive, which was manufactured by Toshiba and costs about $73. The next most costly components were the display module (about $20), the video/multimedia processor chip ($8) and the controller chip ($5). They estimated that the final assembly, done in China, cost only about $4 a unit.
One approach to tracing supply chain geography might be to attribute the cost of each component to the country of origin of its maker. So $73 of the cost of the iPod would be attributed to Japan since Toshiba is a Japanese company, and the $13 cost of the two chips would be attributed to the United States, since the suppliers, Broadcom and PortalPlayer, are American companies, and so on.
But this method hides some of the most important details. Toshiba may be a Japanese company, but it makes most of its hard drives in the Philippines and China. So perhaps we should also allocate part of the cost of that hard drive to one of those countries. The same problem arises regarding the Broadcom chips, with most of them manufactured in Taiwan. So how can one distribute the costs of the iPod components across the countries where they are manufactured in a meaningful way?
To answer this question, let us look at the production process as a sequence of steps, each possibly performed by a different company operating in a different country. At each step, inputs like computer chips and a bare circuit board are converted into outputs like an assembled circuit board. The difference between the cost of the inputs and the value of the outputs is the “value added” at that step, which can then be attributed to the country where that value was added.
The profit margin on generic parts like nuts and bolts is very low, since these items are produced in intensely competitive industries and can be manufactured anywhere. Hence, they add little to the final value of the iPod. More specialized parts, like the hard drives and controller chips, have much higher value added.
According to the authors’ estimates, the $73 Toshiba hard drive in the iPod contains about $54 in parts and labor. So the value that Toshiba added to the hard drive was $19 plus its own direct labor costs. This $19 is attributed to Japan since Toshiba is a Japanese company.
Continuing in this way, the researchers examined the major components of the iPod and tried to calculate the value added at different stages of the production process and then assigned that value added to the country where the value was created. This isn’t an easy task, but even based on their initial examination, it is quite clear that the largest share of the value added in the iPod goes to enterprises in the United States, particularly for units sold here.
The researchers estimated that $163 of the iPod’s $299 retail value in the United States was captured by American companies and workers, breaking it down to $75 for distribution and retail costs, $80 to Apple, and $8 to various domestic component makers. Japan contributed about $26 to the value added (mostly via the Toshiba disk drive), while Korea contributed less than $1.
The unaccounted-for parts and labor costs involved in making the iPod came to about $110. The authors hope to assign those labor costs to the appropriate countries, but as the hard drive example illustrates, that’s not so easy to do.
This value added calculation illustrates the futility of summarizing such a complex manufacturing process by using conventional trade statistics. Even though Chinese workers contribute only about 1 percent of the value of the iPod, the export of a finished iPod to the United States directly contributes about $150 to our bilateral trade deficit with the Chinese.
Ultimately, there is no simple answer to who makes the iPod or where it is made. The iPod, like many other products, is made in several countries by dozens of companies, with each stage of production contributing a different amount to the final value.
The real value of the iPod doesn’t lie in its parts or even in putting those parts together. The bulk of the iPod’s value is in the conception and design of the iPod. That is why Apple gets $80 for each of these video iPods it sells, which is by far the largest piece of value added in the entire supply chain.
Those clever folks at Apple figured out how to combine 451 mostly generic parts into a valuable product. They may not make the iPod, but they created it. In the end, that’s what really matters.
ECONOMIC CRISIS , RECOVERY AND ITS IMPLICATIONS
This article has been published in one of the articles published by the IMF(International Monetary Fund). this article deals with the economic crisis in the East Asia in 1997 and the role played by the IMF and ADB (Asian Development Bank) and World Bank in the restoration of economic stability and the recovery of the worst hit Asian countries namely Indonesia, Thailand, Philippines, South Korea. The darlings of the Asian economy during the 90s, these countries regularly clocked double-digit growth figures till the time when suddenly everything collapsed. The foreign investors who were so eager to invest their green in the Korean and Thai companies suddenly turned their heads away. Catastrophe ensued and many companies went broke.
since then IMF has done well to maintain some sort of order in these countries and helping them bounce back. though they are nowhere close to the boom they were enjoying in the pre-crisis period these countries have been maintaining a respectable 5-7 percent economic growth rate which is more than many of the developing countries elsewhere. but the scar persists and the people have become weary and fearful of starting a new venture ....
Read the whole article here
since then IMF has done well to maintain some sort of order in these countries and helping them bounce back. though they are nowhere close to the boom they were enjoying in the pre-crisis period these countries have been maintaining a respectable 5-7 percent economic growth rate which is more than many of the developing countries elsewhere. but the scar persists and the people have become weary and fearful of starting a new venture ....
Read the whole article here
THE ASIAN CRISIS : A VIEW FROM THE IMF
Address by Stanley Fischer
First Deputy Managing Director of the International Monetary Fund
at the Midwinter Conference of the Bankers' Association for Foreign Trade
As the crisis has unfolded in Asia, the IMF has become, at least for this brief moment in history, almost a household name. But even if the institution has become more well known, its role in Asia and more broadly in the world economy is not widely understood. Thus, I am very pleased to have this opportunity to discuss the Asian crisis, what the IMF is doing to help contain it, and the institution's wider role in the international monetary system.
First Deputy Managing Director of the International Monetary Fund
at the Midwinter Conference of the Bankers' Association for Foreign Trade
Washington, D.C., January 22, 1998
As the crisis has unfolded in Asia, the IMF has become, at least for this brief moment in history, almost a household name. But even if the institution has become more well known, its role in Asia and more broadly in the world economy is not widely understood. Thus, I am very pleased to have this opportunity to discuss the Asian crisis, what the IMF is doing to help contain it, and the institution's wider role in the international monetary system.
Asia's economic success
The crisis in Asia has occurred after several decades of outstanding economic performance. Annual GDP growth in the ASEAN-5 (Indonesia, Malaysia, the Philippines, Singapore, and Thailand) averaged close to 8 percent over the last decade. Indeed, during the 30 years preceding the crisis per capita income levels had increased tenfold in Korea, fivefold in Thailand, and fourfold in Malaysia. Moreover, per capita income levels in Hong Kong and Singapore now exceed those in some industrial countries. Until the current crisis, Asia attracted almost half of total capital inflows to developing countries--nearly $100 billion in 1996. In the last decade, the share of developing and emerging market economies of Asia in world exports has nearly doubled to almost one fifth of the total.
