Colonial Mentality: Chinese Shun Their Own Brands

Given the truckload of goods China makes for the rest of the world, it may seem odd that the Chinese are concerned with their inability to develop homegrown brands: Why should you develop your own brands when Apple/General Electric/Samsung and whoever else have you have done the heavy lifting of brand-building for you as a contract manufacturer? It's certainly not easy, either--none of the world's top 100 brands are mainland Chinese. The answer is as simple as it is clear: actually making consumer goods constitutes an ever-decreasing share of the profits--if any. The higher value-added activities come from branding, marketing and goodwill which emanate from (surprise!) building up a brand name. In other words, the Chinese get the grunt work and the industrial pollution, while Western companies get the cushy high-salaried jobs and clean air.

Just in time, the FT has an article discussing how the Chinese perpetuate this lamentable situation themselves by preferring imported to local brands. In sociology, it would be classified under "colonial mentality" or believing that former colonizers--be they the Japanese or the Europeans--are superior. After all, they managed to colonize you, right?

Chinese consumers want foreign goods. Whether sports shoes or cars, televisions or mobile phones, cosmetics or nappies [diapers to non-Brits], surveys show that foreign brands predominate. Shaun Rein of China Market Research Group says people trust foreign brands not to cut corners and associate them with more of an established heritage than their domestic labels.

This spells trouble for China as its people become more middle-class and spend more on non-essential items. The more that they buy foreign goods, the more that the proceeds of China’s progress will accumulate to shareholders elsewhere. It will also mean fewer profits for Chinese companies to reinvest in innovation and expertise at home in electronics, for example.

Moreover, there is the matter of "sham" trade surpluses (the image above comes from the ADB Institute): trade figures aside, once you adjust for the actual value-added of Chinese exports, the results look rather less impressive:

Its lack of popular brands is already visible to some degree in its trade balances with other countries. China may run a large nominal surplus but when economists adjust those numbers for the value that it adds or gives away in making goods that are consumed at home or abroad, the numbers tell a very different story.

For example, its total trade surplus with the US drops from $189bn to $127bn on a value-added basis, according to calculations by economists at BBVA, the Spanish bank. Most of this reduction is due to value given away in electrical and optical equipment, textiles and clothing.

Consider it as a warning sign. Sometime ago, I wrote a journal article together with a marketing scholar about the pressing need for the likes of China to develop brands of its own. Suffice to say that message has gone unheeded, and things may get worse in terms of prospects for Chinese development going forward if this matter is not addressed:

If China can follow its neighbours and develop its own powerful brands like Samsung of South Korea, or Toyota of Japan, it can sell not only to its own 1.35bn people but to billions of others all over the world.

If it does not build or buy such brands there is a risk that its consistent trade surpluses will become deficits in the decades ahead. That is not what the push to rebalance China’s economy towards consumerism is supposed to do.

Consider these folks warned. After all, if you don't buy your own brands, what confidence will others have in them?

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Cola's Final Frontier: Coke v Pepsi in Myanmar

He thought he was the King of America
Where they pour Coca-Cola like vintage wine

In 1986 Elvis Costello penned the lyrics above to the first song of his album King of America, "Brilliant Mistake." I thought it was pretty crafty way back when, but even then, the snobbery against drinking carbonated beverages was their cultural unsophistication as Costello intoned. Nowadays, of course, we are more concerned with the unhealthy amounts of sugar and caffeine they contain. Such concerns have caused cola consumption to steadily fall Stateside since 2005, but it remains a highly saturated market with the average American drinking a whopping 714 8 oz servings of carbonated beverages in 2012.

Supersaturation of the home market has caused both Coca-Cola and Pepsi to take on a two-pronged strategy. The first is developing ostensibly healthier drinks. The second, of course, involves going abroad in search of new or undersaturated markets. Reflecting the latter concern, it is unsurprising that the current heads of these venerable American brands are foreign-born and that they gained their reputations by growing business abroad: India-born Indra Nooyi has been Pepsi CEO since 2006 and Turkey-born Muhtar Kent has been Coca-Cola CEO since 2009.

Together they have been duking it out in cola wars waged around the world in a battle for carbonated supremacy. Compared to the 714 colas each American consumes, there is room for much sales (and waistline) growth elsewhere. Nowhere is this competition as intense in Southeast Asia as Myanmar. Returning to this market for the first time since Eisenhower was president after decades-long US sanctions were lifted. Coke finds challenges and opportunities in equal measure. While Pepsi was first to re-enter Myanmar last year, it has had to up its pace in market development with the entry of Coke by signing new bottling agreements. Over a third of Pepsi revenues are now in the developing world. OTOH, Coke's Muhtar Kent compares Myanmar opening up to the world to the fall of the Berlin Wall, and fellow MNC Unilever likens it to "another Vietnam" in terms of possible future returns. (Should we be glad that "Vietnam" is now shorthand for promising new markets as opposed to unpromising battlefields?)

The stage is thus set for another battle royale for the hearts and waistlines of the Burmese consumer. (Coca-Cola counters with CSR efforts on the latter point, though.)  Indeed, the only ones losing out economically may be domestic firms that grew during the years of international isolation (see the clip above). Local firms are going into a cost-leadership strategy from what I can tell while ceding the foreigner / upscale segments to the MNCs. Either way, there may be no greater beverage grab of this magnitude to come for years unless North Korea opens to the world, too.
***

NPR has a very interesting write-up concerning Myanmar's isolation: Coca-Cola went back to its promotional strategies during the 1800s to account for ways to gain product attention in a "media dark" environment:

[Southeast Asia Marketing Director Shakir] Moin says he started to go back in the Coca-Cola archives. He was looking at how the company marketed its product before the internet, before TV, even before radio. Eventually he found his perfect model for Myanmar, place where nobody knew anything about Coke — Atlanta, 1886.

Back then the hot advertising trend was wall posters. Moin noticed that in the beginning, Coke didn't use the posters to talk about friends or happiness or style. It talked about what the product tasted like. It simply described it. Moin pulled out two words in particular that would form the core of his Myanmar campaign — "delicious, refreshing." Those two words from the 1800s are now on the Myanmar bottle, and on the billboards and fliers that advertise the product.

Moin pulled another trick from the early days of Coke. They offered free samples. Samples has brought people into the pharmacy soda counters in Atlanta in 1886, now free samples attract crowds at Buddhist festivals in Myanmar. It's a way to get people to taste the product, but just as importantly, it's a way to show off Coke at its best.

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The Tricky Business of Catering to PRC Tourists

Since I am currently writing up some tourism-related research, two recent articles about the global industry catering to Chinese travelers caught my eye. While there is some debate going on as to whether tourism is the world's largest industry, we can safely conclude that it is a very large one. Combine that fact with China becoming the second-largest economy in the world and the embrace of Chinese tourism is only natural: As early as the mid-Nineties, I remember visiting Parisian luxury boutiques and seeing the effects of the first wave of PRC tourists as most had salesladies who were fluent in Mandarin. However, that is pretty much a baseline expectation nowadays.

