Commentaries

Now raising intellectual capital

Ex-Google China chief’s dream factory

Google’s former China head Kai-Fu Lee wants to create China’s next internet giant in a factory. He believes that by combining the smartest entrepreneurs, the shrewdest business people and the brightest business ideas, he will be able to create five highly sellable companies a year. That sounds like an ideal model for venture capital, but is he being realistic?

Lee’s plan, formulated while he spent time in hospital over the summer, follows a battle with Beijing regulators who wanted to censor Google  searches that lead to pornographic sites. It has drawn strong support from investors.
 
Lee has managed to raise $115 million in just one month, winning support from YouTube Inc. co-founder Steve Chen, as well as Foxconn Electronics, Legend Group, New Oriental Education and venture firm WI Harper Group.
   
They believe that as China embraces a start-up culture, Lee’s business, which is a mix of venture capital and development lab, will be well positioned to capitalize. Lee’s plan is to hire 100 to 150 young engineers, help nurture their ideas, then spin off 50 to 75 of them a year with
funding from his venture, whiling hiring new people to make up for the loss.
  
However, it looks as if his company, called Innovation Works, has yet to line up ideas or engineers. This kind of “incubator” model became popular in the U.S. and Europe during the dot-com boom, but most of them just burned through a lot of money and then folded.
 
Lee and his backers believe that China’s market is more favourable, as it is at a crucial point regarding “cloud computing” and mobile technology, and there is a strong need for early-stage funding.
 
The new fund is still starting off, but Lee plans to expand from its base in Beijing to places such as Taiwan, the Asian hardware manufacturing base and his hometown.

Investors are attracted by Lee’s reputation as the single largest magnet for talent in China. Lee, who went to school in the United States, has won a loyal following from Chinese students
through his numerous coaching books, public speeches and blogs, although critics say he has spent too much time promoting his personal brand.

An expert in speech recognition technology, he founded Microsoft’s China research lab in the late 1990s. When he left to join Google, Microsoft sued him for violating a promise not to join a competitor.

A Confucian conundrum for China

The Chinese own more United States Treasury bills than can be counted in a lifetime, and as the dollar printing press roars on, the rulers of the People’s Republic are getting nervous. They would like to see another reserve currency, and quite like the idea of it being the renminbi. After all, the euro and the yen are really too small to fulfill the role, while sterling is just small change.

So China has this week decided to issue its first sovereign bonds denominated in its own currency which foreigners can buy, at least in small amounts. After all, if the world is to hold renminbi reserves, it needs a proper market in its central bank IOUs.

Bad debt below 1 percent in China soon?

After the credit emission in China during the first half, international investors are concerned that bad debt will pile up after three years. Bankers in China are certainly a lot more optimistic.

More than 50 percent of the bankers surveyed by PricewaterhouseCoopers and China Banking Association expect the ratio of banks’ non-performing-loans to range between 1 percent and 5 percent of the total over the next three years. Indeed, 30 percent expect the ratio to be below 1 percent.

How Swedish is Saab now?

Less by the hour if there is any truth to the story in Reuters that China’s SAIC is considering funding the iconic Swedish car brand’s buy-out from GM.

The deal, announced in August, was originally supposed to be a patriotic flag-waving exercise, in which a tiny Swedish supercar maker, Koenigsegg, would “repatriate” Saab from American control. The Opelisation of the Saab range would be stopped. A new generation of quirky cars designed by Nordic designers in square specs would be manufactured at the company’s historic (and splendidly named) Trollhattan factory. Saabs would again be as Swedish as a meatball or an Ikea “Billy” bookcase.

Tough talking for Rio on China iron ore

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CHINA-IRONORE/No great surprise that Rio Tinto has acknowledged it has given up trying to fix an annual iron ore price with Chinese steel mills.

What strains credibility is the miner’s insistence that this has nothing to do with the detention of its negotiating team in China.

Bon chance getting this deal done, Alcatel-Lucent

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It beggars belief that humbled telecom equipment supplier Alcatel-Lucent could be scooped up by a Chinese rival with nothing better to do. Huawei or ZTE seem credible candidates. The question is, why would they ever bother?

