Archive for June, 2011


goodbye Chicago…hello India

Thursday 30 June, 2011

It’s with a tinge of regret that I let all of my faithful readers (& anyone else who’ll read this) know that I’m leaving Chicago to teach @ the Ghandi Institute of Technology & Management in Visakhapatnam, India.  I expect I’ll be teaching international business, marketing, management, etc.  The hook for me was the opportunity to work with the GITAM School of International Business.  The semester starts 7 July, so I’m already in India getting over my jet lag.

On a personal basis, I’ve been looking to work abroad for quite awhile.  In 2006, when I was in AZ @ my Thunderbird class reunion, I was in an automobile accident.  I walked away, but it was a “come to Jesus” moment, in that it forced me to look @ what’s important to me & I determined working abroad should be a priority.  The next year I had an opportunity to teach in Taiwan, which I turned down.  Then I got involved with a woman which postponed my pursuit of that ever-elusive foreign gig.  After that romantic relationship ended, I received a verbal offer to teach in Korea, but never got a written confirmation.  Last year I went through the interviewing process with a consulting firm based in Paris, & made it to the final stage, but was not the chosen one.  Going even further back, my grandfather owned a travel agency & he gave us the travel bug when we sat in his basement watch 8mm movies of his travels throughout the world.  My dad worked in the travel incentive business, so he got to sell travel incentive programs & then get to go on the trips.  Exploring the world is in my blood.

Why India?  It’s the future.  The media & many businesspeople maintain businesses should have a “China Plan.”  My feeling is if you have a China plan, you should have an India plan too because in some ways India is a much better market for western companies.  Indians speak English.  India has a heritage as a British commonwealth country, with vestiges of British common law.  India has an entrenched democracy that will not be usurped anytime soon.  Although there are certainly problems like corruption & bureaucracy, I believe India has the best long-term future in Asia.

I’m a little disappointed to give up gata, but I never found a consistent way to find new customers.  I tried a lot of different means to reach out to potential clients, but even when I did, you have to be careful what you ask for.  Last year I got a project that lined up well with what I professed to do, finding a distributor for a high technology client in Brazil.  It took 4-5 months to find a handful of qualified prospects, then we went down & interviewed them, & picked who we thought was the best fit.  The client was satisfied, but I ended up being dissatisfied.  If you’ve read this blog, you know I rail against businesspeople who fly around the world, pop into different business environments, & then claim to be experts in those countries.  My take is those are superficial experiences, so my aspiration is to learn business cultures in a more deep & meaningful way.  When I lived & worked in Germany many years ago, it was an enlightening experience to learn that you can be successful in a way that’s not American.  I yearn to learn those kinds of things again.  The Indians are very open about encouraging their faculty to pursue consulting work, so hopefully I’ll be able to get engaged with the local business community & work on some consulting gigs there.

Going forward, I still have blog posts on events in Chicago to post, so those will be upcoming in the next month.  After that, my blog & newsletter will simply take a different focus.  Stay tuned if you’re interested on my impressions of India.

My hope is that I’m not done exploring by living & working in India.  Next year may present other opportunities for me to learn about even more places, so keep posted here if you’re interested in where I am & what I’m doing.  Thanks for reading.


The Economist & Baker-McKenzie on China

Friday 17 June, 2011

The good folks @ Baker & McKenzie were kind enough to extend an invitation to an update on China: China Update Roadshow 2011-Structuring for Growth in a Changing China.  Mike Morkin, Managing Partner of BM’s Chicago office, Jia Zhao, the 1st Chinese woman to earn a western law degree & pass the bar, & Tom Doyle, Chair of the North America-China Initiative, provided opening remarks.  We then jumped into new legal developments:

