A Marquee Fashion Brand Becomes the Ultimate Fashion Victim

The global downturn has claimed a high-profile brand in the fashion world. Christian Lacroix, a leading French fashion design house, has filed for protection from creditors citing a drastic drop in demand for luxury goods as the reason, according to the Financial Times.

Lacroix had been seeking a financial partner for support but was “directly hit by the conditions of the financial markets” before arrangements could be completed, said Nicolas Topiol, chief executive, in the FT’s report.

The move is another straw in the wind pointing towards worldwide economic conditions in which even the super-rich are focused on frugality, and luxury brands are groping for new ways to stay viable, as noted in a recent Knowledge@Wharton article “The New High-end Consumer: 'Please Put My Bottega Veneta Wallet in a Plain Bag.'”

Sales of luxury goods worldwide could fall by as much as 10% this year, global management consulting firm Bain predicted earlier this month. In the U.S., where about a third of all luxury goods are sold, sales are expected to drop by 15%.

At the same time, 62% of wealthy consumers report that economic conditions have altered their views on luxury purchases, according to a recent study by the New York-based Luxury Institute. Some are more budget conscious. Others said that flaunting luxury right now is insensitive, and they would rather help others than spend on themselves.

Discounting at luxury department stores, as the Knowledge@Wharton article notes, has made it tough for other designers, like Bottega Veneta. The luxury Italian leather house, a subsidiary of the Gucci Group, is known for woven leather accessories like shoes, wallets, handbags and luggage. The brand saw its sales drop 8.8% in the last quarter of 2008. Given that "the price of craftsmanship hasn't changed, our margins are already [very] small," said Roxanne Paschall, senior merchandising director at the firm. Her comments came at a recent Penn Fashion Week panel discussion titled, "Can Luxury Survive the Economy," hosted by Wharton.

Additional Reading from Knowledge@Wharton

French Luxury Foods Firms Bet on Innovation While Preserving Tradition

Luxury Brands: Marketing the Upscale During a Downturn

Luxury Fashion Executive Domenico De Sole: 'Stay the Course with the Brand'

Bank Regulator Consolidation Said to Be Part of Obama Regulatory Overhaul Plan

The Wall Street Journal, citing unnamed sources, reports today that the Obama administration may propose a single regulatory agency for the entire banking sector. The "hodgepodge of federal agencies" now overseeing the industry has been cited as a factor in the government's slow reaction to the credit crisis as it morphed last year into a global catastrophe.

The proposal remains in flux, the newspaper reports, and will be part of a broader regulatory overhaul plan that the administration is expected to present next month. In interviews with Knowledge@Wharton, Wharton faculty have offered suggestions for changes to the financial regulatory structure. For an article titled, "Getting It Right: Making the Most of an Opportunity to Update Market Regulation," Wharton finance professor Richard Marston told Knowledge@Wharton that the "financial crisis is so serious, and clearly the mechanisms have broken down [to the extent] that we're really going to have to get more serious about regulation." He suggested that one possible model is a consolidated system, in which monetary policymakers and regulators are closely aligned, similar to that of the United Kingdom. "We'll have to start from scratch again and think about how we regulate finance and allow it to thrive, and not take undue risk which society as a whole has to pay for," he says. "It's a balancing act. Everything is on the table."

For more from Knowledge@Wharton about regulation in the post-crisis world, see "How the Credit Crisis Could Forge a New Financial Order," and "A World Transformed: Panelists Look Beyond the Crisis."

While U.S. Travelers Remain Homebound, Chinese Travelers Are Outbound

The global economic downturn and the recent H1N1 “swine” flu outbreak have undoubtedly put a damper on numerous summer travel plans. This is the age of the so-called “staycation” – or a vacation that involves staying at home, as several media outlets (including this recent column in The New York Times) have defined it.

But while families in the U.S. are hunkering down for home-centric fun this summer, the Chinese may have different plans. According to an article published in China Knowledge@Wharton, in 2000, 10 million Chinese traveled abroad, but in 2008, more than 45 million traveled overseas. And despite some minor dips due to the economy and the lingering fear of a pandemic, the number is likely to grow in the long term, experts say. The reason: rising middle class wealth, coupled with the government’s slow but steady relaxation of travel policies allowing more Chinese citizens to visit places that were previously restricted, like Taiwan.

