How the Information Age Affects Asian Banking

The McKinsey Quarterly writes, (bold emphasis mine)

Banks doing business in Asia face rapidly changing consumer behavior, with big consequences for both local and multinational institutions. Consumers increasingly prefer local banks over multinationals, are less loyal to existing banking relationships, are much more cautious about borrowing, and are more open to Internet and mobile banking. These shifts in the nature of banking relationships, product and service needs, and channels are reflected in a 2011 McKinsey survey of 20,000 consumers in 13 Asian markets...

Asian consumers are being weaned from brick-and-mortar branches: for the first time since McKinsey began conducting the survey, 13 years ago, bank branch usage has dropped, plunging by 27 percent on average across Asia between 2007 and 2011.

This drop has been matched by an uptick in Internet and mobile banking, a trend particularly pronounced in developed Asian markets, such as Hong Kong, South Korea, and Taiwan. There, consumers now use new channels, such as the Internet and mobile devices, for their banking more often than traditional ones, such as telephones and branches: the use of new channels rose to 3.2 times a month in 2011, from 2.35 in 2007, while that of traditional channels dropped to 2.57 times a month, from 3.5. In China, about 18 percent of all people who patronize banks now use Internet banking, compared with only 3 percent in 2007.

That shift arises largely from the increased penetration of remote channels. A growing number of customers across income segments are getting accustomed to and comfortable with them for both sales and service. The multichannel environment has thus become a reality: our research highlights the fact that, on average, Asian consumers are using as many as 5 channels for research and 1.8 channels for maintenance.

Some comments

The rapid shift in the preferences of Asian consumers reveals of the increasing personalization or specialization of markets. This extrapolates to an intensifying trend of de-massification of financial services towards niche markets or a transition from products and services designed for the masses towards decentralization or localization. Providers who cannot cope will this seismic development will perish. This is the forces of creative destruction at work.

And this paradigm shift is being enabled and facilitated by the internet which again exhibits how the web revolution has immensely been affecting people’s lifestyle.

In addition, this is another proof that people are getting to be more sophisticated with an extended reach or access to information.

This also means more value added services for the increasingly discriminate consumers.

The forces of centralization seems to be paving way for reign of the forces of decentralization.

The great F. A. Hayek’s knowledge revolution is underway.

P.S. My computer hasn't normalized yet so my post will remain limited

Information Age: The Blooming Internet Search Industry

In today’s rapidly evolving society, many people tend to overlook the contributions of the web in the economy.

McKinsey Quarterly in a new report outlines the fast expanding internet search industry. (bold emphasis mine)

A new McKinsey study, The impact of Internet technologies: Search, takes a more comprehensive view of this phenomenon and its rising value. We looked at five key developed and developing economies—Brazil, France, Germany, India, and the United States—indentifying nine activities that are primary sources of search value, as well as 11 private, public, and individual constituencies that reap the benefits.Among the key findings:

• Using country-level analysis as a base, we estimated that the total gross value of Internet search across the global economy was $780 billion in 2009, equivalent to the GDP of the Netherlands or Turkey. By this estimate, each search is worth about $0.50.
• Of that value, $540 billion—69 percent of the total and 25 times the annual value added (profits) of search companies—flowed directly to global GDP, chiefly in the form of e-commerce, advertising revenues, and higher corporate productivity. Search accounted for 1.2 percent of US and for 0.5 percent of India’s GDP.
• The remaining $240 billion (31 percent) does not show up in GDP statistics. It is captured by individuals rather than companies, in the form of consumer surplus, and arises from unmeasured benefits, such as lower prices, convenience, and the time saved by swift access to information. We estimate those benefits at $20 a month for consumers in France, Germany, and the United States and at $2 to $5 a month for their counterparts in Brazil and India.
• Among retailers, the value of search in 2009 equaled 2 percent of total annual revenues in developed nations and 1 percent in developing ones. That value stemmed directly from online shopping, as well as from online research that led to an in-store sale. US retailers saw as much as $67 billion in search-related revenues, Brazil’s retailers as much as $2.4 billion.
• In the five countries we studied, knowledge workers experienced search-related productivity gains of up to $117 billion, flowing from faster and more accurate access to information.
• Our research also identified emerging sources of search-related value. One is the rise of new niche (or “long tail”) retailing, as search techniques help consumers access ever-narrower product segments. Another is new business models, such as those keyed to the needs of consumers who search via mobile devices.

Read the rest here

As pointed out in the above, many of the web’s consumer surpluses are not being reflected on the GDP statistics, computations of which are based on the industrial age era.

In addition, as more and more people get wired, the complexion of our social activities will dramatically change. And this will be manifested on commerce and the economy. The above is just the start.

McKinsey Quarterly on the Deepening of the Information Age

In a recent study by McKinsey Quarterly Internet matters: The Net’s sweeping impact on growth, jobs, and prosperity, they find a dramatic surge in the influence of the internet on commerce and the global economy.

