Archive for August, 2011


Apple moves from a period of charismatic leadership under Steve Jobs to more organisational leadership under the more low-key Tim Cook, it is following a managerial tradition that pertains in every successful organisation when the founder entrepreneur retires. As Mr Jobs leaves his chief executive post, attention has rightly been paid to his record as a product and marketing innovator, but less to his management style – which, both good and bad, is inimitable. Along with his enviable aesthetic sense, focus and negotiating prowess came a readiness to humiliate and embarrass others.

To discover the useful lessons of Mr Jobs’s managerial legacy, it is worth depersonalising the company he has built. For instance, Apple is not really one company, but three very different organisations lashed together and devastatingly fit for purpose.

At the top is a small company, a decision-making and innovation group made up of senior executives with specialised knowledge, covering Apple’s products and functions. They live and work in Cupertino in California and are physically clustered close to the offices of Mr Jobs and Mr Cook. They range from the heads of marketing and finance, to the design group, which occupies its own building and workshop. Members of this group take total responsibility for anything that occurs on their watch and are summarily fired if they fail.

The hierarchy around them looks flat, but when they make decisions and issue orders, they expect them to be fulfilled with little questioning. They have no interest in watching 1,000 flowers of innovation bloom all over the company. Employees are not empowered to make a difference. They are expected to do a clearly defined job and do it as well as they can.

Apple’s aversion to big mergers or acquisitions also liberates senior managers from this most tedious, and often disastrous, path to growth.

Within this small group, the principle of “talent density” applies. By having just a few very talented people working very hard you not only get superb work, but also reduce the waste incurred by office politics. It is a principle now very popular in the Valley since it was given a label by Reed Hastings, founder ofNetflix. The idea is that one great employee can do the work of five lesser ones, without the need for bickering, cc’d e-mails and interventions from human resources. Mr Jobs has hired consistently along these lines.

The second company consists of most of the 46,000 other full-time Apple employees, most of whom are in marketing and sales. A surprising number of these are the fresh-faced university graduates sweating it out behind the Genius Bars in Apple’s stores – highly educated yet counting their blessings to have a job.

The third company is made up of the vast armies of contract manufacturing employees across Asia, at companies such as Foxconn, who assemble Apple’s products. This is very much Mr Cook’s creation. As a supply chain expert, he pulled Apple out of manufacturing in the late 1990s, and established these contract relationships. No inventory and no unions have been vital to forcing down Apple’s costs. But it has taken a very different kind of management from that required in either the first or second companies.

Mr Cook uses what he calls Apple’s “mother of all balance sheets”, now stockpiled with $76bn of cash, to exercise control over his suppliers. Rather than owning plants or managing inventory or factory employees, Mr Cook corners the market in existing components, such as flash memory, and finances the expensive and exclusive production of new components so Apple has access to them long before rivals do. Bringing truckloads of cash to the low-margin manufacturing and assembly business buys Apple a lot of loyalty and discipline. Coupled with Apple’s knack for forecasting demand, it allows Mr Cook precise control without ownership, the aspiration of supply chain management.

Apple’s structure allows for rapid decision-making at the top and unwavering discipline and efficient execution at the bottom, both vital in this era of ever faster product cycles. Despite its west coast cool, Apple has long had more in common with a well-drilled army, with the joint chiefs on top, the privates and contractors down below and a strict chain of command binding them together. For that, the detail-minded Mr Cook makes an ideal leader.

As with many highly effective men, it is much easier to know whether one would like to invest in Mr Jobs or buy one of his products than if one would like to work for him. It would be a case of “yes”, to the fascinating demands and the opportunity to succeed on an epic scale, and “no” to the shouting and abuse. I met a Silicon Valley psychologist this year who told me that much of his practice was made up of recovering Apple employees.

The head of the International Monetary Fund (IMF) has said the global economy is not growing at a fast enough pace and faces a number of risks to recovery.

Christine Lagarde warned a threat of global recession remained and called for coordinated policy action.

She said this should include the mandatory recapitalisation of European banks.

Ms Lagarde was speaking at a US Federal Reserve meeting at Jackson Hole, US.

“Developments this summer have indicated we are in a dangerous new phase,” she said.

“The stakes are clear; we risk seeing the fragile recovery derailed – so we must act now.”

Recession risk

Following on from the financial crisis of 2008/09, growth in the US and Europe remains patchy, while debt worries in both continues to shake market confidence.

“The global economy continues to grow, yet not enough. Some of the main causes of the 2008 crisis have been addressed, yet not adequately,” Ms Lagarde said.

“There remains a path to recovery, but we do not have the luxury of time.”