PLA soldiers perform during a rehearsal of a musical drama in Beijing

That didn’t stop shares of Alcatel-Lucent from rocketing up as much as 21 percent on Wednesday on rumors of an unnamed suitor. Momentum was helped by a rating upgrade on the depressed stock by French broker Natixis. The shares later settled back somewhat to trade at 2.75 euros, up 12 percent on the day in Paris.

from The Great Debate:

Forget Microsoft, Yahoo’s value is overseas

-- Eric Auchard is a Reuters columnist. The opinions expressed are his own --

eric_auchard_columnist_shot_2009_june_300_px2The fate of Yahoo Inc has become intertwined in the public's imagination with the success or failure of its dealings with Microsoft Corp in recent years.

That's despite the fact that as much as 70 percent of the value investors put on Yahoo's depressed shares are tied up in its international assets or cash holdings -- factors that have nothing to do with Microsoft.

It’s a long way from 950 for the S&P 500

It’s hard to believe that little over a month ago, investors were holding their breath to see if the S&P 500 had enough momentum to burst through 950 – a psychological level that had held firm since November of last year. Carry through buying Monday from last week’s renewed cheer that the U.S. and global economies were leaving recession behind has pushed the S&P 500 to 1033, its highest level since Oct. 6, 2008 when it traded at 1056.89.

But as I noted here last week, markets continue to be pretty fickle when it comes to betting on recovery vs. continuing slump.

Dry spell should bring change to India

India is high on the list of candidates to help lead the world out of the current recession. The country weathered the global downturn remarkably well and looked poised to race ahead in coming years. Against this backdrop, the modest slowdown in growth caused by this year’s weak rainfall is little more than an annoying speed bump.

But the dry spell should sound an alarm to India’s politicians. Years of misguided agricultural policy have indisputably made the situation worse. Greater investment in irrigation and hardier crops could have halved the economic damage from a lackluster monsoon. More crucially, an overhaul of India’s farming policy could help close the gap with China — which has grown more than twice as fast since 1980.

No immediate oil shortage, but medium-term outlook uncertain

– John Kemp is a Reuters columnist. The views expressed are his own –
   
   By John Kemp
   LONDON, July 27 (Reuters) – The oil market looks set to remain well supplied through 2010.
   The huge stockpile of crude oil and refined products now being stored around the world, together with more than 5 million barrels per day (bpd) of spare production capacity, half of it in Saudi Arabia, means the market has a substantial buffer against either supply or demand “surprises”.
   But a Reuters poll of supply and demand forecasts for 2010 highlights an unusual degree of uncertainty on the outlook as forecasters struggle to assess the combined effect of the deepest recession in 50 years as well as structural shifts in consumption patterns and production costs [ID:nLR342038].
   Uncertainty about supply and demand dynamics implies considerable uncertainty about how quickly the market will tighten again. Based on forecasts in the poll, cyclical slack could be absorbed as soon as the end of 2010 or as late as 2012.
   
   FORECAST DISPERSION
   The International Energy Agency (IEA), regarded by many as the benchmark forecaster for the oil market, projects crude oil consumption will rise 1.4 million bpd next year, reversing about half of the demand lost in 2008 (0.3 million bpd) and 2009 (2.4 million bpd) but still leaving consumption far below the 2007 peak (86.5 million bpd).
   Most growth is set to come from emerging markets (1.3 million bpd) such as the Middle East, China  and the rest of Asia with only a marginal contribution from the advanced industrial economies (0.1 million bpd).
   But the IEA is the most bullish forecaster in the survey. Others are more cautious. Estimates in the poll put the increase as low as 0.5 million bpd, with an average of just 0.9 million bpd.
   Similar uncertainty dominates supply projections. While IEA sees non-OPEC crude production rising 0.4 million bpd next year, other forecasters put growth as high as 0.9 million bpd or see a contraction of up to 0.6 million bpd.
   