Their findings as follows (including charts):

-The Internet accounts for 3.4 percent of overall GDP in the 13 nations studied. More than half of that impact arises from private consumption, primarily online purchases and advertising. An additional 29 percent flows from investments by private-sector companies in servers, software, and communications equipment. The Internet economy, now larger than that of Spain, surpasses global industry sectors such as agriculture and energy.

-The Internet is a critical element of economic progress, pushing a significant portion of economic growth. Both our macroeconomic approach and our statistical approach show that in the mature countries we studied, the Internet accounted for 10 percent of GDP over the 15-year period from 1995 to 2009, and its influence is expanding. Over the last five years of that period, its contribution to GDP growth in these countries doubled, to 21 percent. If we look at the 13 countries in our scope, the Internet contributed 7 percent of growth from 1995 to 2009 and 11 percent from 2004 to 2009. In the global Net's growing ecosystem of suppliers, US companies play leading roles in key sectors. China and India rank among the fast-growing players in the Internet's global supply chain.

-Most of the economic value the Internet creates falls outside of the technology sector: companies in more traditional industries capture 75 percent of the benefits. The Internet is also a catalyst for generating jobs. Among 4,800 small and midsize enterprises surveyed, it created 2.6 of them for each lost to technology-related efficiencies.

Read the complete study here

Bottom line:

The web’s dramatic usage explosion is being reflected on the global economy. Real time connectivity has translated to vastly expanding economic value added and to immense productivity growth.

Increasing specialization could be part of the current dislocations that has led to lofty unemployment levels.

Yet those who see the world in terms of the industrial age will get things so awfully wrong.

As Alvin Toffler writes in the Revolutionary Wealth (p.12),

The developments in capital tools for knowledge expansion are like a rocket in a fueling stage, preparing to launch us toward the next phase of wealth creation. That next phase will spread the new wealth system more widely across the world.

A revolution is under way. And the challenge arising with it will challenge everything we thought we knew about wealth.

Hayek’s Ideas As Marketing Strategy

In McKinsey Quarterly’s latest paper, “Capturing the world’s emerging middle class”, authors David Court and Laxman Narasimhan recommends several strategic steps for companies to capture and profit from the rapidly growing and huge middle class markets in emerging economies.

It occurred to me that the gist of the proposals have been latched upon harnessing local knowledge which appears no less than F. A. Hayek’s ideals.

From McKinsey, (all bold highlights mine)

``Another tack is to work at a more local level, gaining scale in specific regions and categories by teaming up with deeply knowledgeable on-the-ground partners. They can help not only in product development but also in distribution and market positioning—the crucial final steps to reaching highly local consumer markets.”

More...

``Other strategies for penetrating this affordable, accessible, and local market are to use celebrity endorsements and to leverage local knowledge, either selectively, in areas such as distribution, or through more comprehensive alliances...