She said the advanced economies which are struggling must ditch long-term plans for now to bring their debt under control, yet at the same time not introduce austerity measures so fast that it imperils recovery,

“Put simply, macroeconomic policies must support growth,” Ms Lagarde said in her first major policy speech since taking the IMF reins in July.

“Monetary policy also should remain highly accommodative, as the risk of recession outweighs the risk of inflation,”

The French and German leaders have called for “true economic governance” for the eurozone in response to the euro debt crisis.

Speaking at a joint news conference, German Chancellor Angela Merkel and French President Nicolas Sarkozy urged much closer economic and fiscal policy in the eurozone.

Ms Merkel said that further integration would be a “step-by-step” process.

They also advocated a tax on financial transactions to raise more revenues.

Negative reaction

The two leaders said they wanted bi-annual meetings of the 17 heads of the eurozone governments, chaired by Herman van Rompuy, the current president of the European Council.

Markets reacted negatively to the conference, with some investors saying that they were expecting bigger announcements.

In New York, the Dow Jones Industrial Average fell 1.3% during and after the press conference, which took place after the close of trading in Europe, but recovered later.

Government bonds in the US and Germany – seen as safe havens in any economic downturn – rallied in reaction to the leaders’ comments.

Ms Merkel again played down the chances of introducing “eurobonds” – jointly guaranteed debts of the 17 eurozone governments – as a solution to the crisis.

The idea has been advocated by the Italian finance minister, Giulio Tremonti, as well as billionaire investor George Soros as a way of providing cheap financing to struggling governments while also incentivising them to put their finances in order.

But the German chancellor said she only saw such a move coming at the end of a long process of fiscal union.

Growth fears

Instead, Ms Merkel proposed that a requirement for eurozone members to balance their budgets should be enshrined in each of their constitutions.

“We will regain the lost confidence,” she said. “That is why we go into a phase with a new quality of co-operation within the eurozone.”

In another initiative to increase tax revenues, the leaders advocated harmonising corporate tax rates across the single currency – something likely to be strongly opposed by the low-tax Republic of Ireland.

However, Germany’s insistence on government austerity across the eurozone has been criticised by some economists for undermining the economic recovery.

The two leaders were meeting in Paris in the wake of last week’s turmoil on the financial markets, which came amid fears of a renewed global recession and over the ability of Spain and Italy to repay their debts.

Earlier on Tuesday, Germany revealed that its economy grew by just 0.1% in the three months to June, much more weakly than previously thought.

Germany had been driving the economic recovery in the eurozone.

Both French and German leaders, along with the European Central Bank, are putting pressure on so-called peripheral economies to extend austerity measures to try to balance their budgets.

Major economies are also making cuts – Italy announced tougher austerity measures designed to reduce its budget deficit on Friday, while Spain has also said it will speed up spending cuts.

However, there are fears that spending cuts by governments – something strongly advocated by Germany – will undermine overall economic growth.

In an article published in the Financial Times newspaper, the head of the International Monetary Fund, Christine Lagarde, warned governments that they must balance spending cuts with measures to support growth to avoid the risk of a double-dip recession.

Ms Lagarde acknowledged the need for governments to reduce debt levels, but said “slamming on the brakes too quickly would hurt the recovery and worsen job prospects”.

The European Central Bank is due to hold emergency talks on whether to start buying Italian debt to contain spreading turmoil on financial markets.

The BBC’s Business Editor Robert Peston says the ECB is split on the move.

Growing worries over debt in the eurozone and the US caused sharp falls on world stock markets last week.

Finance ministers from the G7 major economic powers are also to hold emergency talks on how to calm the markets before they reopen on Monday.

The governing council of the ECB, which includes the central bank governors of all 17 eurozone countries, will hold a telephone conference on Sunday afternoon, the BBC has learned.

According to an ECB source cited by Reuters news agency, the bank’s president Jean-Claude Trichet wants a final decision on whether to buy Italian debt to be made at the meeting.

Meanwhile, Middle East markets, which are open for trading on Sunday, lost ground, with Israel’s main exchange dropping by about 7%.

There are fears that unless leaders can announce a decisive plan of action before Asian and European markets open on Monday, global shares could plunge even further.

Monday will also be the first day major markets are open following the decision by credit rating agency Standard & Poor’s to downgrade US government debt.

According to Reuters, S&P managing director John Chambers said on Sunday there was one in three chance of a further downgrade in the next six months to two years.

Low growth

Italy is the latest and biggest economy to be hit by the eurozone crisis.

The price Italy pays on its government bonds has shot up amid growing doubts it can keep its debt level so high while economic growth is so slow.

