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FIELD TRIP TO ASIA: 1991-2011, from the end of colonial Asia to the birth of modern Asia

Marina Bay Sands, Singapore

22 November 2011 (Manila, Singapore, Hong Kong)

Twenty years is a short blip in the history of Asia.  Yet this span of two decades marks an important moment of resurgence for the region.   In 1991, multinationals and their expats ruled the rooster.   Most of the countries were still entangled in the model of import substitution, current account crisis and shaky currencies.  Old colonial buildings were still the main architectural attractions in most capital cities.  Today, the crowd of expats has seriously thinned on the ground, pushed out by high costs of living and talented local managers.   Cutting edge buildings, such as the Bay Sands complex in Singapore, are now commissioned more often in Asia than anywhere else.  Modern Asia is coming into its age.

During the period of 1991 to 1995 I was fortunate to visit more than twenty Asian countries, from Pakistan and India, to Japan and China, to New Zealand and Australia.  At the time Japan was grappling with its own terrible financial bubble and crisis.  The young economic tigers (Hong Kong, Singapore, South Korea, and Taiwan) were the living proof that the export development model was the way forward for others:  A mix of low costs, hard discipline, national dedication, disguised protectionism and export drives.  Soon the rest of Asia followed suit, dumped import substitution, opened up and built export industries in electronics, garments, industrial goods and IT services. 

1997 saw the transfer of Hong Kong to China, a last closing point in the colonial history of the region.  Then Thailand became the epicentre of the notorious economic crisis that affected emerging countries across the world.   Caught short with insufficient currency reserves, Asian countries responded to the crisis by accelerating economic and financial reforms anchoring their export model.   The hard lessons of 1997 are serving Asia well in this current financial turbulence.  China joined the WTO in 2001, and hence after demonstrated that the famous ‘hockey stick’ projections could actually occur for once in real life.  The tide was by then turning in Asia.

By 2005 it was becoming increasingly clear the Asia region had all in the elements in place to rival the European Union and the Americas in trade and competitiveness:  a vast pool of cheap labour, technology creation and sophisticated manufacturing capabilities in the advanced countries, a growing middle class peppered across the region serving as a large Asian domestic market for scale up, and local financial centers that could oil the wheels of trade and commerce in the region.  Multinationals sped up their investments in off shore production, R&D and marketing and soon FDI was pouring in the region, notably in China.  Thousands of cranes have in the past decade built modern infrastructures, from airports, to highways and port facilities.  Investments into infrastructures and real estate have been a big part of the economic story.  Modern skyscrapers have nothing to envy to North America.

THE NEW MODERN ASIA

Today a new modern Asia is taking shape and the economic challenge to western economies will not abate soon.   There are now more than a dozen countries challenging the West on the road to higher value goods, hungry for market shares.  Asian economies have built critical masses and their growth story benefits from positive reinforcements:

–          Rather sound economic policies are now focused on developing high value exports or protecting value chains, increasing productivity, keeping competitive exchange rates, and building up reserves.  This stability reassures foreign investors targeting low cost export production or marketing for the domestic consumers.

–          More investments and jobs lead to growing middle class markets, which in turn attract more local and foreign investments.

–          The new middle class is young and tech savvy. For instance, call centers in the Philippines employ more than 600,000 young workers, most with graduate degrees. Their impact in Makati is clear in the cafes and shopping centers.

–          Managerial talent: In Hong Kong, new CEOs of multinational affiliates are increasingly Chinese.  Years of training and talent development are now bearing fruits.  The expat crowd is now mostly found in financial centers or in offices playing a regional coordination role.  These regional centers, traditionally located in Singapore or Hong Kong, are now even shifting activities to inland China.

–          Emerging champions: Out of vast markets is emerging a new breed of champions, testing international waters in other emerging markets.  The shelves of local bookstores include titles like The globalisation of Chinese companies, Strategies for conquering international markets, Chinnovation, How China’s leaders think, Start-up Asia, etc.

–          Technology agenda:  Asian firms have been adept at technology transfers, by all possible means. But the best of Asia are building their own technology.  Samsung is the one rival barking at the heels of Apple.   R&D spending is shooting up in Asia.

–          Innovation:  New markets call for new innovation patterns, with an emphasis on high value/cost ratios (frugal innovation). Expect to see some those innovations to cross oceans.

–          Financial centers:  Banking systems differ in Asia, bearing a different mix of private and state banks than in the West.  There is no doubt that Singapore, Hong Kong, Shanghai and Tokyo form a powerful cluster in finance.  We should expect to see the rise of the Yuan as a weighty international currency within 5 to 10 years.

DOING BUSINESS IN ASIA

As much as Asia is luring a column of businessmen, it is still a high risk deal making area, where the rule of man overshadows the rule of law.  The landscape is littered with broken dreams, broken promises and broken bank accounts.  This is not a place for amateurs.  Increasingly doing business in Asia calls on the strength of brands, minimum company size, market knowledge, and long term commitment.  Successful partnering requires astute diligence work, and cultural fluency.