And...

```Using local vendors is critical to running a lean operation: many multinationals have found, for example, that capital outlays in emerging markets are often only 30 percent of those required for a factory in the West if they use local resources for plant and process engineering and to execute projects.

Here is Friedrich August von Hayek on “The Use of Knowledge in Society” (bold emphasis mine)

Today it is almost heresy to suggest that scientific knowledge is not the sum of all knowledge. But a little reflection will show that there is beyond question a body of very important but unorganized knowledge which cannot possibly be called scientific in the sense of knowledge of general rules: the knowledge of the particular circumstances of time and place. It is with respect to this that practically every individual has some advantage over all others because he possesses unique information of which beneficial use might be made, but of which use can be made only if the decisions depending on it are left to him or are made with his active coöperation. We need to remember only how much we have to learn in any occupation after we have completed our theoretical training, how big a part of our working life we spend learning particular jobs, and how valuable an asset in all walks of life is knowledge of people, of local conditions, and of special circumstances. To know of and put to use a machine not fully employed, or somebody's skill which could be better utilized, or to be aware of a surplus stock which can be drawn upon during an interruption of supplies, is socially quite as useful as the knowledge of better alternative techniques. And the shipper who earns his living from using otherwise empty or half-filled journeys of tramp-steamers, or the estate agent whose whole knowledge is almost exclusively one of temporary opportunities, or the arbitrageur who gains from local differences of commodity prices, are all performing eminently useful functions based on special knowledge of circumstances of the fleeting moment not known to others.

Bottom line: The Hayekian concept of knowledge does not just function as an economic theory, but importantly has micro applications in other fields as marketing. In short, the application of Hayek’s Knowledge problem could translate to an edge in business application.

Should You Listen To Equity Analysts?

Should you heed the advise of equity analysts (this includes me)?

If you ask the McKinsey team the answer is a NO!

Why?

Because we are too optimistic, which means "we" (the industry) have usually been off the mark.




The McKinsey Quarterly team explains,

``This pattern confirms our earlier findings that analysts typically lag behind events in revising their forecasts to reflect new economic conditions.

``When economic growth accelerates, the size of the forecast error declines; when economic growth slows, it increases. So as economic growth cycles up and down, the actual earnings S&P 500 companies report occasionally coincide with the analysts’ forecasts, as they did, for example, in 1988, from 1994 to 1997, and from 2003 to 2006.

``Moreover, analysts have been persistently overoptimistic for the past 25 years, with estimates ranging from 10 to 12 percent a year, compared with actual earnings growth of 6 percent."

My comment:

First of all, optimism is basically a "neural network" related trait not only for analysts, but for most people.

Second, it's all about incentives. In the Philippine setting, one reason for the "optimism" bias is that the underdeveloped financial market industry earns only from one direction-the upside!

Lastly, not all analysts share the same methodology of research. Here, most of the mainstream framework is confined to the micro sphere or analysis based on corporate or micro economic fundamentals, while yours truly is concentrated on "inflation" cycle based political-economic analysis.

Moreover, we don't subscribe to the "animal spirits" and "spending the way out to prosperity analytic" in contrast to macro mainstream practitioners.

This means that speaking of track records, this blog should serve as evidence.

My recommendation for everyone is to heed investing guru Peter Lynch's advise, ``The list of qualities [an investor should have] includes patience, self-reliance, common sense, a tolerance for pain, open-mindedness, detachment, persistence, humility, flexibility, a willingness to do independent research, an equal willingness to admit mistakes, and the ability to ignore general panic."

McKinsey Quarterly On The New Japanese Consumers

McKinsey Quarterly has an interesting outlook about the changing habits of Japanese Consumers.

1. A shift to value.

Japanese consumers have been switching preference from classy and branded products to discount stores and online retailers. The reason according to McKinsey Survey: expensive products, “annoying stuff” and “inability to shot at my own pace”

And shifting to value also means bulk buying

[my comment: an aging population is expected to spend less on material things and spend more on health, as noted below this appears to be compounded by economic stagnation.]

2. Home entertainment.

Japanese have also been more “home” oriented in terms of entertainment. And part of the homeward bound lifestyle is that the Japanese have gradually embraced digital revolution through online shopping

Japan is said to lag the US and UK in spite of high penetration level of broadband, and the past reasons for this according to McKinsey have been,

-Japanese consumers love the physical shopping experience;
-mobile-phone screens are too small;
-the density of retail establishments means that online shopping has less of a convenience advantage;
-credit card penetration is low.

However this seem to be changing as more Japanese spend online.

The online market for physical goods (excluding ticket sales and electronic downloads of media such as music, movies, and software), notes McKinsey, is estimated to be nearly $30 billion, compared with only $1.3 billion in 1999



A noteworthy quote ``It’s worth underscoring the tight relationship between online shopping and broader shifts in consumer behavior. In a consensus-driven society where individual choice and expression have historically been frowned upon, the ability to browse products, compare prices, and make purchases relatively anonymously is creating new attitudes and empowering consumers.” (bold highlights mine)

[my comments:

-Online activities are growing not only in Japan but in most parts of the world. Perhaps the reason for the shift to value is that online provides more opportunities for comparison and thus end up with least expensive but still high quality value products choices.

-In addition, since our assumption is that Japanese have broadband connectivity at home, social activities by the youth are conducted online, than in malls.