According to the article, tourism emanating from mainland China is a “potential gold mine.” However, only citizens of certain cities and provinces in China are allowed to travel to particular destinations, and sometimes only under specific circumstances, such as by joining a qualified tour group. The trend is toward a steady increase in the number of qualifying cities and provinces, but given the red tape, patience is advised for all countries that hope to attract Chinese travelers. “It takes time to build up the mainland market,” says Stanley Yen, president of Landis Hotels and Resorts, which manages eight hotels and resorts in Taiwan and two hotels in China. “It’s not like you just open a tap and water comes out.”

Cavaliers and LeBron Hope to Tap Growing Chinese Interest in Basketball

With the Cleveland Cavaliers’ decision to sell a minority interest in the franchise and arena to a group of Chinese investors, several questions arise. One of them is whether LeBron James – who has been quoted as saying he wants to become the first billionaire athlete -- will be more likely to stay with the Cavaliers, given that the deal will no doubt raise his profile in the huge Chinese market. Another question is what role will this deal play in the National Basketball Association’s (NBA) efforts to ramp up its presence in China?

Scott Rosner, associate director of the Wharton Sports Business Initiative and an expert on sports business, has some answers. “It’s a great deal for the Cavaliers,” he says. “They get minority investors into the team and an influx of capital, which can always be a bit of a challenge. It’s a great deal for the Chinese, because they get minority ownership of a team that has a marquee athlete.” Rosner isn’t sure if the deal will be quite as valuable if James jumps to another team next year when he becomes a free agent, but that uncertainty isn’t a “deal breaker or deal maker.” And as for James, the deal “will certainly help him establish his brand in the Chinese marketplace.”

The only reason the NBA’s board of governors would not approve this deal, Rosner says, is “if there is something untoward about the prospective buyers,” a group that includes Kenny Huang, a Chinese-born investor who has already arranged sponsorship deals with such franchises as the New York Yankees and Houston Rockets. Indeed, Rosner expects the board “to go to great lengths [to okay the sale] because it is so concerned with its China operations.”

Rosner doesn’t see the deal as signifying a trend towards the increased globalization of U.S. sports teams. “The exception could be the NBA,” he says, “which is certainly the most global of the leagues. It already has a league in China – although so far it exists only on paper -- called NBA China. The NBA owns the vast majority of it although Disney owns a piece, in addition to some Chinese nationals. Eleven percent of the company has reportedly been sold to private investors for more than $250 million. So the business is implicitly valued at more than $2 billion.”

Additional Reading from Knowledge@Wharton

Baseball, Steroids and Business Ethics: How Breaches of Trust Can Change the Game

Cricket in India: Moving Into a League of Its Own

India's Mobile Phone Giant Aims Again at South Africa's MTN

About a year ago, India Knowledge@Whartonv asked:  "Now That the MTN Merger Deal Has Collapsed, What's Next for Bharti Airtel?" Now we know. It's going to try again. The Financial Times reports today that India's biggest mobile phone operator, which is controlled by billionaire entrepreneur Sunil Bharti Mittal, has renewed discussions for a merger with South Africa’s MTN to create an emerging market Indian-African telecom venture with revenues of about $20 billion and more than 200 million subscribers.

As it was a year ago, one of the more delicate aspects of the talks may be the national pride invested by India in Bharti Airtel and by South Africa in MTN. The new terms of the revived deal appear aimed at making the transaction look like a merger of equals to satisfy South African political sensitivities about selling off a national champion, according to the FT report.

Additional Reading from India Knowledge@Wharton:

Bharti Group's Sunil Bharti Mittal on Lessons of Entrepreneurship and Leadership

Geithner Promises Plan by Mid-June for Realigning Executive Pay to Performance

Treasury secretary Timothy Geithner says the Obama administration’s plan to help realign executive pay with performance will be rolled out by mid-June, according to Bloomberg News. “I don’t think we can go back to the way it was,” Geithner said in an interview on Bloomberg Television’s Political Capital with Al Hunt, which the news service says will air tonight and over the weekend. “We’re going to need to see very, very substantial change.”