This record growth and strong trade performance is unprecedented, a remarkable historical achievement. Moreover, Asia's success has also been good for the rest of the world. The developing and emerging market economies of Asia have not just been major exporters; they have been an increasingly important market for other countries' exports. For example, these countries bought about 19 percent of U.S. exports in 1996, up from about 15 percent in 1990. Likewise, the dynamism of these economies helped cushion the impact of successive downturns in industrial economies on the world economy during 1991-93. In recent years, they have also been a source of attractive investment returns. For all these reasons, the developing and emerging market economies of Asia have been a major engine of growth in the world economy.
So what went wrong? Let me start with the common underlying factors.
The origins of the crisis
The key domestic factors that led to the present difficulties appear to have been: first, the failure to dampen overheating pressures that had become increasingly evident in Thailand and many other countries in the region and were manifested in large external deficits and property and stock market bubbles; second, the maintenance of pegged exchange rate regimes for too long, which encouraged external borrowing and led to excessive exposure to foreign exchange risk in both the financial and corporate sectors; and third, lax prudential rules and financial oversight, which led to a sharp deterioration in the quality of banks' loan portfolios. As the crises unfolded, political uncertainties and doubts about the authorities' commitment and ability to implement the necessary adjustment and reforms exacerbated pressures on currencies and stock markets. Reluctance to tighten monetary conditions and to close insolvent financial institutions has clearly added to the turbulence in financial markets.
Although the problems in these countries were mostly homegrown, developments in the advanced economies and global financial markets contributed significantly to the buildup of the imbalances that eventually led to the crises. Specifically, with Japan and Europe experiencing weak growth since the beginning of the 1990s, attractive domestic investment opportunities have fallen short of available saving; meanwhile, monetary policy has remained appropriately accomodative, and interest rates have been low. Large private capital flows to emerging markets, including the so-called "carry trade," were driven, to an important degree, by these phenomena and by an imprudent search for high yields by international investors without due regard to potential risks. Also contributing to the buildup to the crisis were the wide swings of the yen/dollar exchange rate over the past three years.
The crisis erupted in Thailand in the summer. Starting in 1996, a confluence of domestic and external shocks revealed weaknesses in the Thai economy that until then had been masked by the rapid pace of economic growth and the weakness of the U.S. dollar to which the Thai currency, the baht, was pegged. To an extent, Thailand's difficulties resulted from its earlier economic success. Strong growth, averaging almost 10 percent per year from 1987- 95, and generally prudent macroeconomic management, as seen in continuous public sector fiscal surpluses over the same period, had attracted large capital inflows, much of them short-term--and many of them attracted by the establishment of the Bangkok International Banking Facility in 1993. And while these inflows had permitted faster growth, they had also allowed domestic banks to expand lending rapidly, fueling imprudent investments and unrealistic increases in asset prices. Past success also may also have contributed to a sense of denial among the Thai authorities about the severity of Thailand's problems and the need for policy action, which neither the IMF in its continuous dialogue with the Thais during the 18 months prior to the floating of the baht last July, nor increasing exchange market pressure, could overcome. Finally, in the absence of convincing policy action, and after a desperate defense of the currency by the central bank, the crisis broke.
Contagion to other economies in the region appeared relentless. Some of the contagion reflected rational market behavior. The depreciation of the baht could be expected to erode the competitiveness of Thailand's trade competitors, and this put some downward pressure on their currencies. Moreover, after their experience in Thailand, markets began to take a closer look at the problems in Indonesia, Korea, and other neighboring countries. And what they saw to different degrees in different countries were some of the same problems as in Thailand, particularly in the financial sector. Added to this was the fact that as currencies continued to slide, the debt service costs of the domestic private sector increased. Fearful about how far this process might go, domestic residents rushed to hedge their external liabilities, thereby intensifying exchange rate pressures. But the amount of exchange rate adjustment that has taken place far exceeds any reasonable estimate of what might have been required to correct the initial overvaluation of the Thai baht, the Indonesian rupiah, and the Korean won, among other currencies. In this respect, markets have overreacted.
So, in many respects, Thailand, Indonesia and Korea do face similar problems. They all have suffered a loss of confidence, and their currencies are deeply depreciated. Moreover, in each country, weak financial systems, excessive unhedged foreign borrowing by the domestic private sector, and a lack of transparency about the ties between government, business, and banks have both contributed to the crisis and complicated efforts to defuse it.
But the situations in these countries also differ in important ways. One notable difference is that Thailand was running an exceptionally large (8 percent of GDP) current account deficit, while Korea's was on a downward path, and Indonesia's was already at a more manageable level (3 1/4 percent of GDP). These countries also called in the IMF at different stages of their crises. Thailand called on the IMF when the central bank had nearly run out of usable reserves. Korea came still closer to catastrophe, a situation which has improved following the election of Kim Dae-Jung, the forceful implementation of the IMF-supported program even before he takes office, and the start of discussions with commercial banks on the rollover of Korea's short-term debt.
Indonesia, on the other hand, requested IMF assistance at an earlier stage, and at the start--in early November--the reform program seemed to be working well. But questions about the implementation of the program and the President's health, as well as contagion from Korea, all took their toll. Last week, after intense consultations and negotiations with the IMF, President Suharto decided to accelerate the reform program. Important measures to deal with banking sector difficulties and to increase confidence in the banks should be announced in the next few days. Corporate sector debt difficulties will have to be dealt with in a way that preserves the principle that the solution is primarily up to individual debtors and their creditors. The Philippines, for its part, has not escaped the turmoil, but its decision to extend the IMF-supported program that it had already been implementing successfully for several years has helped mitigate the effects of the crisis.
IMF-supported Programs in Asia
The design of the IMF-supported programs in these countries reflects these similarities and differences. All three programs have called for a substantial rise in interest rates to attempt to halt the downward spiral of currency depreciation. And all three programs have called for forceful, up-front action to put the financial system on a sounder footing as soon as possible.