-Third, the online experience is promoting "individual choice and expression", which probably means more appreciation of freedom]

3. More Travel.

They’ve been more willing to travel more to take advantage of discounters. And one apparent beneficiary of this shift has been private label products.

4. Individualized healthcare

The new trend also suggest that the Japanese are also “directing their own healthcare” spending or that Japanese are spending more for health.

According to McKinsey ``One effect of the greater interest of the Japanese in directing their own health care has been the growing popularity of drugstores, which have been Japan’s fastest-growing retail channel since 2000: store numbers have increased by 4 percent and sales by 8 percent.”

[my comment-Politically perhaps this implies the trend towards less dependence on government welfare.]

5. They have reportedly been receptive to affordably priced “environmental consciousness” products.

Reasons for the shift:

Mckinsey says part of this comes from the recent downturn compounded by the economic weakness in the past 2 decades where the consequences has been the “disappearance of life-long jobs and the increase in part-time and temporary labor”.

McKinsey adds that the emergence of a new generation which characterize “Less materialistic youngsters” had possibly been a product of an era “never knowing the boom times the two previous ones experienced.”

The new lifestyle has “prompted the nickname the hodo-hodo zoku, or “so-so folks” (or, even worse, “slackers” or “herbivore men”).”

[my comment-that's likely plus the web 2.0 factor]

A third of final factor possibly contributing to such changes in behaviour have been a “series of small, largely unrelated” regulatory adjustments

McKinsey notes that ``Japan’s government reduced the maximum freeway toll on weekends to ¥1,000 regardless of the distance traveled—a huge discount that encouraged trips outside Tokyo to big-box discounters and large-format retailers such as Costco and Ikea. Other examples include regulations allowing the wider sale of over-the-counter drugs; a mandate that all employees over the age of 40 (about 50 million people) take a test to determine whether they are at risk for conditions such as diabetes and high blood pressure and, if they are, requiring them to exercise and diet; and recent changes to reduce underage smoking. The Japanese government has also pushed to increase awareness of and access to health remedies, in part to address the challenge of paying to treat these conditions.”

McKinsey's Outlook On Global Banks: Asian And Emerging Markets To Outperform

Here is an interesting outlook on global banks from the McKinsey Quarterly team.

From McKinsey (all bold highlights mine)

One key finding is that the capital shortage triggered by the crisis and recently addressed through several rounds of massive capital raising will endure and get worse. Our scenarios model both the demand for capital (the amount needed to finance projected asset growth and meet regulatory requirements) and the supply (earnings, less the amount likely to be paid out as dividends). In every case, demand exceeds supply. Capital needs will range from small (investment banks, which have already raised significant amounts and are holding substantial buffers, anticipating regulatory change) to vast (emerging-market giants, which will need to finance their growth). In between are the universal banks, which will have modestly challenging capital needs in the midpoint scenario and a very challenging problem in the extreme one.

A second factor weighing on returns will be the high and rising cost of long-term funding.

Several factors are at work here, beginning with a shift in demand. As part of balance sheet restructuring, many banks are cutting back on short-term, unsecured funding (such as commercial paper) and seeking instead to issue longer-dated debt. Demand will also rise as the longer-dated funding currently on banks’ books expires and is renewed. On the supply side, government asset-purchase programs—quantitative easing—are already being retired. Finally, the market will see greater competition for funds, not least from governments that must finance their deficits. All this implies that prices for long-term funding will inexorably rise, shaving as much as several percentage points off ROE, depending on the scenario.

Given these drags on performance, returns will be weak by the standards of the past decade. Worse, they will be highly uncertain—our third finding. In the midpoint case, industry revenues would grow by 5 percent annually through 2014; in the extreme case, the industry would eke out much less attractive annual growth of 1 percent. Under either scenario, the emerging-markets giants come out on top. The story for the other groups of banks is mixed. In the midpoint case, the European and US universals and the investment banks would generate middling ROEs well below their pre-crisis levels. The Japaneseuniversals’ returns would suffer from a poor macroeconomic environment. In the extreme scenario, all but the emerging-market giants will find it extraordinarily difficult to return even their cost of equity. In other words, these banks will face a challenging period reminiscent of the early 1980s.

Our estimates may be cautious. We did not include, for example, the effects of a liability levy such as the one the Obama administration recently proposed. Instead we modeled this proposal separately and found that if such a tax were adopted globally and imposed on the banks in our model, the effect would be to reduce their ROEs by 0.7 to 1.2 percentage points.

A fourth finding confirms the economic evidence of the past several months: the crisis affected emerging markets, especially Asia, less severely than Western ones. Parts of Asia were the last areas to enter into recession and the first to emerge from it—indeed, China’s economy never stopped growing. Asian banks had less trouble with toxic assets and excess leverage than their counterparts elsewhere did. The crisis served to demonstrate that the balance of power shifts abruptly and powerfully rather than gradually; many Asian banks have vaulted to the top of league tables in one go.

Our research confirms that for the next several years, Asia’s economic might will continue to grow, as will the influence and power of its banks. Indeed, in these markets, banking is likely to grow much faster even than the broader economy, because so much of the population is “unbanked.” In both scenarios, all the emerging markets will grow substantially faster than the more mature markets of Europe and North America.

