Saturday, July 19, 2008

More on the UK

I have had several comments posted over the last couple of days, so I will try to address these briefly. The first post is provided by Anonymous, who asks:

'I would be interested to hear who you think the (few) winners will be in the UK business world. What do Asians want to buy from the West? Should business to consumer (B2C) companies look at getting their websites fully translated into Chinese/Hindu?etc.? Could they tap into that emerging market, selling collectibles or other specialist items?'
Dealing with the first question, it is actually very difficult.

The way to think about this is to ask the question of what consumers are likely to do next. In tough times, what will people spend their money on, and what will they give up? The first thing to go are luxuries such as taxis. Secondly, people will not have the money or inclination to spend as much money on home improvements, new furniture, or the latest gadget. Upgrading the car will happen less. Foreign holidays will be more expensive (a falling £GB) and are a luxury, so there may be a switch to domestic holidays, but overall less holidays away from home. For leisure, the evening in with a bottle of wine, a movie, and take-away food will replace the restaurant, cinema, theatre and bars. Designer labels will be less alluring, as people trade down the cost ladder. Where before a person might buy Gucci, they will buy Gap, where they typically buy Gap, they will buy M&S and so forth. Hobbies will come back centre stage in people's lives, replacing shopping as the number one leisure pursuit.

We can think about the kinds of companies that will benefit from such a change in consumer behaviour - those who provide for cheap entertainment. That means video games retailers, home delivery food companies and so on. The discount retailers will benefit. Think Lidl and Poundstretcher. Discount pubs and fast food restaurants will be fine, but up market restaurants will suffer a bloodbath. Retailers able to contain/lower their costs will survive, those that do not - will not.

In the wider economy, manufacturers who have a unique technology or process will improve profits as their costs fall, provided that they have export markets (where the drop in the £GB will help them). For any manufacturers who are primarily serving the UK market, they will struggle mightily. Exporters in general will benefit, and may see real growth, but the growth will be slow to start, whilst the world economy goes through turbulence.

On a more depressing note, debt collection will be a growth business, as will be the companies involved in liquidations, from the insolvency accountants through to the auction houses. Second hand stores and second hand car dealers will possibly do well, and eBay and Craigs list will do well.

What do Asians want from the West? Production machinery, high tech products, machine tools, process design, and designer goods. Pharmaceuticals, medical equipment, insurance, weapons. It is a difficult list to compile, as there are many goods and services that the West still excels at. The trouble is that, Asia is already fast climbing up the technological tree, and is already starting to compete in many of these areas. The only answer is a rebalancing of the cost base of the West to allow the continuation of the strengths in these areas, as well as starting to protect the intellectual property that is the foundation of such advantages.

As for selling through the Internet, there are some problems to overcome in this respect. If you look at China, for example, there is a problem with trust. There are some Chinese companies that are managing this, for example through Cash on Delivery systems. However, there are many challenges to overcome that require an in depth understanding of the Chinese market. You should also be aware that China already has an excellent Internet infrastructure, and already have excellent content and services. As for selling collectibles, I have no idea, but this could only be a small business.

On reading the above post, I am aware of the gloomy picture that I have painted in my other posts. However, the West does still have some outstanding businesses, and outstanding technologies. All is not lost, or at least not yet lost. There are solutions to the challenge of the East, but they require fundamental changes to the structure of our economies. As our currencies shrink (which means we get poorer), we will gain back some competitive advantage, and this will lead to an element of the rebalancing - things will get better eventually. The challenge will be to deal with our other cost disadvantages, such as over-regulation and taxation. On the plus side, we have strong legal systems and relatively little corruption, and a moderately well educated and healthy work force, as well as (variably) good infrastructure. The trouble is that, even if we get these elements right, we are shackled with bad debt, and a collapsing banking system, and that will (in any event) take time to work through the system. All of this will take time, and political will.

Dan, another poster, suggests the following:
'For the individual, asset liquidation should be embarked upon as quickly as you can. If you have got things lying around your home that you no longer need then sell them now. Toys, gadgets, antiques and all our detritus is going to be worth much less in the coming months. Sell them now, while there are still people with money to spend.'
Certainly, if you have assets you do not need, or of no value to you now, then there is no harm in selling them now if you would in any case sell them later. With regards to real estate, getting out now is better than later, if you own more than your home. However, you will be selling into a falling market so better to discount early to get the sale, rather than hang on until later, when the discount might be larger.

Anonymous2 also suggests investing into Asia. For this, I would advise caution, as Asia is fraught with political risk, as can be seen in my post on China. I have hesitated to suggest where to put money for the very reason that the world economy is now so turbulent. The interconnectedness of the world economy and trading system means that the problems of the West will have knock on effects in the East. Add to this the instability (e.g. Thailand and Cambodia are currently close to armed confrontation) - and the conclusion is that there is no safe haven.

Lemming (now a regular commentator on my posts) asks the following:

'So, would it be loosely correct to summarise that we have two trading blocks: China and the rest of the world? On paper, the rest of the world is heavily-indebted to China, but can show that China has benefitted from stolen intellectual property.

