Gordian Knots

From Ragas To Riches
In the past 25 years, members of the Asian American Hotel Owners Association (AAHOA) acquired more than 20,000 hotels with more than one million rooms. This represents more than 50 percent of the economy lodging properties in the U.S. and 40 percent of all hotel properties including many upscale hotels. If you bear in mind that Indian Americans constitute less than one percent of America’s population, the achievement appears extraordinary. The market value of these hotels totals about $40 billion. It is estimated that the hotels employ almost 800,000 people and annually pay some $700 million in real estate taxes annually. Incidentally, there may be an additional 4,000 hotels owned by Indian Americans who are not AAHOA members.

Schumpeter: Taking flight | The Economist
Joseph Schumpeter was one of the few intellectuals who saw business
straight. He regarded business people as unsung heroes: men and women
who create new enterprises through the sheer force of their wills and
imaginations, and, in so doing, are responsible for the most benign
development in human history, the spread of mass affluence.

Via The Baseline Scenario

As for getting an MBA, I would say that 90% of the consultants I
knew already acknowledged what Stewart argues – it’s not what you learn
at business school that matters, it’s the screening function. Top
business schools screen for the attributes that certain types of
companies, including consulting firms and investment banks, value –
above-average intelligence, ambition, presentability, ability to get
along with others, willingness to follow orders, and a strong streak of
conformism. McKinsey recruits people with Ph.D.s (and certain other
advanced degrees) as well because the Ph.D. is an indicator of
intelligence and (to some extent) ambition, but it is considerably
harder to get a consulting job as a Ph.D. from a top school than as an
MBA from a top school because of the other things that an MBA signals.
But the point is that everyone knows this already, and many people
still choose to go to business school, because it’s the rational choice
given the job market.

I think the biggest problem with management consulting is that most
of the work on a project is done by junior people who know absolutely
nothing about the industry they are serving, and don’t even realize how
little they know. (And generally the partners don’t know that much,
either, since many of them have never worked anywhere except in
consulting or maybe banking.) Having worked as a consultant to the
software industry and then as an employee of the software industry, I
have seen this from both sides, and I’m embarrassed for the naive
consultant I used to be. But it’s also true that many of our clients
could not have assembled teams of people to do the kind of work that we
were doing – not because they didn’t have the right people, but because
those people are invariably too important to be freed up from their day
jobs.

Luke Johnson writes in the FT about the characteristics of a good CFO: Via FT.com / Luke Johnson – Numbers guys you can count on

Access to Insurance for the Poor:

Microinsurance is one such instrument for social protection. Of the estimated four billion people worldwide who live on less than $2 a day, fewer than 10 million currently have access to formal insurance from a regulated financial institution. Current work in the area of microinsurance is largely focused on delivering insurance to the poor by partnering with microfinance institutions. This approach is not sufficient, as millions of poor people in rural and other areas live far from a microfinance institution. Formal financial institutions, such as commercial banks and insurance companies, and other institutions, like community-based organizations, can also deliver and service insurance products effectively and profitably.

One of my favorite quotes about accounting (from Warren Buffet):

“Managers thinking about accounting issues should never forget one of Abraham Lincoln’s favorite riddles: “How many legs does a dog have if you call his tail a leg?” The answer: `Four, because calling a tail a leg does not make it a leg’.”

Via The New Yorker:

….one of the critical clues about Enron’s condition lay in the fact that it paid no income tax in four of its last five years. Enron’s use of mark-to-market accounting and S.P.E.s was an accounting game that made the company look as though it were earning far more money than it was. But the I.R.S. doesn’t accept mark-to-market accounting; you pay tax on income when you actually receive that income. And, from the I.R.S.’s perspective, all of Enron’s fantastically complex maneuvering around its S.P.E.s was, as Fleischer puts it, “a non-event”: until the partnership actually sells the asset—and makes either a profit or a loss—an S.P.E. is just an accounting fiction. Enron wasn’t paying any taxes because, in the eyes of the I.R.S., Enron wasn’t making any money.

If you looked at Enron from the perspective of the tax code, that is, you would have seen a very different picture of the company than if you had looked through the more traditional lens of the accounting profession. But in order to do that you would have to be trained in the tax code and be familiar with its particular conventions and intricacies, and know what questions to ask. “The fact of the gap between [Enron’s] accounting income and taxable income was easily observed,” Fleischer notes, but not the source of the gap. “The tax code requires special training.”

The BRICs Dream: Web Tour by Goldman Sachs.

Oh yeah…sign of the changing times ..baby..changing times!

Even the stiff upper lip and buttoned-up holiest of holy ‘The Economist’ now has a blog. I just can’t believe it. Though I am all for it, I just can’t believe it! My friends and regular readers of this blog know that I practically carry my weekly dead-tree ‘The Economist’ everywhere; to the gym, to my bed, in the subway and to the coffee table and sometimes even to the beach.

The online blog is called the Free exchange.