Spain, too, has been caught up in the crisis – hammered by high unemployment, high government debt and anaemic growth.

The high levels of debt coupled with low growth and an uncertain response among eurozone leaders to the crisis has sparked fears that both countries could become engulfed in the same cycle which has led to Greece, the Irish Republic and Portugal already being bailed out.

Last week, European Commission President Jose Manuel Barroso said authorities in the eurozone were failing to prevent the sovereign debt crisis from spreading.

Both Italy and Spain insist they can service their debt.

On Friday, Italian Prime Minister Silvio Berlusconi said he was bringing forward austerity measures and would balance the government budget by 2013, one year ahead of schedule.

Last week, the gap between German bonds – seen as the safest in Europe – and Spanish and Italian debt reached a record high since the euro was introduced in 1999.

There have been rumours that the ECB was preparing to buy Spanish and Italian bonds to try to help those countries. Last week the ECB bought Irish and Portuguese bonds but did not include Spanish and Italian debt in its purchases.

The BBC’s Business Editor Robert Peston says the ECB’s governing council is divided on whether to buy Italian bonds.

A decision not to buy would risk further turmoil in share and bond markets on Monday, he says.

Some analysts argue that investors expected the bank to buy Italian and Spanish debt soon after the eurozone leaders summit on 21 July, and the fact that it has not has undermined confidence in the markets.

Not impressed

S&P ratings (selected)

  • AAA: UK, France, Germany, Canada, Australia
  • AA+: USA, Belgium, New Zealand
  • AA: Spain, Bermuda
  • AA-: Japan, China
  • A+: Italy, Chile, Slovakia
  • BBB-: Portugal, Iceland, Morocco
  • CC: Greece

Source: S&P

Finance ministers and central bankers from the G7 are to hold emergency talks by telephone before markets open in East Asia on Monday morning, aiming to craft a global response on the eurozone debt crisis and ease fears over rating agency Standard & Poor’s downgrading of US credit-worthiness.

The rating agency Standard & Poor’s (S&P) on Friday downgraded America’s top-notch AAA rating to AA+.

S&P, one of the world’s three major rating agencies, failed to be impressed by a last-minute deal in the US last week to raise the US debt limit by up to $2.4tn (£1.5tn) from $14.3tn.

It staved off a potential US government default on its debt but was only achieved after months of wrangling between Democrats and Republicans in Congress.

The credit rating downgrade is seen as a major embarrassment for President Obama’s administration. It could also raise the cost of US government borrowing.

An economic adviser to the White House condemned the S&P move.

“It smacked of an institution starting with a conclusion and shaping any argument to fit,” said Gene Sperling, the head of President Obama’s National Economic Council.

White House spokesman Jay Carney said on Saturday that last week’s debt deal had been “an important step in the right direction”, but that “the path to getting there took too long and was at times too divisive”.

He said the US must now “do better”.

Cyprus President Demetris Christofias has appointed a new cabinet, installing economist Kikis Kazamias as finance minister.

The previous cabinet had resigned on 28 July amid an energy crisis triggered by a blast that destroyed the island’s main power station.

Centre-right party Diko then pulled out of the coalition with the communists over differences on economic policy.

Cyprus risks becoming the fourth eurozone economy to seek a bailout.

Ratings agencies Fitch’s, Standard & Poor’s and Moody’s have all downgraded the island’s credit rating this year, with its banking sector holding between 4.5bn and 5bn euros ($6.4-7bn; £4-4.4bn) of Greek debt.

The Cypriot economy’s growth prospects have suffered as a result of rolling power cuts since the Vassilikos plant blew up on 11 July, when a cargo of confiscated Iranian munitions exploded at a nearby military base.

Austerity measuresMoody’s lowered its growth forecast for the island to zero for this year and 1% next year, while opposition parties accused the government of backtracking on planned financial reforms and austerity measures.

However, Mr Kazamias told Reuters: “What I hope is for sensibility and consensus to prevail. The problems affect the whole country – no-one is exempted.”

The communist AKEL party is now in a clear minority in parliament, with only 19 deputies in the 56-member House of Representatives, making it difficult to pass legislation.

Other appointments to cabinet were Erato Kozakou as foreign minister and Demetris Eliades as defence minister.

Neoclis Sylikiotis retains his post as interior minister, Sotiroulla Charalambous stays as labour minister and Loukas Louka remains in charge of justice.

Deutsche Telekom has reported a big fall in its profits as a result of restructuring costs and poor results from its Greek businesses.

Net profit for the three months to the end of June were 348m euros ($498m; £304m), which was 26.7% down on the same period last year.

Restructuring costs came from putting T-Mobile UK into a joint venture with France Telecom‘s Orange.