There was a time when rules were written by Westerners in Asia.  Now Asians have written their own and we have to learn to play by them.  This is the engine of growth for many international companies, as a great deal of them are expanding at a rate of more than 20% per annum in the region.  Despite the predictable bumps, this is also the promise of modern Asia.

André Du Sault

ADS has visited, worked or travelled in Asia since 1985. Teaches ‘Doing business in Asia’ at McGill University.

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By André Dusault – November 22, 2011

CFO – 3RD QUARTER – EUROPE ON THE EDGE OF A TAILSPIN, three scenarios to watch

10 October 2011

We know it is going to be a long hard slug out of this financial crisis.  Slow growth in Japan, Europe and USA will slow deleveraging for governments and consumers for years to come.  Growth options are just limited.   Despite all the venerable intents to zoom in on exports, the reality is such that a good part of the export game has already been shifted to the emerging markets.  And are they not keen to protect their exports:  Their exchange rates have weakened from 3 to 10% against the US dollar since the beginning of the year (with the notable exception of China at +3.4%).   At best, the roadmap to sustained economic recovery will be a slow process.  At worst, the forthcoming European debt crisis could derail and push it into a tailspin of economic damage. 

The stakes are clearer and riskier than ever in Europe.  Three issues stand out.  First there is a solvency issue with Greece, a liquidity problem with Ireland, Portugal and to some extent Spain and Italy, and a banking crisis in the making.  A frightening number was published by John Hancock last week:  today the total debt of the three largest banks in France reaches a staggering 250% of France’s GDP.  The European Financial Stability Fund, with funds estimated at Euro 440 billion, will look rather insufficient to deal with this soup of solvency, liquidity and banking stress.  Yet we know the cost of an extensive bail-out is a fraction of the cost of breaking up the Euro. Solving the bail-out issue remains the priority in the very short term.  Second, the true proportion of the gap between monetary union and loose fiscal policies, in part at the origin of this mess, is coming to light: large imbalances in labour costs, budget deficits, national debts and current accounts amongst European nations have been allowed to grow over time and are now threatening the very monetary union.  Third, it is awfully painful for depressed countries to restore competitiveness.  How far can austerity dig in, wages fall and jobs disappear without breaking a social contract in these countries?

Thus the ideal package would fix 3 things: 

1. The bail-out:   Currently short of reassuring financial markets

2. Some sort of fiscal union in Europe: Currently under tortuous negotiations

3. A roadmap to country competitiveness for depressed nations:  Which remains hard to sell.    

Under crucial time pressure, what can we possibly expect from European politicians to deliver?  At the minimum, failure to sort out the bail-out between sovereign debt and banks could deal a nasty blow to the world economy, or even create a tailspin:  tipping the USA into a double-dip, slowing Asia and so on.  Leaving the fiscal question untouched would condemn the European Union to an uncertain economic future.  Leaving out the small troubled countries would tear off cohesion in the European project. 

The words of Churchill resonate:  ‘Want of foresight, unwillingness to act when action would be simple and effective, lack of clear thinking, confusion of counsel until the emergency comes, until self preservation strikes its jarring gong -these are features which constitute the endless repetition of history’.

Europe is on the edge of biting a large bullet, with consequences ranging from a muddled economic mess to a full banking crisis. 

A storm is approaching.   Hang on.

André Du Sault.

Posted in CFO & treasury, World economy.

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By André Dusault – October 10, 2011

Jobs, icon of convergence

07 October 2011

For the last decade Steve Jobs has been the natural replacement to Jack Welch as the prominent business icon in America.  It is a reflection of how the digital world has moved into our lives and in the office space.  Going from industrial might to innovation power has highlighted a shift in crucial skills:  technology integration, design, customer experience, innovative platforms and global fluency. 

The convergence of Telco and IT has created a world of connectivity, networks and platforms.  We are just at the beginning of fully understanding this world of platforms:  Government as a platform,  companies as platforms.  New business practices are filtering inside organisations that will accelerate network sharing, collaborative teams,  outsourcing, open companies.  Middle manager will stress out:  Feeling pressures from off shoring reaching his desk,  while his command stick is being replaced by an orchestra baguette.  

The digital revolution is reaching a new stage, ushered in by Steve Jobs.  It will find a fertile ground in this era of budget cuts and deleveraging.  Quite a legacy.

André Du Sault

Posted in Innovation & organisation, Management ideas, Strategy & globalisation.

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By André Dusault – October 7, 2011

(10 september 2011) THE CRACKS OF LONDON TO WIDEN

Economic growth is a hard thing to come by these days.   Politicians are first on the line to know about that.  Not because growth is today damned elusive in the West, but because politicians have generally taken the easy option to manage their economy for more than 20 years. 

