JimPinto.com - Connections for Growth & Success™
No. 203 : 15 February 2006

Keeping an eye on technology futures.
Business commentary - no hidden agendas.
New attitudes, no platitudes.

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New global business models

Last week, I attended the TiE (The Indus Entrepreneurs) monthly meeting in San Diego. TiE is a global network of Indian entrepreneurs and professionals, with 42 Chapters in 9 countries.

This month's meeting featured Dr. Gururaj "Desh" Deshpande, chairman and co-founder of Sycamore Networks. He also founded Cascade Communications, which grew from a one-man startup in 1991 to $500M and 900 employees in 1997, when it was sold for $3.7B. At 55, he is now one of the wealthiest Indians anywhere, is on the Board of MIT and funded MIT's Deshpande Center for Technological Innovation. His success and vision make him a technology visionary of the new economy.

With that introduction, let me see if I can summarize some of the ideas I gained from Desh Deshpande (I didn't take any notes, but they're engraved in my brain). His global business perspectives were well thought out and articulated.

Deshpande says the era of local standards is over. There was a time when America had a significant technology lead and American products became de-facto standards. But with today's global proliferation of technology, anything that works quickly spreads globally.

Today's world has 3 business/technology models:

  • US businesses develop products with 60-70% gross-profit margins, and target revenue growth of $100M to $1B. US investment is simply not available for products with smaller margins and markets. Because of this, products developed in the US are more complex and are targeted for large markets that can justify high investment and subsequent high overhead.
  • Other developing countries, like India, are growing rapidly through products that have intermediate complexity with medium (40-50%) gross-profit margins. In India today, there are lots of exciting technology companies growing to $5-10M within 3-5 years with medium complexity products, quickly developed. This level of success attracts high levels of investment in India, which has a low capital-gains tax (something like 5% for local investors). Today there are some 7,000 companies on the stock market in India (compared to about 12,000 in the US).
  • China is unique in that it is government controlled, with target gross-margins of 5-10% (margins that capitalist ventures would consider too small to merit investment). As a result, China has become the undisputed world leader in low-cost manufacturing of high-volume products. Their primary objectives are local employment and market-share. Also, China mandates that all intellectual property is disclosed.
Desh Deshpande brought up a key factor for investment: what he calls "asymmetric motivation". This is similar to the principle "you can't simulate hunger".

In N. America and Europe salaries are high and the motivation to work long hours is limited to those few who have natural drive. In India the drive for upward mobility is far more pervasive - you may remember we discussed the dedicated people I met at Wipro who all work very long hours. In China, manufacturing people work diligently for comparatively low wages and government-provided housing; working fixed hours in a clean factory beats pulling rice from mud. This asymmetric motivation results in huge productivity differences and global shifts.

I don't know about you; but for me the three new-age business models and the concept of asymmetric motivation, rang a lot of bells.

Click Gururaj "Desh" Deshpande Founder Sycamore Networks

Click Rediff Interview - Dr Gururaj Deshpande

Click China & India surge ahead

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China has a long-term view

It's interesting how people assume that others have motivations similar to their own. There's an old principle: "You can't tell a liar you're not lying." Similarly, capitalists simply cannot understand non-capitalistic motivations. And therein lies the weakness.

Capitalism seems to have a myopic focus on short-term financial performance at the expense of long-term investment. Recognizing the gap between their own present situation and Western advancement, the Chinese are exploiting that flaw.

China has already advanced to become America's largest debtor, holding US Treasury Notes that are financing America's largest-ever deficit. While "money" is important to the US in the short-term, few recognize that it means little to China in the long term. Their failed bid for Unocal notwithstanding (it failed by US government intervention), they will steadily buy large and significant companies (e.g.: Lenovo buying IBM) as they progress steadily to becoming a major world power. Their perspective is long-term.

In the 2 April 2005 issue of JimPinto.com eNews, Michael Ding (Chinese name, Ding Junying) wrote:

    "There have been surprising technology developments during the last 200 years and China was left far behind the advanced nations. But 200 years is very tiny compared with history. I am confident that China will catch up with advanced nations."
You may have heard that China will soon be selling a "Made in China" automobile in America. During recent discussions on this topic, someone suggested that Hyundai gained significant US market share within 7 years, and perhaps China's car will advance even sooner.

My point: We're misleading ourselves by judging China by our own standards. China expects significant market share, but their perspective is NOT 5-7 years; it's 10-20 years. They measure time in decades and centuries, not quarters or years. They expect and intend to exploit Capitalism's weakness for instant gratification.

In the pursuit of quarterly profits, Western businesses are rushing to China and trading away their advantages.