The pay plan is to be included in a proposed comprehensive overhaul of financial regulation aimed at both protecting consumers and reducing vulnerability to crises, the news service reports. Geithner has previously ruled out setting specific caps on pay and declined to alter existing compensation contracts.

Executive pay has been a frequent topic in Knowledge@Wharton, especially since the financial crisis. In a February article,"Outrage over Outsized Executive Compensation: Who Should Fix It and How?," Wharton accounting professor Wayne Guay predicted that the government, under the leadership of President Obama and a Democratic-controlled Congress, will attempt to limit executive pay. "It feels like something the public wants."

More from Knowledge@Wharton on executive compensation:

Current Controversies in Executive Compensation: 'Issues of Justice and Fairness'

Eyes on the Wrong Prize: Leadership Lapses That Fueled Wall Street's Fall

The Art and Science of Measuring CEO Performance

Xerox Chief Anne Mulcahy, a Critic of Short-term Thinking on Wall Street, Plans Retirement

Anne M. Mulcahy, whose plans for retirement as chief executive of Xerox were announced today, was a vocal critic of Wall Street's myopic focus on quarterly results. In a 2005 interview, she told Knowledge@Wharton that short-term thinking was "a huge problem" that may be hurting public companies in the long run. "It's one of the most dysfunctional things going on in the marketplace today." A separate Knowledge@Wharton article noted that Mulcahy was certainly not the first corporate chief to complain about Wall Street's shortsightedness. Her comments resonated, the article said, because in turning around the famed copier maker, she endured a level of pressure that few corporate bosses ever face. Xerox flirted with bankruptcy and was advised to seek court protection from creditors, and it probably would have but for Mulcahy's adamant opposition. More coverage of today's announcement can be found in The New York Times and Wall Street Journal.

The Changing Rules for Urban Development in Spain

What were considered “star” urban projects in Spain just a short time ago have become white elephants, according to research by Gildo Seisdedos, a professor of marketing and urban strategies at Madrid's IE Business School and the director of the Urban Management Forum. “These urban white elephants range from iconic buildings to events on a global scale," according to Seisdedos. Alarmed by the economic crisis, Seisdedos says, taxpayers in Spain are more and more critical of large-scale government-sponsored development projects and question the benefits that come from them. There could be a political price to pay in May 2011, when the entire country participates in municipal elections. In his study, Seisdedos asks: What kind of urban policies does this new situation call for? Read more about the research in Universia Knowledge@Wharton.

Defense Research Agency Offers a Glimpse under the Veil

Attention, defense contractors. A new report from the Defense Advanced Research Projects Agency lists nine of the agency's top strategic research initiatives, each promising to break new ground in various aspects of networking, aerospace, robotics and other technologies. Network World magazine's "Level 8" blog highlighted the report on Monday. "The report states the programs will lead to revolutionary, radical high-payoff (and many times high-cost) technology advances," according to the blog. Many of the projects require advances in robotics -- the pursuit of which was described in a recent Knowledge@Wharton article titled, "Making Robots More Like Us."

Several of the initiatives aim to remove humans from the battlefield and sky above. There are small robots that would array themselves to form ground-based communications networks, a robotic mule to carry hundreds of pounds of gear that would otherwise be on the backs of troops; an unmanned ground combat vehicle; and a high-altitude, pilotless solar-powered aircraft that could remain aloft for years without refueling. The projects are at varying levels of development -- a prototype of the mule is being tested, but the solar powered aircraft will require advances in photovoltaic technology.

Such defense developments are tracked regularly in the Wharton Aerospace and Defense Report, produced by Knowledge@Wharton and Wharton's Aresty Institute of Executive Education.

CBO Study Said to Put Lower Price Tag on Health Care Reform Plans -- With a Caveat

Much has been written in Knowledge@Wharton and elsewhere about extending health care coverage to more Americans. In Washington so far, there has been a lot of discussion surrounding "universal coverage" and the need to lower costs, but there is no wide-ranging health care reform proposal from the Obama administration or Congress. With nothing but vague notions out there, little is known about what the price tag might be.

