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.

Via McKinsey Quarterly:

What are the currents that will make the world of 2015 a very different place to do business from the world of today? Predicting short-term changes or shocks is often a fool’s errand. But forecasting long-term directional change is possible by identifying trends through an analysis of deep history rather than of the shallow past.

Macroeconomic trends

1. Centers of economic activity will shift profoundly, not just globally, but also regionally. As a consequence of economic liberalization, technological advances, capital market developments, and demographic shifts, the world has embarked on a massive realignment of economic activity. Although there will undoubtedly be shocks and setbacks, this realignment will persist. Today, Asia (excluding Japan) accounts for 13 percent of world GDP, while Western Europe accounts for more than 30 percent. Within the next 20 years the two will nearly converge. Some industries and functions—manufacturing and IT services, for example—will shift even more dramatically. The story is not simply the march to Asia. Shifts within regions are as significant as those occurring across regions. The United States will still account for the largest share of absolute economic growth in the next two decades.




2. Public-sector activities will balloon, making productivity gains essential. The unprecedented aging of populations across the developed world will call for new levels of efficiency and creativity from the public sector. Without clear productivity gains, the pension and health care burden will drive taxes to stifling proportions.

Nor is the problem confined to the developed economies. Many emerging-market governments will have to decide what level of social services to provide to citizens who increasingly demand state-provided protections such as health care and retirement security. The adoption of proven private-sector approaches will likely become pervasive in the provision of social services in both the developed and the developing worlds.

1. The consumer landscape will change and expand significantly. Almost a billion new consumers will enter the global marketplace in the next decade as economic growth in emerging markets pushes them beyond the threshold level of $5,000 in annual household income—a point when people generally begin to spend on discretionary goods. From now to 2015, the consumer’s spending power in emerging economies will increase from $4 trillion to more than $9 trillion—nearly the current spending power of Western Europe.

Shifts within consumer segments in developed economies will also be profound. Populations are not only aging, of course, but changing in other ways too: for example, by 2015 the Hispanic population in the United States will have spending power equivalent to that of 60 percent of all Chinese consumers. And consumers, wherever they live, will increasingly have information about and access to the same products and brands.

1. Technological connectivity will transform the way people live and interact. The technology revolution has been just that. Yet we are at the early, not mature, stage of this revolution. Individuals, public sectors, and businesses are learning how to make the best use of IT in designing processes and in developing and accessing knowledge. New developments in fields such as biotechnology, laser technology, and nanotechnology are moving well beyond the realm of products and services.

More transformational than technology itself is the shift in behavior that it enables. We work not just globally but also instantaneously. We are forming communities and relationships in new ways (indeed, 12 percent of US newlyweds last year met online). More than two billion people now use cell phones. We send nine trillion e-mails a year. We do a billion Google searches a day, more than half in languages other than English. For perhaps the first time in history, geography is not the primary constraint on the limits of social and economic organization.

1. The battlefield for talent will shift. Ongoing shifts in labor and talent will be far more profound than the widely observed migration of jobs to low-wage countries. The shift to knowledge-intensive industries highlights the importance and scarcity of well-trained talent. The increasing integration of global labor markets, however, is opening up vast new talent sources. The 33 million university-educated young professionals in developing countries is more than double the number in developed ones. For many companies and governments, global labor and talent strategies will become as important as global sourcing and manufacturing strategies.




2. The role and behavior of big business will come under increasingly sharp scrutiny. As businesses expand their global reach, and as the economic demands on the environment intensify, the level of societal suspicion about big business is likely to increase. The tenets of current global business ideology—for example, shareholder value, free trade, intellectual-property rights, and profit repatriation—are not understood, let alone accepted, in many parts of the world. Scandals and environmental mishaps seem as inevitable as the likelihood that these incidents will be subsequently blown out of proportion, thereby fueling resentment and creating a political and regulatory backlash. This trend is not just of the past 5 years but of the past 250 years. The increasing pace and extent of global business, and the emergence of truly giant global corporations, will exacerbate the pressures over the next 10 years.