First, extensive financial deregulation let the tiger loose.   Financial markets are now so big that they think they can call most of the shots.  Putting this tiger back into a cage will take a feat.  One financial bubble may be an accident in the course of history, but two massive bubbles in the span of a decade speaks about the damage this tiger has created.  Something is deeply wrong.

Second, easy credit and domestic consumption have created an illusion of easy economic growth, well entertained by politicians.  The resulting housing bubble and the financial crisis of 2008 may not have reached the scale of the Japanese crisis of 1990, but it is deep enough to lead the USA into the same rut.  In the space of 15 years, a nation goes from large surpluses to a big hole, from plenty of room to manoeuvre, to a point where a question mark is put on the US dollar.   Quite suddenly it looks a bit more dramatic.

The government, for the better or worse, is doing its bits to revive the economy:  After QE I and QE II, a more modest QE III is on the planning board.  But deleveraging will eventually come roosting to Washington.  At the other end, the consumer is still licking its wounds, paying back debt, and hoping the roof of his house will not fall through.

We are all finding out that real economic growth is built upon the sweat of productivity, innovation, and export markets.  Hard stuff to manage in normal circumstances, but decidedly more difficult when you are facing a massive cost challenge from Asia.   We are discovering as well that off shoring manufacturing to China had an insidious trade off:   Yes a better life for the consumer at Wal-Mart, but a great deal of growth options were signed off as well to emerging nations.  Growing through exports is just becoming a tougher game for all, not least because technology is spreading far off shores. Here the weak US dollar is playing a useful prop for the time being.

No wonder middle class in America is nervous.   Health and education costs have behaved as if completely excluded from the consumer inflation index.  Full time jobs are hard to find and pay rises stay sub inflation. Business prospects look challenging.  The emerging champions from Asia are now big enough to prowl in other emerging markets.  Within a decade, and sooner than later, they might feel ready to give it a try in Europe and America.  Soon corporate middle management, the backbone of middle class, will have a renewed fight in its hands from this competitive challenge.  If blue collars were swept away by technology, software and off shoring, then white shirts will discover that foreign engineers and managers are equally hungry and smart.

Now, how will western politicians behave with this cauldron of angry middle class, elusive growth, a stubborn China, and a debt burden that keeps growing?  We might soon find out.  Elections are forthcoming in France, Germany, USA and a change of brass in China is scheduled next year. 

Will the cracks of the London riots widen and reach the lines of despairs in Athens?   Will politicians be tempted to take from one pocket of the consumer and ask him to spend from the other one?  Will they find the words to tackle the difficult reforms lying ahead?  Or will politicians think it easier to change the rules of globalisation and pull back a little for a breathing space?   Amidst tension and worries, the search for the right compromises will loom large.

Or might the cracks of London just lead to breaking the crystal? 

André Du Sault

Posted in CFO & treasury, World economy.

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By André Dusault – September 11, 2011

Field trip to MAINE: The economic tide pulls back

(08 August 2011)  The annual wave of tourists on the coast of Maine is not reaching far inland this year.  Few RVs are cruising on the roads and vacancy signs are plentiful outside the main vista corridor linking Portland to the National Park of Acadia.  Perhaps only the lobsters can happily celebrate this pressure falling off.

It does not look upbeat either for vacationers who stayed home.  The day following the credit rating downgrade, I found a poster pinned to a roadside mailbox, reading:  ‘The republicans are destroying our economy’.  The squabble is not about to abate.     

The warning sign from S&P is triggering a bout of market realism, downwards to a new economic floor for America.  QE II has fallen short of expectations and growth prospects are now being scaled down.  Will the current soft patch turn into a dip?  Politicians are doing their best to bring it closer to reality.

Democrats and Republicans are camped on opposite shores:  The first are resisting cuts to entitlement programs while the second remain opposed to higher tax revenues.   The end result is to pay lip service to programs and reforms that could aim at growth and employment.   This sort of middle-of-the-road muddling is not serving anyone.  In fact the real costs of any serious adjustment will merely increase in size with time, as Europeans are finding out at their end. 

We can foresee any of the following scenarios if America does not get its act together soon:  The American dollar could take a serious beating if inflation is chosen as the stealth option to reduce debt; social entitlement programs or the military budget eventually could get a much BIGGER chop later than would be the case now; or America could be condemned to forego strategic influence in spots that matter, such as the South China Sea.   

One way or the other, they are losing ground by procrastination.   America is still under a ‘command’ mindset with the rest of the world. 

The next warning shot will hit harder.

André Du Sault

Posted in CFO & treasury, Country visits, World economy.

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By André Dusault – August 8, 2011

CFO – 2ND QTR: HIGHER STAKES TO WATCH, DURING YOUR SUMMER VACATIONS

(14 July 2011) The end of QE II has lifted the fog over the financial markets.  We are now discovering the stakes have grown higher in 4 areas.  The third quarter will remain eventful, just as CFOs will take their vacation weeks.

