India's Low-cost Health Care and Research Talent  Draw Global Insurers and Drug Makers

India's health care industry ails from severe under-penetration among its population, especially in rural areas. But according to an article in India Knowledge@Wharton, the low penetration levels are a glass half full for global pharmaceutical companies. Many of them have steadily increased their investments in the country, drawn by India's talent base and R&D capabilities for drug development, and its strengths in alternative medicine, like Ayurveda (India's traditional system of holistic medicine). Insurance providers, meanwhile, like the country's low cost of health care, which has made it a destination for so-called "medical tourists" from developed countries.

A New Chinese High-tech Stock Market Is Unveiled as China Opens Financial Services to Taiwan

China is moving on two fronts to funnel new investment funds to the small- and medium-sized companies (SMEs) it hopes can drive innovation and economic growth. One new initiative is the launch of the Growth Enterprise Market (GEM) – a Nasdaq-style stock exchange, where the guidelines will take effect May 1. The exchange itself it to open in the fall.The second is a new agreement that will open more financial services in China to Taiwan, part of a larger trade and economic-cooperation package.

Like New York’s Nasdaq, the GEM exchange will focus on small, finance-starved technology and other start-ups with strong growth potential. The move has been widely applauded by venture capitalists in China, but some investor representatives worry that too many of the companies listed will be high risk. They also voice skepticism over the GEM's prospects given the poor track record for similar efforts in other countries. Yet, one thing seems clear as the market gets ready for take-off -- the pool of candidates for listing on China’s GEM will likely be large, according to a report in the current issue of China Knowledge@Wharton.

And just this week, negotiators from China and Taiwan completed a wide-ranging set of agreements that include measures for increasing financial cooperation, according to The Financial Times. The agreements aim in part to funnel more financing to SMEs that often find the lending window at China’s government-owned banks shut tight. The move is particularly significant given that Taiwan already is one of the largest foreign direct investors in China. Expect it to take a couple of years before Taiwanese banks and other financial services companies have a significant impact on Chinese SMEs.

Additional Reading:

Do China's Financial Markets Need More Freedom and Less Government Regulation?

The Spam, Soup and Noodle Index: ‘Recession-proof’ Foods Do Well in the Downturn

In 2001, Leonard Lauder, chairman of Estee Lauder Companies, famously noted that during difficult economic times, sales of lipstick go up as female shoppers forego more expensive luxuries. He called it the “Lipstick Index.”

It was only a theory, and although retailers like to believe it, recent sales figures haven’t cooperated with Lauder’s idea. (Lipstick sales were down 5.8% in 2008.) During the current recession, a different indicator is emerging -- and it goes in your mouth, not on it.  

Spam – that glossy, pink canned pork product (not exactly ham, but made of pork shoulder and a few other odds and ends) – is among Advertising Age’s top “recession-proof businesses.” According to the magazine, sales for Spam – which was created during the Great Depression – “are up by double digits,” and its manufacturer, Hormel, has shifts working around the clock “to meet demand.” 

Not surprisingly, soup topped the list, which also included Wal-Mart, laxatives, inexpensive beer, thrift stores and –bizarrely – mouth guards. (Apparently, the recession is causing some on Wall Street to grind their teeth while they sleep.)

Meanwhile, China has seen the emergence of its own low-cost food indicator: instant noodles, sales for which rose 8.6% last year, reaching $8.6 billion, according to Media magazine. That should be good news for Daisy Poon, president and CEO of noodle chain Ajisen China, whom China Knowledge@Wharton recently interviewed. According to Poon, the chain accelerated its expansion plans in 2008, opening more than 150 restaurants to reach a total of 340 outlets throughout China.

'Our Biggest Opportunity: Investing in the Tremendous Leadership Pool We Have in the NHS'

During a recent visit to the University of Pennsylvania, Ara Darzi, Lord Darzi of Denham, spoke with Wharton management professor Michael Useem about the British National Health Service (NHS) and how it plans to meet the challenges of delivering quality health care in England over the next decade. Darzi was appointed Health Minister by British Prime Minister Gordon Brown in June 2007.

Darzi, a surgeon who still practices surgery two and one-half days a week, noted the importance of prevention, which he said, "is better than cure ... and cheaper than treating illness." He cited obesity as an example. "We look at obesity as seriously as climate change, because we believe, from a health perspective, that it could have the biggest impact on the health of our population." Equally important is "quality, which is not more expensive.... Doing things right the first time, giving patients access at an earlier stage of their disease -- that in itself'" will lower health care costs.