Our last finding stands apart from the rest—and offers a ray of light to many banks. The archetypes constitute a form of destiny: emerging-market giants, riding the back of faster GDP growth, will outperform developed-market universals. In many ways, banking is a leveraged bet on the underlying economy. Yet despite that destiny, banks can do a lot about their performance. The model suggests that within archetypes, differences in performance will be even greater in the future than they are today. The crisis has considerably ratcheted up economic volatility, putting an end to the period some have dubbed “The Great Moderation.” This volatility will amplify the existing differences in performance. Even banks that have been dealt a challenging hand can do much to outperform their peers and reward stakeholders.

Bottom line: global banking is likely to be faced with higher interest rates and an outperformance of Asia and Emerging Markets relative to their OECD peers.

McKinsey Quarterly: 5 Popular Myths of Jobs Creation

McKinsey Quarterly's James Manyika enumerates the 5 popular myths about how to create jobs in the US

Quoting Mr. Manyika, (bold highlights mine) [comments mine]

1. Surely there’s a quick fix.

Oh, were that only the case. The scale of the challenge is enormous. Quick action is important, but remember that the US economy has lost more than 7 million jobs in the past two years. The country would need to create more than 200,000 net new jobs each month for the next seven years to get unemployment back to what was once considered a normal 5 percent. Quick fixes focused on 2010 alone won’t be enough.

Of course, the right mix of government policies can help. But even if Obama’s proposals were enacted right away and they accomplished all that he hopes, they would at best represent a good start. America’s jobs challenge is a multiyear marathon, not a sprint.

2. The key to boosting employment quickly is to help small businesses.

New jobs come from both small and big businesses. From 1987 through 2005, nearly a third of net new jobs were created by businesses that each employed more than 500 workers. By 2005, these big companies accounted for about half of the country’s total employment, although they made up less than 1 percent of all US firms.

But a look at the past two economic booms shows that the pace of job creation depends on more than the size of the businesses. During the economic expansion of the 1990s, large US multinational corporations—which employ an average of about 1,000 workers each in the United States—created jobs more rapidly than other companies. This was because they dominated computer and electronics manufacturing, the sector that drove much of that boom. During the more recent expansion of 2002–07, most of the net new jobs came from local service sectors, such as health care, construction, and real estate—which comprise both large and small businesses.

[yes, the jobs created in 2002-2007 had obviously been in response to policies oriented towards inflating the real estate bubble.

I'd like to add that the current weak job conditions in the small business sector had been a product of uncertainties from ambiguous policies, according to the Wall Street Journal, ``Last year "was a very difficult year for small business," said NFIB chief economist William Dunkelberg. "Continued weak sales and threatening domestic policies from Washington have left small-business owners with little to be optimistic about in the coming year."]

3. High-tech jobs will solve the problem.

There is a lot of talk these days about green businesses, biotechnology, and other emerging industries that will create the jobs of the future. While they are obviously part of the solution, these industries are too small to create the millions of jobs that are needed right away. The semiconductor and biotech industries, for instance, each employ less than one-half of 1 percent of US workers; clean-technology workers, such as those who design and make wind turbines and solar panels, account for 0.6 percent of the workforce.

We’ll be able to generate significant numbers of new jobs only by spurring broad-based job growth across the economy, particularly in big sectors such as retail, wholesale, business services, and health care. High-tech innovations will help employment grow over the long term, as new technology spreads throughout the economy and transforms other, larger sectors. For example, while the semiconductor industry alone doesn’t account for much US employment, the computer revolution has fueled the growth of other industries such as retail and finance; similarly, the clean-technology business by itself doesn’t employ many people, but its developments could transform a big sector such as energy, creating new business models and new jobs.

4. Higher productivity (when an economy produces more goods and services per worker) kills jobs.

Not so. While productivity growth means that individual companies may need fewer employees in the short term, it spurs long-term gains in the economy as a whole. Since the industrial revolution, increasing worker productivity has brought rising incomes, higher profits, and lower prices. These forces stimulate demand for consumer goods and services and for new plants and equipment—fostering, in turn, industry expansion and job creation.

Take cell phones. Even 15 years ago, they were big, unwieldy, expensive, and worked only in limited coverage areas. But as new technologies enabled workers to produce phones and provide service more cheaply, the industry took off. Cell phones are now ubiquitous, and this has created jobs not just among phone makers but also among retailers, service providers, and a new industry of developing and selling applications for smart phones.

5. Increasing exports will revive manufacturing employment.

Maybe for some companies in some industries, but not for the economy overall. While it’s painful to accept, reducing unemployment is not mainly about regaining the jobs that have been lost. Sure, rising exports will cause some factories to scale up again, and many laid-off workers will be called back. But most new job growth will come from other sectors.

History shows that recessions—particularly those that follow a financial crisis—accelerate the growth or decline already underway in industries. In this recession, for example, the auto, financial-services, and residential-real-estate industries have contracted significantly and won’t regain their peak employment anytime soon.

[that's because these areas constituted the concentration of the boom or malinvestment phase]

An increase in exports may stem—but will not reverse—the multidecade decline in manufacturing employment. In today’s developed economies, net growth in new jobs doesn’t come from manufacturing; it comes from service industries. Fortunately, boosting exports creates jobs in supporting service industries, such as design, trucking, shipping, and logistics.

[Some will call these the recalculation or a transitional phase where the economy tries to figure out where to reallocate resources following the market clearing process from the recent recession or bust.

