Wednesday, May 27, 2009

Benchmark . . . for national pride?

(This article tees up the dichotomy of national pride)

Where must we compartmentalize and where must we harmonize?

We ought to compartmentalize when we are assessing gaps against a set of norms, i.e., what precisely and where precisely are the gaps between our performance and the norms used by IMD (Institute for Management Development, a Swiss business school) in the Competitiveness Yearbook? In other words, to be able to objectively assess these gaps we need to be dispassionate and not allow our “sama ng loob” to get in the way?

It is what benchmarking is all about; it is reducing the deviation against the norm such that the tolerance is practically nil – or why German and Japanese cars have a superior quality index than American cars; and why the US auto industry is all but demised. Do we believe we are doing better than, say, Singapore because they are in a recession (owing to the global financial crisis)? That will be akin to embracing the GM mindset, i.e., they have been in denial – a “dead-man walking” – given declining market share for decades; while “Singapore is a nation of homeowners” and their GDP per person is better than the US? Benchmarking imposes the straight and narrow and has no tolerance for fallacy, e.g., it will tell us that countries with meager GDPs per person and alarming poverty rates like we do have economies like we do, i.e., focused and reliant on domestic economy?

We are not new to benchmarking (in private industry) and we can adopt the same perspective when we benchmark our competitive performance against other Asia Pacific countries.

On the other hand, it is imperative we harmonize when we are figuring out how we would address these gaps as well as when we execute whatever plans we devise. In other words, we ought to harmonize our best ideas and the efforts of industry and public sector leaders. Clearly, inertia will work against us as we purposely broaden our economic base to compete for and win overseas markets, hence the need to pull together. (Tripling our exports will mean a huge positive for us but still a drop in the bucket in the global economy and thus should find markets if we strive for competitiveness. See other articles in

But first we must look at the competitiveness rankings like a mirror, nothing more and nothing less.

Money . . . or industrialization . . . may not be important to us. What about national pride and interest?

Our latest competitiveness ranking is bad news says a news report by Business World. We stand at number 43 in a group of 57 countries (and “the worst among 13 Asia Pacific States”) measured by: economic performance, government efficiency, business efficiency, and infrastructure.

Does national pride represent a dichotomy though as The Economist magazine sees it? See: The romance has gone; April 30, 2009: ”. . . Filipino national pride often obscures the national interest . . .” And to “Filipinize” the economy, policymakers have risked even economic setbacks. Anti-Chinese economic measures starting in the 1930s (which included retail trade nationalization in 1955) apparently put many Filipinos out of work”. That’s how a respected Filipino writer (Juan T. Gatbonton) explains the Filipino mindset; and adds: “Protectionist sentiment may be only one expression of our inward-looking nationalism. In our country—as in Latin America—nationalism has been shaped by the overpowering presence of the United States. Resentment of the Americans—coupled with a recognition of our utter dependence on them—had produced self-doubt and turned nationalism inward, toward cultural authenticity and economic preferences for nationals.”

How do we deal with our economic challenges while lifting national pride and not undermining national interest?

Wednesday, May 20, 2009

Is industrialization really in our psyche?

(This article highlights a study on what makes us happy and their implications on our economic development. It has a link to a paper relating culture to economic outcomes.)

It appears that we could not care less if we catch up with the living standards of industrialized countries. So the Asian Development Bank (ADB) report that appeared on May 7th, that it would take nearly two centuries for the Philippines to catch up is irrelevant to the Filipino? (While the top 5 % are thinking: “if it ain’t broke, why fix it?)

On June 8, 2008, the Philippine Daily Inquirer reported the study by Ma. Gladiola M. Santos (PhD, Dean of the College of Sciences of Adamson University) about what makes the Filipino happy. And “family, not money, makes Filipinos happy”.

“Material possessions came fifth (out of twelve themes) as a source of happiness . . . it shows the practical side of the Filipino. But more than anything, it proves that economics is not the topmost source of well-being . . . Responses related to . . . national prosperity and clean government came sparingly.”

What about the poor?

“Surprisingly, the spiritual life occupies only the seventh rank. Faith in God, joining spiritual activities and doing good to others were the variations on this theme. Filipinos are supposed to be known for their religious piety but they have also been criticized for their “split-level Christianity.”

And it appears we can more or less tolerate corruption in public service, i.e., “responses related to . . . clean government came sparingly.”

We’ve survived Marcos and Erap; and we will survive the current and the next one too?

The good news is the export sector is pursuing a more aggressive agenda in order for us to raise our competitiveness and win overseas markets, including setting up R&D capability in electronics, our biggest export. And it appears we’re likewise stepping up efforts in agribusiness. In the same manner that we have strong individuals driving private-domestic business, we surely do have strong individuals to drive our new export agenda.

And of course, the remittances from our OFWs shall tide us over until we become a more competitive exporter.

Albeit slowly it seems we are moving forward, i.e., as the export sector moves up the learning curve we would pick up greater competitive skills. And that they would be able to overcome whatever cultural biases we may have re global trade? (For instance, do we believe that big countries can exploit smaller ones? Yet, it does not require one to be big to succeed in global business; what it demands is competitiveness and economies of scale – which is what Paul Krugman, the Nobel Prize winner, prescribed for our economy to achieve sustainable growth. The Asian tigers were not born tigers.)

See: - an example of “how economists have begun to apply their analytical frameworks and empirical tools to the issue of culture and economic outcomes”.

Wednesday, May 13, 2009

The Asian century . . . is 175 years hence?

(This article poses the question: Is this our wake-up call? And has a link to Paul Krugman’s article describing the economic model that won him the Nobel Prize; it is the foundation of his prescription for our economy.)

On May 8th two news reports appeared: (1) “Asian Century”, in Newsweek and (2) “Filipinos 175 years behind”, in The Manila Times. And the following day, Phil Star reported: “Foreign direct investments seen to hit only $700 million”.

“Every bit of economic data that comes across . . . these days seems to back up the idea that we're very quickly headed for the Asian century”, reports Newsweek: “Investors are steering what little money they have to Asia -- net portfolio investment into the region is running at a pace not seen in five years. It seems clear that Asia will recover from the recession faster than either the US or Europe, and that it will continue to leave other emerging markets in the dust, too. Korea returned to quarterly growth earlier this year, and there are positive signs in Japan, Malaysia and China, too”.

It appears that for us the Asian century is not due until 175 years hence: “It would take nearly two centuries for the Philippines to catch up with the living standards of industrialized countries at its current pace of economic growth”, the Asian Development Bank (ADB) reported Thursday, May 7th.

Do we want to pave the way for the next five or so generations to overcome such a verdict? Or do we . . . ?

What to do? Why worry, be happy?

Clearly 10% of us are happy since we disproportionally generate 31.2% of the country’s income and consumption. The top 5% or almost 5 million are very happy indeed; not to mention the 10 million OFWs who make middle-class income. Unfortunately 10% have to partake a measly 2.4% which is why 30% or almost 30 million of us are poor.

Given the vast number of Filipinos (and they are roughly equal to the population of Singapore or New Zealand or Norway) enjoying prosperous-level income and a lifestyle that is something to cherish – with access to chauffeurs, maids and other domestic help, on top of world-class local resorts, country clubs, gated communities and upscale condominiums, and unheard of to the average person in developed countries – it will not be surprising if none of the above news would give us a wake-up call.

Success (read as prosperous-level income) which has been attained by the top 5% of the population will most likely reinforce the status quo? And they are the opinion leaders effectively steering the course of our economic ship? In short, to them, “if it ain’t broke why fix it?”

Of course, it is a lifestyle that mirrors Latin America’s haves and have-nots which the religious community has been fighting – not very successfully? They probably need Krugman in their bag of tricks? (And similarly, Latin America mirrors our inward- or domestic-focused economy. It appears we share temperaments with the Latins more than the Orientals, more specifically the Asian tigers.)

And when we talk of Christian charity we talk in terms of compassion and giving. But as one columnist put it, “poverty has no cure in poor economies”. The writer could not have said it better.

Unfortunately, those frustrated (47% of Filipinos rate themselves poor according to SWS) about our economy entertain options that could unwittingly throw us from the “frying pan into the fire”. We cannot undo the collapse of the Soviet empire or the interconnectedness of the world? Europeans have realized that they no longer live for the past, i.e., New Europe; and they could share this realization with us?

See writer’s prior articles in (a) “Transparency . . . the best policy” and (b) “In survival mode?”. The first narrates a brief personal history of the collapse of a former socialist state. The second illustrates how our inward or domestic focus in driving our economy precisely puts us at odds with countries that have done better. And reinforces what Cielito Habito wrote on October 19th, 2008 in the Inquirer summarizing the “Krugman’s Philippines prescriptions” as follows: “In short, the only way to achieve long term sustainable growth was to have much higher export growth, by attaining export competitiveness that had long eluded the country’s highly sheltered economy. The essential policy change required, he wrote, “is a removal of the incentives that channel scarce resources into capital-intensive, inward-oriented production.”