(1) To be sure, the cruise ship industry has been hurt by high-profile incidences of American liners alternatively sickening and killing their passengers. Fortunately, its tarnished reputation is not (yet?) global. There are pockets of opportunity alike China. Again, it's only natural that the Chinese would take to the open sea since they have the world's busiest seaports--the infrastructure is already there. What has been lacking, however has been marketing: Chinese with an interest on going on cruise ships cannot be away for too long since they probably are too busy making money (unlike, say, their American counterparts who can go on decade-long cruises if there were some Wall-E style). Hence the popularity of short trips around East/Southeast Asia:

When the Mariner of the Seas arrived in Shanghai in June, it became the largest ocean liner with a home port in China — a 138,000-ton mega-ship that boasts an ice rink, 10 pools, a rock-climbing wall and a mini golf course. But the 3,800 passengers it can carry don’t get long to enjoy the array of amenities. The ocean-going giant, owned by Royal Caribbean International, mostly makes three- and four-night trips to South Korea that start at about the equivalent of $500 per person. 

The preference for such short cruises is one of the major challenges international cruise lines face as they focus more resources on luring Chinese customers, says Zinan Liu, the Shanghai-based managing director for China and Asia for Royal Caribbean, whose parent company is the world’s second-largest operator, with slightly more than 23 percent of all cruise passengers. (Carnival Corp. is the largest, with a little more than 48 percent.) 

If Chinese take to cruising in the same way as North Americans and Europeans, they could provide as many as 40 million cruise guests a year, according to a 2010 market analysis by Royal Caribbean. That is twice the number of passengers expected worldwide this year. But unless they work for international companies, most Chinese take vacations only during the public holidays clustered around traditional festivals like Chinese New Year, usually a week or less at any one time.

(2) However, all is not just moneymaking with PRC tourists. Whereas the rest of the world once had to deal with loud, brash Americans and pack-rattish Japanese, today the accusations of poorly-mannered tourists are aimed at the Chinese:

Now it is China’s turn to face the brunt of complaints. The grievances are familiar — they gawk, they shove, they eschew local cuisine, and last year, 83 million mainland Chinese spent $102 billion abroad — overtaking Americans and Germans — making them the world’s biggest tourism spenders, according to the United Nations World Tourism Organization.

Their numbers have also placed them among the most resented tourists. Mainland Chinese tourists, often laden with cash and unfamiliar with foreign ways, are tumbling out of tour buses with apparently little appetite for hotel breakfast buffets and no concept of lining up [...]

Certainly, more cultured Chinese are ashamed of the poor behavior of some of their compatriots who believe that spending a lot means they do not need to observe manners:

But the greatest opprobrium seems to be coming from fellow Chinese. In May, a mainland Chinese tourist in Luxor, Egypt, discovered that a compatriot had carved his own hieroglyphics on the wall of a 3,500-year-old temple. “Ding Jinhao was here,” it declared. A photo of the offending scrawl spread rapidly on Chinese social media, and outraged citizens tracked down the 15-year-old vandal. The uproar subsided after his parents issued a public apology. 

Embarrassed by the spate of bad press that month, Wang Yang, China’s vice premier, publicly railed against the poor “quality and breeding” of Chinese tourists who tarnish their homeland’s reputation. “They make loud noises in public, scratch graffiti on tourist attractions, ignore red lights when crossing the road and spit everywhere,” he said, according to People’s Daily. 

As the saying goes, you take the good with the bad and try to mitigate the latter through better customer education. There remain instances when the customer is not always right.

UPDATE: This rude Chinese tourists trope is gaining popularity. The South China Morning Post adds to it. 

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Why Eastern Europe Spanks US in Software Development

Last Thursday our home computer running Windows XP was infected by a fairly old autorun.inf virus. For, we accidentally brought home an infected USB thumb drive from the workplace, which has computers running unpatched versions of XP. Unfortunately for us, we were also running copies of Microsoft Security Essentials for our antivirus, which I belatedly found out to be a pincushion for viruses that detects next to no threats. It took me hours to find a solution to cleaning up our infected home computers, and one of the programmes I found most useful was Bitdefender's USB Immunizer. Seeing how well it worked, I became curious about their antivirus software and discovered that it was very highly rated. (I guess that shows you how much I knew about antivirus programmes...)

So Bitdefender Free is now our antivirus programme of choice for an XP and a Vista machine we still find useful despite their age. Though I did not know it at the time, it turns out that Bitdefender is a Romanian firm. By coincidence, I too am playing a video game from a Hungarian developer right now, The Incredible Adventures of Van Helsing. While rather derivative, it boasts offbeat humour of its own along with class-leading graphics. As with most things, it is no accident that Eastern Europe is becoming a hotbed of software development since these are not isolated examples. Avast! antivirus from the Czech Republic has literally topped Download.com's charts for years and years. Video game enthusiasts should also be familiar with Polish CD Projekt's Witcher 2 from a year and a half ago that won a lot of "Game of the Year" plaudits from critics.

To be sure, Eastern Europe' emergence as a hotbed of software development has been a long time coming. The educational systems there are strong in science, engineering, technology and math (STEM )subjects--partly as a reflection of the Warsaw Pact era (go ask Google's Sergey Brin). As early as 2007, Eastern Europe was already being touted as the next India. As far as Western Europe is concerned, instead of outsourcing to India, some have found it more convenient to "nearshore" to Eastern Europe where both physical and cultural distance are not as great. Indeed,  2013 may be the year Eastern Europe gains the attention it deserves with such outstanding software titles becoming evident to the global community of computer users.
  
In the past, I've written about the challenges Asians have--China and India especially--in creating homemade brands with global recognition. With all due respect to our Indian colleagues, they haven't developed antivirus software or games of their own recognized in global markets unlike the Eastern Europeans. By contrast, the latter have the chops in incorporating their culture into their products and they know how to market these worldwide. Just as the Chinese are very good at manufacturing goods to others' specifications, the Indians are obviously talented when it comes to programming software tailored to specified needs. However, when it comes to incorporating folk tales into cutting-edge video games alike Witcher 2--or devising tongue-in-cheek Diablo knock-offs like The Incredible Adventures of Van Helsing--let's just say us Asians aren't quite there yet in terms of branding and marketing. Nor are we in the running for most downloaded (Avast!) or outright best-performing antivirus software programmes in the world (Bitdefender).

The post title also said something about Eastern Europeans spanking the Yanks in software development. I have already alluded to the incredibly poor performance of Microsoft Software Essentials, but as it turns out, it is the absolute worst at virus detection, bar none. (Yeah, go America!) As for video games, the US er, "boasts" of having the world's largest game publisher, Electronic Arts. For two years in a row, though, it's been named not just America's worst video game company but its absolute worst company, period. Microsoft and Electronic Arts are miniatures of modern-day America: having been innovative firms in the past, they've since grown fat, dumb and happy. Meanwhile, there are dozens of lithe, hungry, and infinitely more deserving software labs in Eastern Europe literally waiting to spank these moribund American giants.

They say competition improves the breed, and I'm certainly glad that our choices are not limited to US crapware. Hopefully, these Eastern European upstarts can show the Americans how fat, dumb and happy they've become before it's too late.

Just imagine how much better Windows 8 would have been if the task of developing it were left to the Eastern Europeans...we can only hope for a better world of computing.

UPDATE: Other antivirus test results are of similar opinion in that Bitdefender is tops, while Microsoft Security Essentials is deemed (gasp!) non-competitive.

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LDC Marketing Lessons Selling to Brokebank Yanks

Here's an interesting feature I somehow missed given my interest in the intersection between marketing and international political economy. Nowadays the "American Dream" is a punch line to a sick joke only the most delusional and gullible of USA#1 cheerleaders actually fall for. (And the joke's on you, buddy, as they would say.)  But once upon a time, there was a shining idea of "America" before the world crushed its spirit of smug self-superiority. In reality, 20% of these impecunious wastrels are now worth less than zero.