However, what McKinsey's Manyika seems to imply is that policies aimed at directing public resources for job creation to specific sector/s do not guarantee solutions to the present dilemma. Hence the unintended consequences is that these could lead to waste.

Said differently, let the markets decide where investments should be and jobs will eventually follow.

As Ludwig von Mises wrote, ``Profits go to those who succeed in filling the most urgent of the not-yet-satisfied wants of the consumers in the best possible and cheapest way. The profits saved, accumulated, and plowed back into the plant, benefit the common man twice. First, in his capacity as a wage earner, by raising the marginal productivity of labor and thereby real wage rates for all those eager to find jobs. Then later again, in his capacity as a consumer when the products manufactured with the aid of the additional capital flow into the market and become available at the lowest possible prices."]

The Web 2.0 Evolution: McKinsey Quarterly Interviews MIT’s Andrew McAfee

It's been a frequent theme on this blog space that conventionalism doesn't take into account how the world has been transitioning from the post-industrial age to the information age.

This video interview of MIT's Andrew McAfee by McKinsey Quarterly "How Web 2.0 is changing the way we work"deals with such transformation.

According to McKinsey Quarterly,

``In recent years, using technology to change the way people work has often meant painful disruption, as CIOs rolled enterprise software programs through the ranks of reluctant staffers. Today, employees are more likely to bring in new technologies on their own—and to do so enthusiastically—through their Web browser, whether it’s starting a blog, setting up a wiki to share knowledge, or collaborating on documents hosted online. Andrew McAfee, principal research scientist at the Center for Digital Business at the MIT Sloan School of Management, has been watching this shift closely. His new book, Enterprise 2.0: New Collaborative Tools for your Organization’s Toughest Challenges, explores the ways that leading organizations are bringing Web 2.0 tools inside. McAfee calls these tools “emergent social software platforms”—highly visible environments with tools that evolve as people use them—and he is optimistic about their potential to improve the way we work.

``McAfee spoke with McKinsey’s Roger Roberts, a principal in the Silicon Valley office, in Palo Alto, California, in October 2009.

Andrew McAfee: ``One of my initial assumptions was after looking at the Web, you see the phenomenal growth of things like Facebook and Wikipedia and Flickr and YouTube and all that. I thought these technologies were essentially so cool that when you dropped them in an organization, people flocked to them. That was the assumption I carried around in my research.

``I very quickly had that overturned. And in fact what you see is—particularly for longer tenured workers, particularly for older workers—this is a big shift for them, changing their current work practices and moving over to Enterprise 2.0. This is not an overnight phenomenon at all. And while there are pockets of energy, getting mass adoption remains a pretty serious challenge for a lot of organizations." (Things do change at the margins-Benson)

If video doesn't appear pls proceed to McKinsey's website here.

The Transcript of the interview here

Graphic: Global Property Bubble

A graphic presentation of the 2007 global property bubble by McKinsey Quarterly.

According to McKinsey Quarterly, ``Although the current crisis started with the bursting of the US housing bubble, other economies around the world are feeling the effects of their own real-estate booms and busts. From 2000 through 2007, a remarkable run-up in global home prices occurred (see exhibit). But that trend has reversed abruptly. In 2008, the value of US residential real estate fell 10 percent; the global average fared only somewhat better, declining by almost 4 percent. We estimate that falling home prices erased more than $3.4 trillion of household wealth in 2008. And because home prices are slow to correct, the current slide may persist for some time, which could depress global consumption."
Additional observations:

-The US bubble had been dwarfed by property bubbles mostly in Europe.

-3 major economies, Switzerland, Japan and Germany had no bubbles yet were similarly hit hard (transmitted from Banking and exports)

-Asia (and possibly emerging markets) was mostly exempt-except for Australia.

Stephen Roach: Preparing For The Asian Century

McKinsey Quarterly Interviews Morgan Stanley's Stephen Roach on his latest book "The Next Asia".





Find below the transcript of the Interview from McKinsey Quarterly...(if video doesn't appear pls proceed to McKinsey's website


(all bold highlights mine)

Clay Chandler: We’re joined today by Steve Roach, the chairman of Morgan Stanley Asia. Steve, thank you for being with us. You’ve been watching and writing about the dynamism in this region for many decades now. In your new book, The Next Asia, you write about how the region in the next 20 years will be much different than in the past 20 years. What’s driving that change?

Stephen Roach: Well, Clay, I think the Asia of the past 30 years has done an extraordinary job—especially China, but, increasingly, the rest of the region—in lifting standards of living well beyond anything we’ve seen in the annals of economic development. But the drivers have been primarily export led. And there’s been a lot of investment in the export platform that has been required to get that export machine to the state that it’s at.

But this model is close to having outlived its usefulness. The next Asia will be more consumer led, will have a growth dynamic that places greater emphasis on the quality of the growth experience, especially in terms of environmental protection and pollution control.

Clay Chandler: If I’m the chief executive of a Fortune 500 company and I’m thinking about my global strategy, how do I need to be thinking differently about Asia than I might have been before the crisis?

Stephen Roach: I think global multinationals have, up until now, primarily viewed developing Asia—and China in particular—as an offshore-production platform. The offshore-efficiency solution is still an attractive option. But what really could be powerful would be a growing opportunity to tap the region’s 3.5 billion consumers. This has been the dream all along of the Asian potential. But the consumer dynamic has largely been missing in action. And now, as it comes online, this is an extraordinary bonanza for global multinationals as well.