  • Bing Ho said 85% of BM clients are making money in China, & 20% said China is their most profitable market globally.  Foreign Direct Investment reached $90B in China during the financial crisis, & is now @ $105B.  The government continues to roll out the red carpet & is downsizing it’s approval domain by raising the level which it uses to approve investments from $30M to $300M.  Investing in China still requires skillful due diligence & lots of work post-acquisition.
  • Michelle Gon spoke to compliance & corruption in admitting China is not yet “civilized.”  There is less bribery of public officials, & now no one is exempt from prosecution.  China does have an equivalent to America’s Foreign Corrupt Practices Act including it’s extraterritoriality, but state secret issues are still vaguely defined.
  • Brandon Kelly expounded on taxes.  Shares transfers require a 10% withholding tax on capital gains, which were rarely paid before 2007.  Now transactions are more difficult with more reporting obligations because there are fewer shells in which companies can shelter income.  The withholding tax was reduced to 5% in Hong Kong & Shanghai, but you must have real substance to justify the lower rate, which changes how you structure deals.
  • Joseph Deng talked to employment.  As Chinese demographics change, the is no more endless labor pool.  The dependency ratio is changing from 10:1 to 3:1.  Companies that came to China for labor savings are staying to serve local consumers.  Unions in China are passive & work with the government on development.  Regardless, unrest is now further, deeper, & more dangerous.  The government should not be paranoid about the Jasmine Revolution, but should be afraid of dissatisfaction.  Employee demands for individual rights have increased the last 3 years & we are starting to see some overtime actions.
  • Clement Ngai informed us about intellectual  property (IP).  Because China sees it’s future in innovation, technology, R&D, invention, & patents, rather than as the world’s factory, filings are up the last 5-6 years.  HuaWei was sued by Cisco & they settled, & HuaWei now is a joint venture partner of 3Com.  There is new legislation on patent law:  inventors are required to file in China 1st with creations created in China.  Inventor compensation is now mandatory, but the issue is ownership.  The presumption is the creation belongs to the employee, who receives ongoing remuneration of 2-10%.
  • Howard Wu espoused on  supply chains.  There is a shift from broad assembly for export to turnkey manufacturing for local consumer consumption to add more value & pay more taxes.

I attended the break-out sessions on investments/acquisitions & R&D/IP.   Mergers & acquisitions have increased from $41B in 2001 to $105B in 2011.  The number of projects has dropped from 45 at it’s peak to 28 now.  87% of respondents said their investments are profitable, & 68% are better than overall.  74% make China a top 5 priority & 66% are accelerating their commitment, while 61% are producing locally for the Chinese market.  31% say bureaucracy & 30% say finding capable management are the most pressing challenges.  The Chinese are tightening up on the approval process, having adopted a European model which requires lots of information.  The specifics of a new National Security review are unclear.  If for some reason your deal is rejected, it’s better to negotiate further rather than going to court to overturn a decision.  Pre-acquisition due diligence & post-acquisition integration are key.  The questions respectively are “What will you tolerate & not tolerate?” & given 3 typical sets of books, how do you set a price?  1 result is pushing Chinese multi-national companies out to better compete globally.

To R&D/IP, R&D has increased .45% to 2.2% of Chinese GDP.  High New Technology Enterprises (HNTE) & Technologically Advanced Service Enterprises (TASE)  seek to create National Indigenous Innovation Products (NIIP).  HNTE’s get 10% tax breaks from 25% to 15%.  TASE is created to confront India in services.  Chinese companies compensate inventors with either a 1-off payment when a patent is filed &/or 2-10% when a patent is granted 2-5 years later.  NIIP product certification is done @ the local level, but may transition to federal, & impacts upon government procurement opportunities.

Ran Xu of the Economist Intelligence Unit offered insights from their research.  Although American living standards are still higher than those of the Chinese, China wields more clout around the world today.  Chinese household income is $15K/year, & will equal that of the US in 2014.  The Chinese market is the #2 market in many global sectors after the US.  Chinese growth will fall from 7.5%/annum 2011-2020 to 5.5% 2021-2030.  Rebalancing investment, consumption, & exports is tricky.  The financial crisis exasperated imbalances.  China has 100K infrastructure projects where corruption & quality are problems.  What could go wrong in the next 5 years?