To this end, non-viable institutions are being closed down, and other institutions are required to come up with restructuring plans and comply--within a reasonable period that varies according to country circumstances--with internationally accepted best practices, including the Basle capital adequacy standards and internationally accepted accounting practices and disclosure rules. Institutional changes are under way to strengthen financial sector regulation and supervision, increase transparency in the corporate and government sectors, create a more level playing field for private sector activity, and open Asian markets to foreign participants. Needless to say, all of these reforms will require a vast change in domestic business practices, corporate culture, and government behavior, which will take time. But the process is in motion, and already some dramatic steps have been taken.
The fiscal programs vary from country to country. In each case, the IMF asked for a fiscal adjustment that would cover the carrying costs of financial sector restructuring--the full cost of which is being spread over many years--and to help restore a sustainable balance of payments. In Thailand, this translated into an initial fiscal adjustment of 3 percent of GDP; in Korea, 1 1/2 percent of GDP; and in Indonesia, 1 percent of GDP, much of which will be achieved by reducing public investment in projects with low economic returns.
Some have argued that these programs are too tough, either in calling for higher interest rates, tightening government budget deficits, or closing down financial institutions. Let's take the question of interest rates first. By the time these countries approached the IMF, the value of their currencies was plummeting, and in the case of Thailand and Korea, reserves were perilously low. Thus, the first order of business was, and still is, to restore confidence in the currency. Here, I would like to dispel the notion that the deep currency depreciations seen in Asia in recent months have occurred by IMF design. On the contrary, as I noted a moment ago, we believe that currencies have depreciated far more than is warranted or desirable. Moreover, without IMF support as part of an international effort to stabilize these economies, it is likely that these currencies would have lost still more of their value. To reverse this process, countries have to make it more attractive to hold domestic currency, and that means temporarily raising interest rates, even if this complicates the situation of weak banks and corporations. This is a key lesson of the "tequila crisis" in Latin America 1994-95, as well as from the more recent experience of Brazil, Hong Kong, and the Czech Republic, all of which have fended off attacks on their currencies over the past few months with a timely and forceful tightening of interest rates along with other supporting policy measures. Once confidence is restored, interest rates should return to more normal levels.
Let me add that companies with substantial foreign currency debts are likely to suffer far more from a long, steep slide in the value of their domestic currency than from a temporary rise in domestic interest rates. Moreover, when interest rate action is delayed, confidence continues to erode. Thus, the increase in interest rates needed to stabilize the situation is likely to be far larger than if decisive action had been taken at the outset. Indeed, the reluctance to tighten interest rates in a determined way at the beginning has been one of the factors perpetuating the crisis. Higher interest rates should also encourage the corporate sector to restructure its financing away from debt and toward equity, which will be most welcome in some cases, such as Korea.
Other observers have advocated more expansionary fiscal programs to offset the inevitable slowdown in economic growth. The balance here is a fine one. As already noted, at the outset of the crisis, countries need to firm their fiscal positions, to deal both with the future costs of financial restructuring and--depending on the balance of payments situation--the need to reduce the current account deficit. Beyond that, if the economic situation worsens, the IMF generally agrees with the country to let automatic stabilizers work and the deficit to widen somewhat. However, we cannot remain indifferent to the level of the fiscal deficit, particularly since a country in crisis typically has only limited access to borrowing and since the alternative of printing money would be potentially disastrous in these circumstances.
Likewise, we have been urged not to recommend rapid action on banks. However, it would be a mistake to allow clearly bankrupt banks to remain open, as this would be a recipe for perpetuating the region's financial crisis, not resolving it. The best course is to recapitalize or close insolvent banks, protect small depositors, and require shareholders to take their losses. At the same time, banking regulation and supervision must be improved. Of course, we take individual country circumstances into account in deciding how quickly all of this can be accomplished.
In short, the best approach is to effect a sharp, but temporary, increase in interest rates to stem the outflow of capital, while making a decisive start on the longer-term tasks of restructuring the financial sector, bringing financial sector regulation and supervision up to international standards, and increasing domestic competition and transparency. None of this will be easy, and unfortunately, the pace of economic activity in these economies will inevitably slow. But the slowdown would be much more dramatic, the costs to the general population much higher, and the risks to the international economy much greater without the assistance of the international community, provided through the IMF, the World Bank, and bilateral sources, including the United States.
Most major industrial countries appear well positioned to absorb the adverse effects of the Asian crisis. In the United States, consumer spending and investment remain strong and incoming data for the fourth quarter point to further robust growth in output and household spending. Consumer confidence remains at or near all-time highs, and the unemployment rate stood at 4.7 percent in December, only slightly above the November rate of 4.6 percent, which was the lowest rate in 24 years. Direct measures of prices indicate that inflationary pressures are receding, and the strong dollar and weak import and commodity prices suggest that this trend will continue for a while longer. Nevertheless, it does not take a great deal of imagination to see how the problems in Asia could take on larger proportions, with more profound effects on global growth and financial market stability. That is why the international community has decided to work together through the IMF to try to overcome the crisis in a way that does the least damage to the global economy.
Moral Hazard
Of course, not everyone agrees with the international community's approach of trying to cushion the effects of such crises. Some say that it would be better simply to let the chips fall where they may, arguing that to come to the assistance of countries in crisis will only encourage more reckless behavior on the part of borrowers and lenders. I do not share the view that we should step aside in these cases. To begin with, the notion that the availability of IMF programs encourages reckless behavior by countries is far-fetched: no country would deliberately court such a crisis even if it thought international assistance would be forthcoming. The economic, financial, social, and political pain is simply too great; nor do countries show any great desire to enter IMF programs unless they absolutely have to.
On the side of the lenders, despite the constant talk of bailouts, most investors have made substantial losses in the crisis. With stock markets and exchange rates plunging, foreign equity investors have lost nearly three-quarters of the value of their equity holdings in some Asian markets. Many firms and financial institutions in these countries will go bankrupt, and their foreign and domestic lenders will share in the losses. International banks are also sharing in the cost of the crisis. Some lenders may be forced to write down their claims, especially against corporate borrowers. In addition, foreign commercial banks are having to roll over their loans at a time when they would not normally choose to do so. And although some banks may benefit from higher interest rates on their rollovers than they would otherwise receive, the fourth quarter earnings reports now becoming available indicate that, overall, the Asian crisis has indeed been costly for foreign commercial banks.