USA

The economic growth engine in the USA is sputtering:  Unemployment and real estate remain a serious drag.   The debt ceiling issue has become the playground of harsh partisanship politics.  Increasingly the ghosts of the Japanese lost decade are coming back to haunt the Americans:  sluggish growth, high debt, and a slow transformation.  Not quite as bad as in Europe, but sufficiently serious to prompt the Fed to think about a QE III.   This was just the pattern witnessed in Japan.  It is hard to tell which of the US$ or the Euro is more vulnerable.

EUROPE

Austerity programs, pushed in the throats of peripheral countries like Greece, are not quite buying the time hoped for by politicians, and the French and German banks.  Financial markets are not convinced by a plan to create more supranational debt, while austerity dims the economic growth prospects of Southern Europe.  Contagion theories are back.  Speculators are eyeing Italy, and are testing everyone’s nerves.  Italy has come to control its budget deficit, but debt/GDP is standing at 120%, and growth averaged less than 1% for the last 10 years.   Not quite a standing duck, but the margin of error is rather slim for Italy.  The Euro has in the meantime stood its ground in the currency market.   We suspect the hand of China is protecting its economic interest. Slowly but surely, we are moving towards a resolution of the 3 factors:  Debt restructuring, loss distribution, structural reforms.  The longer it takes, the more painful deleveraging will be. 

CHINA

Perhaps the greatest level of rumours was found in China.  Growth for the 2nd quarter was just reported at 9.5%, calming some stretched nerves.  Yet we seem to go from quarter to quarter about China growth, uneasy about a potential reversal.  The authorities are working hard to contain inflation, which notched up to 6.4% (and food inflation at 11.7%).   They even let the Yuan slightly appreciate against the US$.   There has been a string of reports about the true level of debt in China, and bad loans.  There are surely a few holes in the balance sheets, but we will have to wait and see to get the real picture.  There is room for a few surprises in China on that account.  But the real thing to watch is how China will manage a transition from a growth rate of near 10% per annum, to a more sustainable level of 6-8%.  When and how this takes place is a crucial piece for the rest of the world.

REST OF THE WORLD

As America and Europe remain fragile to external shocks, the rest of the world does count.  The Arab spring is inching forwards.  Egypt is not making much noise, but it is a large country and its political path remains uncertain.  In the 4 BRIC countries, inflation ranges from 6.4% in China to 9.6% in Russia.  There is some story to watch in those numbers.

World economic growth forecasts are still standing clearly above 4%, steady and safe for commodity countries like Canada and Australia.   But the 3rd quarter might move those forecasts.  The game is tight.

 

André Du Sault.

Posted in CFO & treasury, World economy.

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By André Dusault – July 14, 2011

SLOWLY SINKING: CAN WE GO BEYOND RATIONING?

(05 July 2011) We have been rationing budgets for the last 20 years in three of the pillars sustaining the progress of our province:  Education, health care and transport & infrastructure.  Rationing has been our strategy to put a cap on the budgets of these three large spending ministries and contain the threatening consolidated deficit of the province.  The result is today troublesome:  Not only have we failed to square off the deficit, but quality of services in the three pillars has suffered to the point of putting into jeopardy our own progress.

In the critical sector of education, standards have gone down from prep schools to universities.  We are levelling off from the bottom and allowing an easier graduation flow through.  Yet dropout rates in high schools remain scary.  From misguided reform to another, citizens are losing trust in the public education system and the ability of politicians to fix it.  In the public health arena, we are wondering whether we will ever truly shorten the waiting lists in surgeries, waiting times in urgencies, and the list of people without a family physician.  It seems we can’t see the light about this.   Despite additional billions pumped into the health care systems, the performance needle hardly moves at all. 

After health care and education, we are now seeing the ramifications of our rationing model applied to the third pillar in transport & infrastructure.  Evidence is currently spreading about another terrible mess:  A long practice of lousy patching in highways and roads, extensive collusion in the construction industry, mismanagement at municipal and provincial levels, questionable short term planning by an overstretched bureaucracy.  Infrastructures have been the playground of politicians:  You could hear party insiders state that a promise for a bridge could last for four elections.  Infrastructures have not been perceived as fundamental and necessary economic building blocks.  Rather, they have been more important to milk as contributions to political parties. 

We are now caught in a bind.  Rationing is a losing proposal even if politicians mask it as rational management.  In the long run, we are cornering ourselves. The trouble is that rationing is winning over deep changes in practices because vested interests have learned to protect their turf in the face of mild political courage.  We are entering an era of defensiveness, in which lobbyists and interest groups of all shades will hold the high ground.  In a background of limited wealth creation, high public debt and budget constraints, everyone will want to protect its piece of the cake.  Resistance moves up and mobilisation requires unusual leadership.