Those were the days: In the commercial realm there was Raymond Vernon's "product life cycle" theory (PLC) in which the most advanced products would emanate from a highly industrialized nation (like the United States) before being sold as exports to other nations including less developed ones. Eventually, they would even be made there as the "lead" nation moved on to ever-newer innovations.

Unlike ever-decreasing living standards in the US of A, however, there is still lively debate about whether it continues to innovate. That said, it is no longer a given that whatever new products are developed in the USA and other developed countries will eventually "trickle down" to LDCs. For, the implicit assumption underlying PLC is that developed countries remain the most dynamic and cutting-edge of markets. Simply stated, when America and Europe are quite broke, there is not a whole lot of folks to buy all this innovation. It's all a bit Marxist in logic, but hey, I guess he was right about something after all.

Hence, the latest trend given (a) moribund consumer markets in the West and (b) dynamic, fast-growing markets in the developing world is that more innovations are emanating from the latter. What's more, since products coming from LDCs obviously are better attuned to the needs and wants of consumers of more modest means, hard-up Western consumers are increasingly becoming targets for products designed for LDCs and not the other way around as PLC theory and the like would suggest. Let us first remind ourselves of how badly America "existence" stinks before moving on to the opportunity...

But even in one of the world's richest countries the hard-up represent a huge and growing market. The average American household saw its real income decline between 2005 and 2009. Millions of middle-class Americans have been forced to “downshift”, as credit dries up and the costs of college and health care soar. Some 44m Americans live below the official poverty line ($21,954 a year for a family of four). Consumer spending per household fell by 2.8% in 2009, the first time it had fallen since the Bureau of Labour Statistics started gathering data in 1984.

In response, marketing to what I call Brokebank Yanks is not an entirely new skill. Firms from both developed and developing nations have become adept at meeting the needs of marginal-income consumers for the longest time, so why not transfer these valuable skills to hard-up America? It is an eminently transferable skill:

Adjusting to this new world can be hard. Companies have long assumed that America would always be a land of mass affluence and upward mobility. But the American economy was undergoing a structural shift even before the 2007 financial crisis, with galloping rewards at the top and stagnation for many of the rest. Some economists expect the malaise to last for years. Few companies have thought much about the implications of this...

The optimists' complacency creates opportunities for nimbler and gloomier competitors. It also creates an opening for companies from the emerging world, many of which have frugal innovation in their DNA. TracFone Wireless, a subsidiary of Carlos Slim's América Móvil, has sold more than 3m phones in America since 2008 to pre-paying customers. MedicallHome, a Mexican company that provides medical advice over the phone for $5 a month, as well as access to its network of 6,000 doctors, is expanding north of the border. Emerging giants such as India's Tata and China's Haier regard America as a natural market for their frugal products. The bottom of the pyramid is wider than most people realise. Firms that offer ultra-low prices will find themselves as much in demand in Detroit as in Delhi.

I guess you might as well make the best of what's around even if America is increasingly becoming a dissipated wasteland. Make no mistake: there is still money to be made if you're smart enough to cater to the American nouveaux pauvres (newly impoverished) as the Economist calls them. Those Brokebank Yanks are legion.

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Gangnam Fail: A White Guy on K-Wave's Success

I am verily annoyed by an FT op-ed by neoconservative stalwart Christopher Caldwell that so happens to be the most-read article in the opinion section at the moment, so please indulge me in starting off the year with a critique. (This remains a blog, after all.) I do not need to reiterate how Americans are among if not the most insular of people, profoundly unconcerned with the rest of the world. Caldwell's best-known work is a me-too "Eurabia" book peddling apocalyptic scenarios about the forthcoming takeover of Europe by Muslim migrants. It is curious how most of the authors of such books tend to be American; the implicit fear is that Europe is but a step on Islam's global takeover with the US next in line.

After unconvincingly "enlightening" us on Islamic culture's presence in Europe, Caldwell now turns his  attention to the phenomenon of Psy as a spearhead of the Korean Wave of creative industries. Displaying characteristic American insularity of the white-as-snow variety, he is rather late to the game alike his compatriots. In the rest of the world, K-Pop has been a phenomenon over a decade old which stretches from music to TV series to movies. (Lest you think I exaggerate about his cultural blinders, he even mistook Justin Beiber as an American in the op-ed prior to numerous readers pointing this out; see the correction at the bottom of the article.) Interestingly, the FT which he writes for gets this point right via Lex:

President Barack Obama has talked about it. Madonna and Ai Weiwei, among many others, have danced to it. That would be the K-wave, or the overseas export of Korean culture. This was the year that rapper Psy made the world aware, Gangnam style, of a long-running Asian phenomenon [my emphasis]. According to a survey, those who like K-Pop were more disposed to try other Korean products. It is no surprise then that Seoul convened a panel this year to see how to keep surfing the wave.

Last I checked, the Asia-conquering "Winter Sonata" telenovela began production in 2002. Moreover, I recall pirated DVDs being hawked in Los Angeles' Chinatown shortly thereafter of this and other Korean series that had become popular throughout Asia before torrents dealt away with having to mess around with disks.

However, the most profound and insightful misunderstanding from Caldwell that instead demonstrates the white man's blindness is his attribution of the success of American cultural products to its economic might. By the same token, we should see the emergence of more global cultural artifacts like Psy (or at least in America that are evident to white people) as the US becomes mired in economic stagnation:

What the US has is not a national genius but wealth, prestige and glamour. The world is always curious about how wealthy, prestigious and glamorous people dance, fight and fall in love. If this is correct, then the American misjudgment of what other people are really buying from them is going to turn out to be a costly mistake. Obviously, the producers and venture capitalists who drive the entertainment industry will happily turn their focus towards any country that can produce blockbusters...

Should the US reputation for mismanagement, profligacy and trillion-dollar government deficits continue to grow, non-US corporate executives will at some point ask why they are paying an architect to design a conference room like those in Manhattan. Why not get one like they have in Pudong? By the same token, why not ask how people are dressing in Gangnam rather than in South Beach? Culture follows wealth, prestige and glamour. As the US share of these declines, the world’s viewers may come to prefer Sleepless in Seoul to Sleepless in Seattle.

If wealth determines pop culture success, how would Caldwell explain the following:

• As he himself understands, "Gangnam Style" does not laud the lifestyles of the rich and famous in South Korea but is rather a critique of self-important residents in one of its tonier locales;
• Rap music (without which "Gangnam Style" would not have emerged) as a critique of inequality and racism in a supposedly egalitarian, equal opportunity society;
• Reggae music emerging from the country of, er, Jamaica--not exactly high on wealth, prestige or glamour but rather poverty, crime and homicide;
• Rhythm and blues, jazz, soul, and other African-American genres receiving massive international success instead of, say, square dances and barbershop quartets;
• For an Anglo idiom, how about punk which sneers at Caldwell-esque notions of whitebread well-being.

In other words, ascribing the success of cultural products to keeping up with the lifestyles of the rich and famous is dubious. If we followed the simplistic Caldwell recipe for the success of cultural exports, why is the world's richest nation in per capita terms, Qatar, not a powerhouse in music and movies? If he were enrolled in a cultural studies course and presented this inept argument, Caldwell would get an "F" straight away.