On the subject of leadership, Darzi noted that the NHS will be focusing on developing leadership at all levels of the system. "The question is, how do you activate that?" he asked. "How do you promote the leadership gene that exists in the system? That, in itself, requires more than just saying, 'Go out there and be a leader.' Leadership has to have a purpose."

For a transcript of the full interview, click here.

Dustin Hoffman as Bernie Madoff? In Hollywood, the Swindler's Biopic is Underway

When Hollywood and Wall Street collide, the results can be, well, interesting. According to The Insider, an entertainment web site, a feature film about financier and swindler Bernard Madoff has been in production for about three weeks. The working title: Bernie Madoff: Made Off with America. The film has a promotional web site, which, according to The New New York Times "Deal Book" blog, indicates that the film is not likely to be an Academy Award nominee. The Daily Beast web site had some fun with casting suggestions, including Dustin Hoffman as Madoff. Actor Kevin Bacon could play himself, the site noted, becauase the actor was one of many entertainment figures who fell victim to Madoff's Ponzi scheme.

To gain some depth, the film makers might do well to focus not only on the money that Madoff "made off" with, but also the trust he diminished in the market, which could have long-term reverberations. In an interview with Knowledge@Wharton earlier this year, information management professor Maurice E. Schweitzersaid that because of the Madoff scandal,"investors... are now going to be much less trusting of legitimate, honest hedge fund managers and investment managers. There's going to be a lack of liquidity, so the markets are going to be harmed by this." In that same interview,G. Richard Shell, a Wharton professor of legal studies and business ethics, also noted the broader impact: "There's no way that any social system can work without trust. So we're still going to have to trust each other, somehow. And the interesting question is going to be, what institutions will rise that will allow us to do that?"

There Was More to the Summit of the Americas than Obama's Handshake with Chavez

In the United States, headlines from the recently concluded Summit of the Americas focused intensely on President Barack Obama's easing of restrictions on travel and remittances to Cuba and his hearty handshake with Venezuelan President Hugo Chavez. But U.S.-Latin American relations were not the only pressing topic during the meeting of the region’s 34 leaders. Latin America is focusing its attention on overcoming the current economic crisis and avoiding any chance of another "lost decade" like the one it experienced during the 1980s, according to Juan José Toribio, a professor at the IESE Business School and executive director of the International Monetary Fund from 1996-1998, and Riordan Roett, a professor in the international relations program at the Instituto de Empresa Business School. They spoke with Universia Knowledge@Wharton about the political and economic realities of the region.

IMF Lowers Growth Forecast for 2010

The International Monetary Fund projects that the global economy will shrink by 1.3% in 2009, with a slow recovery expected to take hold next year. In its April World Economic Outlook, released today, the IMF lowered its January forecast for a 3% rate of growth in 2010. The new report predicts growth of just 1.9%, largely because of the slower-than-anticipated recovery of the banking sector and that sector's reluctance to lend capital -- especially to emerging markets -- because so much as unknown about the direction of the economy.

“This is not the time for complacency, and the need for strong policies, both on the macro and especially on the financial fronts, is as acute as ever," IMF chief economist Olivier Blanchard said in a document accompanying the report. "But, with such policies in place, there is light at the end of this long tunnel. World growth can turn positive by the end of this year, and unemployment can start decreasing by the end of next year.” 

Bankers are not the only people who have become too fearful and uncertain to play their usual roles. For an article titled "Global Economic Forecast for 2009: Will Demand for Good News Outpace Supply?" Wharton finance professor Franklin Allen told Knowledge@Wharton that the economy will remain weak as consumers and businesses refrain from new spending until they are confident that asset prices are no longer falling. "We need things to stabilize," he said. "The problem at the moment is that people don't know what their wealth is." Americans have no idea what their investment portfolios or real estate holdings are really worth and, as a result, are afraid to spend or make additional investments. "I think everybody is frozen with fear of losing their jobs and the rest of their wealth. There's huge uncertainty. Until that starts going away, until things stop getting worse, we'll keep going down."

The fear factor was also examined in the current Knowledge@Wharton article, "Hope, Greed and Fear: The Psychology behind the Financial Crisis."

Chrysler's Ultimate Deadline: Reach an Acceptable Rescue Deal with Fiat, or Liquidate

Will there be a Chrysler Corp. in nine days? If the federal government's latest ultimatum is to be believed, there will be no Chrysler unless it's part of Europe's second-biggest automaker, Fiat. Treasury Department officials, representatives of the United Auto Workers union, and Chrysler and Fiat executives are meeting this week in Washington to determine whether Fiat, which has expressed a tentative interest in Chrysler, can strike a deal by April 30.