Paul Krugman won last year’s Nobel Prize for Economics for his model describing trade and economies of scale which he explains in the following article:

Monday, May 11, 2009

Wal-Mart and San Miguel responding to global economy?

The Wal-Mart story is a microcosm of how the global economy plays out.

Blue chip Western companies, not unlike the Ayala group of companies, are committed to progressive business and management practices. Yet, it took a company in the middle of nowhere from a very poor, conservative, Midwestern state to force Western businesses to update their practices.

The Proctor & Gambles of the world were caught flatfooted when Wal-Mart started dictating terms and conditions of doing business with them. Despite the history of progressive management education and training in these companies and cutting-edge innovation and technology, they woke up one day to realize that they were not geared to deal with the new Wal-Mart – their sales force were not equipped to negotiate with Wal-Mart buyers; as bad if not worse were their infrastructure, systems and processes especially sales forecasting and supply chain – production planning, materials, warehousing and logistics management.

How can these pillars of Western business not foresee what Wal-Mart saw much earlier?

Paraphrasing George Soros (in reflecting the influence of Karl Popper, Aristotle and his own life experience): our cognitive function cannot be divorced from our own view of what we consider reality such that our understanding is not a pure outcome of our thinking but colored by our culture, ideology and other biases.

In particular, Wal-Mart saw that their margins were at risk as they faced greater competition from other retailers; and so they had to reassess their business model, beliefs and practices. Early on they assumed that economies of scale were the key to their success. But retailing is not a high-value adding (essentially a brick-and-mortar and no R&D) business such that their margins were very thin; while a manufacturer (given greater value-adding elements) is able to generate double-digit profit margins north of 10% - retailers net a much lower 3% to 4%.

Wal-Mart did not have to go very far to seek models to adopt given the learnings from the challenge the U.S. faced with Japan, Inc. – that threatened the profitability of Corporate America. From Japan they “shamelessly copied just-in-time” inventory management principles and from the U.S. (and later Germany) they acquired state-of-the-art computing and communicating technology; while still pushing economies of scale but in a more aggressive manner – they put together a plan to rapidly build more stores across the U.S. and in numerous strategic international locations.

And then they announced to the manufacturers that henceforth there would be new rules that they had to meet if they expected Wal-Mart to continue to carry their products – Wal-Mart accounting for upwards of 10% of their revenues.

Here was where the manufacturers were caught off-guard: Their sales force’s skills-set was based on relationship selling; while logistics was driven by traditional inventory practices, e.g., safety stock levels.

Wal-Mart buyers could run rings around the sales managers of the manufacturers. To begin with, they were savvy MBAs and financial analyst-types who were writing up orders based on: “just-in-time” delivery (so that they would not be carrying safety stocks and hence reduce inventory and improve working capital), shelf-space allocation by market shares of categories/brands/SKUs as well as planned in-store promotion programs (designed to cover any margins of error in their forecasting and/or realize incremental revenues). Such a bias for driving revenues may not be inherent in the public sector but given our negative balance of trade and if we are to become a developed country, do we need to put our collective brainpower behind gearing up to drive export revenues? Both Thailand’s and Malaysia’s exports alone are bigger than our total GDP – this is where we need to invoke and rally national pride; but we can’t go it alone with our limited resources; we need to partner with the right global players?

The Wal-Mart buyers were no longer predisposed to oblige and indulge in such niceties inherent in relationship selling as having coffee or a meal or even a night out with the manufacturers. The manufacturers were blown-away! They had to say yes to most everything Wal-Mart demanded or lose the business.

The manufacturers had to quickly do their homework and then in rapid succession: developed the appropriate training and education programs, installed enterprise-wide information systems and linked their order-processing to the Wal-Mart system (i.e., integrated checkout scanners and warehouse network) which in turned drove their own inventory management and production planning processes.

The result of all these combined efforts and on-line processes was to reinforce Wal-Mart’s “everyday low-price” pitch while the manufacturers similarly achieved greater efficiency, productivity and profitability – and at the macro-level they held inflation at bay thus fueling consumption and higher GDP.

The rest of the retail industry including those outside the U.S. (Metro/Macro, Carrefour, etc.) did the same thing thus elevating competition to an even higher level – and challenging human capacity once more.

How will a retailer in a smaller market like the Philippines deal with this development? As we now know, a couple of our taipans partnered with these global retailers so that they co-own the business in the Philippines. Another opportunity they pursued was to partner with these global retailers as they set up shops in other countries. “Partnering” is today’s mantra as opposed to “monopolizing” (a throwback to our cacique history), e.g., San Miguel very recently sold a major stake in the company to Kirin to diversify and optimize its investment portfolio; and generate greater profit potential – that would reflect a bigger dent on our GDP. (It appears San Miguel is not waiting for the global economic turnaround and instead is gearing up to exploit the moment – mirroring the investment philosophy of Warren Buffett.)

The Wal-Mart story is a microcosm of how economies of scale drive businesses to go global and how smaller businesses and countries can piggyback on and partake in the benefits/positives of the global economy and engender a healthy GDP.

In the same manner that a typical negotiation does not have to be a win-lose proposition, leveraging the global economy does not have to be a zero-sum game. (But there is anecdotal if not empirical evidence that countries with hierarchical cultures see things otherwise, i.e., the “master” will always get the better of the “servant” especially when transparency is the exception than the rule. Yet, China and the Asian tigers have overcome their cultural and ideological baggage in pursuit of free-market economics.)

And as importantly even blue chip institutions (or the Proctor & Gambles of the world – progressive, cutting-edge and innovative) can be overtaken by the rapid and accelerating generation of new thinking, knowledge and practices in today’s age – of Gmail,, iPods and Black Berrys.

At the country level, invoking ideology that shunt “imperialism” or multinationals or foreign investors will not stop the speed and progress of today’s cyber world. At best it will stunt the progress of economies like the Philippines, i.e., limiting our options means establishing an economic model that will be characterized by sub-optimization – sub-optimized: capital formation, investment, market, technology, efficiency, productivity and competitiveness; and in the final analysis, sub-optimized GDP growth yielding more not less poverty. And that is without factoring corruption yet; and when combined equates to a perfect storm?

Transparency . . . the best policy

China, India, Malaysia and Thailand and the rest of the Asian tigers all lived through the imperfections of the global economy . . . as well as that of their leadership, corruption, systemic and other structural weaknesses.

Are we still pointing fingers at many elements to explain our weaknesses as a nation? No one will be sympathetic if we continue to blame every conceivable culprit for our economic woes? Victimhood is not applauded?

“Lady, you are here to confess your sins not that of your husband,” so said a priest at a confessional.

In marketing and sales the typical slap on the wrist is the boss saying: “stop pointing your finger at the competition, remember that every time you do you are pointing three fingers at us”.

Obama rose above the biggest defense mechanism that had been associated with minorities in America, victimhood. And which is why he inspired the majority of Americans, black and white, and elected him at a time when the country was and still is facing such unprecedented challenges.

While the global economic crisis has impaired every country’s ability to right their economic ship, countries like us with fundamental structural issues better deal with our own problems lest any global recovery leaves us again in the dust?

Are we dissecting our economic woes ad infinitum or simply cheering that our glass is half-full or flirting with socialism? There is a report that a group from the academe is advocating socialism as a cure to poverty.

This thought would just not go away despite the fall of the Berlin Wall and the series of events that followed and dismantled centrally planned economies.

Over the last 6 years the writer has divided his time between Eastern Europe, the U.S. and the Philippines spending the most time in Eastern Europe, doing business across a number of former socialist countries. He first came over to represent US AID/IESC, who had tapped Fortune 500 companies to equip young local businesses with sufficient competitive skills as these countries prepared for EU membership.

The Eastern Orthodox Church celebrated Easter over the weekend. Just like in the West, this is a day when families get together, roast lamb being the special dish – served with Rakia or fruit brandy. They call it ”Great Day” (like the appellation “Great” to describe Alexander). And they don’t say “Happy Easter”, instead they say “Christ is risen” and the response is “Indeed, Christ is risen.”

Over the sumptuous lunch the writer was reminded of how some of us Filipinos continue to talk about the virtues of socialism given our frustrations with capitalism.

The writer was a guest of his assistant’s family – maternal grandparents who were celebrating their 50th wedding anniversary, the parents and the sister. The parents had just bought a new apartment that they intended to rent out in a new development near the airport in Sofia, Bulgaria; and like most families felt good about an acquisition more so with the 11% discount that they got. The country is in the midst of a housing bubble gone bust and the timing of the purchase was by design.

The grandmother had a wicked sense of humor and talked about the upscale apartment their family had during the communist rule – she still votes for the socialist party. The rest of the family tried to explain to the writer that the grandmother’s family was special because within her family was a member of the communist party. The bottom line: most Bulgarians resented the communist rule precisely because of the special privileges those in the party enjoyed while everyone else made 180 leva (or 90 Euro) a month, irrespective of skills.