To me, there are many more things that help determine pop culture success--including deft marketing. In reality, much K-Wave is alike its American equivalent in being superficially attractive but ultimately vapid. Interestingly, this line of criticism often emanates from Koreans themselves. Of course good-looking people singing and dancing tend to catch the eye more. What the Koreans have done which many of their Asian peers have not really achieved is to imbue entertainment products with high production values--choreography, cinematography, costumes, lighting and so forth that approach the best global standards. That they happen to be (mostly) in Korean language doesn't necessarily mean that Korean culture is ascendant, but again that they are able to combine high production values to messages Asians can relate to which Westerners occasionally get, Oppa Gangnam Style. Ever bothered to read its lyrics translated into English? We're not exactly dealing with KRS-One here. It's mostly commerce; that's all.

I tired long ago of people living in their whitebread world trying to explain everything else in Amerocentric terms whether in IPE or elsewhere. That's part of why this blog exists--to present an informed (non-white) counterargument. Caldwell is clearly among the worst offenders.

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Park Geun-hye's Lump of Coal for Chaebol Haters

When it comes to showing the West how things differ in Asian nations, I suppose nothing quite beats electing a military dictator's daughter to power via freely contested polls. But that of course is just what has transpired in prosperous South Korea. And General Park is a rather revered figure for spearheading their nation's rise to the top tier (OECD) of the global pecking order culminating with the hosting of the 1988 Seoul Olympics. Park Chung-hee has set off lots of debate about the merits of authoritarian development that continue to this day. For more on the specifics from an obviously supportive POV, I refer you to my current reference on the subject matter of Korean economic policymaking during the Park era by Kim Chung-yum.

Anyway, back to the subject matter at hand. Public debate in Korea has concerned continued favouritism shown towards large Korean conglomerates known as chaebol. These were of course modelled with a few modifications on Japanese zaibatsu. Despite differences here and there, the criticisms are remarkably similar, too. Because credit and whatnot have been preferentially allocated to these mega-firms, there has not been sufficient development of young, innovative firms. Insofar as alternative SMEs would be more geared towards meeting local tastes and customs, these countries also fail to become less dependent on export markets at a time when the West is, well, kaput. Lee Byong-chul notes how, in the run up to the elections, even mighty Samsung--vanquisher of Sony, highest-rising global brand, and the only real Apple rival--came under sustained criticism:

When asked to identify Samsung’s fiercest enemy, most people would name Apple, given ongoing patent lawsuits in various countries. But Samsung, the largest of South Korea’s chaebol (vast, politically connected, family-run conglomerates), has bigger problems at home. In the run-up to the December presidential election, the chaebol have become a target of growing popular anger...

But the conglomerates’ gluttonous business practices have suffocated small and medium-size firms, stifled innovation, undermined job creation, and left much of South Korea’s population in relative poverty, while catapulting their founding families to extreme wealth. As a result, what had once been a fount of pride for South Koreans has become a source of contention.

Chaebol reform is a defining issue in this year’s presidential campaign, epitomized in popular bumper stickers reading, “It’s the chaebol, stupid.” Past presidential candidates pledged to reform the chaebol – from cracking down on corruption to restructuring corporate governance – but delivered little, instead favoring short-term political gain from maintaining the status quo. Nevertheless, many anticipate that this year’s election will catalyze change, and that the cycle of greed and corruption that is weakening South Korea’s economy will finally be broken.

For all the huffing and puffing from the presidential contenders, though, Park's reforms are expected to be more cosmetic than a real change to Korea's political economy:

[G[iven that the Saenuri Party is traditionally pro-business, Park limits her reform pledges to harsher sentences for convicted chaebol executives and new restrictions on circular equity investment through chaebol affiliates.

Not pardoning convicted executives and cutting down on cross-shareholding doesn't count as a revolution in corporate governance in my books. While you can certainly have a debate on the merits of these practices, they are ultimately not very major efforts to begin with. Timing-wise, this election was doubly critical for reformers since a new generation of chaebol leaders--drawn from their families, naturally--are coming into power. From Reuters:

The election came at a sensitive time for Samsung and Hyundai as both are in the process of passing power to a third generation of their family owners, a process that left-wing candidate Moon Jae-in could have complicated with an attack on their shareholdings, had he won. "She doesn't have any plans to alter the structures of the chaebol ownership and their concentration of economic power," said Kim Sang-jo, an economist at Hansung University and executive director of a group urging reform of South Korea's economy...

Park Geun-hye is not likely to be as irascible as her father and her policies remain sketchy. She has promised to share wealth more widely but said no new taxes on individuals or companies, and no attack on the chaebol. "It is not my aim to dismantle or bash the chaebol," Park said in July. "The main aim is to fix negative parts such as abuse of economic power and to save the positive part the chaebol have such as job creation..." 

The chaebol themselves appeared to be happy with Wednesday's outcome and the prospect of being left alone. "We want (the president-elect) to undertake lots of economic policies that help investments and job creation so that our companies can focus on reviving the economy," chaebol lobby group the Federation of Korean Industries said in a congratulatory message.

I am not entirely sure if the chaebol inevitably "crowd out" SMEs. Anyone not hiding in a cave somewhere will have noticed Korea's newfound dominance in pop culture via the "Korean Wave." Its dominance is not an accident as the state once again has a strong hand in developing entertainment talent. Importantly for this discussion, it is not chaebol who are leading the charge here but smaller outfits alike Psy's YG Entertainment and a whole host of other acronym-heavy entertainment groups.

Botttom line: Korea is the envy of all Asia and perhaps the world for its economic dynamism and exceedingly popular entertainment. Why mess with a good thing? Economies of scale matter especially in export industries, hence the continuing relevance of chaebol. During the Asian financial crisis, Kia was bankrupted. In less than fifteen years, it is one of the world's top 100 global brands. As for the SMEs, I certainly think they can apply the lessons of the "Korean Wave" in extending the state-led model of development to smaller firms. Why should it not work for them as well?

Ultimately, Park Geun-hye gives lip service to reining in the chabeol. But honestly, they seem to be doing well enough to be left alone. As with many things, you can't argue with results. In a down world economy, you cannot ask for more.

PS: You may be wondering about the title. There is the oddly routine celebration of Christmas in any number of predominantly non-Christian nations that befuddles Westerners. Go to the lobby of any major international hotel and there will be the inevitably humongous Christmas tree. While their materialistic interpretation centred on gift-giving and a festive atmosphere kind of loses out on the core irony that the saviour of the world was born in a horse's stable, I just wanted to point out that a "lump of coal" is not an entirely foreign idiom. South Korea is rapidly gaining Catholic adherents as well, but I'll keep that idea for another post which will appear near December 25.

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F1 in Hickville: The United States Grand Prix

Yee-haw! Y'all jus' be wonderin' 'bout how F1 landed in Texus thus weekund! The news agency Reuters is usually very reliable--especially when it comes to financial news. However, I take immense exception to this feature entitled "Motor racing-U.S. goes from F1 wasteland to land of promise" as the Austin Grand Prix is underway. You see, after years of absence, F1 is back in America, this time with a purpose-built race track. Most American racing series alike NASCAR just feature oval racing, so road courses appropriate for F1 have not been plentiful stateside. Again, F1 coming to America is being lauded as a breakthrough. (The same way soccer is always said to be on the brink of becoming a mainstream pro sport in the US.) However, the sad reality as F1 promoters should be aware of is that this is but the latest effort to hold a race there after years and years of failed attempts, Further on in the article it gets more honest:

Unable to find a permanent home, F1 has barnstormed its way around the U.S. with Austin becoming the 10th city to host the series after Sebring (Florida), Riverside (California), Watkins Glen (New York), Phoenix (Arizona), Dallas (Texas), Detroit (Michigan), Las Vegas (Nevada), Long Beach (California) and Indianapolis (Indiana).