In effect, we face a trade-off. Faced with a crisis, we could allow it to deepen and possibly teach international lenders a lesson in the process; alternatively, we can step in to do what we can to mitigate the effects of the crisis on the region and the world economy in a way that places some of the burden on borrowers and lenders, although possibly with some undesired side effects. The latter approach--doing what we can to mitigate the crisis--makes more sense. The global interest, and indeed the U.S. interest, lies in an economically strong Asia that imports as well as exports and thereby supports global growth.
Simply letting the chips fall where they may would surely cause more bankruptcies, larger layoffs, deeper recessions, and even deeper depreciations than would otherwise be necessary to put these economies back on a sound footing. The result would not be more prosperity, more open markets and faster adjustment, but rather greater trade and payments restrictions, a more significant downturn in world trade, and slower world growth. That is not in the interest of the United States, nor of any other IMF member.
Role of the IMF
If I am emphatic on that point, it is because the IMF was founded in the hope that establishing a permanent forum for cooperation on international monetary problems would help avoid the competitive devaluations, exchange restrictions, and other destructive economic policies that had contributed to the Great Depression and the outbreak of war. The international economy has changed considerably since then, and so has the IMF. But its primary purposes remain the same; they are (and here I quote from the IMF's Articles of Agreement):
- "to facilitate...the balanced growth of international trade, and to contribute thereby to...high levels of growth and real income"--and we have consistently promoted trade liberalization;
- "to promote exchange rate stability, to maintain orderly exchange arrangements among members, and to avoid competitive exchange depreciation"; and
- to provide members "with opportunities to correct maladjustments in their balance of payments, without resorting to measures destructive of national or international prosperity."
When crisis does strike, the IMF has been willing to act in accordance with its purposes to deal with major problems confronting the international economy. On numerous occasions, the IMF has helped provide the expertise and vision needed to come up with pragmatic solutions to important international monetary problems, and it has helped mobilize the international resources to make them work. This was true during the energy crisis in 1973-74, when the IMF established a mechanism for recycling the surpluses of oil exporters and helping to finance the oil-related deficits of other countries. It was true in the mid-1980s, when the IMF played a central role in the debt strategy. It was true in 1989 and after, when the IMF helped design and finance the massive effort to help the 26 transition countries cast off the shackles of central planning. And it was true in 1994-95, when the IMF came forward to help avert Mexico's financial collapse--and to prevent the crisis from spilling over into the markets, forcing other countries to resort to exchange controls and debt moratoria, and possibly causing a dramatic disruption in private capital flows to developing countries. Because of the authorities' efforts and IMF support, Mexico's markets remained open and capital continued to flow.
There is no denying that each of these crises has been difficult--especially for the IMF members most adversely affected. In each case we, the IMF and the international community as a whole, learned from our experiences. And in each case, it is clear that without Fund assistance, things would have been much worse. The IMF's effectiveness derives from the fact that as an international institution with a nearly global membership, it can carry on a policy dialogue with member countries and make policy recommendations in situations where a bilateral approach would not be accepted. At the same time, the IMF provides a mechanism for sharing the responsibility of supporting the international monetary system among the entire international community.
IMF Resources
Part of that shared responsibility is to provide resources to the IMF. Let me emphasize that the IMF is not a charitable institution, nor does it carry out its operations at taxpayers' expense. On the contrary, it operates much like a credit union. On joining the IMF, each member country subscribes a sum of money called its quota. Members normally pay 25 percent of their quota subscriptions out of their foreign reserves, the rest in their national currencies. The quota is like a deposit in the credit union, and the country continues to own it. The size of the quota determines the country's voting rights, and the United States, with over 18 percent of the shares, is the largest shareholder. Many key issues require an 85 percent majority, so that the United States effectively has a veto over major Fund decisions.
When a member borrows from the Fund, it exchanges a certain amount of its own national currency for the use of an equivalent amount of currency of a country in a strong external position. The borrowing country pays interest at a floating market rate on the amount it has borrowed, while the country whose currency is being used receives interest. Since the interest received from the IMF is broadly in line with market rates, the provision of financial resources to the Fund has involved little cost, if any, to creditor countries, including the United States.
As you are no doubt aware, the Fund's membership has recently agreed to increase IMF quotas by 45 percent, about $88 billion, which will raise the capital base of the institution to some $284 billion. The United States' share of this increase would be nearly $16 billion. In addition, the Fund has taken steps to augment its financial resources through the agreement on the New Arrangements to Borrow (NAB). Under the NAB, participants would be prepared to lend up to about $45 billion when additional resources are needed to forestall or cope with an impairment of the international monetary system, or to deal with an exceptional situation that poses a threat to the stability of the system.
These are large sums. They are often described as an expense to the taxpayer. We are deeply aware in the IMF that our support derives ultimately from the legislatures that vote to establish their countries' quotas--their deposits--in the IMF. We must justify that support. But it must also be recognized that contributions to the IMF are not fundamentally an expense to the taxpayer; rather, they are investments. They are an investment in the narrow sense that member countries earn interest on their deposits in the IMF. Far more important, they are also an investment in a broader sense, an investment in the stability and the prosperity of the world economy.
Thank you.
Jul 15
economic crisis and recovery in Asia and its implications
This article has been published in one of the articles published by the IMF(International Monetary Fund). this article deals with the economic crisis in the East Asia in 1997 and the role played by the IMF and ADB (Asian Development Bank) and World Bank in the restoration of economic stability and the recovery of the worst hit Asian countries namely Indonesia, Thailand, Philippines, South Korea. The darlings of the Asian economy during the 90s, these countries regularly clocked double-digit growth figures till the time when suddenly everything collapsed. The foreign investors who were so eager to invest their green in the Korean and Thai companies suddenly turned their heads away. Catastrophe ensued and many companies went broke.
since then IMF has done well to maintain some sort of order in these countries and helping them bounce back. though they are nowhere close to the boom they were enjoying in the pre-crisis period these countries have been maintaining a respectable 5-7 percent economic growth rate which is more than many of the developing countries elsewhere. but the scar persists and the people have become weary and fearful of starting a new venture ....