And to the father, the biggest shortcoming was the absence of motivation. And the mother and sister chimed in that they had to fight their way to buy the apartment that they needed, i.e., separate rooms for the two kids, a boy and a girl.

And the humor continued: at night the whole city was like a disco club, every two hours the lights would go out . . . and water was also rationed just like the food staple that every family was allotted.

There was not much to spend money on so families would save to buy a car; but to buy a Lada (a Russian car) took years of waiting. (Today, the father drives a Toyota and the mother a Seat-Volkswagen.)

And of course, in the end, the system became unsustainable: goods were sold below market prices (i.e., something had to give – the cycle cannot replenish the factors of production when the output is priced below costs) and so the system grounded to a halt; it could no longer supply even staples like bread. The writer has heard this story line in various shades and hues as he traveled across Eastern Europe.

The fundamental issue with socialism is transparency: when pricing is not transparent it follows that the decision-making process, i.e., how prices are set, is not transparent. And when the decision-making process is not transparent then leadership is prone to abuse, i.e., or why those in the party had special privileges.

But in the Filipino culture we don’t instinctively see anything wrong with the absence of transparency? The Catholic Church upon which we were born is not a model of transparency; for instance, we were told we were not equipped to read the bible. We thought initially that Marcos was doing us a great service so we did not question the lack of transparency.

The bottom line: our hierarchical culture tends to accept the lack of transparency, but in a democracy whatever the shade, transparency is fundamental; and similarly, what undid socialism was the lack of transparency. Likewise, the collapse of the global financial system was due to the absence of oversight over and lack of transparency of derivatives and subprime mortgage loans. And in a recent study, even in entrepreneurship, a key element in economic development, transparency has been found to be a critical factor. (See:

And in the age of facebook, myspace and twitter we are bound to learn more in the spirit of transparency, e.g., Obama releasing secret memorandums re CIA harsh interrogation tactics.

A Spanish hotel chain at its Black Sea location has, spread out around the resort, dozens of cylindrical decorative planters about 6 feet in height engraved with Rizal’s Mi Ultimo Adios – an open, transparent tribute to Rizal’s heroism?

Back to Bulgaria: what has happened to Bulgaria since it joined the free-market system?

The assistant of the writer is a product of the local technology university but in his job is learning about business both local and multinational – beyond being a translator, he can explain in his language key marketing and sales principles as well as the dynamics to generate margins and profits, among others. The mother, educated under the Russian education system taught Russian, and then pursued a PR (Western-style) career; and the father, a respected chemist who had worked in the Bulgarian defense department now runs a snack food factory for a company owned by Greeks – in a country of less than 8 million people, the turnover of the factory is more than the average sales of the average Western multinational subsidiary, i.e., their export business is bigger than local consumption.

Foreign ownership is not unique. The print media in Bulgaria is controlled by the Germans and foreigners have bought into radio and TV; and foreign banks have a major stake in financial services and Western investors financed a big chunk (23%) of the real estate industry.

What model are these people following? Like the Asian tigers and China and India, they know what they lack and so they have embraced foreigners that could provide these to them. As the global crisis deepens Western investors are seeking to acquire local companies that are predisposed to selling their businesses.

In just a couple of decades, Bulgaria has seen the extremes of capitalism: from massive devaluation when they first joined the free-market system to an influx of foreign investors to inflation to the global economic crisis to business restructuring to a big drop in unemployment and most recently to an increase in unemployment.

Small as they are they have relied on the global economy and have practically no option but to stay with it especially given the size of their external debt – 100% of GDP but still a huge drop from where they started. And importantly, they have been in a budget surplus for the past several years that they reduced income taxes (corporate and individual) to 10% - to compete for and attract investors.

Their GDP (PPP) per person (given smaller population) is at $12,900 versus the Philippines at $3,300; while their poverty rate is down to 14.1% (from 35% in 2001) against our 30% - Ukraine (38%) and Georgia (31%) have higher poverty rates yet have higher GDP per person than the Philippines, a function of our higher population, i.e., population size is not irrelevant. Bulgaria’s GDP has grown in the 6% range annually since 2004.Their foreign direct investment is more than 2 times ours at $45 B.

They still feel they are a poor country and just like the Philippines 10% of Bulgarians are migrants in search of a better life. And just like everyone else, including the Asian tigers, they believe that their government is corrupt and that their system needs lots of repair.

Yet they don’t equate ownership to nationalism or patriotism. It is not important to them who own the businesses; all they want is for the economy to grow even more so that they can partake in the benefits. They may be Easterners but still European and the 7 pillars of Western wisdom (e.g., pragmatism) are probably inherent to them.

Here is a country that has lived through socialism and the imperfections of capitalism; they simply smile whenever the writer tells them he knows people leaning to socialism.

RP-Taiwan partnership: moving on the right track

Two news items about the Philippines and Taiwan were truly welcome news: RP, Taiwan sign 4 agreements at joint economic conference – including the grant of a host of incentives to Taiwanese high-technology firms that will locate in Subic and Clark; RP scientists get pointers from Taiwan. And so were a couple more about Del Monte shifting from domestic to export orientation and the WTO warning against protectionism.

In his blog (see the writer talked about the dynamic of: capital formation, investment, technology, market, productivity and efficiency as key to competitiveness. And that for a developing like we are it starts with partnering with the right global/regional players in order to optimize as opposed to sub-optimizing these elements.

On other hand, there is the school of thought that given the greater impact of the current global economic crisis on the Asian tigers that we should not rely on exports, foreign investment and remittances of OFWs. In his blog the writer raised the imperative that remittances from OFWs must simply be a stop-gap measure – they are in exchange for draining talent; what we need is an economic engine that provides a larger, more sustainable revenue-generating capacity.

While we are in the current global economic crisis both exports and foreign investments are expected to decelerate; yet they are two critical elements if we are to become competitive. And so we must gear up like businesses do via a multi-year plan. As importantly forward-looking businesses (e.g., Del Monte and San Miguel) view the current crisis as the time and the opportunity to step up investments.

We cannot talk about competitiveness in isolation given our limited resources. It is market forces that make exports ideal, specifically economies of scale. The bigger the market the greater the potential for higher margins . . . though the more competitive it is; and precisely why competitiveness is an imperative.

Marketers keep an eye on their product architecture in order to overcome the product-cycle phenomenon and as importantly open up new categories and segments that offer higher-value added products, the key to competitiveness. (See re Coca-Cola’s redrawing of their product architecture.)

The RP-Taiwan joint economic conference brings to mind the evolution experienced by economies over the years.

By the East River and the Hudson River bordering the east and west of Manhattan are relics of the once engine of New York’s economy, manufacturing – and hence the shift to a service economy. Germany has switched its emphasis from consumer goods manufacturing to industrial equipment and machinery given their high cost structure and thus leveraging instead their competitive advantage in higher-value added industrial products – because of their engineering and manufacturing prowess. Beyond the U.S. Taiwan has established manufacturing facilities in China to take advantage of lower costs. And with China experiencing an economic imbalance of its own, new manufacturing facilities are coming to India and Vietnam.

And it appears Taiwan now sees opportunities in establishing manufacturing facilities in our export processing zones. A businessman in Angeles was telling this writer over dinner the other night that in Clark a couple of new investments (by an American and a South Korean) are going live shortly, and it would be good for his business.

This seeming shift to the Philippines should be most welcome; and the right response from us would put us on the right track: to move beyond comparative advantage – to competitive advantage – we have to optimize capital formation and acquire state-of-the-art technology by seeking regional/global players like the Taiwanese, and the American and South Korean investors at Clark.

In the past countries were focused on comparative advantage especially low labor cost. But as we now know such advantage could be short-lived when labor cost alone is what drives comparative advantage.

On the other hand, competitive advantage leverages all the elements that drive competitiveness:
  • Capital formation – our tendency to go it alone is reflected in our higher external debt versus foreign direct investment – see; the Asian tigers mirror the strategy of progressive private enterprises, i.e., seek low-cost capital; competitiveness starts here – the lower the cost of capital the greater the ability to move towards competitive advantage
  • Investment – the more expansive the source of capital the greater the ability to elevate investment capacity – to pick and choose the most viable investments that will yield the best returns, including acquiring the critical input – from talent to technology to machinery and equipment to raw materials to infrastructure to market, etc.
  • Market – the bigger the investment capacity the greater the ability to target a bigger market and the greater the margin opportunity and the potential to sustain the undertaking, building from strength to strength; this requires a market-oriented mindset, constantly updating the product architecture and delivering higher-value added products – product development efforts must be part of an innovation culture: it is not purely R&D or purely marketing or purely engineering. (See re the Toyota model.)
  • Technology – our tendency to go it alone is reflected in our inability to partner with the right global/regional players that can provide state-of-the-art technology; our scientists working with their Taiwanese counterparts in the electronics industry is a step in the right direction
  • Productivity – the better the technology and the bigger the market equate to leveraging economies of scale, i.e., greater volume, revenues and margins
  • Efficiency – the ability to pull together all the above elements brings about efficiency in every aspect of the undertaking and sustains competitiveness
We should be focusing on developing competitive advantage so that the “ideological debates are left behind”? (See re the 7 pillars of Western wisdom.)