The cat is finally starting to peek out of the bag. Today morning the commerce department reported that the annualized GDP growth for the third quarter is just 1.6%, much lower than the consensus Wall Street estimates of 2.2%. The markets seemed to take the hint and went somewhat lower, though the full extent of the impact on markets will be apparent only in the coming weeks. There could even be a minor rally in the year-end before we start to see whether the economy is really in a recession.

I don’t see any real economic engine driving the economy and financial markets in the coming months. A minority of economists and commentators are already forecasting the upcoming recession. The fourth quarter GDP growth could be either 0% or even negative. Prof. Nouriel Roubini is among the leading bears forecasting this trend. The Economist, in its most recent issue is predicting that the GDP growth in America for the next few years will be the lowest in almost a century! Ouch….that hurts!

This will have a ripple effect on the broader social landscape in America. If the housing burst proves to be worse in 2007-08 than what the average Joe Sixpack expects, then we will see a resurgence of trade unions (memberhsip of which has been decreasing for the past quarter of a century) and a potential Democratic president in 2008. Growth will be restricted mainly to innovative industries and excess flab across the economic landscape will need to be shed.

Lots of people have lost their shirt betting against the American consumer in recent decades. But as Adam Smith and Ludwig Von Mises will tell you, business and economic cycles are a way of life in a capitalistic society.

The key question is whether the Asian economies will ‘de-couple’ from the upcoming American slowdown (which increasingly looks like a possible recession). Watch out for forecasts from the Economic Cycle Research Institute, which has successfully forecasted all recessions in the last two decades.

I will have more insights on these and other issues over the weekend. I’m also changing the blog posts format into just one single post everyday, along with a collection of links to interesting articles that I read in the media.

Have a happy weekend and don’t forget to set your clocks back on Saturday night! Remember, fall back and spring forward

Knowledge@Wharton’s special section on Selling in China. Interesting.

I will attending the TiE Economic Forum tomorrow in Santa Clara at 6:00 PM. The topic of discussion is

“Financial Trailblazers: Alternative Investments, Emerging Markets, Technology”.

A few friends and acquaintances of mine are speakers in this event.

The Race to Become Partner – WSJ.com

In June, top executives at Goldman Sachs Group Inc. began compiling lists of candidates for one of Wall Street’s most exclusive clubs — the 300 or so “partners” who take home a big chunk of the firm’s profits.

It’s one of the business world’s most lucrative and secret sweepstakes: Goldman’s selection of its elite “partner managing directors,” or PMDs. It dates back to Goldman’s roots as a private partnership, in the days when that’s how big Wall Street firms were run. Goldman went public in 1999. But every two years, in an effort to retain the clubby culture of old, Goldman anoints about 100 PMDs. Being inducted is considered a ticket to huge riches.

“On Wall Street, this club is the endgame and it is the best corporate motivation tool I have ever seen,”……

Goldman will announce on Oct. 25 its new class of partners, who will join the 287 who currently hold that title. Last year, that group shared more than $2 billion, or about 20% of the total compensation Goldman paid to its more than 25,000 employees world-wide, according to people familiar with the matter. That averages out to about $7 million per partner.

Law Blog » Issue Spotting: Larry Sonsini’s Email Exchange
Regardless of the legalities, HP’s board is comprised of intelligent, accomplished individuals and therefore they should be held to a high standard of behavior. Exactly how does a board member expect a private investigator to obtain confidential information without operating in a gray area of ethical behavior?

American businesses operate all too often under the misguided idea that media exposure and “spin” are an acceptable impetus of behavior. While recognizing that one’s reputation is valuable and should be jealously guarded, one should also realize that our actions speak more clearly than our words. That anyone’s reputation can be damaged by others should prompt us to focus on what we can control instead of what we cannot.

Eventually HP’s business will be rated by its performance in the market place. Revelations of confidential “squabbles” between board members or their intended business strategy should be, at most, a temporary concern. Does this board really think the revelation of HP’s turnaround strategy is truly that important? Or does the board recognize not only it’s own failure at HP, but also the failure of most boards to act decisively. Their fear of culpability is exaggerated in the recognition of their inability to incur the necessary changes required to lead a large corporation.

Clearly, Keyworth did not like the results of the board’s performance. Perhaps he recognized that he was powerless to change things inside the board room? Although violating his confidentiality agreement doesn’t seem to be the best solution, it appears he thought differently and took the course of action which allowed him to exercise power and meet his obligations as a director.

Perhaps a truly diligent director recognizes the implicit conflict in retaining responsibility while not being able to effectively delegate one’s authority. If in fact board members have any authority to delegate in the first place. Which in turn begs the question if one has no authority how can one be responsible?

It is beyond my imagination as to how anyone can authorize access to private and personal telephone records of a company’s board number, to investigate a purely business issue. Patricia Dunn, the chairwoman of HP should resign. Infact, I think every one of HP’s board should’ve resigned the minute they were informed of the above breach of privacy. It just goes on to show that stupidity and arrogance knows no boundaries. I’ve known stupid and arrogant PhDs when I was in academia. Now real-life board of directors are no better either. More on Calif. Investigates Legality of HP Probe

Dunn’s consultants weren’t actually listening in on the calls—all they had to do was look for a pattern of contacts. Dunn acted without informing the rest of the board.