Read the whole article here
since then IMF has done well to maintain some sort of order in these countries and helping them bounce back. though they are nowhere close to the boom they were enjoying in the pre-crisis period these countries have been maintaining a respectable 5-7 percent economic growth rate which is more than many of the developing countries elsewhere. but the scar persists and the people have become weary and fearful of starting a new venture ....
Read the whole article here
Jul 15
WHO MAKES AN APPLE I-POD ? IT'S NOT APPLE !!!
Who makes the Apple iPod? Here’s a hint: It is not Apple. The company outsources the entire manufacture of the device to a number of Asian enterprises, among them Asustek, Inventec Appliances and Foxconn.
But this list of companies isn’t a satisfactory answer either: They only do final assembly. What about the 451 parts that go into the iPod? Where are they made and by whom?
Three researchers at the University of California, Irvine — Greg Linden, Kenneth L. Kraemer and Jason Dedrick — applied some investigative cost accounting to this question, using a report from Portelligent Inc. that examined all the parts that went into the iPod.
Their study, sponsored by the Sloan Foundation, offers a fascinating illustration of the complexity of the global economy, and how difficult it is to understand that complexity by using only conventional trade statistics.
The retail value of the 30-gigabyte video iPod that the authors examined was $299. The most expensive component in it was the hard drive, which was manufactured by Toshiba and costs about $73. The next most costly components were the display module (about $20), the video/multimedia processor chip ($8) and the controller chip ($5). They estimated that the final assembly, done in China, cost only about $4 a unit.
One approach to tracing supply chain geography might be to attribute the cost of each component to the country of origin of its maker. So $73 of the cost of the iPod would be attributed to Japan since Toshiba is a Japanese company, and the $13 cost of the two chips would be attributed to the United States, since the suppliers, Broadcom and PortalPlayer, are American companies, and so on.
But this method hides some of the most important details. Toshiba may be a Japanese company, but it makes most of its hard drives in the Philippines and China. So perhaps we should also allocate part of the cost of that hard drive to one of those countries. The same problem arises regarding the Broadcom chips, with most of them manufactured in Taiwan. So how can one distribute the costs of the iPod components across the countries where they are manufactured in a meaningful way?
To answer this question, let us look at the production process as a sequence of steps, each possibly performed by a different company operating in a different country. At each step, inputs like computer chips and a bare circuit board are converted into outputs like an assembled circuit board. The difference between the cost of the inputs and the value of the outputs is the “value added” at that step, which can then be attributed to the country where that value was added.
The profit margin on generic parts like nuts and bolts is very low, since these items are produced in intensely competitive industries and can be manufactured anywhere. Hence, they add little to the final value of the iPod. More specialized parts, like the hard drives and controller chips, have much higher value added.
According to the authors’ estimates, the $73 Toshiba hard drive in the iPod contains about $54 in parts and labor. So the value that Toshiba added to the hard drive was $19 plus its own direct labor costs. This $19 is attributed to Japan since Toshiba is a Japanese company.
Continuing in this way, the researchers examined the major components of the iPod and tried to calculate the value added at different stages of the production process and then assigned that value added to the country where the value was created. This isn’t an easy task, but even based on their initial examination, it is quite clear that the largest share of the value added in the iPod goes to enterprises in the United States, particularly for units sold here.
The researchers estimated that $163 of the iPod’s $299 retail value in the United States was captured by American companies and workers, breaking it down to $75 for distribution and retail costs, $80 to Apple, and $8 to various domestic component makers. Japan contributed about $26 to the value added (mostly via the Toshiba disk drive), while Korea contributed less than $1.
The unaccounted-for parts and labor costs involved in making the iPod came to about $110. The authors hope to assign those labor costs to the appropriate countries, but as the hard drive example illustrates, that’s not so easy to do.
This value added calculation illustrates the futility of summarizing such a complex manufacturing process by using conventional trade statistics. Even though Chinese workers contribute only about 1 percent of the value of the iPod, the export of a finished iPod to the United States directly contributes about $150 to our bilateral trade deficit with the Chinese.
Ultimately, there is no simple answer to who makes the iPod or where it is made. The iPod, like many other products, is made in several countries by dozens of companies, with each stage of production contributing a different amount to the final value.
The real value of the iPod doesn’t lie in its parts or even in putting those parts together. The bulk of the iPod’s value is in the conception and design of the iPod. That is why Apple gets $80 for each of these video iPods it sells, which is by far the largest piece of value added in the entire supply chain.
Those clever folks at Apple figured out how to combine 451 mostly generic parts into a valuable product. They may not make the iPod, but they created it. In the end, that’s what really matters.
ZIP ZAP DHOOM: INDIA SET TO COMMANDER SMALL CAR REVOLUTION
India is set to lead the low-cost vehicle revolution and is likely to grab the top slot in both low-cost vehicles sales and production.
By 2014, the year by which this segment is expected to develop substantially, India’s share of the estimated annual production of about 3.5 to 3.7 million low-cost vehicles is projected to be nearly 34%. In comparison, adversary China which is ahead on most parameters — the number of telecom users, internet connections, cars and retail — is expected to account for only 11% of global production.
Says PricewaterhouseCoopers partner Abdul Majeed: “India will emerge as the largest producer of cheap vehicles not only in sub-compact cars (the proposed Rs 1-lakh car of the Tatas and Renault’s $3,000 car) but also low-cost multi-utility vehicles.”
A report prepared by PwC also predicts that India will become the single-largest test ground for all kinds of low-cost vehicles as almost all auto makers would plan to launch their low-cost offerings in India. “We believe that by 2010, more than 100 million households will be able to afford a $2,000-3,000 car, which means India will also become the largest consumer of small cars,” he added.
The Renault-Nissan combine, Italian automaker Fiat and Indian company Tata Motors are likely to emerge as the three largest global low-cost vehicle manufacturers. By 2014 the Renault-Nissan partnership will corner 25% market share in low-cost vehicles, followed by Fiat (21%) and Tata Motors (15%). Japanese automaker Toyota will be another close contender and likely to finish with a market share of 14% during the same period, said the report.