Click Michael Ding's "Direct from China Response"

Click Global Manufacturing - The China Challenge

Click Book: The Chinese Century

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Hospital care moves offshore

With the soaring costs of medical care in the US, offshore medical treatment is increasingly gaining momentum. Millions of people are already seeking treatment in hospitals in Mexico and Eastern Europe for non-emergency and cosmetic surgery. Many combine their treatment with holidays at posh resorts, which are often included in the price.

An operation that costs $50,000 in the US can usually be done in Mexico, India, or Turkey for $ 5-10,000. Travel and accommodations are usually minimal by comparison.

Foreign medical treatments are often pooh-poohed in the media, as poorly equipped and unsanitary. But the reality is often in stark contrast. When compared with often crowded US hospitals, bogged down with legal costs, malpractice insurance and high costs, many foreign hospitals are well equipped, superbly staffed and the facilities are sometimes considered luxurious.

Medical treatments for foreigners are growing at double-digit rates, already worth $300 million annually for India. Luxury hotels are announcing collaborations with major hospitals to promote and exploit the soaring demand for cheaper medicine.

Of course, whether or not US insurance companies accept foreign medical treatment is the KEY consideration. People go abroad for cosmetic surgery because it's not insured and is too expensive locally. Now that the cost advantages are being recognized, US insurance companies are starting to review and approve selected foreign medical facilities. When US insurers start covering foreign medical costs, growth will accelerate.

Many consider this the start of a process that could eventually result in a multi-billion dollar business that will reduce the mounting cost of health insurance and health care in the US. Now, THIS is an interesting twist to the already burgeoning outsourcing trade.

Click Insured in US and treated in India

Click India's medical facilities big hit in UK

Click Cosmetic Surgery Vacations - Risky and on the Rise

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Growth will shift to new arenas

The recent high-profile layoff announcements by Ford and GM have added to the grim realization that the hollowing out of manufacturing in the industrial world is underway, and has been underway for several years. The emergence of China and India and their impact on the global labor market are causing fundamental shifts. If India is to services as China is to manufacturing, what does the future hold for high-wage workers in the developed world?

There is no easy way out. The Internet has already changed the rules of global engagement. It has revolutionized the logistics of supply-chain management, accelerated the onset of global manufacturing and is making possible offshore outsourcing in previously non-tradable service industries.

The globalization of information services is migrating quickly up the value chain, from its start in call centers and data processing five years ago to software, design, medicine, accounting and other many other professions. The asymmetric motivation simply accelerates the problem and exacerbates the shift.

Stop the gloom and doom; let me bring up some positive points. The 3 major drivers of the future economy are:

  1. Global, competitive open markets.
  2. The evolution from manufacturing and services to knowledge as the foundation for wealth creation.
  3. The high rate of technological change.
America is still a young country and will not only survive, but thrive, because of it's entrepreneurial spirit. This country has been though other changes in it's short history. Deshpande cites the example of Lowell, Massachusetts. Founded as a planned manufacturing center for textiles along the Merrimack River northwest of Boston, it was a thriving industrial center during the 19th century, attracting immigrants and migrant workers to its mills. With the decline of its manufacturing in the 20th century, the city moved into mini-computers (DEC occupied some of the old mills), and is now heavily into pharmaceutical and other high-tech businesses.

America's top Universities and R&D labs are matchless, and will continue to churn out research and innovation. America's silicon valleys and the high-tech corridors throughout the country will continue to generate leadership.

The top 10% of drivers and entrepreneurs will always jump in to develop new growth horizons, and the broad spectrum of flexible American workers will follow with remarkable speed. Of course, there will always be the laggards who will complain about change; and there will always be lots of Lou Dobbs and a plethora of politicians to speak up for them.

Click Newsweek: Global Investor - The Hollowing Ring of Davos

Click Technology Futures - Future Impacts

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The continuing oil crisis

When one travels around the world, it's interesting to keep track of gasoline prices. In the US, we complain when gas prices hit $3 - and yet, people pay something like $ 6-7 in Europe.

When I visited Bangalore, I noticed that gas prices where about $5 per gallon. Well, considering local purchasing power, that's the equivalent of about $20 a gallon. Well, it's interesting that when stopped at traffic lights, many cars taxis and especially auto-rickshaws simply switch off their engines - to save gas (wouldn't you?) and avoid pollution. Instead of rotating the key to the OFF and then the ON position, they have a push button to turn the engine off temporarily. Most traffic lights have a count-down timer; it's interesting to watch the countdown - 5-4-3- they start and 2-1-0...rrrroar!