Part of the problem stems from there being no top-class American driver in F1. Indeed, there hasn't been one since the legendary Mario Andretti won the F1 championship in 1978--a long time ago in a race series popular far, far, away from American shores. Just as Fernando Alonso brought an F1 craze to Spain and races to boot, so have they been looking for an American champion without success.

That said, F1 sponsors are keen on an event in America since some of if not their biggest markets are stateside:

Teams would not be against three stops in the U.S., which is the biggest market for many outfits, including Ferrari, Red Bull and Mercedes Benz. "It's crucial for Formula One to be a true world championship you've got to have a race in America, said Red Bull team boss Christian Horner. "For the first time ever we've got a circuit that's been specially made to bring out the best and showcase Formula One cars. "It's a crucial race for Red Bull. America is Red Bull's biggest market."

Even the ever-optimistic F1 ringleader Mr. Ecclestone does admit though that F1 is very, very low on the American pecking order of spectator sports:

Ecclestone admits he does not know why F1 is so popular in some countries yet virtually ignored by others, including the U.S. "It's a strange thing I don't no, no idea," said Ecclestone. "When I arrived here the guy at customs said, he had not heard of Formula One." In Texas, NASCAR is king and it is likely more eyeballs and television remotes will be focused on Homestead, Florida where the Chase championship will also be decided on Sunday.

Dear billionaire Bernie, I'll tell you why F1 is lame in America: there is no marquee American racing car driver. If you really want to break into this market, try paying more attention to American-born drivers coming up the ranks in various driving academies. In the meantime, you will get clobbered by the archetypal Jurassic race series, NASCAR, where the American primitives only adopted fuel injection at the start of 2012 [!!!] This when most passenger cars have had them for, what, a quarter of a century? Being outmoded has resulted in several NASCAR race fatalities, too, so I have to question why a slick, international product must be dumbed down--hicked and domesticated to meet American tastes.

Lastly, another reason Bernie Ecclestone should contemplate is that race time is non-standard for large TV audiences in Europe (and Asia more and more). I know, I know--many events in Asia and North America also have this issue, but at least they have much local drawing power locally as well as having the aforementioned growing TV audience in Asia. The same cannot be said for F1 in America, so I remain pessimistic about F1's chances of survival this time around.

UPDATE: Christian Sylt of Autoweek has the lowdown on the wacky political economy that brought this race to Texas. Its future apparently hinges on the state's willingness to keep forking over a hefty annual fee to Bernie and Co.

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China's Growth Slowdown is Utterly Unsurprising

Nobody is immune to economic slowdowns, and it was perhaps only a matter of China encountered such an episode. To paraphrase my erstwhile LSE IDEAS colleague Martin Jacques, when China rules the world may be set back a few years. Even the Associated Press via Yahoo! News has noticed that, gee, maybe the advice offered to China in recent times about transitioning to a sustainable form of growth not fuelled by mercantilist policy and presumptions of steadily expanding global economic growth was sound:

The cost of inaction could be high. The World Bank says without change, annual growth could sink to 5 percent by 2015 — dangerously low by Chinese standards. Some private sector analysts give even gloomier warnings. The government's own advisers say it needs to promote service industries and consumer spending, shifting away from reliance on exports and investment. That will require opening more industries to entrepreneurs and forcing cosseted state companies to compete. State banks would have to lend more to private business that is starved for credit.

An overemphasis on manufacturing and an underemphasis on services not only relies more on external demand but is also more damaging to the environment. In turn, export markets tend to get fed up running persistent deficits with China. Credit going mostly to traditionally favoured SOEs instead of entrepreneurs and SMEs is another thing to consider. Misallocation of credit on an epic scale, to be sure. If it sounds familiar, it's because these prescriptions have constantly been offered to the Chinese policymakers who thought that the old export-led model could continue forever, but no. They were drunk on success, but it's now time to sober up.

Actually, Dani Rodrik has long offered the wisdom that igniting economic growth is a separate task from sustaining it. And, of course, China's current model is visibly straining against the limits of ecological and economic unsustainability. But, here is Rodrik from 2004:

The second argument is that igniting economic growth and sustaining it are somewhat different enterprises. The former generally requires a limited range of (often unconventional) reforms that need not overly tax the institutional capacity of the economy. The latter challenge is in many ways harder, as it requires constructing a sound institutional underpinning to maintain productive dynamism and endow the economy with resilience to shocks over the longer term. Ignoring the distinction between these two tasks leaves reformers saddled with impossibly ambitious, undifferentiated, and impractical policy agendas.      

The institutions Rodrik speaks about generally concern property rights and rule of law--not necessarily always in evidence in the Wild, Wild East. More recently, Rodrik offered an opinion that there are "no more growth miracles" that revolves around similar ideas:

Manufacturing enables rapid catch-up because it is relatively easy to copy and implement foreign production technologies, even in poor countries that suffer from multiple disadvantages. Remarkably, my research shows that manufacturing industries tend to close the gap with the technology frontier at the rate of about 3% per year regardless of policies, institutions, or geography. Consequently, countries that are able to transform farmers into factory workers reap a huge growth bonus.

To be sure, some modern service activities are capable of productivity convergence as well. But most high-productivity services require a wide array of skills and institutional capabilities that developing economies accumulate only gradually. A poor country can easily compete with Sweden in a wide range of manufactures; but it takes many decades, if not centuries, to catch up with Sweden’s institutions.

Too dependent on demand from enervated Western economies in North America and Europe instead of from home, this outcome was actually rather predictable. I will soon offer more thoughts on this topic, especially China's inability to move up the value-added chain in terms of branding and marketing. I have covered this topic in some depth, and I do believe that it helps that my masters degree was in marketing, not political science! At any rate, more soon.

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Unionization, Or Why American Carriers Stink

[NOTE: This post won't win me any points with the Barack Obama / Dean Baker / union apologist crowd, but this blog couldn't care less about parochial US concerns. This is the international political economy zone, buddy.] Everyone knows that American carriers are among the worst in the world, and are certainly the worst in the developed world. Given that Americans came up with the concept of services marketing, it is galling that the most visible services those of us in the rest of the world experience firsthand when voyaging there are their el crappo airlines. The planes are ancient. The food is bad (if there's any at all). And, worst of all for an industry that used to capitalize on the glamor of flight--sorry for being politically incorrect once again--the flight attendants are geezerized, surly and big enough to be beat you into a pulp. Before you accuse me of all sorts of things, here is WSJ travel correspondent Jennifer Chen illustrating that this is not mere male bias at work with her characteristic in-flight horror story:

Less than an hour into the [domestic] flight, I was regretting my choice. Flying coach, I expected uncomfortable seats, lackluster food and surly service, but what I hadn’t counted on was being turned away from the toilet. As I reached out to open the door, a flight attendant preparing a drinks cart two feet away barked, “You can’t go in there. I’m busy. Go to the one in the front.” When the other toilets turned out to be occupied, I turned back to discover the occupied sign was on. “I’m not letting you in,” the flight attendant insisted.