Fiat India MD Giovanni De Filippis said: “India has the capability to become the low-cost car hub in future and is important for our growth strategy.
Toyota Kirloskar Motor India’s deputy MD, Mr KK Swamy, said that the country’s income demographics will sustain the demand for low-cost vehicles. Nearly 35% of India’s population is young and likely to buy a small no-frills car as their first vehicle. Toyota plans to make India its small car hub.
Says Mr Jnaneshwar Sen, senior GM marketing, Honda Siel Cars India: “Every year India sells 6-7 million motorcycles. Imagine the demand when they decide to convert to four wheelers. That alone will make it the largest low-cost car manufacturer.”
India’s strong low-cost auto component base will also help it gain the number one position in low-cost vehicles. Even though China competes with India on auto parts it faces serious intellectual property issues.
According to the Society of Indian Automobile Manufacturers (SIAM) small cars (Alto, Santro, Wagon R and others ) grew 16% to touch 7.14 lakh units in 2005-06. The same segment clocked more than 23% growth to touch 8.81 lakh units in 2006-07. The mini segment which is essentially Maruti 800 is the only model which did not grow its sales 2005-06 and grew only a little over 1 % in 2006-07.
By 2014, the year by which this segment is expected to develop substantially, India’s share of the estimated annual production of about 3.5 to 3.7 million low-cost vehicles is projected to be nearly 34%. In comparison, adversary China which is ahead on most parameters — the number of telecom users, internet connections, cars and retail — is expected to account for only 11% of global production.
Says PricewaterhouseCoopers partner Abdul Majeed: “India will emerge as the largest producer of cheap vehicles not only in sub-compact cars (the proposed Rs 1-lakh car of the Tatas and Renault’s $3,000 car) but also low-cost multi-utility vehicles.”
A report prepared by PwC also predicts that India will become the single-largest test ground for all kinds of low-cost vehicles as almost all auto makers would plan to launch their low-cost offerings in India. “We believe that by 2010, more than 100 million households will be able to afford a $2,000-3,000 car, which means India will also become the largest consumer of small cars,” he added.
The Renault-Nissan combine, Italian automaker Fiat and Indian company Tata Motors are likely to emerge as the three largest global low-cost vehicle manufacturers. By 2014 the Renault-Nissan partnership will corner 25% market share in low-cost vehicles, followed by Fiat (21%) and Tata Motors (15%). Japanese automaker Toyota will be another close contender and likely to finish with a market share of 14% during the same period, said the report.
Fiat India MD Giovanni De Filippis said: “India has the capability to become the low-cost car hub in future and is important for our growth strategy.
Toyota Kirloskar Motor India’s deputy MD, Mr KK Swamy, said that the country’s income demographics will sustain the demand for low-cost vehicles. Nearly 35% of India’s population is young and likely to buy a small no-frills car as their first vehicle. Toyota plans to make India its small car hub.
Says Mr Jnaneshwar Sen, senior GM marketing, Honda Siel Cars India: “Every year India sells 6-7 million motorcycles. Imagine the demand when they decide to convert to four wheelers. That alone will make it the largest low-cost car manufacturer.”
India’s strong low-cost auto component base will also help it gain the number one position in low-cost vehicles. Even though China competes with India on auto parts it faces serious intellectual property issues.
According to the Society of Indian Automobile Manufacturers (SIAM) small cars (Alto, Santro, Wagon R and others ) grew 16% to touch 7.14 lakh units in 2005-06. The same segment clocked more than 23% growth to touch 8.81 lakh units in 2006-07. The mini segment which is essentially Maruti 800 is the only model which did not grow its sales 2005-06 and grew only a little over 1 % in 2006-07.
INDIA INC SHINING BRIGHT
IF INDIA is Shining, much of it is the reflected glory of India Inc.
Corporate India is on a high, after proving the sceptics very wrong not just by surviving the liberalised environment but thriving in it. With the barometer of the corporate sector, the stock market, climbing — witness the nearly doubling of equity values in the last year or so — India Inc is certainly hot property.
There are other pieces of evidence too. But the most prominent one is the Government's high-decibel "India Shining' campaign, which suggests that that worst may be over for the corporate sector. The chambers of commerce too are reiterating that business confidence is at an all-time high. Public policy think-tanks are echoing such views with their assessment that sustaining the current high rates of growth is eminently feasible.
Yet, for all the current hype about what the future holds, there is no denying that it had been an eventful, roller-coaster ride for the corporate sector, ever since the government began the process of unshackling Indian industry, a little over a decade ago. If we analyse the corporate performance during this period the same three distinct phases are clearly discernible.