Clay Chandler: In The Next Asia, you strike a very optimistic tone. You note that Asia has always embraced change and that that’s really been the secret of Asia’s dynamism in years past. But the same thing was said in the wake of the Asian financial crisis in 1997. And yet by and large, most Asian economies went right back to the model that worked so well for them before the Asian financial crisis, a model that was heavily focused on exports and government-led investments. What’s different about the economic scene today?

Stephen Roach: The external demands that underpin the export model are now in trouble. So even if Asia is the best and most efficient producer that anyone has ever seen, the external demand is not going to be there the way it was. So if Asia wants to keep growing, if Asia wants to keep developing, if it wants to keep raising the standard of living for its three-and-a-half-billion consumers, it’s got to depend more on its own internal demand. So it really boils down to the fact that Asia’s options have been narrowed in terms of economic development as never before. And it has no choice but to become more internally, rather than externally, dependent.

Clay Chandler: Let’s talk for a moment, if we could, about India, the other big, growing economy in the region.

Stephen Roach: I think the micro has always been very positive in India: a large population of world-class competitive companies; a well-educated, English-speaking, IT-competent workforce; pretty good market institutions; relatively stable financial institutions; rule of law; democracy. The micro has never been the problem.

What’s really been the problem for India has mainly been the macro—inadequate savings; relatively limited foreign direct investment, especially when compared with China; and, of course, the horrible infrastructure. The macro has actually gotten better. In the last three to four years, India’s savings rates have moved from the low 20s nationwide to the mid-to-high 30s, which is still short of China but a huge improvement for India.

Foreign direct investments accelerated dramatically—again, not up to Chinese standards, but a huge acceleration vis-à-vis where India has been historically.

And the third leg of the stool is politics. The mid-May election, by sweeping the Communist Party out of this new coalition, gives the reformers an opportunity to finally deliver on the promises they made five-and-a-half years ago, when they first took power. I think that India actually could be the real sleeper in Asia over the next few years. Just at a time when everybody is all lathered up and excited over a China-centric region.

Clay Chandler: You can’t really talk about Asia’s future without also considering the trajectory of its largest economy. That, of course, is Japan. The story there has been almost unrelentingly gloomy for years. But now we’ve got a new government.

Stephen Roach: Well, you know, Japan is an example of what happens when you take a very prosperous economy and allow it to experience the post-bubble aftershocks of a massive asset-led implosion.

But here Japan sits, 20 years into the post-bubble era, and it’s not clear that it has really awoken from its long slumber, as you aptly put it. This is an economy that remains very much export dependent. Its two largest export markets, the US and China, are not providing much sustenance. The Japanese consumer is very constrained by demography, by unfunded pension liabilities. It still has a very high predisposition toward saving. There has been some capital-spending impetus in recent years but, again, it has largely been driven by a new export linkage into China, and that’s on hold right now. And then finally, Japan has a horrific leadership problem. So the combination of structural problems, this long post-bubble hangover, leadership issues—it’s hard to be too constructive on the Japanese economy going forward, I’m afraid.

Clay Chandler: How about prospects for greater integration and cooperation in Asia as a whole? In your book, you talk about the emergence of what you call a pan-Asian economic framework. What will that framework look like?

Stephen Roach: Well, I think the building blocks of that framework are starting to fall into place. There’s been increased integration in a China-centric supply chain, with most of the large economies in the region—from Japan, to Korea, to Taiwan—now more dependent on exports to China than any of their other major trading partners, including Europe or the United States. So the logistics of an increasingly China-centric supply chain are starting to fall into place.

But here again, I would say that the real challenge for a pan-regional economic integration would be to shift the structure increasingly away from one that’s externally led to one that’s internally led. When the Asian consumer starts to rise and is sourced increasingly by the Asian producer, that’ll be the real, powerful synergy that I think can take this region to the next place.

Clay Chandler: Is it fair, do you think, to say that the Asian Century has finally arrived?

Stephen Roach: The central premise of my book, The Next Asia, is that it’s a little early to crack out the champagne and declare the onset of the Asian Century. It’s the stuff of great headlines and possibly documentary films, but the next Asia—an Asia which is more balanced, one that brings the Asian consumer into the equation—that’s what the Asian Century needs. The Asian Century, in my view, is not a sustainable image if it’s an Asia of producers or exporters selling things to others. The Asian Century is one where Asia produces to its home markets, rather than just to markets around the world. And until we see that, I think, again, that champagne is going to have to stay on ice for awhile".

Decoupling in Oil Markets: The Centre of Gravity in Energy Markets Has Shifted To Emerging Markets

Mr. Tony Hayward, chief executive of BP made a dramatic revelation about the evolving energy industry published at the Telegraph last week.

He said that the "centre of gravity" of the energy markets had permanently shifted towards emerging markets.

We quote Mr. Hayward (emphasis added), ``But one event went almost unnoticed. 2008 was the year when the centre of gravity in the energy market tilted sharply and permanently towards the emerging nations of the world. For the first time ever, non-OECD energy consumption outstripped that of the OECD nations.

``This really is a decisive moment. People have been predicting such fundamental shift, with its implications for the world economy and geopolitics, for some time. Now it has happened."

Yet, ironically, many so called experts stubbornly insist that the world can't decouple.

chart from BP Statistical Review on World Oil consumption

Adds Mr. Hayward, ``As has been the case for several years, China again led the way in incremental energy consumption in 2008, accounting for three-quarters of the extra growth, and India took second place.