Business, particularly big business, will never be loved. It can, however, be more appreciated. Business leaders need to argue and demonstrate more forcefully the intellectual, social, and economic case for business in society and the massive contributions business makes to social welfare.

1. Demand for natural resources will grow, as will the strain on the environment. As economic growth accelerates—particularly in emerging markets—we are using natural resources at unprecedented rates. Oil demand is projected to grow by 50 percent in the next two decades, and without large new discoveries or radical innovations supply is unlikely to keep up. We are seeing similar surges in demand across a broad range of commodities. In China, for example, demand for copper, steel, and aluminum has nearly tripled in the past decade.

The world’s resources are increasingly constrained. Water shortages will be the key constraint to growth in many countries. And one of our scarcest natural resources—the atmosphere—will require dramatic shifts in human behavior to keep it from being depleted further. Innovation in technology, regulation, and the use of resources will be central to creating a world that can both drive robust economic growth and sustain environmental demands.

Finally, we have identified a third set of trends: business and industry trends, which are driving change at the company level.

1. New global industry structures are emerging. In response to changing market regulation and the advent of new technologies, nontraditional business models are flourishing, often coexisting in the same market and sector space.

In many industries, a barbell-like structure is appearing, with a few giants on top, a narrow middle, and then a flourish of smaller, fast-moving players on the bottom. Similarly, corporate borders are becoming blurrier as interlinked “ecosystems” of suppliers, producers, and customers emerge. Even basic structural assumptions are being upended: for example, the emergence of robust private equity financing is changing corporate ownership, life cycles, and performance expectations. Winning companies, using efficiencies gained by new structural possibilities, will capitalize on these transformations.

1. Management will go from art to science. Bigger, more complex companies demand new tools to run and manage them. Indeed, improved technology and statistical-control tools have given rise to new management approaches that make even mega-institutions viable.

Long gone is the day of the “gut instinct” management style. Today’s business leaders are adopting algorithmic decision-making techniques and using highly sophisticated software to run their organizations. Scientific management is moving from a skill that creates competitive advantage to an ante that gives companies the right to play the game.

1. Ubiquitous access to information is changing the economics of knowledge. Knowledge is increasingly available and, at the same time, increasingly specialized. The most obvious manifestation of this trend is the rise of search engines (such as Google), which make an almost infinite amount of information available instantaneously. Access to knowledge has become almost universal. Yet the transformation is much more profound than simply broad access.

New models of knowledge production, access, distribution, and ownership are emerging. We are seeing the rise of open-source approaches to knowledge development as communities, not individuals, become responsible for innovations. Knowledge production itself is growing: worldwide patent applications, for example, rose from 1990 to 2004 at a rate of 20 percent annually. Companies will need to learn how to leverage this new knowledge universe—or risk drowning in a flood of too much information.

Equity bubble:

Is the private equity market beginning to resemble the dot com boom? Yes, according to Andrew Sorkin, author of a New York Times article called “The Great Global Buyout Bubble”, (11/13/05). The infusion of capital into the market and the competition between so many well-heeled players is driving up the cost of buyouts at an accelerating rate. And now with the real estate bubble fizzing, getting the big returns (20% or more) that equity investors demand means more is going into buying bigger and bigger companies.

Right now, as Sorkin points out, the litany of name companies controlled by equity firms includes “Hertz, Nieman Marcus, Metro-Goldwyn-Mayer, Toys ‘R’ Us and Warner Music, to name a few.” The equity firms have done well in flipping over companies (through IPOs, sales to industry players, or to other equity firms). Thanks to low interest rates, and the interest from mutual funds, pension funds, and rich investors keep tossing in cash (over $400 billion).