The indulgent phase It is often mistakenly believed that the defining characteristic of the reform process in the macro economic policy framework was the abolition of licensing controls on fresh capacity creation. In truth, the abolition of controls on issue of capital by enterprises is perhaps its most significant characteristic. For, even before the formal abolition of industrial licensing, the Indian industry enjoyed a fair measure of freedom in creating fresh capacities in manufacture. Even in the mid-1980s, the policy framework had been liberalised enough to permit automatic expansion of licensed capacities by a fixed annual percentage. This was reinforced by a concept of `broad-banding' of licences — a flexibility that permitted companies a wide latitude in what they could manufacture. A commercial vehicle manufacturer was atuomatiocally entitled to make more trucks or branch off into making cars. But in the absence of freedom to issue capital or price it appropriate to the stock market conditions prevailing or for that matter, access external sources of capital, the freedom to expand manufacturing capacity meant little. In the event, the abolition of the law on control of capital issues — a law that conferred on the government the right to decide if companies should be allowed to issue capital or the price at which it would be marketed to the public if permitted etc. — marked an epochal event in the evolution of organised corporate sector. This decision set off one of the worst forms of corporate excesses from a minority shareholder perspective. This phase saw many listed corporate entities conferring largesse on their promoter groups by issuing them shares at a steep discount to the prevailing market prices. The Government turned a blind eye to such goigs-on in the name of corporate democracy. While the Indian affiliates of multinational corporations may have been the most visible practitioners of this chicanery, home-grown enterprises too were not far behind. In fact, practically all the major domestic companies resorted to it during the period that such freedom (to issue shares to promoters at a discount) was available. That brand of corporate excess was finally ended when the market regulator stepped in with the stipulation that preferential offers should be at prices aligned to the prevailing market prices. But the corporate sector's penchant for excesses was by no means exhausted. The period also saw it indulging in mindless expansion into related and unrelated areas. The Central Statistical Organisation (CSO) estimates that the private corporate sector added on an average some Rs 73,000 crore in asset base in the first five years of the reform period. This is nearly four and a half times the average growth in the 1980s. Clearly, the freedom to access external capital — a feature of liberalisation — did help. The belief that with the Government, now having got off the backs of domestic enterprises, there really was nothing to stop them from growing in strength helped boost stock market sentiment among investors. But such a sentiment would not have survived in the absence of tangible evidence of rise in equity values. Since this coincided with international investors believing that India was the place to be in, their interest in domestic equity provided the spark for a flare up in equity values. The process was helped along by domestic entrepreneurs indulging in a bit of artificial boost to the sentiment as they were busily raised money from overseas investors on the strength of a manipulated valuation in the domestic bourses. A permissive atmosphere that prevailed in nation's stock markets made all this possible. The years of struggle The party that began in mid-1991 lasted all of five years. It was payback time thereafter as companies suffered the debilitating consequences of the twin forces acting on it at that time. There was the investor disenchantment from earlier decisions that led promoter-enrichment and poor profitability from a competitive environment that had greatly intensified with the entry of newer domestic and overseas players. The flames of investor anger and the searing heat of competition devoured many but those that survived emerged stronger. The industrial output net of unorganised sector manufacture (a useful proxy for corporate sector output) grew annually by only 11.1 per cent during 1996-2001. In contrast the growth in the first five years of reforms was a healthy 16.6 per cent. The decline in net value added in the second half was due in part to the price pressure that operated on domestic enterprises during this period. Incremental investments in new capacities in the later years was also not generating as much additional output as they did in the initial years of reforms. In 1994-95, the best year for the corporate sector, a rupee of additional output could be secured by an incremental investment of only Rs.1.61 while in 1999-00 it needed as much Rs 3.76 in fresh investments for the same one rupee of additional output. The dawn of a new era But signs of a turnaround in fortunes have begun to manifest as industrial output staged a smart recovery with 9 per cent growth in 2002-03. This comes on top of a 6.25 per cent growth the previous year. Capital efficiency too has improved, as it needed only Rs 2.50 of fresh investments for generating a rupee of additional output. The process of recovery in the corporate sector is well and truly on and companies look set to capitalise on it for quite some time to come. The India Inc story so far has revealed quite a few winners. Equally, there have been countless losers too, most notably from among the vast army of small investors who have were taken in by stories of quick fortunes in the stock market. Unfortunate as that may be, the India's development story pretty much reflects global experience in this regard. |
GOOGLE BUYS AN EMAIL MANAGER
Taking further aim at one of Microsoft’s core franchises, Google said Monday that it would acquire the e-mail security and management company Postini for $625 million in cash.
The deal underscores Google’s ambitions to become a serious player in the business of selling software to companies and organizations, in competition with Microsoft and others.
Google, which earns the vast majority of its profits from selling ads it places next to search results and on sites across the Web, has increasingly emphasized its small but rapidly growing software business.
This year, Google’s chief executive, Eric E. Schmidt, said the company’s strategy had three components: “search, ads and apps,” or applications, meaning software.
As part of that strategy, Google has been trying to persuade businesses to replace existing e-mail systems and other programs with the company’s own package of business software. That package, called Google Apps, includes the Gmail service, an online calendar and programs that can read and edit documents created with the Word and Excel programs from Microsoft.
But many businesses — especially large ones — remain leery of moving some critical functions like e-mail to Google’s programs, which, unlike traditional business software that resides on corporate networks, are delivered as services over the Web and are considered less secure.
The acquisition of Postini — a private company whose products allow businesses to control spam and viruses and help them to monitor and preserve e-mail messages to comply with regulations — is an effort by Google to allay some of those concerns.
“In bigger businesses, security and compliance requirements are a must,” said Dave Girouard, Google’s vice president and general manager for enterprise.
If completed, the deal would be the third-largest acquisition in Google’s history, after its planned $3.1 billion purchase of the online advertising company DoubleClick and its $1.65 billion deal for the video site YouTube.
Google and other companies say that software will increasingly move to the Web and will often be free and supported by advertising. Over the last year, Google has pursued that vision with efforts to turn some of its Web programs, which are popular with consumers, into business tools.
Last year, the company began to offer companies, academic institutions and nonprofit organizations a version of Gmail and other business applications at no charge. In February, Google packaged a broader set of business programs, including a word processor and spreadsheet, into Google Apps and began charging businesses $50 a user annually for a version that includes customer support.
By comparison, the market research firm Gartner estimates that businesses pay on average about $225 a person annually for Microsoft Office, which includes Word and Excel, and for Exchange, the widely used corporate e-mail program.
Microsoft, for its part, has sketched out a future in which business programs are likely to become a hybrid of desktop software and Web services.
Moving in that direction, Microsoft acquired FrontBridge Technologies, a Postini competitor, in 2005, and offers that company’s products as Web services. And while its core e-mail Exchange products are still programs that it sells and that customers must install on their networks, some Microsoft partners offer Exchange as a Web service.
Microsoft played down the notion that Google’s acquisition of Postini would create more competition for Exchange and other Microsoft applications.
“What we are hearing from our customers is that they are looking for an experienced solutions provider,” said Roger Murff, director of marketing for unified communications services at Microsoft. The deal is “further validation that we are doing the right thing and have been doing the right thing for several years,” Mr. Murff said.
For now, Google’s efforts to make inroads into the $2.5 billion corporate e-mail business remain just that. The company said more than 100,000 businesses are using Google Apps, but it will not say how many of them are using the pay version. Microsoft’s e-mail products are used by 62 percent of corporate users, and I.B.M.’s by 26 percent, according to Gartner.