The reason for American airborne mediocrity, of course, has much to do with unionization:

Why are Asian airlines generally so much better? And why have the standards on U.S. airlines fallen so low? The differences lie in history. Since airline deregulation in the late 1970’s, America’s big three have struggled with “legacy issues”—an industry term for older workforces, higher salaries, pensions and union contracts that all add up to higher costs.

Not only are Asian airlines relatively unhampered by these issues, but they’re also blessed by the fact that their region is seeing phenomenal growth in passenger traffic. Asian airlines in recent years have accounted for half of total industry profits. And those earnings are wisely reinvested into newer planes, cutting-edge seats and innovative entertainment systems. Even Chinese airlines are noticeably improving, leading a regional buying spree of planes. “[Asian airlines] are constantly thinking six or seven years ahead, and they have the money to invest,” Brendan Sobie, an analyst with the Centre for Asia Pacific Aviation, told me.

Industry awards tell the tale as US carriers are nowhere to be found while Asian carriers are among six out of ten of the world's best airlines. US carriers routinely fly in and out of bankruptcy, with American Airlines doing so most recently. And yet even more of their workers are planning to--get this--unionize? Board AA on the flight to unionized financial hell. Last I heard, US Airways was also headed there.

To be perfectly honest, Asian flight crews are often chosen and trained to be easy on the eyes and courteous to boot. Being a member of flight crew should be a young person's trade. In this day and age of sky-high fares, those are small but significant rewards for flying on Asian carriers. To be gender-neutral, I obviously have no objection to hunky male attendants for female passengers, either. At any rate, you won't find them on American carriers since they are about as superannuated as the female flight crew--fat, balding, and the rest of it.

So American carriers are uncompetitive, habitual money losers awash with decrepit capital goods and geezerized Anglo fatties with attitude problems. In short, the US airline industry is a microcosm of America itself; they expect you to fork over good money for the privilege of being abused. If you want a poster child for the problems of organized labour Stateside, you don't have to look far. The rest of us see the folly of America and prefer to do without.

And no, you cannot have another bag of peanuts.

DISCLAIMER: My old boss used to be chairman of Malaysia Airlines (2012 winner for "Best Cabin Staff")

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Perestroika 2012? Cuba's Zany Capitalist Transition

The reforms that Mikhail Gorbachev introduced in the Soviet Union a quarter of a century ago or so ultimately put its demise into motion. Authoritarian regimes have thus been wary every since of following the USSR's fate. Certainly, China's more deliberate pace of adopting market reforms has succeeded in creating a form of market socialism that seems to be reasonably durable. Hence the familiar notion that market reforms should not happen faster than the political system's ability to cope with them for those keen on retaining a grip on power during this transition.

When Raul Castro took the reins of power in Cuba due to his (marginally) older brother Fidel's increasingly poor health, he too brought about a set of reforms including availing of consumer goods from abroad sold through private retail channels. Unfortunately for him, state-owned enterprises--or at least what passes for them in Cuba--have borne the brunt of shifting tastes as many SOEs offered consumer products and services:

Retail sales by Cuban state-run businesses declined significantly over the last two years, the government reported this week, as privately imported goods and a growing "non-state" sector took their toll. The report, which would be shocking in any other economy as it would signal a drastic fall in consumer spending, in the case of Cuba reveals the difficult balancing act of Cuba's communist leaders as they attempt to reduce the state bureaucracy and encourage private sector growth in a major transformation of its centrally planned economy. Retail sales fell 17 percent, or from 11 billion pesos in 2009 to 9.3 billion last year, the National Statistics Office said in its 2011 statistical year book, which is gradually being released on its Web Page (www.one.cu).

Actually, consumer spending is not caving in as it appears through official statistics. Rather, the influx of Cuban-Americans bringing consumer goods with them obviously purchased from elsewhere and traders from nearby Latin American nations have meant a lot of domestic demand is now met by what we used to call the "grey market": Unrecorded imports and goods sold under the rather that while not strictly "illegal" are not recorded in the official statistics:

The most dramatic decline came in durable goods, from 1.2 billion pesos in 2009 to 266 million last year, as Cuban Americans brought in flat-screen TVs, video game and DVD players and other domestic appliances for relatives and sale after U.S. President Barack Obama lifted all restrictions on interaction with their homeland. Hygiene and cleaning products fell from 920 million pesos in 2010 to 338 million in 2011 as the Cuban Americans joined thousands of Cubans who took advantage of lax visa regulations to move to Ecuador in recent years, where some set up trading schemes to move clothing, personal hygiene and other products to the island for sale through informal networks of door to door distributors and the mom and pop businesses like those in central Havana...

Up until this month, when import duties were drastically increased at airports, ports and post offices [on "grey market" products], presumably to slow the decline in retail sales, the informally imported goods were cheaper and often of better quality than those at the state-run stores, chipping away at sales.

A walk along Neptuno or San Rafael streets in Central Havana, one of the busiest areas in the city, tells at least part of the story. Dozens of private makeshift shops in people's doorways and living rooms, which began opening over the last two years, sell privately imported clothing, under-garments, hardware and other items right next door to state-run stores with similar goods. 

Meanwhile, reform continues apace--especially in the money-losing state services sector where privatization is afoot. Alike in the USSR all those years ago, they are being asked to become self-sustaining:

As part of an overall reform of Cuba's Soviet-style economy, the Communist Party loosened regulations on small, retail service-related businesses in 2010 and began moving thousands of state-run outlets into the "non-state" sector. This resulted in a boom of private cafeterias and restaurants, presumably responsible for a fall in state food service revenues from 14.1 billion pesos in 2010 to 12.7 billion pesos last year, according to the government report.

Cuba is gradually moving state-run retail services, such as barber shops, appliance and other goods repair and small cafeterias, into a new system where employees rent the premises, set their own prices, pay taxes and compete with small, privately owned businesses. Most of these state establishments have always operated at a loss, due to fixed prices, theft and the expense of controlling them, so less revenues in this case could translate into more money for the state through rent and taxes.

So, is Cuba going to go the way of the USSR or modern-day China? The Castros likely wish it would go in the latter direction obviously, but the dynamics of a large informal sector sitting uneasily alongside the formal one are eerily familiar. Either way, the gales of creative destruction are certainly passing through the island nation.

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Hedonism in Retreat: FT 'How to Spend It' Now Free

[After many months going without one, dear readers I bring you an honest-to-goodness weekend feature.] The Financial Times has always been regarded as an excellent source of business news, hence it struck many as odd that it would cater to the upscale demographic by expanding its "How to Spend It" feature from the weekend editions into a full-fledged website. While FT readers are wealthier than the average newspaper readers in the same way that Yogi is smarter than the average newspaper reader, this online feature seemed odd for a number of contextual reasons.

First, the British have traditionally been far more circumspect than their American brethren about showing off their money. While Robin Leach of Lifestyles of the Rich and Famous fame--he of champagne wishes and caviar dreams--was of course British, his tasteless vulgarity of a TV programme was of course produced Stateside where such crass fare is the rule and not the exception. Second and most damning of all, the "How to Spend It" website went live in 2009--just a few months after the global recession.

