Summit Notebook

Short-term hopes, long-term gloom

By Tomasz Janowski

Optimism that Japan’s economy will bounce back from a post-quake slump and pessimism about its long-term prospects is the prevailing message of economists addressing the Reuters Rebuilding Japan Summit.

The reasons for the near-term optimism are well known: strides made by Japanese manufacturers in restoring production and supply networks ripped apart by the March 11 earthquake and tsunami and expectations that sooner or later hundreds of billions of dollars spent on rebuilding the ravaged northeast coast will grease the wheels of the stuttering economy.

There is also little doubt about what has been holding back Japan, which has been in and out of deflation and recessions over the past decade.

Its society is aging faster than any other nation, the productive (and consuming) population is shrinking, its manufacturers keep shifting operations abroad where wages are lower and markets grow and its debt burden makes it impossible for Tokyo to engage in any grand-scale pump-priming.

Now, one can also add concerns that a shift away from nuclear power will bring higher costs and doubts about reliability of electricity supply and possibly accelerate the hollowing out of the manufacturing sector.

from Newsmaker:

How to create a new industry

Last week, President Obama went to Cleveland to meet with small business owners to hear about their successes and setbacks. One of the prominent themes of that meeting was innovation. In his closing remarks from the forum, Obama cited multiple examples of innovation in companies he sees moving the economy forward, such as Ashlawn Energy, a company that Obama says is "poised to manufacture a next-generation energy storage system in Painesville [Ohio] that will improve efficiency."

While we wait to see which companies will shape our future, an example of one company that transformed the U.S. economy over 100 years ago is Alcoa, the world's leading producing of aluminum. The current head of that company, Klaus Kleinfeld, will be at Thomson Reuters tomorrow to discuss how to thrive in a new global economy as part of the Reuters Future Face of Finance Summit. But before we get ahead of ourselves, there's a lot to learn from Alcoa's past -- and present day -- success.

ALCOA'S BEGINNINGS When Charles Martin Hall was a student at Oberlin College, his chemistry professor told the class that "fame and fortune awaited the man who would find an inexpensive way to separate the metal (aluminum)" from bauxite ore, the rock from which most aluminium is extracted. Hall turned out to be that student. In February of 1886, at the age of 22, he discovered that molten cryolite, a sodium aluminum fluoride, would dissolve aluminum oxide. That discovery completely changed the manner -- and cost -- of aluminum production. And it paved the way for the founding of Alcoa, which had a profound impact on the metals industry and the U.S. economy in ways that even Hall's prophetic professor couldn't have imagined.

So, how does an aluminum experiment performed in a summer kitchen attached to the back of Hall's home lead to the creation of one of the nation's largest companies? From the beginning, the importance of Hall's discovery was recognized by businessmen of the day. In 1888, a group of Pittsburgh businessmen agreed to put up $50,000 to build a plant for what was then called the Pittsburgh Aluminum Company. They recognized that a cheap process to produce aluminum would have a major impact on the construction industry.

Before Hall's innovation, aluminum was quite expensive. Hall and his backers knew that they needed aluminum to be seen as a common metal and not a specialty material. So they set out to achieve this goal and by 1897 the fledgling Alcoa managed to reduce the price for a pound of aluminum to $0.36 from $8. This positioned the company to  compete directly with the prevailing construction materials of the day, such as wood and steel, which paved the way for Alcoa's success.

THE NEXT ALCOA? Looking at Alcoa in relation to Obama's small business summit in Cleveland, one has to ask, of all the new companies that have been started recently, which ones will be talked about in 125 years as not only changing, but also creating an entirely new industry? One might say the tech boom was just that. We have yet to see if Facebook and Twitter will create the same amount of jobs that Alcoa does. Currently there are around 59,000 employees, at Alcoa (123 years old) compared to about 2,000 at Facebook (seven years old) and some 350 at Twitter (five years old).

So, we'd like you to tell us. What company do you think is or will be the next one born from an industry-changing innovation?

from Newsmaker:

Dominic Barton 101

On March 1, Reuters Global Editor-at-large Chrystia Freeland sits down with McKinsey & Company Global Managing Director Dominic Barton. In anticipation of the event, here's some helpful background on Barton and McKinsey:

Barton grew up in a small town in Canada. Out of his high school class of 200 students, Barton was one of just six to go on to attend college. Barton graduated from the University of British Columbia and went on to study at Oxford University, where he was a Rhodes scholar and received an MPhil in Economics. He came back to Canada and joined McKinsey in their Toronto office in 1986. In 2000, he was given the chance to lead McKinsey's office in Korea and decided to take the offer despite being told by many mentors not to take it. He was so successful in his role, that in he then became the chairman of Asia, based in Shanghai, from 2004 to 2009.

In his 24 years with McKinsey, Barton has advised clients in a wide range of industries, ranging from financial sector reform to technology to public and private governance. Barton was named the as one of the National Associations of Corporate Directors list of 100 most influential people in corporate governance. He wrote "China Vignettes: An Inside Look at China" and is also co-author of "Dangerous Markets."

McKinsey, founded in 1926, is the world's leading management consulting firm. According to Forbes, McKinsey was the world's 43rd largest privately held company in 2010. They deal with companies in industries ranging from automotive and telecommunications to travel and entertainment. In addition to their consulting business, they also publish the business journal "McKinsey Quarterly" and run the McKinsey Global Institute, the company's economics research arm.

So, when one of the leaders of one of the world's biggest consulting firms sits down with Reuters on March 1, what would you like us to ask him?