Behind rationing and political tepidity, hides the root of our predicament:  The management of our economy.  We have been content to ride on the American economy for the second half of the 20th century.  It brought us enough prosperity to modernize the state of Quebec, and to crank up borrowing to sustain a social model copied from the French.  It has been a comfortable ride for the baby boomers.  In fact it was all about managing wealth, easily acquired.  We built a social model we can’t afford to pay today, even under our rationing model.  As Warren Buffet says, it is under low tide that we see who is swimming naked.  With the rise of Asia, the tide is pulling back.  Creating wealth will be much harder in the 21st century.  Our chronic level of unemployment is hurting, entrepreneurship is dwindling, the technology wave of the late 1990s was wasted, our manufacturing firms are struggling to catch up to a strong dollar and we are losing more R&D capability than we are creating new ones.  No wonder we are once more turning to natural resources, to play our best card, the ‘Plan Nord’.  The ‘Plan Nord’ would have looked visionary ten years ago, today it is a fine and safe initiative. We will come down to either implementing deeper budget cuts, or else lifting our economic growth. 

Quebec exited the last financial crisis in good shape, protected by the Canadian shield in banking.  The auto crisis did not hit Quebec, since it had already lost its small position in that industry.  Local banks held up reasonably well, but not without significant losses, picked up by Ottawa.  The financial crisis did not reach and poke at our treasure of debt in Quebec.   Luckily, we were given a reprieve, some additional time to sort out our problems, push up competitiveness and boost our economic engine.  In the last 20 year we have been managing a gentle decline, soft, impervious and treacherous.   Rationing might extend the ride for another 10 years, but our political masters would be leading us towards closer to bankruptcy.   We feel desolate about extreme partisanships in the United States, but we witness the same stubbornness here in Quebec:  The PQ blinded by independence at all costs, and the Liberals afraid of their shadows.  When are we going to see a real ‘plan Montréal’?

What could possibly lie beyond rationing? 

The Quiet Revolution gave birth to a new local enterprising business class.  The voice of the business executives has been too quiet for its own good, much too reactive to the siren calls of the government.  If we can’t trust our politicians and bureaucrats on the three basic pillars, we ought to require a greater involvement from the business class about a stronger economy and a strategic response to the economic challenges of this new century.    The economy must rise on the political agenda.  It is now up to this Business Class to show the way in shaping a stronger vision for our economy, in finding new growth paths, and in raising expectations on government policies and practices affecting business.  Business must pressure Government, not the other way around.   Some recent initiatives have sprung up and  are noteworthy:  The Ecole d’Entrepreneurship de la Beauce, the Secor Strategic Forum on Quebec 2010, etc.   Yet much more must be done.  Absence of true leadership from the business community will condemn us to a landscape of competing interest groups in the face of continuous decline.  Once that landscape sets in, reversal will be much harder.  Then, we might very well find out, like Greece, that our list of friends is rather short.

 André Du Sault

Posted in Governance, Management ideas.

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By André Dusault – July 5, 2011

FIELD TRIP TO THE US MID-WEST (Indianapolis, St-Louis, Kansas City) : BAD OMEN FOR THE MIDDLE CLASS.

(18 May 2011) Traffic in Indianapolis consists of small bursts twice a day.  Residents wish to believe they have traffic problems. But cars and trucks move swiftly on 6-lane highways around this city of 800,000 people.  Traffic runs more freely than a race car on the tracks of the Indy 500.  You could think that the local economies would be as fluid, but high speed highways can be deceptive.  Things are not looking as bright as before for the middle class in Middle America.  The writing on the wall tells us that  it could get a lot worse before it could get any better.

Suburban man is feeling severely pinched nowadays.  Manufacturing jobs have marginally but steadily slipped out of the region for quite some time.  New jobs look elusive and part-timers are a growing lot. The economic recovery is looking brighter for Wall St than Main Street.  House prices have tumbled and remain sickly attached to the bottom.   The US dollar is following the same path.  A lower dollar might throw a saving line to exporters, but suburban man is finding imports and foreign travels a good deal dearer.   It turns out as well that 2011 is the year of belt tightening in state and municipal budgets:  Transport and education services are down or else cost more.  Petrol prices at the pump hurt all gas guzzlers and cereal boxes in supermarkets have downsized.   In a nutshell, salaries remain capped while running expenses are ballooning.    Middle class is asking when will their outlook turn around?    Perhaps, not for a long while.

Official inflation has generally remained subdued in the USA, helped by a neat trick dreamed up by bureaucrats:  that of excluding food and energy from the official indices.  This adjusted rate worked wonders when the Fed was preoccupied to constrain wage inflation, in the later part of the 20th Century.   Inflation in manufacturing goods and services used to transmit into wage inflation. This self-feeding mechanism was dreaded by central bankers.   The rise of China as the factory of the world broke down that relationship.  For the ten years before the financial crisis, middle class enjoyed what looked like a free ride:  the recurring benefits of lower prices on manufactured goods from China.  And it played wonderfully into the business model of Wal-Mart.  But the relentless growth of China and other BRIC nations is changing once more the economic picture for the West. 