“Parable of the talents”

The master was unforgiving using words like evil and lazy.

The Rockefellers had to yield to events (when antitrust judgment scaled down their entity) and a century later the original Standard Oil still evolved into one of the world’s largest enterprises (though others argue that it would have been much bigger) with professional managers running it; and generating wealth that benefits far more people (with over 50% owned by institutions managing investments like pension funds and the balance spread out even more broadly) beyond the Rockefeller family – while the Rockefeller Foundation remains one of the largest charitable institutions.

Yet this business-model is facing an altogether different challenge – to explore alternative sources of energy. Man is constantly challenged ever since Adam and Eve were challenged to conquer the world despite their human nakedness – and that is the source of man’s strength? Overcoming two world wars and several regional or local conflicts, tyrants, famines, recessions and the Great Depression, among others? And we can now add the current global economic crisis to this list.

Warren Buffett and Bill Gates are putting their enormous wealth into charitable endeavors, having generated or mirrored the performance of the first two servants with their God-given talents.

The converse of the above examples may not be as noble: for example, the rule of three (generations) applies to inheritance? That sub-optimizing talent or resources risks them fading away as opposed to flourishing? And which is why both Buffett and Gates are giving away most of their wealth? They expect their heirs to compete and win like the master expected of the three servants?

Is San Miguel surrendering a big piece of itself if not national pride in selling over 40% of San Miguel Brewery to Kirin? Or does San Miguel’s action mirror the object of the parable of the talents? That it is broadening its investment portfolio and optimizing its profit potential?

McKinsey, a consultancy, has published a study: The new dynamics of managing the corporate portfolio, Number 23, Spring 2007 - it spells out when to stick to the knitting and when to diversify. For instance if we view our market as limited to the Philippines it follows that the conglomerate model will work – especially if a business has a high probably to saturate the market and reach the point of diminishing returns, and hence the need to diversify. Yet the underlying principle still applies, that every business venture must seek and attain competitive advantage lest it becomes a liability.

For decades San Miguel was the pride of the Filipinos despite Don Andres switching to American citizenship. (The Sorianos had to yield to events too.)

Fortunately, aside from San Miguel, our tycoons are pursuing profit optimization having adopted a more inclusive capital formation strategy – generating a greater ability to invest beyond our shores and likewise pulling in outside investors.

Are our ownership concepts and beliefs sub-optimizing our ability to invest, develop and grow?

Are we unwittingly rationalizing our economic performance by pointing to the many flaws of capitalism and globalization? And do we see the global economic meltdown as doomsday? Like Adam and Eve thought when they were driven out of Eden? And as a knee-jerk reaction do we want to isolate ourselves from the rest of the world albeit temporarily?

We’ve been there before? Done that – what we think is temporary becomes ingrained in our system like our OFWs and import substitution?

Every developing country needs to institute some form of protection, e.g., import substitution, until it becomes competitive. But yet today or decades later we are still uncompetitive. Why? Because we have made the temporary so ingrained by sub-optimizing the factors that should have driven our economy – from capital formation to investment to market to technology to efficiency to productivity – and instead collectively made us uncompetitive? We are caught in a vicious circle that will require some doing for us to break free?

And given our low GDP per person of $3,400, which is a fraction of Thailand’s or Malaysia’s, how can an isolationist strategy substantially raise revenues and make us competitive? We need to do a temporary fix but bearing in mind that we need to gear up beyond the temporary?

In fairness we have though somewhat reluctantly acknowledged the economic successes of our neighbors, the Asian Tigers – they clearly were able to leverage and benefit from capitalism and globalization, drastically reducing poverty in East Asia to 18% versus our over 27%.

Will they likely owing to the global economic crisis shut their borders and expect the rest of the world to shut theirs too? Why is China railing against protectionism by the US? Just like every beneficiary of capitalism and globalization, these countries given economies of scale will continue to make the world their market once the global crisis sorts itself out – when supply and demand approximate equilibrium; the bad news is the crisis may take longer to put to bed given the artificial demand created principally by the subprime mortgage mess that can be at least a trillion dollars, i.e., this artificial demand has now become a real oversupply (of products directly and indirectly related to housing like construction materials, appliances, cars, furniture, etc.) of the same magnitude that must be flushed out. And which explains why Obama wanted a stimulus plan to match this oversupply. Unfortunately, the stimulus plan given the politics in Washington is a watered down version and most likely prolong the fix. And the longer the fix takes the longer exporters to the U.S. will suffer like the Asian tigers.

In the meantime, Germany, like GE, is gearing up to exploit the infrastructure and industrial needs of emerging economies like China. “The Chinese have to restructure their economy in the long run (as they move beyond consumer goods) and they need new industrial facilities for that. That’s where German industry can step in.” – c/o the head of the German exporters’ federation, Anton Börner, February 15, 2009, newspaper Berliner Zeitung. And this is the kind of mindset that made Germany the world’s largest exporter?

Early on Germany figured that despite their engineering and manufacturing prowess their cost structure made them uncompetitive in the consumer goods market so they had to shift to industrial equipment. But the core model (see remains, whether for private entities or countries, i.e., moving up to higher-value added products is key to competitiveness. And small countries don’t have to go it alone – small Eastern European countries have partnered with German entities to acquire German technology.

And not surprisingly, communist China and communist Vietnam as well as Eastern Europe (former members of the Soviet socialist bloc) have emulated the Asia tigers albeit sounding the alarm bell against American excesses and greed especially given the global economic meltdown. None of these countries ever embraced capitalism and globalization for their perfection?

Pareto’s Principle and the Great Commandments come to mind – that we must not overlook the vital few when we dissect capitalism and globalization? Even Eden was made imperfect by an extraneous presence; and so was the Last Supper – man’s ways are inherently imperfect . . . but perfection is anathema/not a requisite to innovation, progress and development? None of the most developed countries (the U.S. or Japan or Germany) would claim that perfection resides in them?

Rising above the status quo

Can we be competitive against China, India, Malaysia and Thailand?

There is no question that we Filipinos can match their brain power. (The writer had worked with them at close range for a decade.)

If there is one difference between us and them, it is we have yet to rise above the status quo.

It brings to mind New Europe versus Old Europe – when asked by Americans how they could spend so much time in a café, the response was: “We live to eat, which is alien to and why Americans miss the finer things in life.” And the Americans would reply: “But look at how successful McDonald’s is in Paris!”

There was a column about the U.S. ambassador to the Philippines in a local daily; she was in awe about the sophistication of the Filipinos. She had spent time in a couple of other countries and must have a basis for saying so.

Our facility in the English language and being well-informed of developments and events in the rest of the world, our Spanish and American heritage and our love for travel could explain our level of sophistication. (The writer has worked in countries where nuances were lost in translation – which is probably why the Ambassador is impressed with the Filipinos; while doing business appeared inefficient in non-English speaking countries, this seeming disadvantage was more than compensated by their desire for a better life.)

To rise above the status quo we may have to take a piece from the 7 pillars of Western wisdom; and pragmatism is one of them. (See:

We believe we are adaptable people: when the US Armed Forces ran Clark and Subic we would drive like they did while inside the base; when we rent a car in California we do likewise.

And as one columnist put it, in Metro Manila we have to drive like everyone else, i.e., aggressively if not discourteously otherwise we would be left behind.

This attitude is not strange; it is human nature as behavioral scientists in Obama’s camp (pre- and post election) explained in a recent Time magazine article (Obama is using the science of change; April 2, 2009), i.e., people feel comfortable doing what others do.

But this thing that others do may be confined to a local setting like within the country and not beyond. As most Filipinos know, our neighbors have progressed much more than we have yet we have not adopted the things they have done.

In reading how Filipinos view the challenge of change, there seems a common belief that we must fix our educational system. We are in good company; U.S. opinion leaders have been debating education reform for years.

Others say we need better leaders or a different form of government or a different economic model or a different constitution.

It appears we are looking at two things: (a) leadership and (b) structure.

Unfortunately as the writer wrote in an earlier article, leadership in a democracy comes from us; the quality of our leadership is a function of the quality of the pool, meaning us. (See:

And structure comes from both us and our leadership, i.e., our perspective as a people.

The bottom line is: we need to look at us, dig deep into our mind and our heart and our soul and work from there to create the leadership and the structure that we want.

What made the Asian tigers and China? Or more to the point, how did they become economic tigers?

They knew what they lacked and opened their arms to outsiders to provide these to them.

Their educational system has remained the same. Their leadership system is still the same.
Their basic structure is the same.