According to The Wall Street Journal, a purchase by Fiat may be the only option left for Chrysler. Citing "people familiar with the negotiations," the Journal reported that some Obama administration officials "have come to conclude that Chrysler isn't worth trying to save because of its weak product line and lack of international reach." Still, unnamed Chrysler and Fiat representatives, according to the article, believe the two parties are nearing an agreement. But even with a deal, there's no telling what a Fiat-owned Chrysler would look like.

For a deeper understanding of how Chrysler and other automakers got into the mess they're in, see these Knowledge@Wharton articles and podcasts:

Changing Course: The Chrysler Deal, Rising Gas Prices and Other Car Talk

Driving Lessons: Dieter Zetsche's Experiences behind the Wheel of Daimler-Chrysler and Beyond

The U.S. Auto Industry: Dangerous Curves Ahead?

Behind the Curve: Have U.S. Automakers Built the Wrong Cars at the Wrong Time -- Again?

On the Skids: Are U.S. Automakers Running Out of Time -- and Options?

Despite Recent Turbulence, Angelo, Gordon’s David Roberts Sees “Opportunities in Private Equity"

The world of private equity has been in a shambles since the onset of the financial crisis, but some executives see that as an opportunity rather than a threat. Among them is David N. Roberts, senior managing director of Angelo, Gordon, who manages the firm’s private equity business. A 16-year veteran of the firm, Roberts also founded the firm’s opportunistic real estate area.

During a visit to campus recently, Roberts pointed out that while the government’s stimulus programs have not yet had a widespread impact, some opportunities are starting to open up that could ease the credit crunch. “The best government programs are the ones where the government is stepping into the financing markets, in a creative way, and trying to lower credit spreads,” he said. “For example, they have just started something called TALF, where they are making money available to make loans to help people like us buy triple-A rated securities. What that will do – it’s just really started – is to make other triple-A securities trade at lower interest rates. That will trickle through the economy to make credit more available.”

Roberts also noted that though opportunities do exist, they are rare. Each private equity firm has had to adjust to at least two trends in the market. “One trend is that most people have legacy portfolios, where they have companies they have to deal with and decide: Is this company worth nursing back to health? Is there a way of restructuring the balance sheet? How do I preserve value? Does it make sense to put capital in? A lot of private equity talent and energy is being devoted to that. The second trend is that the traditional leverage buyout is off the table, for now and for the foreseeable future. So when we’re looking at transactions, by and large, we’re looking at transactions that have no leverage, where you’re buying all equity. And therefore, you have to come up with prices and returns that make sense in that context. We’re finding some situations, but they’re few and far between.”

Click here for the full podcast and an edited transcript of the interview with David Roberts.

Deal Will Bring Network TV Shows to YouTube -- Perhaps at a Price

Will YouTube users pay to watch mainstream entertainment on its wildly popular -- and currently free -- Internet video service? After it announced deals yesterday to add content produced by the likes of Sony, Lions Gate, MGM and others to its lineup, YouTube's owner, Google, said it hopes the premium content will attract more advertisers -- and perhaps provide a category of video for which users would be willing to pay.

Ever since Google bought YouTube in November 2006 for $1.65 billion, investors and other observers have wondered when the video services would begin to generate revenue to justify the investment. At the time, traditional media companies -- especially TV networks -- were still trying to determine if YouTube and Google presented them with a threat or an opportunity. Just before the acquisition was announced, Wharton faculty and other online media observers told Knowledge@Wharton that YouTube would make money only if it could devise a revenue sharing model with mainstream content producers (see "Coming Attraction: YouTube's Business Model"). A few months after Google's YouTube deal, the business model was still awaited, and mainstream content producers remained wary -- not only of YouTube, but also its big parent. "Google wants to be the center of the universe for all information and content," Wharton law and public policy professor Kevin Werbach told Knowledge@Wharton in March 2007 (see: "At Google, the Search Is On for a New Approach to Old Media"). "That's a scary thing for a lot of companies, including media companies. [But] the media companies want and need Google, because Google is extraordinarily good at the two things that underlie most media businesses: directing users to content, and matching advertisers to users."

YouTube has already started to sell advertising on its site, but The New York Times, citing a Credit Suisse analysis, said that the site "will lose approximately $470 million in 2009, as the costs of bandwidth and storage to stream more than 5 billion clips a month far exceed the revenue YouTube earns from advertising." Google said the analysis was inaccurate.