``Both countries rely heavily on coal for power generation. China in particular has extensive coal reserves and this means that coal remains the fastest-growing fuel, as it has for six consecutive years.

``The shift in energy consumption towards the non-OECD is not a temporary phenomenon. On the contrary, I believe it will increase still further over time. It is a trend which will continue to affect prices and raise questions about the sustainability of economic growth, energy security and climate change."

Chart from McKinsey Quarterly/Reserach Recap

Well it isn't just Mr. Hayward or BP saying so, research institute McKinsey Quarterly observes the same dynamics in motion too.

Mckinsey Quarterly's Interactive chart depicting of the World Energy Demand (I placed it under a severe downturn scenario).
Also Mckinsey Quarterly's Interactive chart on World oil consumption (I also placed it under a severe downturn scenario)

From McKinsey, “More than 90 percent of this demand expansion will come from developing regions, with China, India, and the Middle East leading the way. Five sectors within China—residential and commercial buildings, steel, petrochemicals, and light vehicles—will account for more than 25 percent of global energy demand growth. India’s light-vehicle, residential-buildings, and steel sectors and the Middle East’s light-vehicle and petrochemicals sectors will be other notable contributors to the growing demand for energy.” (bold highlight mine)

So Emerging Market demand, restricted supplies, inflationary policies and limited geographical access adds up to $200 oil or more as we wrote in $200 Per Barrel Oil ,Here We Come!

Power Curves Applied To Economy, Markets And Nature

This is an interesting study from The McKinsey Quarterly which dwells with power curves in "Power Curves": What Natural And Economic Disaster Have In Common

The power curve or the power law according to wikipedia.org,``A power law is a special kind of mathematical relationship between two quantities. If one quantity is the frequency of an event, the relationship is a power-law distribution, and the frequencies decrease very slowly as the size of the event increases. For instance, an earthquake twice as large is four times as rare. If this pattern holds for earthquakes of all sizes, then the distribution is said to "scale". Power laws also describe other kinds of relationships, such as the metabolic rate of a species and its body mass (called Kleiber's law), and the size of a city and the number of patents it produces. What this relationship means is that there is no typical size in the conventional sense. Power laws are found throughout the natural and manmade worlds, and are an active area of scientific research.

McKinsey suggests that the laws of nature can be applied to economies or marketplace, ``Scientists, sometimes in cooperation with economists, are taking the lead in a young field that applies complexity theory to economic research, rejecting the traditional view of the economy as a fully transparent, rational system striving toward equilibrium. The geophysics professor and earthquake authority Didier Sornette, for example, leads the Financial Crisis Observatory, in Zurich, which uses concepts and mathematical models that draw on complexity theory and statistical physics to understand financial bubbles and economic crises.

``Sornette aims to predict extreme outcomes in complex systems. Many other scientists in the field of complexity theory argue that earthquakes, forest fires, power blackouts, and the like are extremely difficult or even impossible to foresee because they are the products of many interdependent “agents” and cascades of events in inherently unstable systems that generate large variations. One symptom of such a system’s behavior is that the frequency and magnitude of outcomes can be described by a mathematical relationship called a “power law,” characterized by a short “head” of frequently occurring small events, dropping off to a long “tail” of increasingly rare but much larger ones...

``If, for instance, you plot the frequency of banking crises around the world from 1970 to 2007, as well as their magnitude as measured by four-year losses of GDP for each affected country, you get a typical power curve pattern, with a short head of almost 70 crises, each with accumulated losses of less than 15 percent of GDP, quickly falling off to a long tail of very few—but massive—crises . While the most extreme cases involve smaller, less developed countries, the same distribution also applies to more developed ones—and with much larger absolute values for GDP loss. Earthquakes, forest fires, and blackouts yield a similar power curve pattern—for instance, from 1993 to 1995, Southern California registered 7,000 tremors at 2.0–2.5 on the Richter scale, falling off to the 1994 Northridge earthquake, at the end of the tail, with a magnitude of 6.7. The curve highlights a key property of the power law: extremely large outcomes are more likely than they are in a normal, bell-shaped distribution, which implies a relatively even spread of values around a mean (in other words, shorter and thinner tails)."

The power law applied to the industrial production...

``These examples indicate that power law patterns, with their small, frequent outcomes mixed with rare, hard-to-predict extreme ones, exist in many aspects of the economy. This suggests that the economy, like other complex systems characterized by power law behavior, is inherently unstable and prone to occasional huge failures. Intriguing stuff, but how can corporate strategists, economists, and policy makers use it? This is still a young field of research, and the study of power law patterns may be part of the answer, but it isn’t too early to consider and discuss potential implications."

Read the rest here

Peter Bernstein on Risk and Risk Managment

McKinsey Quarterly presents Peter Bernstein [my apologies I erroneously placed Richard Bernstein earlier]

``The celebrated author of Against the Gods: The Remarkable Story of Risk explores the history of risk and how it works in real-world markets and in our lives.

``Risk doesn’t mean danger—it just means not knowing what the future holds. That insight resides at the core of risk management for companies, whether in managing the potential downside of an investment or putting a value on the option of waiting when making irreversible decisions. In this video Peter L. Bernstein also explains why in the real world the most sophisticated mathematical models can sometimes fail."

Peter Bernstein in this video deals with Risk, Risk Control and Management, Options and Option pricing, and mathematical models that can't input world dynamics.

"It's how you deal with it when it happens"

Update: Learned today June 10th, that risk guru Peter Bernstein has recently passed away at age 90 (Bloomberg). Sad to lose such an inspirational icon, he will surely be missed.