What has changed then? They have pursued capitalism aggressively with foreigners supplying much needed capital: in the process they gained technology and the know-how that comes with it, world-class manufacturing and the requisite R&D, access to foreign markets and critical skills-set to pull together a more dynamic economic system thus making them competitive in the bigger globalized world.

This is the core of why we are different from our neighbors? Obviously the range of opinions would differ given the variation in our perspectives. If Obama is tapping behavioral scientists to help him get America to embrace his agenda, should we follow his lead?

For instance, behavioral scientists prescribe “unfreezing exercises” whenever groups of people are dealing with the challenge of change. In accounting and budgeting lingo, they call it “zero-based” budgeting. In other words, don’t do incremental budgeting but rather start from scratch. In behavioral science, it means unfreezing thoughts that can render us inflexible. Kids call it generation gap or why we won’t understand them. In fact we call them kids irrespective of age.

Our neighbors have managed to change? What about us? What we seem to be creating are barriers against some present day realities that on the one hand our neighbors chose to embrace.

For instance, we have erected barriers (imposing limitations) against foreign ownership in our schools. Knowledge is power and if we set aside the debate on this issue for a moment, the search for knowledge ought to be expansive not restrictive – which also explains our sophistication; our love for travel has shown us what it is like across the seas, i.e., it is educational.

Many Asian countries have partnered with foreign educational institutions; it has accelerated in the recent past when Western educational institutions embarked on global partnerships and expansion – for instance, Stanford University has ten overseas campuses. Such partnerships are creating a far richer educational environment and providing greater access to contemporary knowledge in many parts of the world.

The point is: we should seek to make our educational system expansive and world class by partnering with world-class educational institutions. And in the same manner that China was flexible with ownership structures in order to attract foreign investors we should focus on getting the best educational institutions over and not start with setting up barriers like ownership restrictions.

Foreign educational institutions may not necessarily want 100% ownership, but our thrust ought to be: to seek knowledge expansion and not impose ownership restrictions.

In an interconnected world we cannot talk of competitiveness from a purely local perspective given our limited resources. And competition starts with knowledge expansion . . . not restriction . . . or confined to internally fixing our educational system.

Competition is also more than brain power. GM and Ukraine are two entities with lots of brain power. We all know about GM. The writer had never met a rocket scientist until he worked with Ukrainians. Rocket scientists were in great abundance in Ukraine. Yet today Ukraine is at the bottom of the economic heap, being propped up by Western institutions lest they crumble given heavy external debt and a collapsed export business – principally extraction industries – on top of their messy politics.

In the Philippines, what we have seen over the years is that shutting out the outside world does not guarantee our economic protection, progress and development. For instance, import-substitution was meant to be temporary or until we become more competitive. Yet today decades later we remain uncompetitive and hence we continue to seek protection.

Seeking protection risks moral hazard or the law of unintended consequences, i.e., humans take the path of least resistance and in the process do not develop the capacity to face greater challenges. It is a self-fulfilling prophesy. Moral hazard is something that we know instinctively or why there are good works that we are not predisposed to supporting.

If positive thinking reinforces positive behavior and outcomes, negative thinking reinforces the opposite?

For instance, what are the implications of the following protectionist elements if in indeed they represent our perspective as a people: (a) imposing barriers against foreign ownership in schools, (b) restricting foreign professionals to practice in the country and (c) continuing to seek protection in trade as spelled out in foreign investment negative list?

We can say that we are gradually putting down these barriers or that unfettered capitalism is unwise to begin with. That may be good sound bite and great intellectual exercise (and sophistication) but how does it translate to economic realities?

China and the Asian tigers took a more pragmatic posture in this regard and the results are quite evident: they did not leave themselves naked and without protection but they were focused on the thrust of their economic plans – aggressively attract foreign investors and be flexible with ownership structures, for instance.

The various restrictions that we put communicate to the outside world that: we don’t trust our educational system, we don’t trust our professionals, we don’t trust our ability to compete in today’s interconnected, globalized world?

That is not the face we want to present to foreign investors? We want to demonstrate and exude confidence: our engineers are world-class, our financial managers are savvy, our accountants can teach their Western counterparts a thing or two, our lawyers represent Fortune 500 and Global 2000 companies; and on and on and on.

How do we begin to look forward? By rising above the status quo and setting our sights higher?

Our economy, human nature and George Soros

It is not surprising that the head honcho of the Ayala group, one of our tycoons, has acknowledged the role of OFWs in our economy:

“Ayala said OFWs might remit less next year, but by sheer numbers alone and the reality that they are scattered all over the globe would probably serve as buffer for dollar inflows to help the Philippines withstand the global financial crisis.” (Business Mirror, Nov. 19, 2008)

Given the magnitude of OFW remittances (over $15 billion in 2008) we have been blessed to overcome whatever ails our economy.

As we now know these remittances have been the driving force behind our consumer-driven economy. And thanks to our tycoons, the Ayalas, Cojuangco and company and the taipans, they have turned this source of capital into an active investment machine.

Yet our tycoons recognize that while they have the ability to pursue aggressive investments, they can still use capital from foreign sources, which they have done, i.e., we are still capital-challenged compared with our neighbors, the Asian Tigers. In other words, we have room to, say, double our current investment levels and we would only be matching the Asian Tigers. And we need greater investments in order to sustain and strongly drive our economy and meet the needs of our people.

As our tycoons continue driving their investments to respond to the demands of our consumer-driven economy, they have joined the ranks of Forbes’ wealthiest.

But what about the country itself, how can we elevate ourselves economically?

Should we mirror the model demonstrated by our tycoons? And that is, subscribe to the belief that investments and foreign partners engender greater productive activity, GDP and wealth creation?

Or does our culture or ideology or our nature as a people put us in a different school from our tycoons?

For example: human nature may cause us to take a slack in our efforts to drive our economy. Just like the Dutch who earlier on relied heavily on their extraction industry only to learn that they needed greater efforts to sustain their economy, e.g., establish a stronger manufacturing industry. In other words, why even think of driving and sustaining a country’s economy when it has a fairly good source of income? And so The Economist magazine coined the term “Dutch disease”.

Even America is suffering from their own “Dutch disease” and that is their heavy reliance on foreign capital to cover their capital shortfalls given their credit-card culture; which they have recognized as unsustainable.

The investor/philanthropist turned philosopher George Soros has an exhaustive treatise about human nature that he spelled out in his latest book, “The new paradigm for financial markets”.

He claims that his interest in philosophy dates back several decades when he was penny less (“I have touched bottom”) and “waiting to be admitted to the London School of Economics”. He read and was influenced by Karl Popper, later reinforced by his study of Aristotle and his own life experience.

In so many words, he says our cognitive function cannot be divorced from our own view of what we consider reality such that our understanding is not a pure outcome of our thinking but colored by our culture, ideology and other biases. George Soros, in his own words:

“Our understanding of the world in which we live is inherently imperfect because we are part of the world we seek to understand. There may be other factors that interfere with our ability to acquire knowledge of the natural world, but the fact that we are part of the world poses a formidable obstacle to the understanding of human affairs.”

To drive home the point, Soros maintains that:

“The financial crisis was slow in coming, it could have been anticipated several years in advance.

“It had its origins in the bursting of the Internet bubble late in 2000. The Fed responded by cutting the federal funds rate from 6.5 percent to 3.5 percent within the space of just a few months. Then came the terrorist attack of September 11, 2001. To counteract the disruption of the economy, the FED continued to lower rates – all the way down to 1 percent by July 2003, the lowest rate in half a century, where it stayed for a full year. For thirty-one consecutive months the base inflation-adjusted short-term interest was negative.

“Cheap money engendered a housing bubble, an explosion of leveraged buyouts, and other excesses. “

What lessons can we learn?
  • Given our inability to raise capital at competitive levels, how do we raise capital?
  • Do we simply reject foreign capital because we don’t want foreigners to own a chunk of our economy?
  • Given our inability to pursue world-class research and development, how do we acquire state-of-the art technology to be able to develop competitive products and services?
  • Do we simply reject foreign-sourced technology?
  • Given our inability to accelerate infrastructure development, how do we raise productivity, efficiency and competitiveness?
  • Do we simply reject foreign participation?
If we accept the above as a set of imperatives to deal with our economic challenge, how do we pursue them proactively? Or is being proactive against our nature?

Respecting time and space

When we talk about pushing competitiveness or fighting corruption is there something fundamental – i.e., a core value like respect for time and space – that can either drive (when present) or hinder (when absent) our efforts? Even one’s (false) sense of entitlement may have the same roots?

Filipinos who have traveled to Tokyo or Los Angeles would most likely have visited Disneyland. Disney is acknowledged the gold standard in customer service and a large piece of that comes from respecting time and space. And it positively impacts efficiency and productivity as well as revenues and profits.

Disneyland can entertain upwards of half-a-million guests at any given time and the whole system just hums without much of a hiccup.