China’s own middle class is rising and their wealth is now reaching a point where the demand for metal and food commodities and energy is creating rarity situations. Jeremy Grantham, from GMO, a well renowned investment outfit, published a bell ringing report (www.gmo.com):  ‘Time to wake up, days of abundant resources and falling prices are over, forever’.    In a nutshell, commodity price curves have shifted upwards.  It is not just a question of prices being pushed up in a cycle before coming down, but of a permanent shift in the price curve, upwards.  This could just indicate a turning point:  After 10 years of deflationary prices exported by China, we might just be in for 10 years of soft inflationary prices in food and energy.  Exactly those items kept outside the official inflation rate!  Suburban man should be worried.  If interest rates eventually move up, as they should, there will be one more hole in the belt tightening.

Can Washington reverse the economic predicament for the middle class?  Not immediately if key interest groups keep charging their political masters with missions to protect their specific interests. This could escalate into a war of lobbying and protecting.  From what I heard on radio and television shows, smart bi-partisan policies working for the long term good of the country are likely to remain the exception in the near term.  Observers are troubled:  What policies will allow the economy to grow beyond the point needed to repair balance sheet damage and kick up employment?  Wall St is showing an amazing resilience as the elite companies have been quick to adapt to new conditions.  But Wall St, keen to arbitrage the low costs of Asia, will not come to the rescue of suburban man.

Washington politics, and in many other Western countries, will remain a risky business:  How to redesign lifestyles in the face of rising anger amidst the ranks of middle class.  Bad omen.

André Du Sault.

Posted in Country visits, World economy.

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By André Dusault – May 18, 2011

TECHNOLOGIE ET INNOVATION: SOMMES-NOUS SUR LA VOIE DE PERDRE LA SECONDE BATAILLE MONDIALE?

L’intégration des pays du BRIC au commerce mondial durant la dernière décade de 2000-2010 a fortement ébranlé les entreprises manufacturières à travers le pays.  Un grand nombre de PME ont perdu des plumes, soit en profitabilité, compétitivité, parts de marché, ou ont tout simplement disparu quand leur industrie a été prise de court par l’éruption de la mondialisation.  En résumé, nous avons essentiellement perdu la première bataille de la mondialisation contre la Chine et l’Inde dans le secteur manufacturier.  Il n’y aura pas de répit : alors que nous tentons aujourd’hui de rattraper le retard de nos exportations dans les pays émergents , nous sommes également confrontés à la seconde bataille de la mondialisation.

La prochaine décennie (2010-2020) verra la montée d’un nouveau défi à la compétitivité de nos entreprises canadiennes : Technologie et Innovation.  L’intensité des innovations technologiques s’est accrue exponentiellement.  Les sommes dédiées mondialement à la recherche et développement (R&D) ont plus que doublé dans les dix dernières années, pour atteindre un total approximatif de US$1.2 trillion par année (Financial Times).  Les trois principaux budgets s’inscrivent aux États-Unis (US$ 400 milliards), en Chine (US$ 154 milliards) et au Japon (US$ 144 milliards).  Au Québec, les budgets de R&D, tous secteurs confondus, atteignent un montant d’environ C$ 10 milliards, une somme certes non négligeable, mais tout de même une goutte dans le seau d’eau.  Ce défi en innovation technologique ne s’exprime pas seulement en dollars de recherche et développement, mais aussi en capital humain.   Selon John Gapper du Financial Times, la Chine inscrit 15% de tous les étudiants universitaires du monde, alors que 40% de ces étudiants chinois obtiennent des degrés en sciences et ingénieries.    Aux États-Unis, cette proportion n’est plus que 15%, alors que 68% des doctorats en ingénierie sont octroyés à des étudiants non américains.  La Chine a confirmé par ailleurs ses ambitions technologiques dans son dernier plan de 5-ans, publié en mars dernier. 

 Cette intensité technologique raccourcit non seulement les espérances de vie commerciale des produits et services,  mais compresse également les cycles de développement.  Peu de secteurs échappent à l’intrusion de la digitalisation, aux avancées des nouveaux matériaux ou à la pénétration de la micro-électronique.  En contrepartie des lancements accélérés de nouveaux produits, il est plus aisé d’organiser une commercialisation mondiale des innovations technologiques, par le biais des accords de libre-échange, des chaînes d’approvisionnement bien huilées, et d’un capital de risque disposé à arbitrager technologies, compétences et coûts sur une base globale.  Ces nouvelles règles favorisent les entreprises d’une certaine taille, ambitieuses et agiles.   Il semble que nous soyons tous prisonniers d’un cycle d’accélération et de pression technologique.  Nous pourrions être témoins d’ un changement de paradigme au cours des dix prochaines années.  Alors qu’est-ce qui nous guette au Canada et au Québec?