In these trying financial times, people will apparently spend on the FT's unparalleled business news coverage but not necessarily for its lifestyle features. After all, there are jillions of magazines and TV shows that have a similarly hedonistic focus--and that often give away such content for free. Apparently, the FT has decided it's time to emphasize that "How to Spend It" does not require a financial outlay--demonstrating that most web surfers do not intend to spend it by paying for access to the FT's sybaritic offering. I thus conclude they're looking at a mostly ad revenue-driven model, but I suppose three straight quarters of economic contraction in the UK have dealt away with champagne wishes and caviar dreams for the online offering.

So rejoice that we are all "free" to dream about living like the famously bling-bling Beckhams c/o the FT. Head here, dahling.

UPDATE: The "How to Spend It" folks have gently reminded me that the standalone website has been free since its launch. I think I got the impression that it only became so because that fact has been emphasized during this year's redesign. While such is probably the case, the juxtaposition of a gated financial news service (FT proper) vis-a-vis its free website devoted to the finer (and costlier) things in life remains curious.

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Lamborghini Aventador, US-Subsidized Supercar

Now for one of my occasional Robb Report impersonations--albeit with an IPE twist. (We've got style, baby.) In 1998, Lamborghini became a wholly-owned subsidiary of Audi AG, which in turn is a luxury brand of the almighty Volkswagen Group--the real largest automaker in the world. What if the Germans overran not the world's territory but the global automobile industry? I'd venture that it would look a lot like the present-day VW Group: (British) Bentley, (French) Bugatti, (Italian) Lamborghini, (Spanish) SEAT, (Czech) Skoda and the father brands (they're from the Fatherland, right?) Audi, Porsche and Volkswagen. Being made to point out this fact because of Obama's disingenuous SOTU address jogged my memory of this post which I planned to write sometime ago. Many blogging ideas; too little time.

The debate over whether Volkswagen or General Motors is the world's largest automaker obscures a number of things we should also consider in which firm outdoes the other. First, VW has never, ever needed any bailout from the state of Lower Saxony (which owns part of it) or Germany itself. This is partly down to the astute management of Ferdinand Piech--a real automotive genius who is none other than the grandson of Ferdinand Porsche (of the eponymous marque and the designer of the VW Beetle). Piech has proven himself to those in the motor trade by, among other things, designing the Le Mans-winning Porsche 917 in his early days. Second, VW's profitability is secured by owning a lot of luxury brands that can command higher margins on the market. The cachet of Audi, Bentley, Porsche and so on is unmatched by anything Goverment Motors offers.

Recently, I've succumbed to an admittedly unproductive diversion I've had growing up which should be familiar to males the world over: reading car magazines. Having not read these darned things in a while despite watching Top Gear fairly regularly, I like many was struck by today's supercar du jour, the Lamborghini Aventador. Just watch that mighty beast in action. To achieve truly astounding performance feats alike accelerating from 0 to 60 MPH in 2.9 seconds, this "Italian" supercar embodies among the most advanced technologies you can find in a production car.

Thus the third point that underscores just how far the once-mighty GM has fallen is the advancement of VW Group designs over their American counterparts. In particular, the carbon frame pictured above of the megabuck Lamborghini Aventador is impressive, combining very low weight with very high strength. The most galling thing for USA #1 cheerleaders--and there are too many out there in the part of the blogosphere I come across--is that this technology comes from the American commercial jetliner maker Boeing. In turn, Boeing gained this technological edge via subsidies from the US government. Don't believe me? Fine. How about a WTO ruling which suggests just that?

Boeing received at least $5.3 billion in improper subsidies from the United States government to develop its 787 Dreamliner and other jet models, giving it an unfair advantage against its European rival, Airbus, the World Trade Organization confirmed...

In an 850-page report, the Geneva-based trade body accepted a claim by the European Union that research and development grants provided by United States space programs contributed substantially to the technologies used in building the 787, Boeing’s latest flagship aircraft.

Trade watchers will want to scrutinize the nitty-gritty details of DS 353 - Measures Affecting Trade in Large Civil Aircraft which are available on the WTO website. As for the rest of us, just keep in mind that the Lamborghini Aventador shares the carbon fibre space frame technology found on the 787 Dreamliner. Notably, the Aventador has not only starred in a car show but also an advanced materials show:

Whoever said “beauty is only skin deep” apparently never watched a Lamborghini get built. Thanks to the Italian automaker, those shallow types can head over to the Paris 2011 JEC composite show, and see their latest supercar, sans skin.

Built with a reinforced carbon fiber composite that was developed in conjunction with Boeing, the Aventador LP700-4’s naked chassis looks right at home in the showcase of materials and technology. And since composites also comprise many of the car’s other components, including wheels, frame and seats, there’s a little more to look at than just a carbon tub.

And here's the Lambo press blurb:

Automobili Lamborghini's participation in the 2011 edition of the JEC Composite Show in Paris - one of the world's most important exhibitions of composite materials - is intended to emphasize the company's leadership in this highly specialized sector, not only in applying these materials in mass production (as shown by the new Aventador LP 700-4), but also in the investigation and development of new manufacturing technologies and the resulting product spin-offs.

The use of composite materials reinforced with carbon fiber is becoming increasingly widespread in the automotive sector, as revealed by a study by Lucintel that foresees a growth of 65% over the next 5 years. Many manufacturers are working on developing and applying these technologies so they can build lighter vehicles that make an important contribution to reducing fuel consumption and air pollution, through improvements that include increasing the strength of the vehicle's structures.

The overall point is that the main beneficiary of Boeing's advancements in carbon fibre technology which are partly down to DoD and NASA inputs are not fellow US companies but a German-Italian concern. In other words, what's best for Boeing is not what's best for GM. With their superb application in road cars as exemplified by the Lamborghini Aventador, this knowledge gap between automakers will only become larger. There is a "trickle down" of technologies here, but for the benefit of non-Americans' bottom line. While you can of course argue that GM cannot sell such a premium vehicle, it calls into question why its marketing prowess does not extend to luxury cars. Remembering GM's Saab fiasco gives me shivers.

Bailouts aside, the world has moved on. Isn't it great that all those US government subsidies that funded Boeing are helping...a German-Italian automaker? VW is rolling on the tarmac laughing all the way to the bank. American industrial policy (whatever that is) is so inept and uncoordinated that they can't even tilt the playing field in the favour of their own companies consistently.

NOTE: Making these carbon fibre thingamajigs is a costly, proprietary process as demonstrated by the even more exclusive (if not higher performance) Lexus LF-A.

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Goin' Down: Those Crappy US Airlines, Cruise Lines

For those of you who remember your high school literature, Charon in Dante Alighieri's Inferno was the ferryman of Hades who transported the souls of the dead across the river Styx on a journey to farther reaches of the underworld. In today's international political economy, you can argue that American travel services now perform similar functions. Perhaps ol' Charon has hung up his oars for good and struck a deal with Satan himself to outsource these devilish duties. At any rate, modern American travel services epitomize America itself circa 2012: an economically unviable entity that should be put out to pasture ASAP if our contemporary era of subprime globalization had any sense (which it doesn't).

For a country that pioneered the concept of services marketing, its cutting-edge research, and its application to real-world business, it remains astounding how poor the United States' travel services are. Truly subprime, in fact. Let us begin with the most egregious violator of economic logic, the US airline industry. Given how flying into and around the US presents America's face to the world at large, this industry drags the USA's tarnished reputation further into the mud. We all know the maths of it: In no small part due to American warmongering in Iraq and perhaps Iran in the near future via the Bushite doctrine of pre-emptive strike, oil prices have shot through the roof and caused American carriers already on shaky ground post-9/11 to cease being businesses in the commonly understood sense. In the decade since, these airlines have lost over $50 billion. Especially if you're of the "deficits don't matter" persuasion, you can of course argue that this amount pales in comparison with the US federal deficit. But, the larger point is that the constant need to subsidize this money loser and keep interstate/international air travel is but another leech on the decaying body politic of America.