But in an article titled "Numbers Racket," The New Republic says it has gotten wind of some cost estimates by the Congressional Budget Office (CBO), which is tasked with figuring out the real price of legislation offered by members of the Senate and Congress. Based on "rough proposals that reformers in the Senate submitted for consideration" the CBO came up with a figure of $1 trillion. The magazine says that's "a lot less than many outside experts had predicted." The outside experts' prediction? "A politically daunting $1.5 trillion."

The article suggests this reason for the lower estimate: "Even with a requirement that everybody obtain insurance -- a so-called individual mandate -- the CBO assumes that between a quarter and a third of the uninsured still wouldn't have coverage." Indeed, one of the intractable barriers to universal health coverage is that some people won't buy health insurance at any price, according to Wharton health care management professor Mark Pauly. In an article about the health care debate during the presidential election last fall, Pauly told Knowledge@Wharton that most of the uninsured in the United States are not sick or poor. "They are just taking a chance," he said. "You can't buy insurance in the ambulance on the way to the hospital and cancel it when you get out. It's worth noting that not everybody who fails to buy insurance is miserable."

The New Republic article says it is not clear what parameters guided the CBO estimates, so it is safe to say they are subject to change. The same can't be said of human nature.

Additional Reading from Knowledge@Wharton:

Social Security and Medicare: Trying to Tackle Two 800-pound Gorillas

Why Consumers -- Not Companies -- Should Make Health Care Decisions

'Major League, Middle Class Anxiety': Is the U.S. Closer to Universal Health Care?

Europe's Biggest Economy Continues to Shrink, But Its Stage Is Set For a Greener, Brighter Future

Most of the time, other Western nations envy Germany's strong export economy, but the global recession has been particularly hard on exporters. In the first quarter of 2009, Germany's GDP suffered its biggest contraction since World War II, a whopping 3.8%, according to the Financial Times. That makes Germany as eager as any nation for a global recovery to take hold. Despite the recession's headwinds, Europe's largest economy also has areas of strength, according to a recent Knowledge@Wharton special report, "Germany Seeks to Position Itself for a Greener, Brighter Future." The report concludes that German cities are competing to attract international business; innovation is thriving; clean energy initiatives are moving forward; and educational reform is helping make schools more responsive to future economic needs.

Chinese Overseas Investment: Global Competition and Other Factors Are Fueling the Next Wave

The ranks of Chinese companies seeking cross-border M&A deals are due to swell, according to Kang Rongping, a researcher at the Chinese Academy of Social Sciences and director of the World Chinese Companies Research Center.

The reasons are many, he says, but companies that decide to go global are looking to sharpen their competitive advantage in a world where “being a multinational is no longer a choice.” What are the challenges of managing cross-border mergers and acquisitions in the present environment? And how has the nature of competition in the domestic market helped to drive this trend? Kang, who closely follows Chinese overseas investment, shared his thoughts in an interview with China Knowledge@Wharton.

Aligning Executive Compensation with ‘Sound Risk Management and Long-term Value Creation’

As Knowledge@Wharton has reported, grumblings about executive compensation have reached a fever pitch over the past few months, with many -- including President Barack Obama -- laying partial blame for the current financial crisis on unchecked executive salaries and bonus packages. 

Citing Wall Street’s “reckless culture,” Obama introduced new caps on compensation for firms receiving TARP funds in February. Today, The Wall Street Journal reports that the administration is now looking beyond TARP recipients to the wider financial services sector, with the intention of formulating new rules “that would curb banks’ ability to pay employees in a way that would threaten the ‘safety and soundness’ of the bank – such as paying loan officers for the volume of business they do, not the quality.”

According to one administration official who spoke with The Journal, “This is not going to be about capping compensation or micro-management…. It will be about understanding what is the best way to align compensation with sound risk management and long-term value creation.”

The Journal notes that any new rules would be packaged with the Treasury’s wider upgrade of regulations concerning financial markets, which it is expected to deliver sometime in the next few weeks. 

Will it work? Although Wharton faculty disagree about the degree to which compensation should be regulated, in an article titled “Outrage over Outsized Executive Compensation: Who Should Fix It and How?” they agreed that some changes need to be made.