  • a volatile stock market with lots of insider trading & the end of cheap Chinese labor could lead to inflation
  • changing demographics lead to 1 worker feeding 4 mouths as the young decline & the aged rise
  • the centers of wealth are changing 2009-2015 with new consumer markets:  Carrefour moves fast & makes decisions after opening a store whether to stay open or close in 1 year; Burberry is buying back it’s franchises.  Income disparity is leading to social stability issues as local governments are beholden to the rich, & there is lots of hidden wealth.  Shanghai residents have 1.3 computers while the national average is .6-.8
  • In 2012, the majority of the Chinese population will live in urban areas, which is increasing property values, & potentially leading to another bubble.  The majority of the Chinese can’t afford to buy a home, (men have lost wives due to lack of a house) but there is little incentive to build low-cost housing.  Property value has been divorced from rent.  The population was angered when, during China’s most recent earthquake, the government buildings withstood the melee while schools did not.
  • China is the world’s biggest consumer & emitter of CO2, so they are desperately seeking new energy sources, but China doesn’t develop it’s own technologies:  it imports or “shares” them.


  • Whether inflation will kick in depends on whether or not you include food & housing in the definition
  • GDP/per capita will plateau in 2015 & then show 5% growth
  • China will not crash in the next 1-2 years

invest in Bulgaria?

Tuesday 14 June, 2011

The International Trade Association of Greater Chicago invited us to learn about Bulgaria-your strategic gateway to southeastern Europe which featured speakers from Johnson Controls. Kraft, & McDonald’s.   Ambassador of the US to Bulgaria James Warlick kicked off the road-show’s 1st stop in the city with the most Bulgarians in the US to introduce Bulgaria to investors & exporters.  The US was the biggest investor in Bulgaria in 2010 & forecasts 3 1/2 % growth for 2011.  The remaining issues are the legal system & infrastructure.

Elena Poptodorova, Ambassador of Bulgaria to the US, let us know Bulgaria joined NATO in 2004, the EU in 2007, & contributed to defense cooperative agreements in 2006 in Afghanistan & Iraq, which creates bonds stronger than politics.  Big investors like McDonald’s & Starbucks are now part of daily life in Bulgaria, but SME’s are a focus, such as special programs for rural areas.

James Kramer, VP-Intl Franchising for McDonald’s, expounded on Mickey D’s experience in Bulgaria.  They entered the market in the mid-1990’s as owners & built 19 restaurants then transitioned to a franchise structure in 2006.  Since then, they’ve added 15 new stores, + 2 this June, & 8 McCafes to employ 1300 people.  On the Corporate Social Responsibility side, they’ve opened a Ronald McDonald House in 2002 & raised $300K & also sponsor McHappy Days.  McDonald’s has won a best employer award in Bulgaria & internal awards for the highest quality & employee experience in Europe.

According to Sherrie Esposito, Assoc. Dir. of Global Issues Management, Kraft entered Bulgaria in 1993 with the acquisition of a chocolate plant that employed 500 people.  In 2001 they expanded to Nova Brasilia with 100 employees & made a $30M expansion in 2009.  Kraft is #2 to Coke in recognized brands in Bulgaria.  The reasons Kraft went to Bulgaria are:

  • member of EU, including Schengen agreement
  • low costs & skilled workforce
  • low taxes (10%)
  • location

In the future, the Bulgarian government needs to:

  • streamline government
  • establish the rule of law
  • build infrastructure

Johnson Controls Director of Sofia Development Center (SDC) Roman Vasilev told us about their batteries & power solutions for autos & building efficiency.  At their SDC they made a long term commitment to do R&D on hardware, software, & mechanical design for 5-10 years there.  They’ve actually invited R&D competition because that is better for everybody.