Perkins _ co-founder of Menlo Park-based venture firm Kleiner Perkins Caufield & Byers _ complained to other executives and journalists about the investigation’s ethical implications.

His attorney, Viet Dinh, a former assistant U.S. attorney general, says he discovered that one of HP’s private investigators also obtained the last four digits of Perkins’ social security number.

The investigator used that information to open an online account with AT&T, Dinh said. The investigator then called the telephone provider and impersonated Perkins, offering up his social security digits as proof of identity and asking AT&T to send a record of phone calls to and from his house in December 2005 and January 2006 to a free, Web-based e-mail account.

Deloitte and Touche’s new report on China and India is interesting. I will need to read it in detail later this week. Get it here. Personally, I am more bullish on India over the long term. (and I am not biased just because I am an Indian.) Much of China’s growth is driven by government stimulus. On the extreme, I would say it is 21st century version of Stalinistic planned communism on steroids. There is an inherent undercurrent of societal discomfort. The recent PBS documentary Tankman explains this more. You can watch it online in the PBS website.

Sooner or later, China’s economic growth will ‘regress to the mean’. Indian growth is happening from the bottom, through the entrepreneurship of people with much less government intervention. I believe this is more sustainable over the long term. I read Economist’s survey of China in their March issue. And I have firsthand experience of the Indian growth.

India has its own set of problems, not least of which is religious and class tensions. Infrastructure is a big bottleneck, and trade unions and fringe political parties scuttle development. It will take a generation of time and effort for true visible transformation in people’s quality of life.

As an investor, one should of course invest in both the growth economies, however, as they always say, ‘On the keyboard of life, keep one finger on the escape key’. Be ready to liquidate your positions in a short notice. I would invest primarily on those companies who have a huge internal market. For example, the retail outlet Pantaloons in India is a big bet. They have a captive internal market, local knowledge and can leverage issues that traditional MNCs cannot. Case in point is the recent withdrawal of Walmart from South Korea after losing ground to local competitors.

The Economist has some incisive answers.

If Mittal acquires Arcelor it may be well placed to bargain with customers and suppliers and thus ride out any slump. Three suppliers dominate the global market for iron ore and coking coal. In 2005 they raised prices sharply. Further smaller increases are likely this year. Scale will confer on Mittal more power to resist price hikes. Furthermore, a combination of the mining activities of Arcelor and Mittal will foster self-sufficiency. Mittal claims that the new firm will expand its iron ore operations to provide half of its own supplies by 2010.

I am trained as an electronic manufacturing engineer (a specialised area of Mechanical Engineering). I have two Masters degrees in this area. Nothing fascinates me as much as opening up the innards of a high-tech product and marvelling at the precise organization of the individual parts. Together with my last few years of finance, I now wonder about the cost aspects and profit margin too.

Extremetech talks about the ‘Bill of Materials’ of a an Apple iMac. As a major Apple fan (I own a iPod Nano and iMac G5 and the Apple stock!), this was interesting to me. I plan to buy a MacBook Pro sometime this year.

Apple Computer’s hardware costs to create the new $1,299 dual-core Intel iMacs total about $898, according to analyst firm iSuppli.

The firm opened up one of the new iMacs, which were officially announced at Apple’s recent Macworld show, inventoried the contents, and came up with an estimated cost for the parts. The teardown did not include the mouse, keyboard, or other documentation included with the iMac, and not attempt to estimate Apple’s cost of developing its operating system and related software.

What iSuppli discovered, however, is that Apple selected components typically found within an Intel-based notebook PC, to minimize power consumption and the noise generated by fans to cool them.

“Users want quiet and powerful machines,” said Matthew Wilkins, senior analyst for compute platforms research for iSuppli, in a statement. “Intel is very focused on designing microprocessors that deliver the maximum performance without generating excessive heat or consuming huge amounts of power. For now, the Intel Core Duo fits that bill perfectly.”

Not surprisingly, Intel’s chips form the heart of the iMac, and the bulk of its cost. Inside the iMac, iSuppli found an Intel Core Duo T2400, which the firm estimated cost about $265 apiece. That, combined with the Intel 82945GM north bridge and related NH82801GBMSL8YB south bridge, added another $45 to the total.

On its web site, Intel advertises the Core Dup T2400 for $294, although those prices reflect a purchase of 1,000 processors at a time. The Apple volume discount ascribed to the iMac teardown would be an additional 11 percent.

The firm estimated that the included ATI Radeon X1600 graphics card cost approximately another $30, while the included 512 Mbytes of Samsung memory added another $20. iSuppli did not publicly break out the costs for the LG.Philips 17-inch LCD or the Maxtor DiamondMax 10 160-Gbyte SATA hard drive, leaving such details for its paying clients.

In addition, the iMac carries another $25 in test costs, the firm said.