Guests would grin and keep their smile: from the moment they get into Disney’s parking lot where they are directed to designated-parking slots and then board the tram that takes them to the entrance in no time, and until they drive out of the amusement park, with the pleasant and wholesome experience reflected in their smiles.

And it is principally respect for time and space that drives Disney’s competitive advantage – treating every person as a guest. (Yet given our Filipino culture we may instinctively do one better: offering the best room in our home to guests has become trademark-tradition that visitors marvel about.)

The culture at Disney has become a “best practice” such that other companies go on a pilgrimage to Disneyland to seek and learn it. And Disney obliges by conducting programs for their benefit. (A relatively young company, Zappos – an online shoe store with revenues of over a billion dollars – similarly shares their culture with others; and Fortune magazine recently named Zappos as one of the best companies to work for.) The moral of the story: when transparency rules growth and success triumph because great ideas freely bloom and get nurtured; when transparency is suspect – as in a culture of corruption – chaos reigns.

Disney is open and transparent; and confident of its competitive advantage that it openly shares what for others would most likely be corporate secrets.

Friends were talking to this writer (on his most recent trip to the Philippines) rather animatedly about an ongoing premier real estate development in Metro Manila that visually looks world-class until one drives into the outdoor parking area: the supposed “brand image” becomes suspect. Respect for time and space is absent or lacking? The same can be said of the basement parking.

The development must have been in a profit margin-enhancing mode when they designed the parking facility. Unfortunately, such a mindset could create and reinforce a culture within an organization that runs counter to attaining efficiency and productivity at competitive levels. This is one of the learnings from the seminar Disney runs for other companies. (And hence it is not surprising that at Proctor & Gamble their culture demands of everyone to obtain the best fragrance and quality across the board . . . that is the foundation of their competitive advantage.)

When a troubled organization examines why it is lagging in revenues and profits they struggle to figure out what the negative or restraining forces are – because a culture is so abstract and intangible yet pervasive.

For instance, it appears that even the parking allotted for potential buyers in the sales office of the development are likewise inadequate. A premium development like a premium brand must constantly drive every element of the brand image it wants to sell, e.g., anyone visiting a Lexus show room would see and feel what premium means.

Makati was once viewed as a promising, premier development and municipality. Today it is a microcosm of the density that is Metro Manila. And density does not equate to premier or premium; time and space do!

Individuals like organizations may carry a sense of entitlement or the absence of a core value: “I am the owner of this lot; I can maximize its use” – ignoring basic easement rules. “I live in a premier gated community, I am entitled to get in and out of the community ahead of outsiders” – ignoring that a red light means stop.

And so corruption finds fertile grounds: “You’re required by law to keep a 3-meter easement between the street and your house” . . . so says the inspector from City Hall; and what happens next is all too common. “You ran a red light” . . . so says the traffic cop; what happens next is all too common.

Which comes first, the chicken or the egg? In an earlier article the writer raised the challenge that confronting corruption is an inside-out process? That means we have to step up to the imperative of individual responsibility? Because corruption is a Filipino cancer and no one else can cure it for us? Of course we have institutions that can play a lead role; and they must – and we must hold them accountable? But just like the reaction of the couple of Filipino Ivy League students (see that spoon-feeding was apparent in a typical class in one of our premier universities; no one can spoon-feed us out of corruption? But we can be our brother’s keeper?

On a more positive note, residents of one condominium have asked their building management company to upgrade their basement parking – to match the quality of another development. They realized that while their parking facility had ample space, quality-wise it paled in comparison to the one they wanted to copy – where the facility was spanking and pleasant. They realized that they could enhance the value of their property if they could upgrade their parking facility.

To drive competitive advantage does not require complex efforts. Keeping it simple (which is facilitated when the undertaking is founded on a core value like respect for time and space) is the mantra of time-tested, successful enterprises doing business on a global scale. An excellent example is McDonald’s: it is the simplicity of the whole undertaking that is the genius. (This simplicity must have been obvious to Jollibee that they were able to replicate the model beyond the Philippines.)

The value-added that is McDonald’s competitive advantage is not fine food or fine dining but lifestyle, i.e., fast and convenient (another translation of respect for time and space) for “people on the go”. And as globalization was raising the standard of living and drastically reducing poverty in many parts of the world, it meant more people were now on the go. And as the global financial crisis has deepened, their value-pricing coupled with their lifestyle positioning have resulted in unprecedented revenue growth.

Complex on the other hand – at either the country or global level – is the natural outcome of lack of clarity in the object and mechanics of the undertaking (which fundamentally connotes a leadership vacuum) such that the various pieces instead of being one synergistic whole are at cross purposes; and consequently transparency becomes elusive as silos and kingdoms emerge . . . and in the final analysis chaos reigns.

An unfortunate example is Fortis, the giant financial institution and the largest employer in Belgium, who entered the derivatives business with the view to accelerating profitability in order to maintain its growth momentum (a reward from their earlier M&A initiatives yet envious of how their US counterparts were raking it in with highly engineered financial products) without the requisite core competency to begin with. And hence they had to hire away recognized experts from competitors. The newcomers effectively gained free rein with Fortis new to the business. And the rest is now history: their portfolio of toxic CDOs sank Fortis and quite deservedly together with their US counterparts.

Saturday, May 9, 2009

It’s a small world: Germany, Japan and GM/Toyota

Germany and Japan unlike the U.S. and the UK cannot be blamed for the subprime mortgage mess yet they have to similarly suffer the fallouts of the global financial meltdown.

As two of the largest exporters, Germany and Japan have the world as their market and have no choice but to support its recovery – although Germany’s Chancellor has been chided for her tepid response to the pump-priming orchestrated by the EU.

It’s a small world indeed.

Germany has a long history of innovation, R&D and product development. Japan, on the other hand, credits W. Edwards Deming for showing them the way to becoming the gold standard in product quality.

Deming, an American, introduced the Japanese, including Toyota, to the quality evolution starting with statistical quality control following the end of World War II. General Motors, on the other hand, had been viewed as a pillar of America’s industrial dominance and perhaps needed no help.

Fast forward to 2008, Toyota overtook GM as the world’s biggest auto company. And Toyota’s premium auto brand, Lexus is now the largest premium car brand in the U.S., beating Germany’s Mercedes Benz and BMW.

George Soros argues that the global financial meltdown was slow in coming. The same can be said of the fall of GM. As an example GM’s market share has been on a decline for decades and hence there is a lot of taxpayers’ anger in their bail out. Clearly, GM has failed in the market and its ability to compete and succeed in today’s highly competitive global market is suspect.

GM chose to nibble the edges instead of fixing its fundamental problem, i.e., products that consumers do not prefer. They played for and managed survival, i.e., focused on high-margin SUVs. It was a short-lease on life given a shrinking business. It was clear they were on the path to destruction which was only accelerated by the recent global financial meltdown.

Toyota, on the other hand, understands how small the world is and aimed for robust global market share and benefit from economies of scale to sustain success.

Toyota was laughed at when the first Toyopet appeared in 1957 on the U.S. high-speed turnpikes (which as we now know, were modeled after the German autobahn network by Eisenhower who admired it when he commanded the Allied Forces during World War II) for being so lame compared to the muscle cars from Detroit.

But Toyota has learned from Deming and has developed an insatiable appetite to accumulate learnings from the rest of the world. For instance, it stripped down a few German cars to figure out how to make better cars and then went to school in marketing and consumer insights from the likes of Proctor & Gamble, i.e., it interacted with consumers right in their homes in California. And presto, from pedestrian-cars evolved the Lexus brand.

Toyota also leads the hybrid car market although GM had early on bragged about their pioneering efforts. But playing the survival game made them decide to pull the plug on their electric-car project.

Product development for global brands even simple toilet soaps can take over a year and in some cases closer to 3 or even 5 years which is why innovative companies like P&G and GSK have 5-year product development plans.

Investors, companies and countries are gearing if not yet geared up for when the global slowdown (or recession in the developed world) would turnaround. For instance Warren Buffet just raised his investment in GE by $730 million and Pfizer is working on a merger if not an acquisition; while Vietnam is playing the role of door-to-door salesperson peddling its newly developed exports products given that their original target markets like the U.S. are in recession.

The global financial crisis has not spared Toyota but given its strong business fundamentals they are expected to ride out this rough patch. They not only understand economies of scale they are also very disciplined not to fall victims to sub-optimized thinking and practices.

As an example, Toyota has introduced the world to “just-in-time” manufacturing practices – and its support structure, i.e., flexible, low-cost, high-speed production and logistics and infrastructure network on a global scale. They know “it’s a small world”. In the past we called it “imperialism” whether it was out of Japan or America. But the reality is it reflects the model described by Nobel Prize winning economist Paul Krugman in his 1991 book, Geography and Trade, to illustrate economies of scale.

