Monday, May 11, 2009

“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?

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