Profits fell “significantly” in Greece due to the economic situation.

“Although these figures are not a cause for celebration, they still give us reason to be confident that we will achieve our targets in a persistently difficult environment,” said Deutsche Telekom chief executive Rene Obermann.

Despite falling profits in the first half of the year, the company has maintained its forecasts for the full year.

Adidas has raised its forecasts for 2011 after reporting strong figures for the three months to the end of June.

Net profits for the quarter came in at 140m euros ($200m; £122m), up 11% from the same period last year.

Adidas is predicting record earnings for the full year, despite 2011 not being an Olympic or World Cup year.

It is now forecasting earnings per share of between 3.10 euros and 3.12 euros, having previously said they could be as low as 2.98 per share.

The top of the range would represent a 15% increase from 2010’s figure of 2.71 euros per share.

Major sportswear companies tend to do better in years with major tournaments.

“High exposure to fast-growing emerging markets, the further expansion of retail as well as continued momentum at all key brands will more than offset the non-recurrence of sales related to the 2010 FIFA World Cup,” the company said.

Sales were particularly strong in China, where they rose 41%, excluding currency effects.

Debt-laden Italy is likely to default, but Spain might just avoid it, according to the British think tank, the Centre for Economics and Business Research.

With the countries weighed down by debt, the think tank modelled “good” and “bad” economic scenarios for both.

It found that Italy will not avoid default unless it sees an unlikely big jump in economic growth.

However, it said, “there is a real chance that Spain may avoid default”.

Even though Italy has managed to run tight budgets, and has vowed to eliminate its deficit by 2014, the economy needs a significant boost in growth.

But its economy grew by just 0.1% in the first quarter of 2011 and further growth is expected to remain sluggish.

On Wednesday, Italian Prime Minister Silvio Berlusconi addressed parliament, saying the economy was “strong” and the nation’s banks “solvent”.

But many economists believe that the eurozone’s third largest economy risks being engulfed in the debt crisis.

In a report published on Thursday, the CEBR calculated that Italy’s debt would rise from 128% of annual output to 150% by 2017 if bond yields stay above the current 6% and growth remains stagnant.

“Even if the cost of borrowing goes back down to 4%, the growth rate is so anaemic that we see the debt-GDP ratio remaining at 123% in 2018,” said Doug McWilliams, the CEBR’s chief executive.

The conditions in Spain are better because its debt is much lower. Even under the “bad” scenario, Madrid‘s debt ratio would climb to no higher than 75% of national output.

“Fingers crossed but there is a real chance that Spain may avoid default and debt restructuring, unless it gets dragged down by contagion,” Mr McWilliams said.

“Realistically, Italy is bound to default, but Spain may just get away without having to do so,” he said.

London-based, Asia-focused Standard Chartered Bank has reported an increase in half-year profits.

Pre-tax profits for the first six months of the year were $3.6bn (£2.2bn), up 17% from last year.

Profits grew in all of the territories where Standard Chartered operates, except for its biggest market, India, where profits fell by 5%.

It blamed rising interest rates, growing competition and regulatory changes for falling profits in India.

Profits grew by 23% in Hong Kong, 34% in Singapore, 14% in South Korea and 19% in China.

Income from its businesses in the Middle East grew 4%, in Africa it grew 10% and in the Americas and Europe it grew 11%.

“The group’s strong performance in the first half of 2011 should be seen in the context of the ongoing economic uncertainties, particularly in the West, and the sustained global regulatory upheaval,” said Standard Chartered chairman Sir John Peace.

“Standard Chartered has had a strong start to 2011 and this momentum has continued into the second half.”

Second-quarter profits at Societe Generale, France’s second-biggest bank, have fallen as a result of its exposure to Greek sovereign debt.

SocGen‘s net profit for the quarter fell to 747m euros ($1.06bn; £652m), down 31% from a year ago.

It made a 395m euro writedown on its Greek debt holdings. The bank holds about 2.65bn euros of Greek sovereign bonds.

SocGen also warned that its 2012 profit target would be “difficult to achieve”.

In a statement, the bank said that the second quarter results reflected the global economic and financial situation, which remained very mixed.

Frederic Oudea, the group’s chairman and chief executive, said, “The Q2 results testify to the Group’s resilience in an uncertain economic environment.”

On Tuesday, BNP Paribas, which has the biggest exposure to Greek debt among France’s banks, announced that it was setting aside 534m euros to cover its expected Greek losses.

French banks are among the biggest holders of Greek debt and were involved in the negotiations of a second bailout for the country, which included private sector support.

Banks could end up taking a loss of 21% on the value of their Greek debt as a result of the bailout.