   FORECASTING UNCERTAINTY
   The problem for all forecasters is how to assess the overlay from the largest cyclical variation in business activity and oil demand since the Second World War, as well as structural shifts in both consumption patterns and production costs, on longer-term trends in supply and demand:
   
   (1)  LONG-TERM TRENDS
   For the advanced industrial economies, oil consumption has been basically stable since 1997. Efficiency gains and the transfer of energy-intensive manufacturing industry to emerging markets have offset increases in GDP and transport demand.
   Marginal demand for crude has come almost entirely from emerging markets (up 11 million bpd between 1999 and 2007) especially the fast-growing economies of China, the rest of Asia, and the Middle East. The pattern is consistent with research showing oil demand rises steadily as per capita GDP rises from $5,000 to $20,000 before stabilising.
   On the supply side, underlying production from existing fields is falling by around 7 percent a year, according to the IEA. Producers need to bring on almost 6 million bpd of new capacity each year just to ensure output remains unchanged [ID: nLK174997].
   Much of the new production involves development of smaller, more expensive fields; often in difficult geological areas or expensive deepwater environments; employing costly techniques to enhance recovery rates (such as water injection); or involves unconventional resources such as Canada’s oil sands.
   Given enormous resources of conventional oil, bitumen, coal and gas, let alone methane hydrates, there is unlikely to be a real shortage of hydrocarbons for hundreds of years (long after combusting them has cooked the planet, if fears about global warming prove correct). But the industry’s rising cost structure means the days of cheap $20 oil are over forever, unless there is a major technological breakthrough in recovery and refining systems.
   
   (2)  DEEP CYCLE EFFECTS
   Overlaying these trends, the financial crisis has introduced the largest cyclical variation in both economic activity and oil consumption since 1945.
   The collapse of world trade has produced sharp declines in diesel and jet fuel consumption [ID:nLL657354]. This demand should return as the major economies start expanding again from Q4 2009 and world trade levels normalise. It will add back hundreds of thousands of barrels per day in consumption next year, but only once high inventories of both jet and distillates have been worked down [ID:nLN322311].
   On the supply side, the lasting impact is harder to gauge. While major oil companies have largely protected capital investment programmes, many smaller companies have cut exploration and production development expenditure sharply in a bid to conserve cashflow.
   The number of rotary rigs drilling exploration and production wells in the United States has halved since September 2008. For the time being, production has continued to increase, reflecting the lagged effects of the earlier period of high prices in 2004-2008. But past experience suggests the fall in new drilling activity could cut underlying production by as much as 500,000 bpd next year if not quickly reversed.
   The same pattern is repeated worldwide. OPEC’s capacity is set to rise sharply in 2009 and 2010 as new Saudi fields (Khurais, Shaybah and Nuayyim) planned during the years of high prices finally come online after lengthy construction delays. It will push Saudi Arabia’s maximum theoretical capacity to 12.5 million bpd compared with actual current output of around 8.2 million bpd, restoring a generous cushion of spare capacity to the market. But this will be gradually absorbed unless prices are sustained at a level high enough to continue incentivising new investment.
   Less clear is whether the price collapse will harm investment in the long-term. Following a rebound, current prices of $60-70 per barrel should be high enough to make most of the investments needed in the short-term economic. But the price gyration itself could make the industry more cautious about committing capital, slowing supply growth over the next 2-4 years and tightening the market by 2012-2015.
   
   (3)  STRUCTURAL BREAKS
   From the demand side, the shock caused by the earlier surge in prices has led to determined interest in conservation and substitution measures. Because many of these are embodied in legislation, they will not be reversed just because prices have fallen. In the United States, toughened ethanol blending requirements will displace an extra 30 million barrels of crude in 2010, followed by a further 16 million barrels in 2011 and 20 million in 2012.
   Price volatility, together with pressure for “decarbonisation” is pushing petroleum-derivatives out of the power stack in favour of cheaper and cleaner-burning natural gas — as well as non-fossil sources, with heavy investment in windpower and solar systems [ID:nLD829860]. Cheaper prices may slow, but will not reverse, determined efforts to reduce dependence on conventional petroleum.
   Meanwhile rising costs are increasing the price-hurdle needed to sustain investment, meet demand growth and compensate for natural field declines. In a sign of the future, BP’s state-of-the-art Thunder Horse platform cost $5 billion and extracts oil from three intervals of oil as much as 4 miles below the surface of the ocean at pressures almost 1200 times the earth’s atmosphere.
   The poll’s uncertainty about near-term and future production reflects the growing challenge of maintaining sufficient, risky investment to keep the market adequately supplied, with a cushion of spare capacity, in the face of an increasingly tough technical environment. 
    

 http://graphics.thomsonreuters.com/ce-insight/OIL-POLL.xls 
 http://graphics.thomsonreuters.com/ce-insight/OIL-FORECASTS.pdf 

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