Green shoots and short attention spans

Coming out of one of the darkest recessions, have we learned the lesson at all? Or are we going to repeat the mistakes of the past again?

Khuram Maqsood, managing director of boutique corporate financing advisory firm Emirates Capital, thinks we may well repeat them.

He says a second wave in the downturn – if it comes at all – is unlikely to come from a new, unseen fault in world markets.

The Geithner approach: make the best of bad choices

Ever wonder how the U.S. Treasury Secretary gets through some of the most economically stressful times this country has seen in a while — does he go for long runs? Sleep two hours a night?

Timothy Geithner has been in the job less than a year, and came in after the economy had slumped into recession. Now unemployment is approaching 10 percent, he’s had to navigate through an economic stimulus package, and on top of all that the weakness of the U.S. dollar has other countries questioning whether it should still be the reserve currency.

Enough problems, we imagine, to give anyone a big giant headache and more than a few sleepless nights.

So what does Geithner do under the weight of it all?

“I’ve been in the middle of this for quite a long time,” he said in an interview at the Reuters Washington Summit on Tuesday. (Remember, before this job, Geithner was president of the New York Federal Reserve Bank).

His general approach, Geithner said, is to “focus on trying to make sure you’re making the best of a bunch of bad choices.”

And to make sure “you are helping the president make sensible decisions,” he said.

Tax evaders on the run

  By Neil Chatterjee     The U.S. has promised it will hunt down tax evaders.     And it seems tax evaders are on the run.     DBS bank, based in the growing offshore financial centre of Singapore, told Reuters it had been approached by U.S. citizens asking for its private banking services. But when told they would have to sign U.S. tax declaration forms, the potential clients disappeared.       Swiss banks also approached DBS on the hope they could offload troublesome U.S. clients to a location that so far has not been reached by the strong arms of Washington or Brussels.     DBS said no thanks. In fact many private banks and boutique advisors now seem to be avoiding U.S. clients.     Will this spread to other nationalities, as governments invest in tax spies and tax havens invest in white paint?     Is this the end of offshore private private banking?

Emerging Europe – what’s next?

Reuters Central European Investment Summit, September 28-30, 2009

The former Communist countries of central Europe have been the last to be hit by the global economic crisis, but th e hit they took was among the hardest. Only big neighbour Russia’s deep plunge into recession is rivaling the sharp fall from record economic growth that’s in store this year for the economies between the former Soviet Union and Western Europe.

Global risk aversion and deleveraging exposed the weaknesses that the countries had been able to gloss over during the boom years – which in retrospect appeared to have been, in some countries, a colossal binge bankrolled by cheap foreign credit extended by Western European banks that had to come to an end when funding dried up.

Welcome to the 2009 Reuters Paper and Packaging Summit

The global paper industry has struggled for more than six years to claw its way out of a slump, as soft demand and overcapacity have kept prices down, leading to poor earnings, production curtailments and layoffs.

The current global downturn has further eroded demand for basic materials, including paper, as print advertising has dropped steeply in the crisis. Companies have been forced to run just to stand still, temporarily or permanently shutting mills and axing staff.

The sector is now at a crossroads. Will businesses after the recession look roughly the same, only smaller? Will demand ever return when electronic books and newspapers are surging? With many forestry companies big producers of biomass, what role will green energy play in the future?

No more green shoots, but lots of bottoms

From the start, “green shoots of recovery” was not necessarily the British government’s wisest choice of words and after a few months of being on everyone’s lips, has given way to a more lowly metaphor. Business Minister Baroness Vadera raised the hackles of the political opposition in January when she spotted “a few green shoots” on a day of large-scale job losses and collapsing share prices. Evidence of economic revival is still elusive, but there are ever louder hints that we have at least seen the worst — or bottomed, to use the mot du jour. Bottom as a noun and a verb was widely brandished by speakers attending Reuters Global Energy Summit this week, who based on their analysis on a slight increase in available credit, a tentative pick up in energy demand and rising commodity prices. OPEC Secretary General Abdullah al-Badri has an interest in spotting the kind of confidence that has driven oil prices up from a low below $35 a barrel in December to almost double that. “I have no doubt that the recession has bottomed out, but is it a V shape or a U shape?” he asked during a Reuters summit session. Others were less convinced and the most bearish of them all was a representative of the very oversupplied tanker market, where freight rates have sunk to their lowest levels in decades, with not a green shoot in sight. “We have seen lower than the bottom,” said Erik Ranheim, a manager at oil tanker association Intertanko.

Lamenting the good ol’ days

    The sprouting of privately-held alternative trading venues has seriously mucked up the trading landscapes in the United States and elsewhere, or so says Thomas Caldwell, chairman and chief executive of Caldwell Financial.     Caldwell, founder of a major exchange investment firm, sees a world that has quickly evolved into one of nimble, electronic players coupled with more and more trading venues with the proliferation of alternative trading systems, or ATSs.     (They’re also called electronic communications networks (ECNs) in the United States and multilateral trading facilities (MTFs) in Europe).     These new venues, which can include the ominously-named dark pools, or alternative venues, where they can secretly match buy and sell orders, leads to, among other things, “deeply flawed” pricing for market participants, in Caldwell’s view.     The idea of bank-backed stock trading venues is also suspect, says Caldwell.     “Publicly-owned exchanges, open and visible trading, an auction market environment,” he said during the Reuters Exchanges and Trading Summit in New York.     “These are centerpieces if you really want an economy to grow and you want to encourage entrepreneurs with access to capital. The more we get into gamesmanship and side products and all this other stuff it depletes from this.”     (Posted by Jennifer Kwan)