Does the rest of the world have to honour its debts to China?

Things seem so bad that the only way out of it might be some sort of drastic 'resetting' of the world economy. Or must we work through the consequences of all the millions of individual failed deals and transactions in order to preserve the purity of 'capitalism' for an eventual return to better days?'
The short answer to this question is 'yes', we must honour our debts to China. To not do so would see a complete closure of the world trading system. Without such a system, we would all suffer. The explanation for why open and fair trade works is beyond the scope of a short answer. The trouble is that the trade has not been open and fair, and this is part of the reason for the current problems. Trying to rectify previous failings by now refusing to honour debt obligations would not be a solution. The solution for the US and Europe is to give China a clear warning - fix the intellectual property problems by 'x' degree, by 'x' date, or face trade sanctions. Furthermore, give China a fixed period of time to enact a fully floating currency.

The trouble with such a scenario is that, as happened previously, China will just threaten to sell the $US that they hold onto the open market, thereby destroying the US economy (and probably other currencies too). The way that they did this previously was to use a Chinese 'think tank' to suggest that this was a possibility (I recall that it was during a period when the US was threatening action over faulty merchandise, but can not be sure I have remembered correctly), then the government denied that this was policy. This is quite a typical method in Chinese politics, as those who have studied China closely will be aware. Use a proxy to set up the scenario, rather than make a direct confrontation.

My own answer to this is that it is better to take the pain now, and face down China now, rather than later. It is to reshape the trading system such that it becomes fair. The price of such reshaping may well result in things getting much worse before they get better. It is a short term severe pain to offset longer term worse pain. My answer lies in reshaping of the structure of the Western economies to put them into shape to meet the challenges of Asia. I hope to post more on how to do that in the future.

As a note, I had the following comment on my post on the 'Economic Rise of China':

'..but shouldn't Europe be grateful that the Chinese Government are not suing us for the defects in the last intellectual property they acquired: Marxism?'
All I can say is, a very witty comment.......

1 comment:

  1. With respect, I think it is fair to say that the lifestyle changes the author has mentioned are already taking place. There are cars in the Lidl car-park now. Previously, anyone who could afford to run a car would never go to Lidl or Netto.

    In Leicester, if you go out on any night apart from Saturday, you give up and go home because there is nobody else out. Saturdays feel like Fridays used to, with the main clubs and bars about 60% full at best.

    People are staying at home, but they are not hiring films, they are just illegally downloading them from the net. I don't know anyone who has paid for CDs, but everyone has an MP3 full of 1000s of tracks they never paid for and in most cases they have never listened to. The world has collectively begun to ignore intellectual property. However, only China has turned wholesale theft into something approaching an entire new sector of the economy.

    This is not the future, this is the current status quo. Where do you buy food, if you cannot afford the prices in Lidl. There is no down-market vendor of petrol, gas, or electricity. If the govt is broke, how is it going to pay for all the new welfare claimants, when hoards file for personal-bankruptcy? Alistair Darling is already saying that there is no money, anywhere, in the Treasury. He now wants to tear up Labour's pledge to keep govt borrowing to less than 40% of GDP. But who else is going to lend to this country and for how long? The country cannot pay it back and it is difficult to see how it ever will in the future.

    In other articles, the author has mentioned that the Chinese are 'good at business'. He is right, but it goes deeper than that. Most Chinese and Indians have experienced real hardship, all their lives. They are hungry for success and live in societies where there is little decadence and personal conduct is very much under the microscope from their peers. People are expected to work very hard and most would not think of doing anything else, anyway.

    Most of the staff I have taken on (I run a small business. Just filed VAT returns which are down 45% on the previous quarter. Many other businesses will be writing similarly smaller cheques to the govt this time around and this is where the real trouble starts for Labour) have been sacked within weeks of getting the job. I paid them well over the minimum wage but they didn't care about getting the push. They knew they would walk into another job, straight away, and could get away with doing the bare minimum and take plenty of days off with sickness.

    Whenever I advertised a vacancy, I hoped that Eastern Europeans or Asians would apply but no such luck. All we ever got was local white kids who moaned about immigrants taking all the jobs. It quickly became apparent that they could not spell, do basic maths or communicate effectively. They had nothing to offer, other than a sense of entitlement. I don't recall one of them even having an opinion on anything that didn't involve the few people they knew (always from the same town where the company is based) and who they inanely texted, constantly, throughout the day.

    These are the people who are going to be hit hard. In the last recession, in the early 90s, we had an indigenous labour market that was, for the most part, competent and hard-working. Many still found themselves out of work for a long time. From what I have seen ove the past few years, the typical British worker is heading for real trouble.

    To get back to my original point, what does the author see Britain being like in one year from now? Would we recognise it as the country we know today? Or will it be a very different place, where many of the rights and absolutes we take for granted no longer exist? Are we heading for the 2nd, or even 3rd world? I feel that the author still is shying away from telling us how this is all going to end. I can understand any reluctance to do this, because it really is going to be that bad. Social disorder on an unimaginable scale. The teenagers already packing knives may well point the way for all of us.



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