The newspaper also notes that YouTube is facing new competition from mainstream media companies that are offering their content on their own web sites. The biggest of those is Hulu, a joint venture of NBC and the News Corp. Last month it streamed close to 350 million videos to nearly 9 million unique visitors. YouTube still dominates the Internet's video delivery sites; last month it drew almost 90 million visitors who viewed just under 5.5 billion videos.

YouTube may be able to attract more advertisers to its site, but getting its users to pay may be a much bigger challenge. Consumers have developed a strong sense of entitlement to free online content, according to Wharton marketing professor  Stephen J. Hoch. For a recent article, "How About Free? The Price Point That Is Turning Industries on Their Heads," he told Knowledge@Wharton that the decision by media companies to offer their content for free online has led to a disaster. "It's had a yet unknown catastrophic effect on the news. It's had a catastrophic effect on music. Clearly the concept that you can make it up in volume is bogus, because you can't. Music CD sales have gone from $13 billion in the U.S. to about $7 billion since 2001 while legal digital downloads generated about $1.5 billion in sales recently."

$8 Billion for High Speed Rail? Stimulus Funds Could Jump Start Such Systems in the U.S., Says Obama

President Obama today called for $8 billion of the $787 billion economic stimulus package to be invested in the development of 10 high-speed rail corridors, a first step toward bringing the United States up to par with long-established high-speed rail networks in Europe and Asia. Wharton professor of business and public policy W. Bruce Allen, whose research focuses on transportation, says the investment is overdue.

"We're way behind Europe and Asia on these trains," Allen said. In its coverage of Obama's announcement, The New York Times called the American rail network a "caboose" relative to those in such nations as Japan, Germany, France and Britain. Taiwan recently spent about $15 billion to build a high-speed network (see Taiwan's High-speed Rail: It's Been a Rapid Learning Curve).

Able to reach speeds of about 300 miles per hour, the trains would provide a viable alternative to air transportation on short-haul trips of up to about 400 miles, Allen said. Indeed, since the 9/11 terror attacks, the number of rail passengers in the Northeast Corridor from Washington, D.C. to Boston has exceeded the number of air travelers, even at the relatively poky speeds of Amtrak's current fleet, according to Allen. "Because of security, people have to get to the airport an hour before they leave, and of, course, trains can pick up and drop off passengers in downtown stations."

Amtrak already has trains capable of reaching 185 miles per hour -- on paper. But on Amtrak's actual rail corridors, they rarely exceed 100 miles per hour, mostly because of traffic conditions and the physical limitations of the rails. The proposed investment would not only buy new trains, but also rails capable of supporting such high speeds.

Obama said the high-speed corridors would help reduce highway traffic congestion and reduce greenhouse gas emissions. "The trains are very energy efficient, more so than airlines -- if the trains are being used," Allen said. Complaints about the level of service provided by Amtrak haven't helped attract passengers. Allen noted that the government-sponsored passenger railroad has long suffered from underfunding. Still, he said, "I'd like to see them put in place a Southwest [Airlines] style of management that really understands its passengers' needs."

Is the World’s Cheapest Car Headed for the U.S.?

Last month, India’s Tata Motors introduced the world’s least expensive car: the Tata Nano, priced at around $2,400. Indian consumers are lining up to buy the vehicle, and the company has indicated that a U.S. edition isn’t out of the question. Is the time right for American consumers to embrace a new kind of auto? 

According to a report in The Economist, the company’s ambitions for the Nano are not “limited to India. The Nano Europa, a plusher version that meets Western safety and emissions standards, will go on sale in 2011, with an American version due a year or so later.”

“The interest in the Nano is worldwide,” Ravi Kant, Tata Motor’s managing director, told the publication.

In a recent interview with India Knowledge@Wharton, David Good, Tata’s “ambassador to the U.S.," indicated a similar vision: “… I think at some time in the future, certainly some form of the Nano designed for American roads and American consumers is a very distinct possibility."

The Nano runs on two cylinders, goes up to 75 miles per hour and reportedly gets 54 miles to the gallon. Given the recent volatility in gas prices and the current global downturn, what’s not to like? In an interview with Knowledge@Wharton last year, Wharton management professor John Paul MacDuffie alluded to some potential hurdles for U.S. Nano sales, including the need to meet stringent safety and emissions standards, as well as functional issues, like poor acceleration, which could be a turnoff for consumers.