Countries can do aToyota too like China is doing. India, on the other hand, took a while to pick it up. For instance, for decades India subscribed to sub-optimized manufacturing by restricting the size of companies and instead promoted cottage industries. India is still lagging behind China in its infrastructure development and so even if India has had a longer history of the free-enterprise system, the Indian model has a lot of inefficiencies. Jack Welch the former CEO of GE that had poured tons of investments in India is now ringing the alarm bell.

Every country has its own problems yet the Chinese always see opportunity in adversity; not unlike our taipans. Should our economic managers take a similar mindset?

Our GDP is relatively small by global standards, i.e., our exports (at $ 50B yields a negative balance of $ 8B) are less than a third of Malaysia or Thailand’s; and given investors are constantly seeking investment opportunities how does NEDA in partnership with the private sector, for example, translate our economic development plans into a truly tangible business proposition for investors?

How do we, say, double exports which will still be just two-thirds of Malaysia or Thailand’s? This cannot happen overnight; do we want to be gearing up then?

How do we, for instance, build on our electronics exports, which account for 59% of our exports, and move up the value chain, i.e., we are producing intermediate as opposed to final products? We may not have the expertise to pursue such an initiative but there is no stopping us from partnering with global players that have the expertise in electronics consumer products for instance.

At the end of the day, we can look either at GM (i.e., nibble the edges) or Toyota (i.e., establish strong economic fundamentals) or China (i.e., leverage the global economy) or India (i.e., pursue sub-optimization) as a model.

Or we can opt to be an island unto ourselves?

Planning and Execution

It was a year ago over Holy Week when friends and relations expressed elevated frustrations about the economy. And subsequently this writer wrote to columnists and newspaper editors with the view to engaging them in the process – please refer to “Genesis of this blog”.

The writer now senses that while our economic challenges remain serious news reports and opinions are becoming more forward-looking: economists are offering new initiatives to explore in the export arena, the Department of Trade and Industry is harmonizing export initiatives for greater impact, we have ongoing efforts to drive economy in partnership with Japan and Taiwan, etc.

As we plan and gear up to execution, we face the reality that planning and execution can be miles apart – that execution is never a given – such that even the best institutions can fall flat on their face when it comes to execution. But that does not mean we should throw in the towel.

What is important is that we start on the right foot.

Focus and Leadership

Great athletes are great because they can psyche themselves up and focus like a laser. They are not unlike our tycoons; reading the many stories and profiles of our tycoons reveal the common denominator of great achievers.

In the military focus is established by “defining the hill” – what is the object of the exercise?

In the case of China and the Asian tigers they had to “leave the old ideological debates behind”; that allowed them to focus on their economy. And in all cases leadership was the common denominator – to define the hill and to leave the old ideological debates behind.

Leadership and Democracy

Fundamental in democracy is we get the leaders that we deserve – or why there was EDSA I, i.e., we did not elect Marcos for life so we made him account for stepping beyond the line. And in the case of the Americans, the hard lesson they learned with Bush, i.e., electing him twice – that made Europeans wonder about American sanity?

Our leaders come from among us: we cannot pin corruption in isolation on our leaders until we ourselves (the pool from where our leaders come from) have taken individual and collective responsibility in fighting corruption. Sounds foreign given our hierarchical culture? Or sounds daunting?

Character-building starts with baby steps; and with the young it starts at home and in school – recognizing that spoon-feeding is not synonymous to character-building (see; Our romanticized view of America).

For instance, how can our Boy Scouts or PMTs or ROTCs embrace citizenship like volunteering to assist traffic aides? How can businesses engaged in transportation support and sponsor campaigns to step up traffic management? What about the homeowners in our gated communities; what community-building initiatives can they pursue? How can the numerous civic organizations step up teaching and practice of civics within their respective constituencies – for instance, beyond the Rotary 4-Way Test, can we adopt a practice by American managers in response to the Foreign Corrupt Practices Act – managers sign a yearly personal declaration that they did not engage in any form of bribery in the country where they represented their employer? How can the church isolate the poor from exploitation by vote-buying politicians? If not the church, who?

The list goes on; “beyond the Filipino focus on family (and our tendency “to shelter” and consequently “be sheltered”) we have the community to sanctify”, so said one Filipino priest.

In earlier articles the writer talked about focusing on driving our economy as well as the starting point of the undertaking – execution will not be a walk in the park yet starting on the right foot is a good start.

Entrepreneurship does not mean local

“Culture . . . and . . . economic policies founded on transparency, convenience and rule of law.” That is how the World Bank defines the bedrock of entrepreneurship, now acknowledged as a key factor in economic development . . . even in prim and proper Oxford University – where traditionally entrepreneurship was not spoken.

The Economist magazine reports that India, China and the U.S. are the most entrepreneurial culture, quoting a study by Monitor, a management consultancy . . . which many have probably read.

The point to make is: in America change is imbedded in its beginnings, history and culture, but China and India? China demonstrated its capacity to change when it embraced capitalism; with India it was by opening up its economy . . . although both countries continue to have harsh critics: China remains autocratic while India is arguably a study in bureaucracy. (To India’s credit, in Bangalore for instance, despite their dreaded bureaucracy they now have a modern airport. Local folks used to say: “I will believe it when I see it”.)

In earlier articles the writer has written about private businesses that have become models of change but countries changing?

In the Philippine when we talk of change we mean ridding the country of corrupt leaders . . . The reality is not unlike private business, if a country and its people are not predisposed to change . . . its system and thus its output will remain the same . . . same old, same old – humans are creatures of habits and habits are hard to break! And this can be rationalized by assuming that we have not found the perfect system to adopt; unfortunately there is no perfect system – to seek one is an exercise in futility. Free market has not claimed perfection, i.e., no two free-market economies are identical.

To be progressive is to be forward-looking; and old habits can rob us of the vision and the confidence to reach for a higher goal.

When we talk about how tradition-bound we are it is either in the context of a joke or an emotional argument. But we can do a compartmentalized change like China and India, i.e., keep the elements of our culture that we cherish but push economic development with a more pragmatic, forward-looking attitude? To China and the Asian tigers, this meant leaving the old ideological debates behind!

Change is never easy whether in the private or public sector.

The Economist magazine talks about how the Indians’ penchant to argue (which used to fascinate the writer up to a point) has become a positive in developing an entrepreneurial culture; but also makes the point that while India’s higher education traditionally produced civil servants, today they are producing entrepreneur-types.

Tom Friedman’s best-seller, “The world is flat”, points out that the turning point in India’s psyche occurred with Y2K: India’s low-cost computing and programming skills absorbed much of the back office work the West needed to prevent a global catastrophe. And so Indians at home and abroad including those in Silicon Valley realized the great potential they had in this field, i.e., the global market dwarfed local boundaries – and simply exploited the opportunity, creating local equivalents of Bill Gates – i.e., getting themselves on the Forbes lists of the wealthiest people. The bottom line: entrepreneurship has gone global . . . beyond local. And according to Monitor, countries that welcome outsiders have seen a higher proportion of entrepreneurs among them versus locals – which should not be surprising to us Filipinos given the predominance of Filipino-Chinese tycoons.

For many years India’s socialist bent meant sub-optimizing and undermining economies of scale in favor of homegrown/cottage industries – such that the national market was not optimally served, i.e., to market nationally meant cobbling together a number of scattered mini-production facilities that translated to high-cost, inefficiency and with quality compromised at best. In fairness, industries that met a set of “high-tech” criteria were allowed large-scale production operations – and not surprisingly this spawned bureaucracy if not corruption.

The Chinese simply wanted a better life; consequently Beijing needed to satisfy this craving. With a billion people wanting a better life, Beijing figured that capitalism was the way to go; and courted foreign investors like no man can – e.g., by being flexible in the construct and ownership of ventures with foreign investors! (In the process the writer learned that communist people could be friends too that gave him the predisposition to become friends with Eastern Europeans much later. His other learning: Chinese leadership would punish corruption within the communist party structure.)

The Chinese and the Thais shared a common desire to absorb new ideas, learnings and investments (to lift themselves up) from the outside. And both learned and evolved to meet world-class productivity, efficiency and competitive metrics that saw their economies growing rapidly from global trade.

The Indians, the Malaysians and the Filipinos shared something in common too: given their facility in the English language it was acknowledged that they were as informed as outsiders and foreigners. Where they differed: India and Malaysia attracted more foreign investors (to compensate for what they lack) and grew their economies faster than the Philippines. Malaysia’s population is a tiny fraction of India’s and a mere 27% of the Philippines, and had to rely on exports to drive their economy, similar to China. Population size was not their common denominator but rather foreign investments and markets.

Some in Eastern Europe – being creatures of habits too – share the Filipino’s instinct that can be tradition-bound while recognizing that life could be better. Will these Eastern Europeans take longer to attain developed-country status as well? And not unlike the Philippines they also have entrepreneur-types. In other words, will the entrepreneurial spirit be robust to overcome old habits?

