Cover Story

Gulf War II : Potential Impact on India

-- Y Chandra Sekhar

The war on terrorism is taking new strides. All of a sudden, Iraq has once again become the cynosure of all eyes. With a potential war in the Middle East, in sight, concerns are being expressed about the repercussions that the new war can have on the global economy. India is also concerned about the impact of Gulf War II on its economy, which had a bitter experience during the first Gulf War.

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Spotlight

US Housing boom : A bubble for real(ty)?

-- N Janardhan Rao

Housing prices in the US have been moving up over the past two years despite prolonged economic recession. The economy is being propped by consumer borrowing; if it collapses, a more prolonged downturn will follow.

The world economy is flooded with debt. Intensive borrowing by companies, households and governments is the order of the day. In the world's largest economy, the US, households and companies took on record debts relative to their incomes in the 1990s and are still borrowing more. While the world's second largest economy, Japan is still in the doldrums, German recovery has more or less stopped. Beyond this, the risk is that the heavy build-up of debt in many rich economies in recent years combined with the near-absence of inflation could hamper a sustained recovery. Besides, corporate balance sheets look expanded in many countries round the world. However, it is in America that both households and companies look most vulnerable and hence it is there that the greatest economic risks lie ahead.

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Case Study

Samsung Electronics' Turnaround : Focus on profits

-- C S V Ratna

Samsung's sales-focused strategy mired the company in deep troubleuncontrolled production led to global oversupply, which ultimately meant heavy discounts on its merchandise thereby adding to its losses. But then the shift to a profit-thrust strategy that emphasizes streamlined and controlled production turned the company around.

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Financial Services

Basel II norms : Making it work

-- D Satish

The New Basel Accord has become so complicated that some of the bankers have questioned its practicality. However the Basel committee is bent on making the accord work. The July agreement on some of the major issues is a step in that direction.

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Investment Banking : Paying the price

-- D G Prasuna

Investment banks such as Merrill are facing a credibility crisis. They are asked to account, reason and pay for the excesses of the boom time. Merrill has already shelled out more than $100 mn in fine, others might soon follow. Add to this the lackluster equity markets and the future of investment banks is far from bright.

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Insurance DISTRIBUTION IN India : Brokers: Get, set, go

-- Abhishek Agrawal

Indian insurance industry is gradually opening its wings. A metamorphosis from agent-driven model to multiple distribution channels.

The Indian insurance sector is experiencing cosmic changes with the entry of new entities after liberalization. Firstly it was new insurers, then Third Party Administrators (TPA) and now with Insurance Regulatory and Development Authority (IRDA) passing a regulation, brokers can now make their entry. The step has been taken by the regulatory authority in order to ensure the quality of service provided to the end customer by the insurance industry through multiple distribution channels. There is a great deal of enthusiasm in the sector after this regulation is passed. Many aspirants have already formed companies and are waiting for the license to be granted by IRDA in order to commence operations. IRDA Chairman, N Rangachary has promised to clear all the applications by the first half of November 2002 to make the festival of Diwali more happening for the enthusiasts. Vinod Sahgal, Consultant, JLT Group and Adviser, Confederation of Indian Industry opines, "Until now agents were the only source through which insurers sold and clients bought insurancethis still resulted in a representative of the insurer who sold the insurance products, brokers on the other hand will be the representatives of the insurance buyer and so will provide the facility of meeting the insurers on an equal footing of domain knowledge."

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Reinsurance : Insure thy future

-- N Janardhan Rao

Despite high premium levels, the global reinsurance industry faces some fundamental questions about its future. September 11 was undoubtedly a watershed event for the insurance industry, creating a whole new set of claims that just weren't anticipated. Since terrorism had never been a serious consideration in the industry prior to September 11, no premiums were collected for the terrorism peril. After each disaster, reinsurance companies (who insure insurers) have tried to improve the way they manage their risks. However, after WTC attacks, terror cover was excluded from all reinsurance contracts particularly in Europe and North America. In response to continued shortage of terror cover, a number of countries have reviewed the option of setting up a special pool mechanism to handle this exposure.