Size, of course, is another hurdle. Despite recent declines in SUV sales, Americans still cling to six- and eight-cylinder engines. Meanwhile, a widely publicized video report from the nonprofit Insurance Institute for Highway Safety, released this week, shows the not-so-pretty results of crash tests involving “microcars” like the Honda Fit and Toyota Yaris. Despite the ongoing recession, reports like the Insurance Institute’s might help to keep U.S. consumers firmly ensconced in their larger, more expensive vehicles for some time to come.

Rising Costs Drive Some Chinese Manufacturers to Hinterlands -- or Out of China Altogether

For manufacturers in China, “business as usual” no longer exists. Just one year ago, according to the 2007-2008 China Manufacturing Competitiveness Survey, conducted by the American Chamber of Commerce in Shanghai and Booz & Company, the main concerns of manufacturers in China were the rising costs of labor, raw materials and land, and the growing strength of the renminbi. Those factors were forcing some manufacturers to move to the country’s hinterlands, while others moved to Vietnam, India and other locations where land and labor are cheaper. As a production base, the 2007-2008 report concluded, China was losing its competitive advantage. For more, read this report from China Knowledge@Wharton.

Microsoft and Yahoo’s Fitful Courtship Dance Finds a New Tune

Carol Bartz, the new CEO at Yahoo, and Steve Ballmer, Microsoft’s CEO, have reopened the communications lines that shut off some months ago when talks of a potential collaboration broke down, according to the Financial Times, citing a piece in The Wall Street Journal's tech blog AllThingsD.com.

The FT reports that while talks between the two remain preliminary, the discussions could lead -- at a minimum -- to a testing-of-the-waters collaboration, such as a teaming up in Europe to offer enhanced search engine capabilities. That might make sense given that both companies have a relatively weak web presence in Europe, the FT notes.

Knowledge@Wharton recently wrote about Bartz’s need to set a strategic direction for Yahoo: “Carol Bartz's Challenge at Yahoo: Choose a Path, Build a Team and Do It Fast.” Wharton experts noted in the article that Bartz's biggest decision would be whether to outsource Yahoo's search service to Microsoft, which wants to take market share from Google.

Google accounted for 63.5% of search queries in December 2008, according to research firm comScore. Microsoft, which accounts for 8.3% of the more than $30 billion search market compared to Yahoo's 20.5%, has shown interest in buying Yahoo's search business, which generates revenue by linking ads to specific queries. Wharton experts suggested that outsourcing search functions to Microsoft could make sense for Yahoo – it could boost revenues, cut costs and provide needed focus. The move could also enable Yahoo to become a next-generation media company, said Kendall Whitehouse, senior director of IT at Wharton.

"Strategically, a Microsoft deal looks like a good move," Wharton management professor Lawrence Hrebiniak noted in the article, adding, "Ballmer wants to get this deal done and go against Google. Yahoo should take the money and find other opportunities," Wharton management professor Keith Weigelt agrees. "Yahoo is losing the battle with Google slowly. I'd seriously consider the Microsoft search deal as a way to focus the company."

Additional Reading:

Fast Forward: Tech Giants Scramble For Bigger Piece of Growing Online Ad Market

Knowledge@Wharton

Winners and Losers in the Rising Tide of Proxy Wars

Knowledge@Wharton

Microsoft and Yahoo: Does It Make Sense (and Will It Work)?

Knowledge@Wharton

Some Free Advice for Yahoo CEO Jerry Yang

Knowledge@Wharton

Steve Ballmer Speaks Passionately about Microsoft, Leadership ... and Passion

Knowledge@Wharton

A 'Sensitive' Indicator -- Initial Unemployment Claims -- Shows Improvement

Yesterday's Labor Department report that initial unemployment claims for the week of April 4 had declined by 20,000 reminded us of a recent Knowledge@Wharton podcast with Wharton finance professor Jeremy J. Siegel. Asked which indicators he watches for signs that the economy might be on the mend, Siegel said that initial unemployment claims were first on his list. "Jobless claims are sensitive data," Siegel noted. "The first sign will be not that they're robust, but that they're not getting worse. We might actually see a reduction." Not only did the weekly claims number decline to 654,000, the four-week moving average fell to 657,250, a decrease of 750.

Siegel also monitors monthly job losses, which were 663,000 in March. "They will begin to moderate," Siegel said. "Hopefully, by the middle of the year, they will be zero or even slightly positive." Normal monthly job growth is about 200,000 "just to keep the economy growing at the rate of the growth of the labor force. But we should see moderating trends in the payroll loss and in jobless claims that tell us that the worst of the recession is behind us."