Web e-mail services like Gmail will not be a significant force in the corporate market until 2010, when they are likely to become the first choice of 8 percent of corporate users, according to a Gartner forecast in January.
“Google has a long ways to go before they become a strong competitor to Microsoft” in business software, said Chenxi Wang, a principal analyst with Forrester Research.
Still, the size of the deal underscores how important the corporate software market is for Google.
“Google wouldn’t spend $625 million on something that they didn’t think would be a material opportunity for them,” said Mark Mahaney, a securities analyst with Citigroup. “It really fits into Google’s worldview of being a repository for all users’ — including business users’ — information.”
Google has been working with Postini since April, when the two companies announced a deal to deliver Postini’s service to Gmail customers. The acquisition will allow the companies to tie their products more closely. “We were dating back then; now we are moving toward marriage,” Mr. Girouard said.
Google plans to continue offering Postini’s services, which customers pay for, to users of other e-mail systems, Mr. Girouard said. But he added that Google intended to make it easy for Postini’s customers to “test drive” Google Apps. Mr. Girouard also said Google had not decided which of those services would be integrated into the free and paid versions of Google Apps.
Postini said it had 35,000 business customers that delivered its services to 10 million users worldwide. More than 60 percent of those customers use Microsoft Exchange, the company said.
Postini, which is based in San Carlos, Calif., has about 300 employees, and will become a wholly owned subsidiary of Google.
Shares of Google rose $3.16 Monday, to $542.56. Early in the day, the stock reaSURGE IN INDIAN MARKETS CREATE SOME GLOBAL HOTSHOTS
Skyrocketing stock markets and a surging rupee are creating publicly traded behemoths in India.
Keeping an eye on the ticker at the Bombay Stock Exchange. Its Sensex index has soared since Sept. 17.
These new giants have swiftly overtaken some long-established Western competitors, in terms of market value. Their lightning-fast growth may usher in a new round of foreign partnerships, overseas takeovers and competition for resources and talent.
Fueled in part by overseas investors seeking refuge from America’s subprime mortgage mess, share prices in India’s markets have outpaced other Asian markets in recent weeks. The Bombay Stock Exchange’s Sensex index set records on 10 of the last 11 days, before closing slightly lower on Thursday at 17,777.14.
The Sensex is up 14.6 percent since Sept. 17. That follows months of somewhat slower gains — the index is up 28.9 percent so far this year, according to Bloomberg Data, and up 102 percent (0r more than double) over the past 24 months.
“All of a sudden, India has these world-beating serious-market-cap companies across multiple sectors,” said L. Brooks Entwistle, the chief executive of Goldman Sachs in India. The global ambitions of the companies “continue to grow.”
The real estate company DLF, for example, which had a $2.3 billion initial public offering in July, now has market capital of more than $37 billion — making it roughly the size of Marriott International and Hilton Hotels combined. On Thursday, the company said it would consider overseas acquisitions and offshore fund-raising at its next board meeting.
Reliance Industries, the largest publicly traded company in India, reached a market cap of more than $85 billion this week, up from $6.5 billion in January 2003. Reliance, an oil, chemical and manufacturing company, is now about double the size of Dow Chemical. The market cap of Bharti Airtel, a telecommunications giant, nearly reached $46 billion this week, making it triple the size of Qwest and larger than Telecom Italia.
A strong rupee and weak dollar are also helping Indian companies look large compared with their overseas counterparts — but their bulk is still predominantly a result of investor faith in India’s long-term growth.
A large increase in market capitalization does not necessarily mean the companies will go shopping for deals. Many Indian companies trade only on local exchanges, which means that the stock is not a viable currency to buy a foreign company. Even if they do plan to raise money overseas, few have huge trophy deals on their mind, bankers say. (Marriott, for example, is probably safe from the clutches of DLF.)
Indian companies are investing at home first, then looking abroad, said Chanda Kochhar, deputy managing director at ICICI Bank. “The Indian corporate sector is talking of investing $500 billion in domestic projects in the country over the next three years,” he said.
Acquisitions are also being planned — but not necessarily to acquire customers or clients, as they would be in developed economies, Ms. Kochhar said. Instead, companies are looking at buying suppliers (for example, a power producer would acquire coal mines) or distribution networks. Dozens of such deals are in the works, Ms. Kochhar said.
A large public market capitalization also makes Indian companies even stronger global competitors for everything from raw materials and talent to partnerships and clients. It attracts coverage from research analysts at international banks and brokerage firms, which in turn attracts more foreign investors.
In fact, a growing market capitalization can sometimes make it easier for companies to get even bigger. Indian companies that tried to raise small amounts of capital, say $10 million, on the equity markets in the past were passed over by most big foreign institutional investors, said Shriram Iyer, head of research at Edelweiss Securities in Mumbai. Now that they have grown, and are looking to raise $50 million or $100 million, “it becomes a meaningful investment.”
So far this year, Indian companies have issued $42.6 billion in debt and equity worldwide, according to Thomson Financial, up from $32 billion in 2006. In 2003, the amount was $5.8 billion.
Chinese companies also jumped in market value as investors bought stock. But that growth has not translated into a boom in deals, in part, bankers say, because of foreign opposition to takeovers by state-run Chinese companies.
Indian companies can use a high share price in several ways, from making all-share acquisitions of cheaper value companies, to raising cash by stripping assets, to recruiting employees using shares as compensation, said Nilesh Jasani, an India strategist for Credit Suisse in Mumbai.
Indian companies may be smart to start translating their high public market values into other forms of collateral. There are constant concerns that Indian markets are overblown — even within the Indian government. The finance minister, P. Chidambaram, warned this week that retail investors should use caution if entering the market, and do their homework or buy mutual funds instead.
Raising funds in the current credit cycle is not a cakewalk, no matter how well the markets are performing.
“Indian companies and their global ambitions are not immune to what is going on in the credit markets globally,” Mr. Entwistle said. They often rely on overseas financing to do deals, he said, and that needs to be taken into account before predicting any big takeovers.
Still, the mood in India is bullish. “There aren’t too many large acquisitions you can make within India, because there are no willing sellers,” Mr. Iyer said. Instead, “everyone wants to grow.”
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