In the meantime, lift your spirits by listening to (or reading) Knowledge@Wharton’s interview with Leonard Abess, who, after selling a majority stake in Miami-based City National Bank last fall, took $60 million of that money and gave it out as bonuses to 399 current bank employees and 72 former employees. When asked on ABC News about his decision, Abess, who remains chairman and CEO of the bank, said, “I prefer to live in a world where this is ordinary.”

For China, Domestic Consumption Will Likely Be the New Growth Engine, at Least for Now

China's report today that exports fell nearly 23% in April is the latest indicator that the country is generating more of its economic growth domestically and relying less on overseas sales, recent reports suggest. This shift results in part from the weak world economy, which needs fewer Chinese products, but also from policies aimed at raising domestic consumption to offset that lower overseas demand, most notably the $586 billion stimulus measure.

Some results of this shift are starting to turn up in the statistics. “China’s growth is increasingly self-generating and continentally driven,” notes the Financial Times in a story published May 11. Not only have China’s retail sales held up much better than in most large economies, but the strongest results come from “inland and lower-tier cities, rather than from the traditional growth powerhouses clustered around the Yangtze and Pearl River deltas,” the FT notes.

China Knowledge@Wharton reported similar trends in its April 29 edition in "The Road to Recovery? Some Positive Signs Emerge for China's Economy" which noted comments by Wensheng Peng, head of research for Barclays Capital in Hong Kong. He thinks domestic consumption will rise more than enough to offset the fall in exports. “Domestic demand, particularly government-led investments, will be the main source of economic growth this year, while exports are likely to remain weak for the remainder of the year.” On balance, Barclays Capital has raised its 2009 GDP growth projection to 7.2%, up from 6.7%, based on stronger-than-expected first-quarter data, says Wensheng.

Still, the picture remains mixed. Yves Smith, in her blog, naked capitalism, notes that power use is a good gauge of economic activity. “And while many have pointed to loan growth as an indicator that China is making a recovery, energy consumption has yet to confirm it,” Smith wrote. She went on to note this report from ChinaStakes, which points out that China’s power generation dropped once again in April, “indicating that the macroeconomic rebound the market has expected is yet to appear.” China’s latest reports show that national power generation fell 3.55% this April compared with last April and was 3% below March. For the first quarter, power generation fell 4%.

And while exports appeared to rebound somewhat in March – they were down from year-earlier results by just 17.5% after plummeting by 26.5% in both January and February – the latest numbers out today show that exports continued to tumble in April by 22.6% compared with April of 2008.

Meanwhile, those who saw a ray of hope in the positive level of loan growth in China may have to think again. The latest FT report notes that lending by Chinese banks “slowed dramatically” in April on worries that first quarter loan growth had been excessive and could lead to “possibly creating a new round of asset bubbles.” The FT also reported that officials were concerned that stimulus money was illegally being put into the stock market and that “state-sponsored stimulus projects of dubious commercial value could become non-performing assets.”

The China Knowledge@Wharton article also offered some caution regarding the recent optimism about the world's fastest-growing economy. It pointed to a recent report from Standard Chartered Bank, which noted the recent positive indicators do not “represent an immediate recovery or rebound. We think China's economy will see a U-shaped recovery, and the real economy will run at the bottom for quite some time, without further deterioration or a conspicuous rebound ... Industries like transportation and equipment manufacturing are the main beneficiaries of government investment, whereas SMEs (small- and medium-sized enterprises) are on a footing that is still quite worrisome.”

Additional Reading:

The Road to Recovery? Some Positive Signs Emerge for China's Economy

Attached at the Wallet: The Delicate Financial Relationship between the U.S. and China

In India, Capital Is Available for Entrepreneurs -- Especially in Energy and Real Estate

Things are tough all over, but some entrepreneurs in India report having greater access to capital than their counterparts in other economies. According to Bain & Company, the Indian venture capital/private equity market totaled $17 billion in 2007, and declined slightly to $14 billion in 2008. Information technology-enabled services and telecommunications companies were the main targets in earlier years, but more recently the focus has shifted to the real estate and energy sectors. In its most recent issue, India Knowledge@Wharton looked at the startup environment in India, where entrepreneurs need perseverance and a "thick skin."