Developing progressive economic policies (founded on transparency, convenience and rule of law) can indeed be driven or restrained by a country’s culture but as we have seen in other countries, the desire for a better life can be more powerful than any restraining forces.

The global financial crisis has held global trade at bay but in the same manner that we expect OFWs (Overseas Filipino Workers) to continue to find foreign “homes” for their skills and services albeit at a decelerated pace, manufactured goods and other services will likewise find their “due homes” given that countries could not produce the goods and services they need as efficiently as those with comparative and/or competitive advantage, i.e., protectionism is simply impractical – we cannot expect a world where the Middle East will keep their oil for themselves and those with none like us will rely on horses and carabaos for transport and energy. Or what if Thailand or Vietnam cannot sell us their rice?

The good news is the world has recognized the reality – the positives and negatives – of global trade and world leaders have found it wise to come together and aggressively deal with its challenges individually and collectively. Yet we cannot expect them to deliver nirvana given the politics back home they have to deal with – but who says the road to progress is paved with gold?

Subsidies from the West to protect local cotton and cocoa farmers, for instance, have marginalized farmers in developing countries especially Africa – which the writer has seen with his own eyes beyond the horror stories narrated to him. This is a tough nut to crack but Obama and the EU need to step up to the plate (e.g., via Doha) and exercise leadership especially the U.S. if the U.S. is to regain moral leadership and authority.

In the media we have written a lot about Obama: The real lesson of Obama is not color; which he again demonstrated at the G-20. What Obama is is forward-looking; he is about thinking like a winner as opposed to feeling and thinking like a victim. He lost his father – was bounced around across oceans, not spoon-fed, he lost New Hampshire, he lost most of the Republican senators in his stimulus plan – as well as Merkel and Sarkozy – and of course he’s black. Losses don’t deter him. Victimhood is not in his psyche – blaming no one for the card that was dealt him.

Closer to home we have our tycoons who are no different.

Individually we have indeed learned from them like the OFWs, our present-day heroes, and many, many more of us. We, as country, can learn from them too.

Mastering Jujitsu

“Look beyond the crisis, forum says”. This is a most welcome news that appeared in Business World on April 24th.

In said forum attended by economists, ours and from the World Bank, we were urged to develop long-term, sustainable competitive advantage. With “shrinking global demand” courtesy of the global economic crisis, countries that are truly competitive will corner the market.

Unfortunately, the converse is likewise true: countries that are not competitive will be losers. And our economists explained that "our problem is competitiveness – the roots of obstacles to growth are less directly linked to the global crisis; they are deep-seated problems that require strategic responses, with or without the crisis."

Like athletes we must gear up because this competition is even more demanding than the Olympics.

As we have seen, big countries are already playing bully because so much is at stake, more than Olympic medals. The WTO will say NO to protectionism but “survival of the fittest” will be the unwritten rule, i.e., more barriers will be erected than competing smaller countries will want to encounter. Why? World leaders are local politicians that pander to populist demands; and which is also why developing countries given little resources make bad economic choices and inflict damaging blows to the economy or why economic reforms become mere rhetoric in many of these countries.

But where is the fairness? “Life is not always fair” as psychologists will tell us. (See: The 5 things we cannot change, by David Richo; “There are certain facts of life that we cannot change—the unavoidable "givens" of human existence”.)

What we need instead is to learn and master Oriental martial arts, i.e., using the big guy’s advantage to our advantage or using leverage over strength?

The writer (then a newly minted professional taking advantage of the consumer credit market freshly made available to him) spent the Christmas holidays many Christmases ago (in 1970) in Singapore when the last few remaining British soldiers were departing this tiny city state and Lee Kuan Yew was personally supervising work at the Singapore Zoo. Here was literally a tiny country that never asked the question: But where is the fairness?

The writer many years later would work with Singaporeans visiting the country countless times (over a decade, including being stranded in Singapore when his plane to Manila was turned back at the onset of People Power as opposition soldiers attacked the Manila International Airport; and this became the new normal for the writer, but that’s an altogether different story) and those couple of scenes would still be etched in his mind against the backdrop of present-day Singapore.

Singapore like the rest of the world is suffering from the shrinking global demand yet they have the foundation and the infrastructure to flex their competitive muscle once the global economic cycle registers an uptick. In the meantime, given their tiny population (4,657,542) they are unable to rely on domestic demand to compensate for shrinking global demand and hence are in a recession. But still, they have the cushion to weather the storm, e.g., in some respects they are better than the US – in 2008 they still registered a budget surplus, their GDP per person is higher at $52,000 versus $47,000 and they have more than twice in foreign exchange reserves.

So how do we use leverage over strength to develop a long-term, sustainable competitive advantage?

We need to recognize that we need capital, technology, research and development, high-value added products, market access, infrastructure and logistics if we are ever to have a chance at these highest-levels of competition? And yet we don’t have them all in abundance or at competitive levels? The key is to acquire them?

In private business, we would incorporate and seek capital in the capital market. In short, we would not be organized like a sole proprietorship, or like a mom and pop operation as they call it in the West. Instead we would be organized like a publicly-owned company. That means giving up full ownership in exchange for the acquisition of and access to requisite resources.

Is this an academic model or a realistic model? This is the model adopted by the Asian tigers as well as former socialist states that have joined the free-market system – and in many cases they gave full ownership to investors whoever they may be.

We want economic progress and reduced poverty? We cannot have our cake and eat it too?

Economics 101 – as practiced by a priest

This writer found himself sitting (in a family reunion) next to a priest who had successfully built a lovely church – some call it a cathedral. He was narrating that he had moved on to another job running a retreat center in another diocese.

He must have established his financial savvy within the Philippine Catholic Church hierarchy given that his new role mirrors two previous assignments – to fix the financial problems of the retreat center. They had to let go a dozen employees before he arrived and yet in barely a year he has covered his annual budget, paid down half of the debt of the center, upgraded the living quarters (that can accommodate over 200), built a garden chapel and upgraded the huge garden itself, stopped the cost overrun in the kitchen, has begun to upgrade the center’s dining room menu and is currently working with a culinary institute to educate the kitchen staff – he does not want any more complaints about the food they serve. In addition, he has incremental funds to do charity work.

How did he raise the revenues of the center? He went on a road show to several schools to promote the retreat center and as his volume went up he offered volume discounts – the retreat center is now a truly income-generating enterprise. To fund his capital expenditures, he did a similar road show to several prominent, wealthy Filipinos replicating previous successes in two parishes.

How did he stop the kitchen cost overrun? He subjected the staff to inspection before they leave from work and found to his dismay that they were bringing home center supplies; he told them they could eat anything in the kitchen but they were not ever to take any home. He also reassigned the task of buying kitchen supplies to the religious from the lay staff explaining that he wanted the religious to learn every task in the center because in future they would run it.

To address the needs of the poor families around the center especially those of school age, he negotiated with a school to organize an extension program and give them subsidized education. But he wanted to ensure that the families were committed to the education of their children so he had them pay a token sum. Likewise he negotiated with a bookstore to provide subsidized books and supplies.

How did he learn all this? He said he had spent time in Italy, the UK, Canada and the US and in all the churches he had worked with, money was the fundamental requirement.

This writer told him if he were in the private sector, he would be a successful sales manager, finance manager if not general manager. In jest he said, if he were in private business, he would love to be a sales manager.

Can we laypeople learn from this priest? That nibbling the edges won’t cut it? For instance, how can we reasonably bring Philippine poverty (at over 25%) down when our GDP per person is a low $3,400? That is a mere 22% of Malaysia’s ($15,700) and 39% of Thailand’s ($8,700); and consequently, their poverty is at an enviable 5% and 10%, respectively.

We have embarked on numerous laudable efforts: from housing for the poor to micro-financing to entrepreneurship. And while homegrown or cottage industry can tide families with sub-par incomes over it will not in their aggregate compensation for our meager exports (of $50 billion) nor raise our revenues to over $150 billion to match Thailand’s or Malaysia’s exports.

What else do we need to do? The lesson of the Great Commandments comes to mind – we don’t have to stop the good deeds we do but we must not overlook the overarching deed? Or if that is too biblical we can take refuge in Pareto’s Principle?

Since we cannot reduce our population, the only way to raise our GDP is to drive revenues, e.g., exports – Malaysia’s and Thailand’s exports alone are bigger than our total GDP, which is less than $150 billion. At our current GDP level we can expect poverty to remain at alarming rates?

Is this the cancer staring us in the eye? Radical surgery and chemotherapy (like driving export revenues) is not easy? But we have to do it – we have no choice, e.g., move up from intermediate to final products which will require a lot of effort and time worth expending? We cannot let over 25 million Filipinos live in poverty on the one hand yet on the other – in our heart of hearts – we know we can do better? (To put this number in perspective, it is more than the entire population of Romania and more than half of the population of Ukraine, both poor Eastern European countries – both more recent entrants to the free-market system and still struggling to right their economic ship.)