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We believe the profits to be genuine

Interview with Frank-Jürgen Richter, Business & Economy, July 2012

 

Dr. Frank-Jürgen Richter, Chairman of Horasis, is a strategy advisor to governmental organisations across Asia and Europe. Today, he works to build cooperation between agencies in emerging and mature markets. Dr. Richter talks about the B&E US Power 100 companies and the road ahead of them

B&E: Last year, the total profits made by B&E US Power 100 corporations rose more than 13% y-o-y. Do you think there has been a real appreciation in terms of profitability, or is the jump an outcome of 2010 being a bad year?
Frank-Jürgen Richter (FJR): The data is real but has to be placed in the context of trends in the US and in other countries. By and large, all business cycles are out of synchronisation with each other – except for firms working along the same supply chain. But even in the latter, we may see apparently large fluctuations, especially if some have ramped up and in the short term demand falls. For example, take the US Employment Figures released in mid-June this year. They showed a fall and the markets ‘went wild’ and pundits’ sound bites were overstating that US was slowing down. It reflected the easy US ‘hire & fire’ regime. And, if they were part of a long chain incorporating value-added assembly in China, it is possible a US firm may have decided to fire some staff. Its goods would be shipped to Asia over 20 days minimum, be assembled (maybe 20 days more) and shipped back for sale (a further 20 days). Data from China shows transaction volumes rising at 20% y-o-y. The Asians will be taking in part-finished goods from US made by staff just recently made redundant. Apparently the US workforce is being reduced just at the time that China needs more staff to handle increasing trade. Yet it is true that the recession cut jobs into 2009 and 2010, so the increases in production and profitability come from a lower base – year on year. But in general, we believe the profits to be genuine.

B&E: How do you think the slowing down of emerging markets like Brazil, China and India, would hurt the top and bottomline outlook for B&E US Power 100 firms?
FJR: The policies of US firms must be differentiated across the BRICS. What might work in one market may not work in another, and this applies across all overseas ventures. Brazil has a policy-led growth strategy unlike the other members of the BRICS as it is more inward looking. China is edging into a long-term fall in its working age population; and India is waiting for the results of its next national elections in the next few months (a bit like the US). Slowdowns arrive as a trend that might be forecasted. So US firms must do much new ‘home work’ – not just in innovating and believing the world will both make it in volume and then buy it. The new manufacturers have to think ‘outside the box’ and ask their venture capitalists do likewise. Even in these times of global market stress! There is no bad news for US firms – or at least the ones that can look ahead to selling what the Asian and emerging market wants. But overall I expect isolated announcements of poor data affecting major US firms and their non-US sales and profits in 2012.

B&E: Would you say the American economy has got back on its feet to be able to support the domestic demand that is crucial?
FJR: I would agree with this premise, but due to the large fluctuations globally, US will see adverse data from time to time. One statistic that is very worrying is the high [and growing] rates of youth unemployment.

B&E: Earnings forecasts for oil companies like Exxon Mobil, Chevron, BP and others, for 2012 and 2013, do not appear very encouraging. We expect their profits to fall in 2012 & 2013. Would you agree as well?
FJR: We are simply running out of all natural resources. While we may become more skilled at recycling glass or metal drinks containers, we cannot recycle the liquid fuels we burn in vehicles or to generate electricity. However we are emptying the on-land fuel reservoirs and are moving off-shore to deeper and more dangerous waters in the Gulf of Mexico, offshore-Brazil or in the Arctic Ocean (as its ice melts). Deep water or frozen wasteland exploration and subsequent exploitation cost much more than the on-land ‘cherry picking’ that was done earlier. Further, the off-shore risks are high as BP has found out in the Gulf of Mexico. All in all with higher costs and lower traditional resource-field yields, we will see the margins of oil producers shrink.

B&E: On the other hand, financial firms, are showing signs of a bounce back post the 2008 mess. We expect AIG, Wells Fargo and Citi to record a better 2012. Your view on this?
FJR: Some of this situation is due to a curious use of existing laws and a waiver of actions by the US Treasury. They used past net operating losses to offset gains for tax purposes – which is common practice. Firms that file for bankruptcy usually lose this ‘right’ but the Treasury allowed this for a few firms: it is estimated that AIG does not now have to pay taxes for many years and some others follow in line. There is thus a game being played in which the US Treasury is hoping the share value of AIG and other Treasury taken-over firms will rise above target values and on eventual sale will yield a profit for taxpayers. It is thus not a secret, but more a government sleight of hand to help raise share prices before sell-off through a tax manipulationnot widely available. Even so, these firms are demonstrating a real bounce-back, and thus showing a rising economy.

B&E: And Apple Inc. is our favourite pick for topping FY2012. You agree?
FJR: As with all tech-firms Apple has to continue to innovate in ways desired by the public. We will see if the new Windows and Google tablets will cut into Apple’s margins which have been massive for some while. This has lifted the profits of its suppliers and major assemblers in Asia. Tim Cook was and is the supply-chain guru for Apple and he understands the need to reach markets on time – but does he have the vision to fight off unannounced products from others? Time will tell.

B&E: Barack Obama’s policy of discouraging outsourcing – you see any headache for America Inc. in that?
FJR: You ask difficult questions! Long ago, Adam Smith said that if someone could make things better than you it is best to negotiate how to buy from them and to concentrate on other tasks over which you have raised competence. Over the past 20 years, most developed nations’ firms have found that using cheap labour in Asia though outsourcing and off-shoring has led to high benefits. Now the lift in Asian salaries is causing concerns. First it is simply by lowering gross profits. But secondly, if the firm wishes to return to local manufacturing it has to re-skill a labour force (that might have gone very lazy in the interim years of living off benefits) and to re-machine the factory with top class kit that needs skills that were not needed in the original firm. One policy that really needs looking at is labour laws that interact with the longer-term demographic mix that will be required in a future US labour market. Can the US continue to attract bright overseas students, persuade them to continue as researchers and then to become serial entrepreneurs in the US to the chagrin of US nationals? Immigration laws are a very sensitive issue globally as local demographic profiles and salary rates shift.

 


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