Au Canada, nous avons dans les trente dernières années essentiellement fait la promotion de programmes publics en R&D comme axe principal de développement en innovation technologique. Cette politique visait en quelque sorte à renforcer la présence au pays des laboratoires de R&D des multinationales.  Force est de constater que les résultats et les retombées économiques de cette stratégie publique ne se retrouvent pas à la hauteur des attentes, toujours croissantes dans ce nouveau siècle.  De nombreux rapports (Conference Board of Canada, Conseil des Académies Canadiennes) font égard à notre retard en matière d’innovations commercialisées.   Par ailleurs les pays asiatiques ont poursuivi une stratégie d’innovation technologique subtilement différente de la nôtre : ils concentrent et accouplent leurs efforts sur le développement de familles de produits technologiques bien visés, en appui à leurs industries clés.  Il est notable de constater que le Japon et la Corée du Sud ont des cultures en capital de risque peu élaborées pour la bonne raison que ce sont les leaders d’industries qui ont traditionnellement été sommés de développer les nouvelles technologies servant à améliorer tant leurs processus de fabrication que les produits finaux.  Cette approche, disciplinée et ambitieuse, leur a en fin de compte permis de capturer des champs entiers de technologie industrielle et de rester maîtres dans des industries telles que l’électronique, la robotique, les automobiles, les nouveaux matériaux, etc. 

Nous nous retrouvons donc à un carrefour stratégique en politique d’innovation.  Certaines questions méritent d’être examinées si nous voulons éviter d’être laissés pour compte  non seulement par les grands pays, comme la Chine et l’Inde, mais aussi par de plus petits pays très agiles en innovation technologique, comme la Suède et Singapour :

1. Est-ce que nos dollars publics en R&D sont efficaces en transferts technologiques?

2. Est-ce que les centres de R&D des multinationales établis au Québec sont à risque de déménager?

3. Est-ce que nos propres entreprises canadiennes sont suffisamment innovatrices pour être compétitives dans 5-10 ans?

Transferts technologiques

La R&D canadienne est bien reconnue pour sa qualité.   Mais selon les études publiées, l’impact commercial des budgets publics en R&D technologique n’a pas donné les fruits escomptés jusqu’à maintenant.  Les grappes technologiques ont stimulé les découvertes et les inventions, mais notre performance à les transformer en entités commerciales demeure en dessous des attentes confiées au capital de risque canadien.    Nous avons réussi à développer nombre d’objets techniques, mais qui n’ont souvent pas su trouver leurs marchés et clients.   C’est un syndrome courant. Nous souffrons de deux désavantages dans cette compétition publique : Nous n’avons ni la taille de marché pour assurer un ‘scale-up’ rapide de nouveaux produits, et ni les vastes budgets pour capturer notre part de ces découvertes technologiques fondamentales qui donnent naissance à de nouvelles industries.  Notre stratégie de niche se retrouve toujours amputée par un écosystème d’innovation et de financement qui n’a pas encore tous les outils en main pour atteindre la maturité et l’échelle nécessaire à une performance constante et crédible.

Laboratoires R&D des multinationales

Le Canada a longtemps été dans le passé un endroit de prédilection pour les multinationales, qui désirait établir un centre de R&D de qualité.  Elles y retrouvaient  un réseau de scientifiques dédiés et très professionnels, enveloppé d’un régime de crédits d’impôt généreux.   Cette offre répondait bien aux cultures de travail des multinationales.  Mais la montée de la Chine et de l’Inde a désormais transformé cette équation.  Depuis dix années, les multinationales n’ont pas cessé de relocaliser bon nombre d’activités de leurs chaînes de valeur à ces pays, notamment en production.  Aujourd’hui ces multinationales se battent vigoureusement pour remporter les gros contrats dans ces pays et un investissement local en R&D devient une condition sine qua nom des appels d’offres.  Le transfert des centres de recherche vers l’Asie est déjà bien avancé.  Nous sommes témoin de la mise en place d’une nouvelle géographie de l’innovation technologique, menée par les budgets R&D, le talent scientifique, une fiscalité avantageuse et l’entreprenariat.  Par exemple, Huawei, un fabricant chinois d’équipement en télécommunication, n’hésite pas à souligner que ses ingénieurs chinois en R&D coûtent 40% moins cher qu’en occident, et qu’ils travaillent 40% plus d’heures.    Le Canada, pays de petit marché, aura besoin de tout son petit change pour  limiter l’érosion de sa position comme  centre de laboratoires étrangers en R&D.  Devant une performance moyenne en R&D publique, et un parc de laboratoires privés en contraction, est-ce que nos entreprises canadiennes sont prêtes à prendre la relève?