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Business Environment

China as A Global Manufacturing Base : Challenging the dragon

-- Anindya Roy

How can other Asian countries counter the growing strength of China as a low-cost manufacturer. According to the United Nation's recently released annual Trade and Development Report, labor- intensive manufacturing, including assembly operations in electronics in ASEAN countries and Mexico would face the biggest competition from China. Taking advantage of China's friendly policies, companies from all over the world have come in droves to set up their offices, R&D and manufacturing units in China. The century old textile and ceramics companies in Gifu in central Japan have shifted their bases to China. Intel recently announced a $100 mn investment in Shanghai to assemble Pentium 4 microprocessors. Dell moved its PC manufacturing facility from Kuala Lumpur to Xiamen. Astec Advanced Power Systems shifted one of its electronics plants to China from Penang, Malaysia. Acer, Taiwan's well-known PC manufacturer already has offices and manufacturing facilities in China. Evidently China is becoming a manufacturing superpower.

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Employees as Stakeholders : Safety net against corporate collapses

-- Amit Singh Sisodiya

The growing cases of corporate scandals in America expose the chink in the system in safeguarding employees' interests. The recently introduced Employee Abuse Prevention Bill aims to correct the situation.

"In just three years, they (executives) grossed about $3.3 bn before their companies went bust, having wiped out hundreds of billions of dollars of shareholder value and nearly 100,000 jobs."

- Congressman William D Delahunt, US House of Representatives

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Industry

US Aviation Industry:A glimmer of hope

-- K B S Kumar with C S V Ratna

US airlines industry is going through the toughest times in history. But, even amid such turmoil, a few like southwest are thriving, offering valuable lessons to the tumbled giants.The US aviation industry is passing through precarious times. Flight delays, mishandled baggage, general and other customer service glitches have taken their toll on the already beleaguered players. What's more, the September 11 attacks have further worsened the situation, giving way to heavy retrenchments and bankruptcy petitions.

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Corporate Strategy

CEO Compensation : Out of sync?

-- D G Prasuna

CEO compensation is in the eye of the storm in corporate America. Larry Elison, CEO of Oracle took home $706 mn in 2001, a year when Oracle's shareholders got the least return. Does he epitomize the problems of corporate America's CEO compensation?

Jack Welch, the charismatic leader of GE and `the manager of the century' was back in the news when the details of his retirement package were brought out glaringly into public notice. Welch's severance package allows him the use of corporate jet, $80,000 a month Manhattan apartment, financial planning services, golf club memberships, theater and sports tickets, office space, so on and so forth. Welch offered to reimburse GE for the use of these facilities. But that did not stop SEC from launching an informal inquiry into the issue nor could it avoid the debate on `CEO compensation practices'.

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Corporate

Yahoo!’s business model : The balancing act

-- C S V Ratna

While most portals continue to struggle, Yahoo! has made profits after two years and has been able to sustain its free-services like e-mail, thanks largely to broadband sales and fee-based services like job listings to compensate for the slump in ad revenues.

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By Invitation

Corporate Governance : The new order

Corporate governance has acquired dimensions larger than usually visualized to facilitate a transformation in the economic and social performance of a country as a whole, says J Narayanamurty, Director JNIDB and Chief General Manager, IDBI.

Traditionally, corporate bodies in India are family-owned companies. It is well-known that these companies are either shy of disclosing or known to disclose as little as possible. Boards constituted for running such companies have become objects of ridicule, and are often dismissed as `dummy' or `rubber stamp' boards, having only one single agenda i.e., protection of the controlling interest of the owners. In view of what usually people thought as `unsalutory linkages with the promoting families' the corporate credibility and professional competence of these boards had become a subject of serious discussion even before the advocates of corporate governance appeared on the scene.

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International Finance

Argentine crisis : Spreading tentacles

-- Debasis Mallik

The financial crisis of Argentina ceases to be domestic any further. It is fast spreading its tentacles across Latin America. Though Mexico has largely been able to avert it due to its association with NAFTA, the rest of the economies may severely suffer from the spillover effect.

Contagion is the transmission of a crisis to a particular country due to its real and financial interdependence with countries that are already experiencing a crisis.

Guillermo A Calvo and Carmen Reinhart

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