  • it takes a few months to incorporate in Bulgaria
  • there are no restrictions on foreign ownership
  • Johnson Controls bought an instrument company in 2001 with 50 engineers which has now grown to 500 engineers.  The cultural fit & mobility of Sofia’s engineers keeps Johnson Controls there.  McDonald’s expanded into a number of other similar countries @ the same time.  The size of each market determined if they entered as owners or franchisees.
  • Bulgaria is ready for €RM2 & it’s banknotes are simply tied to the €.
  • Because of it’s educational system, Bulgaria is a technology-driven economy.  There are no issues with intellectual property.  The # of FTE’s (full-time engineers) is comparable to Egypt, a much larger country.  Unlike other emerging technology centers, Bulgarians ask more questions up front so that there are fewer problems later on.  McDonald’s focuses it’s technology on consumers & reporting.  Internet penetration in Bulgaria is 48%-broadband penetration is higher than in Western Europe.
  • McDonald’s uses a single franchise model in Bulgaria because it’s the best model for McDonald’s, which allows them to manage risk better by engaging local business people with high profiles & financial resources to build the business & brand.  They take no real estate interest to minimize their risk.
  • McDonald’s employs only 1 American in all of Europe, which has 6K restaurants, because there are talented people everywhere “with ketchup in their blood.”  Johnson Controls was skeptical of Bulgaria before it hit bottom, but entered @ the right time as the people & government matured.
  • Inflation is predictable @ 3-7%.

the growing middle classes in the B(R?)IC countries

Thursday 9 June, 2011

The University of Chicago hosted a conference focused on the BRIC (Brazil, Russia, India, China) countries called BRIC in 2020 which I was only able to attend for the 1st day, which focused on the emerging middle classes in those countries.  You’ll find many of the presentations on the website.  Dipesh Chakrabarty of UC’s dept. of history opened with a quick summary of today’s global middle class, in families cut across borders.  As the older middle class rode a wave of prosperity, today’s growth brings environmental & inequality problems along with it.  As there is more economic growth & “globility”, there is also more conflict.

Marcelo Neri’s presentation on Brazil is here or here:  brazilsmiddleclass

Harley Balzer of the dept. of government @ Georgetown addressed the middle class in China & Russia by 1st acknowledging that Russia really doesn’t share the growth characteristics of the other BRIC countries.  It doesn’t have the historical links or geographical proximity that the others do.  It’s not a member of the WTO & hasn’t diversified it’s economy off of oil, plus Russia is losing it’s educational & science/technology role.  Russia’s middle class is richer, but a smaller % of the population, the same as in 1995.  There are mostly private, & very few public goods.  There are also big security & mobility issues there.

In both Russia & China, higher education enrollment is increasing, but neither is expanding faculty.  The political role of the middle class is ambiguous because a sizable middle class is necessary but not sufficient for democracy.  Typically the professionals provide leadership & lead revolutions & they’re just not doing that.  Their welfare states are under pressure & demographics & income disparities are becoming problems.  The middle class is vulnerable to housing bubbles & food & energy price shocks, while governments are cutting services & jobs.

The number & wealth of China’s middle class is growing, but more education is not leading to better prospects, so China might not be changing fast enough.  It’s growth curve is leveling off.  Western companies have experienced consumer market failures like Best Buy Home Depot because of intense price competition & the focus on consumption is pernicious.

Devesh Kapur of the Center for the Advanced Study of India @ Penn addressed 4 topics:

  1. fractured coherence/cohesiveness-15-20% of the Indian population still lives on $2/day while the number of taxpayers has risen to 30M households, 1/6 of the population.  50M or 15% of the population, have college degrees but their incomes are still less than in the west.
  2. characteristics-in the 1990’s, jobs were linked to state employment, which is now flat.  The middle class has grown from self-employment & entrepreneurship, although less Anglicized & moving from major metropolitan areas to smaller cities.
  3. attitudes-Pew global surveys indicate India is an outlier in that middle class attitudes are similar to those of the poor with no gap, & rate their past lives low & are optimistic & not nostalgic.  That they’ve become consumerists is no surprise.  The professions won’t play the same role as in the past.  They can be crusaders against corruption, but many self-governing bodies are corrupt themselves.  The media is corrupt too, so they don’t report on corruption.  Ultimately there is no vanguard for change.
  4. political roles-the middle class is the base of power but are disenfranchised & dislike the democratic process.  The Right to Information Act was a result of middle class activism.  Whereas the old left looked to the state, the new left is skeptical of everything, the state, markets, etc.  2M non-governmental organizations (ngo’s), of which many are great & many are crooks, have substituted for the state, which parallel the for-profit sector.