At the end of last year, we received news that American Airlines entered bankruptcy proceedings. This action completed the cycle of every single major US carrier (save for Southwest, but some would say it doesn't count as a discount carrier) declaring insolvency at least once. Hilariously, it was not long before that when American Airlines proudly proclaimed that it made the largest order in airline history with Airbus and Boeing. Again it's symptomatic of America nowadays: speaking loudly, carrying no stick. The truth is more straightforward: US carriers have among the oldest fleets, poorest customer ratings, surliest and highly unionized flight crew, lousiest on-time performance, a chequered history with lost baggage...the list goes on and on. Let's just say you won't be hearing "Relax" playing in the background with this lot. That they run old jets exacerbates their status as perennial money losers given that older designs are less fuel-efficient than modern ones. America and its airlines: misery loves companies.

* * *

We also received truly appalling news of the Costa Concordia sinking in Italy. My first reaction was, "That's impossible! European cruise lines aren't into PR fiascoes." Its online advertising states "Experience the Costa Concordia cruise ship for a cruise vacation you will never forget." Quite so. Ever-so-slightly more investigation reveals that the parent company of the doomed liner is none other than the former Carnival Cruise Lines. Having a long memory--sometimes a blessing, often a curse--I recall the good ol' days of its operation when the worst sort of maltreatment passengers encountered on Carnival was chronic food poisoning [1. 2, 3]. Apparently unsatisfied with such offences to passenger health, they hired some nutter to run a $600 million vessel into something.

You can argue that Carnival improved somewhat by linking up with a British cruise line. You can further argue that it has done reasonably well compared to its airline counterparts. All I can say is wait till the lawyers are done with Carnival. There may have been a smidgen of improvement via the British involvement, but traditional American hallmarks of harming the customer never really go away in these sorts of services. How about giving a 30% discount to survivors of the ill-fated Costa Concordia on future Carnival trips to add insult to injury? Let's say the PR geniuses at Carnival will never get over that blunder. US airlines may be terrible, but outright termination is admittedly seldom on the cards. It's even pulled much advertising out of sheer shame.

And don't get me started on how US airports have suffered from neglect alike the rest of America's rotting infrastructure. With New York's JFK Airport ranked worst in the world, America's shame is only increased. Got that, America #1 cheerleaders? Instead of telling us how great your nation is and how stupid us primitives are, why not address your thoroughly rotten transportation services that reveals the joke is on you?

Certainly Obama's drive to double exports in five years should benefit from services people actually can, ah, stomach using? That such matters appear like a pipe dream in modern America tells you how far it's fallen. Hellbound, in fact--go ask Charon.

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Apple & Samsung: Who's Got Whom by the Balls?

[NOTE: For those who don't get the title, play this AC/DC song.] There are two broad debates going on regarding the current dominance of Samsung in the consumer electronics space. First we have the perennial question about the role of industrial policy for its success. Widely lauded for being a source of South Korea's competitive advantage during its rise to "Asian tiger" status, industrial policy was subsequently derided as a mechanism for harmful corruption during the Asian financial crisis. Surely there are those who criticize the continued state favoritism shown towards chaebol and its effective stifling of the emergence of smaller, nimbler Korean startups.
Me? I say the results speak for themselves.

Second and more interesting to me at the moment is the ongoing legal battle being waged by Apple against Samsung. At the same time that the Korean firm manufactures a number of the components used in the Apple iPhone, it makes its own line of smartphones. Samsung has been very successful in this regard, overhauling Apple as the world's largest seller of such devices in Q3 2011. Samsung's explanation for this strategy is that being a parts maker and a branded seller helps achieve economies of scale which it otherwise would not have had if it did not spread development costs to other customers. On the other hand, Apple is very much in line with the modern vision of an American "knowledge economy" firm that does not concentrate on manufacturing (the gritty stuff whose value-added tends to fall over time) but on branding and design (the glamorous stuff whose value-added tends not to fall). That is, who wants to be stuck with plant, property & equipment when they eventually become obsolete--isn't it worth a lot more "up there" in your head?

In many ways it's a next-generation debate between those who see the "knowledge economy" or a broader shift towards services as a source of comparative advantage (especially Americans) and those who perceive that industrial policy is still viable in the 21st century with tweaks here and there (especially Asians). Yet to paraphrase an ad slogan from long ago, Korea no longer practices its grandfather's reverse engineering but one wherein it sets the pace in new industries ahead of its Western competitors. It has certainly done well in this regard during the 21st century with bets that have paid off:

In 2000 Samsung started making batteries for digital gadgets. Ten years later it sold more of them than any other company in the world. In 2001 it threw resources into flat-panel televisions. Within four years it was the market leader. In 2002 the firm bet heavily on “flash” memory. The technology it delivered made the iPhone and iPad a reality, and made Samsung Apple’s biggest supplier—and now its biggest hardware competitor.

Or so the Koreans would like to think. As you know, Apple has taken Samsung to court over, indeed, copying the look and feel of its products (imitation is the sincerest form of flattery and all that):

Competitors also balk at the way that Samsung scales up quickly to supply parts to other firms as well as to price its own gadgets keenly. Supplying the rest of industry drives down Samsung’s costs yet further, with its rivals in effect financing its success. This strategy can create problems. Samsung is Apple’s most important supplier in the smartphone and tablet-computer markets. Samsung components, which include all the product’s application processors, account for 16% of the value of an iPhone. It is also Apple’s greatest competitor in those markets. Apple is now suing the socks off the company for copying the look and feel of its products. At the same time it is urgently seeking new ways to diversify its supply chain.

There may thus be limits to the symbiosis said to be going on between these firms. Apple may want to broaden its component supplier base in case Samsung tries to get back at it for legal contretemps. Meanwhile, Samsung may want to devote more attention to the software side as the hardware side of the consumer electronics equation. That is, an amount of overlap in expertise is perhaps inevitable for each to maintain competitiveness vis-a-vis each other. While the Economist views this relationship as rather unique, B-school professors Brandenburger and Nalebuff already noticed how widespread the phenomenon of "co-opetition" was back in 1997 when Steve Jobs had yet to sell a single iProduct (having just rejoined Apple). Been there, done that, saw the movie, bought the T-shirt.

Returning to the post's title, who has whom by the balls? In the short term it's to an extent mutually assured electro-destruction if either backs out in a significant way. In the long term it's probably not a question we will be asking as Apple seeks to broaden its supplier base and Samsung does what it's done many times before and moves on to other industries it deems more promising--which are not necessarily those in the consumer electronics space. Remember, Samsung was not originally a consumer electronics company. Tis but a momentary convergence of interests.

That said, the broader debate on the prospects for the "knowledge economy" which America has in large part bet its economic future on compared to those for the reworked conception of industrial policy which Asian nations have staked a claim to should be interesting to watch. Who says both cannot work--and purchase stocks of both firms to diversify one's portfolio? More importantly from a political economy perspective, which specific strategy will be most beneficial to their home nations? I've already criticized the Apple model for not doing much that is good for America, for instance.

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