On average, 60% of the price European drivers pay at the pump goes to taxes. In Britain, the government takes 75% and raises taxes by 5 percent above inflation every year. Without taxes, the price of gas in the US would be $2.17, instead of $2.56; in Britain, it would be $1.97, instead of $6.06.

The US is unwilling to use taxes to conserve oil. Consumers want Humvees and SUVs, manufacturers make what the consumers want, and the government panders to both.

Oil continues to be an acute, civilization-changing crisis. Almost any slight disruption reminds us how dependent our economies are on oil and gas. It has become vital to virtually everything we do. 95% of all our transportation, whether by land, air or sea, is fuelled by oil. 95% of all goods involve the use of oil. 95% of all our food products require oil use.

The world consumes more than 80 million barrels of oil a day, 29 billion barrels a year. Usage is growing fast, with India and China's millions starting to drive automobiles. The US government says that global demand will grow to around 120 million barrels a day, 43 billion barrels a year, by 2025.

The US consumes a quarter of the current global demand for oil. Of America's current daily consumption of 20 million barrels, 5 million are imported from the Middle East, where almost two-thirds of the world's oil reserves lie - a region of especially intense and long-lived conflicts.

The US government could wipe out the need for the mid-East's 5 million barrels, by requiring the domestic automobile industry to increase the fuel efficiency of autos and light trucks by only 2.7 miles per gallon. But instead, it continues to allows the production of gas-guzzlers. Some Hummers average just four miles per gallon.

The SUV market share in the US was 2% in 1975. By 2003 it was 24% In consequence, average US vehicle fuel efficiency between 1987 and 2001 fell from 26.2 to 24.4 mpg. This at a time when other countries were producing cars capable of up to 60 mpg.

In the recent State of the Union address, George Bush pushed American energy independence which seems like a good thing. But, it was probably just the evil-genius Karl Rove at work again. The lame-duck President is in trouble (his Republicans are deserting him now) and so his marketing director Rove picked the best "apple-pie and motherhood" topic he could find. Of course, no one can disagree, or measure the results for about 20-25 years. The very next day, the Secretary of the Energy admitted that the President should not be taken too literally.

Oh well.....

Click Gas prices around the world

Click American Energy Independence

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In the last eNews (6 Feb 2006) I wrote that in the US and Europe cellphone calls are charged twice, both the caller and as the receiver pay. Whoops, I was wrong, as Peter Michelson, [Peter.Michelson@eon-uk.com] points out:
    "This certainly isn't the case in UK - incoming calls are free. I am not sure if charging for incoming calls is even common anywhere outside of the US.

    "My understanding is that people in Europe have access to a much greater variety of mobile charging schemes than you have in the US. I have read that this is an explanation for the relatively higher use of mobile phones in Europe compared to the US."

It turns out too that some American companies also have free incoming calls (notably, Cellular South). Well, I'm sure the others will soon follow.

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John.Yolton@skf.com [John.Yolton@skf.com] of SKF Pulp & Paper Global described a truly global meeting:

    "Interestingly, I was reading your newsletter and you were discussing the differences between the US and China/India, settling on the fact that the US is composed of many different communities and cultures and religions, etc. and we've learned to somehow get along.

    "I was struck by the fact that I had just returned from attending an SKF Asian Pacific (AP) Reliability Systems (RS) Manager's meeting in Bangkok. Assembled there were individuals (sales & service managers) from Pakistan, India, Vietnam, Malaysia, Thailand, Indonesia, Australia, New Zealand, Philippines, Taiwan, China, South Korea, Japan, Singapore and a few Americans (2 from RS HQ in San Diego and me). The service manager for Australia is Indian, the service manager for China is Swedish and the region's RS director (in Singapore) is American.

    "During the meeting, which was held in English, everyone had an opportunity to discuss their country's business. I thought at the time, 'What a remarkable event, here we have so many different cultures, beliefs and values and yet we are all striving for the same thing, improving our (and our family's of course) life through our work.'"

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Bob Fritz [rfritz@avtron.com] describes the "Intrinsic American Difference":

    "True, the American difference is the ethnic mix of our people. But it goes beyond this. It involves our freedoms, and the ease with which we can become entrepreneurs. With practically no legal barriers, it is easier to start a business in the US than practically anywhere else. This is the basic flaw in much of the underdeveloped world, and why many have lagged behind us.

    "Consider Andy Grove, a Hungarian immigrant. Could he have earned acceptance and started Intel in Britain, France, or Germany? Probably not. Where, in fact, are all the European Bill Gateses? Europe and most other countries tend to have large state-sponsored industries, not so much innovative industries.

    "It remains to be seen if China and India will adapt the relative freedoms which characterize the US, or the tolerance for diverse peoples."

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