Panel Q&A highlights

Brazil’s universal health care & public services provide poor quality, but it’s population wants a big state role.  Brazil’s diverse but integrated culture helps so they can take a middle path.  It has a relatively closed economy, but that has internal advantages.  Brazil is targeting OECD levels of education by 2020, which is the #2 priority now, up from #7.  They are learning from the Chinese in “working the plan.”

Russia’s Putin closed their 1990’s trajectory & discredited democracy where corruption has blocked globalization, which will all take a generation to change.  As they view the outside world, they may demand changes.  A Russian bubble would be tied to oil, but a petro-carbon-based economy can’t last.  Their future now depends on the price of oil & their budgets are in trouble.

India’s middle class is exiting from the state’s education & health sectors because they paid taxes but got little in return, but there is rapid growth in taxpayers.  The fastest rising asset class is student loans, debt & mortgages are rising, leading to supply & demand imbalances.  The poor still favor democracy as a fundamental right, while it’s extremely heterogeneous population has both positives & negatives.  Despite many communists losing elections recently, there are still photos of Stalin in every office.

China has reestablished the intrusion of the state into life.  Housing & food price bubbles could pop up because their economic history dictates that their current growth rates are not sustainable.  Their large & integrated domestic market leads them to be optimistic, similar to the US in the 19th century.  Chinese savings are a result of a lack of valid pension schemes, so the government is concerned about inflation.


how to enter India

Tuesday 7 June, 2011

The Chicagoland Chamber of Commerce Global Connections Council presented a much improved forum INDIAN BUSINESS FORUM: NEW BUSINESS OPPORTUNITIES IN INDIA which featured Eric Cohen of Power Plant Services & George Molokal of Alcor Fund & was hosted by Allen Ginsburg & Raj Shah of DLA Piper.  Those techy Indians opened with greetings from the Consul General in Chicago sent via video feed.  She informed us that her US region did $4-5B in trade in the Midwest, the most with Illinois & Michigan.  There are at least 13 Illinois companies working in India.  India’s GDP is growing @ 8.5%, & 2nd in the world in Foreign Direct Investment, while India has invested $5.5B in the US, which is more than the reverse.  If you’re interested in working in a country with a stable democracy, large & young population, (their growing middle class is now bigger than the population of the U.S.)  that is investing in infrastructure, India is your place.  But because India prohibits foreign law firms to practice there, foreign lawyers have to partner up with the locals.

George Molokal was kind enough to send over the very comprehensive presentations by him & Eric Cohen.  Here they are:  India Forum – Alcor Presentation


  • Corporate taxes are uniformly applied @ 35%.  Withholding taxes are 15% on dividends.  There have been no issues with repatriation of profits for the last 15 years.
  • Doing 360 degree interviews with employees & customers of 8-10 potential partners as an extra layer of due diligence should enable you to find partners you can trust.
  • The Indians are more process-driven & capitalistic than their neighbors to the east, so political connections are less important than they are in China.  However, certain industries, like infrastructure, have more political controls…
  • It’s best to take services & construction companies to India via partners, which is easiest & cheapest.  To hire & build takes experience & a long time.
  • Meeting partner expectations on both sides is a cultural risk.  Contracts very well may change in 6 months, so design that into your plans.
  • Because of India’s focus on education, the caste system has diminished in the last 15-20 years.  Now capitalism & merit-based systems prevail.
  • Geographically, there is more manufacturing in the west;  silicon valley is in the south; the auto industry is centered around Chennai; the northeast is the weakest.
  • More Indian women are joining the workforce, but most still stay home.
  • India’s Right to Information (RTI) act has opened up government bureaucracies so that they are now more transparent & move faster.  Thus, these bureaucracies have been losing power the last 5-7 years.
  • India is culturally different in being more family-driven, showing respect to elders, & minimizing individualism.