The Largest Customer Financing program in history?

Big technology companies in the US - such as Cisco, Dell, IBM are known for their huge customer financing programs. In fact during the last tech boom, some of these companies were alleged to prop up their revenues by financing "not so healthy" customers (call them the "subprime" customers - sorry couldn't avoid using subprime these days). As some of you might remember, the whole thing backfired during the subsequent recession as these customer defaulted resulting in big write-downs by these tech giants. History surely repeats itself especially if it is cleverly conceived financing trick that adds no value. Anyway getting back to the point that I am trying to make.

Do you know what is the largest customer financing program in place today? No points for guessing if you have been following the US-China trade imbalance issue. Yes, it is the China financing of the US. By investing its more than $1 trillion foreign exchange reserves in US Dollars China is effectively financing the US economy. The Chinese purchase of the US treasury bills is one of the reasons US is able to keep its interest rate so low and provide cheap credit to its population to continue to buy Chinese goods.

Now we all know how disastrously the last customer financing boom ended. Is something similar going to happen? If it does what will it mean - higher interest rates, higher inflation in the US, increasing foreign ownership of US assets etc or all of the above? In any case, doesn't look that rosy to me!!

Can India compete with China in manufacturing? What's next for India?

Talking about India and China is such a cliche these days that I am really dreading writing this post. But this is my attempt to dig a little deeper that the usual soundbites coming out of WSJ and NYT.

Lately I am hearing a lot of talk about how India with its cheap labor pool and upcoming labor reforms could attempt to successfully compete with China in manufacturing. China's dominance is surely awe-inspiring but can India compete effectively with China in manufacturing?

Note: In the following discussion when I use the word India or China - I usually mean that to refer to Indian and Chinese manufacturers or companies and not as much to the nation itself. It would be foolish of me to postulate on what such highly complex societies and nations should or would do in the future.

China dominance in manufacturing outsourcing:
In trying to understand this issue, let me first discuss where China comes from. So why does China dominate in manufacturing? Is it just because of low-cost labor and favorable govt. policies? But these two specific factors exist in quite a few countries including Thailand, Vietnam and increasingly India. The answer unsuspectingly lies a little deeper. China dominates not because it is cheap but because it is FAST (reference - a must read on this topic). Companies outsource to China not only because it is cost effective but also because Chinese manufacturers are known for fast turnaround on orders and to quickly adapt to design changes. This is an outsourcers dream! And over the years both the companies in the developed world and Chinese have developed tremendous expertise in working together - from understanding the intricacies of the relationship that exists in the ecosystem of small and nibble suppliers in places such as the Pearl River Delta to comprehending the true capabilities of its supplier base. As a result of this expertise, for some companies their Chinese supply chain is their IP. And no company wants to mess around with its IP. As a result, I believe it is almost impossible for someone else to unseat the Chinese dominance in manufacturing in the near future. There might be small victories in specific sub-sectors such as we have already seen in auto parts in India but a large scale unseating seems increasingly remote.

So what should India do?
To better answer this question, let's extrapolate where will China go from here? I believe that just like the Indian outsourcing companies are trying to move up the value chain, Chinese are doing the same in manufacturing. This implies participating in designing products to building brands to selling the product in retail stores. Does that mean we will see the likes of world-dominating Apple to P&G to Wal-mart coming out of China soon? We do see some signs of it through companies such as Lenavo, Haier etc but I believe that future is little further out. There will be an intermediate step - where I believe India can/should play a part.

How does India play a role in this?
For the reasons stated above, I believe, India or for that matter any other country would be ill-advised to focus its energies on unseating China dominance in manufacturing. Rather they should compete with China on its next big move up the value chain. As the China moves up the value chain to areas such as design, product development, branding etc, it will bring the same disruptive cost efficiencies and speed that it bought to manufacturing. In response to these threats, the companies in the developed world will increasingly look to compete effectively by outsourcing low-value added jobs of these functions. With a huge pool of talented, creative, English-speaking workforce India could work with its US counterparts in increasingly outsourcing these functions. Why can't China do the same - yes it would for sure but at least India and China are on the same ground while competing for this new piece of business. China lacks experience as much as India in this new areas. Some might argue that India with its free market economy tradition of competing on design/brand building and English Speaking workforce has an advantage. But that remains to be seen. But I will take this bet any day over the other.

Startup School

Found some really cool advice meted out to developers/hackers here. Few interesting lessons while building a startup:

We all know that Type A people attract/hire other Type A and Type B attract Type C. Interestingly Marc Andreessen goes a step further about how hiring not so good ("crappy') people impacts organizational performance over the long run - he likes to call this the law of crappy people. This is how it goes. Straight from the man himself - "The Law of Crappy People kicks in because the worst employee at any level becomes the de facto standard for that level. Your executives sit around the table. Some EVP wants to promote one of his or her directors to vice president. Or maybe they want to bring in someone new. Someone at the table says, 'That person isn't good enough,' to which the first person responds, 'Hey, you've got Joe Schmo, who is a bonehead. This guy is better than Joe.' So the guy who hired or promoted Joe Schmo shuts up."

I have to agree as I have myself noticed this in my professional career.

What's driving World's food price increase?

Here is a good report on this issue, published by two Purdue University Economists. The report identifies three key reasons:
- Changes in the production and supply of key commodities
- Depreciating Dollar
- Growth in the production of biofuels

Interestingly, the report does not put direct blame on the rising demand from India and China for the increase in price of food grains. However, the report says that China's demand for oil is driving prices in oil and that indirectly drives prices of other commodities and food grains.

Both India and China are pretty self-sufficient in the production of most food grains. If you are interested in better understanding of this issue, please check out Ajay Shah's blog post. I do not agree with him on all the points but he has some good analysis. The main issue I have with his analysis is that it rests on the price signaling mechanism for balancing supply and demand in the market. However, such price signaling mechanism does not really work in Indian and Chinese context because the govt. controls the price for food grains. And this is what the above reports also implies.

Some tips on making an effective apology

Find yourself in a mess? Here are some tips on effective ways to say - I am sorry. http://conflictzen.com/how-to-say-youre-sorry-really-sorry/

Lessons from the Treasury Secretary's Senate Testimony

One might not like Mr. Paulson's solution to current credit crisis, but one must surely like the way he has rallied people around his proposed solution. Some key lessons in handling media and some heavy senate committee grilling in spite of not having the best communication skills. Check out the Q&A session here (sorry no transcripts are available) and also read more for a good coverage of the whole issue at NYT. http://www.nytimes.com/2008/07/27/business/economy/27hank.html asd