But, according to Sorkin,

here’s the rub: In the next there years, to reap returns on all those big name investments they have been making, private equity firms are going to have to sell $500 billion worth of assets. The question is, to whom? Even in the last three years, in as big a bull market as they come, private equity has never sold more than $153.2 billion in one year.

At this point equity firms are biding up every business or business division that comes on the market, and not for $3 or $4 billion deals, but for $10 and $15 billion purchases. A big raise in interest rates or a slump in economy, or especially both, is likely to leave many of these companies with heavily devalued portfolios.

Globalism and shifting costs:

In the 1980s and early 1990s GM was in almost as bad a plight as it is now. At one point, they brought in Spanish executive Jose Ignacio Lopez from their European operations to run their purchasing operations. What Lopez did is revive the company’s fortunes by driving ever harder deals with GM’s suppliers.

What’s interesting to us is how his actions were part of a bigger movement, one we see in as a major part principle of the new oligopoly, namely squeezing the suppliers. As Lynn points out: “Up to 90 percent of the value of any product is created before the final assembly process, and the manufacture of small parts and components is often scattered among hundreds of small plants.” (p. 22)


Much of the work at the big auto companies in the 1980s, according to Lynn, was in improving the assembly line. Robotics, ergonomics, computers were integrated and quality control was improved. Yet that wasn’t enough. The real efficiencies were to be gained in the 90% of the work that happened before it reached the final plant.

As Lynn points out, the automotive industry had at that point a very cozy relation to its suppliers, who had their little plants clustered around big GM plants and who could expect fair treatment as long as their deliveries were on time and according to specs delivered by GM engineers. GM gave the marching orders and handled all the coordination.

Lopez changed all that. He heaped far more responsibility on the suppliers, centralized more purchasing requirements on fewer firms, and made these bigger supplier firms coordinate the design, manufacturer, and supply chain for subsystems. The end job of the suppliers was to minimize the cost of the components they delivered and to lower the cost of final assembly. “Lopez was calling on his suppliers not merely to cut their prices but to assume much more of the responsibility for the overall manufacturing process….This, he believed, would allow a complete redesign of the final assembly system, as suppliers would now be called on to deliver a few very large clusters of components, or subassemblies, to the lead manufacturer, where a greatly stripped-down continent of workers would quickly bolt the pieces together.”(p. 42)

Soon enough, the suppliers started moving offshore in order to meet the demands of the manufacturer. The assembly lien was made simpler, requiring fewer workers and minimizing variability. GM more than ever became a marketing and design company, with more and more of the manufacturing outsourced.

The benefit to GM was a cut in costs, both for components and for its own unionized payroll. GM once was the US’s biggest employer and one its most generous. By the end of the decade, its workforce shrunk, and its payroll has been surpassed by the much lower-cost ones of Manpower and Wal-Mart.

This change, along with the SUV boom, gave GM over a decade of renewed life. More particularly, it serves as model for other companies, in defense, in electronics, in appliances, in aeronautics, and in most other areas, that have followed GM’s lead. While the old brand names still remain and some assembly is done in the US, but the big factories are increasingly empty.

Lopez, by the way, was a victim of bitter internal strife at GM, according to Lynn. The streamlining he envisioned upset too many execs whose jobs were threatened. But the overall landscape was changed, as Lopez showed other product firms how to cut costs to the bone and to reduce their labor overhead.

Guy Kawasaki on VC’s lies.

“We like early-stage investing.” Venture capitalists fantasize about putting $1 million into a $2 million pre-money company and end up owning 33% of the next Google. That’s early stage investing. Do you know why we all know about Google’s amazing return on investment? The same reason we all know about Michael Jordan: Googles and Michael Jordans hardly ever happen. If they were common, no one would write about them. If you scratch beneath the surface, venture capitalists want to invest in proven teams (eg., the founders of Cisco) with proven technology (eg., the basis of a Nobel Prize) in a proven market (eg., ecommerce). We are remarkably risk averse considering it’s not even our money.