Entreprises canadiennes

L’épine dorsale de l’économie canadienne demeure la PME, typiquement équipée de 10 à 20 employés.   Autrefois les petites PME pouvaient très bien se débrouiller dans des économies régionales, supportées par un marché américain d’accès relativement facile.  Aujourd’hui, cette petite taille nous joue des tours : il est de plus en plus nécessaire d’investir dans des technologies de pointe ou de les développer pour demeurer en affaires et prospérer.   Les entreprises qui prennent du retard ont par la suite de la difficulté à protéger leurs marchés de niche, ou même à contempler une expansion hors de la zone traditionnelle de l’ALENA.  Elles peinent à suivre la cadence mondiale et sont souvent à court des ressources financières pour revirer la situation.  L’innovation technologique appelle les dirigeants, toute taille d’entreprise, à tendre un pied hors de leur zone de confort traditionnelle.   Bien que nous ayons plusieurs exemples d’entreprises qui ont su développer une prédisposition à innover, l’ensemble du parc canadien des PME se compare mal à d’autres pays, selon le Conseil des Académies Canadiennes. Celui-ci nous mettait en garde dans un rapport publié en avril 2009 (Innovation and Business Strategy : Why Canada falls short), que notre retard était sérieux.

Nous avons tous l’impression que le Canada est un pays technologique, et qu’il a dans ses mains plus que le temps nécessaire pour rajuster ses stratégies nationales et encourager nos PME à innover.  Cependant, l’échiquier de l’innovation technologique est en bouleversement et les champions émergents des pays du BRIC nous enseignent que la deuxième bataille mondiale est bien déjà amorcée.  Serons-nous sur la bonne voie en 2015-20?  

André Du Sault.

Chronique au bulletin de l’Association des MBA du Québec.

Posted in Innovation & organisation, Strategy & globalisation.

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By André Dusault – April 29, 2011

CFO – 1st Quarter: More warning lights on the dashboard!

Despite the recent encouraging developments in the USA, few of the fundamental structural gaps have actually narrowed around the world.  In  fact more warning lights have started to flash around us.  It reminds me of what the dashboard looked like before the 1997 financial crisis:  An unusual fragility in the system.

Positive pop from QE II

The first quarter of 2011 has confirmed the initial promise of QE II from the Fed:  The $60 billion program translated into $3 trillion of gain in stock market valuation, pulling away the American economy from the slippery tract of deflation.  Even the unemployment rate has managed to dip below 9%.   Indeed, the American economy has seemed to gain traction.   The excess liquidity has pushed up the inflation rate here and there, notably in emerging markets, but not anywhere close (yet) to a critical level. 

But medium term concerns remain

In the USA, the heavy weight deleveraging has been postponed, for good fiscal reason. But Congress has yet to find substance in a coherent program to reduce budget deficits and the national debt in the medium term.  Dollar watchers will be scrutinizing the end of QE II, scheduled in June.  Surviving the end of QE II should prove the hard test for the American economy in 2011. In the meantime raging deficits at state and municipal levels are biting into basic services.   And a fight between public unions and bond holders, over deficits in municipal pension fund has just been ignited.

Slow deployment in Europe

In Europe, the dangers of sovereign defaults across the continent have been at the center of a cat and mouse game between banks, governments and the financial market.  The latter has been particularly edgy with Ireland and Portugal, and to a lesser extent, Spain, but most bought the arguments from politicians about the birth of a new deal for the Euro.  Much is expected from a new Euro package marked for the end of March.  The second quarter will surely test the resolve of the players.  In the meantime, the US dollar and the Euro are playing yo-yo against each other, whenever the markets shift focus to a perceived weakness on one side or the other.

Faith in China

Despite a string of capital requirement measures for Chinese banks, inflation is stubbornly cracking the 5% level.  This is good news and bad news.  On the negative side, food inflation is a headache for authorities, as it traditionally brings social disruptions.  Wage inflation, on the other hand, is likely to act as the transmitter between the export side of the economy to the domestic consumption side.   Higher wages will slow exports, but boost consumption, thereby leading to a more balanced economy.  Now that China has captured the number one spot as the largest manufacturing nation on earth, thus ending the 110-year long reign of the Americans, the rest of the world is hoping the Chinese consumer will catch up.  But as ever, we will watch the show in China on a tightrope:  Too much inflation or not, or too much heating in real estate or not, or too much bad debt in the system or not. 

A spark in the Arab world

Like it or not, a spark was ignited in the Arab world.  It is hard to tell where it is going to end, but it is not going to die soon and for good.  The upheavals just showed us how hot the  temperature was in the cauldron. Putting back the lid will not remove the pressures.  Again diplomacy, military actions and the oil markets will oddly coexist for a while.  But I suspect that fringe groups, liberal and extremists, are likely to take advantage of a tepid reaction from the West, caught off guard, unable to articulate acceptable alternatives to the Arab peoples.  

Japan takes another hit

Regrettably nature struck again in Japan, further testing the hardened resilience and courage of a nation.  It reminds us that natural and man-made disruptions will not be the exceptions in this decade.  The number of climate disasters (as registered by the insurance industry) reached 950 in 2010, up from an annual average of 285 in the 1980s, and 450 in 1990s.  Natural disasters, pandemics, terrorist acts and mini economic crises will dot and shake the landscape from time to time. 

Flashing lights.

 André Du Sault.

Posted in CFO & treasury, World economy.

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By André Dusault – March 18, 2011