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Sunday 19 September 2010

BBC at a crossroads

Behind The Headlines by BUNN NAGARA

The world’s biggest broadcaster faces funding cuts again, and more challenges to its professional standards.

THE British Broadcasting Corporation’s greatest strength is also a prominent weakness, thus its most profound contradiction.

This relates to its most vital ingredient: government funding, through direct grants and household licence fees. Downing Street has successfully pressured the BBC to freeze the £145.50 (RM707) annual fee for the next two years, although the BBC is entitled to seek a rise.

Result – the broadcaster is short of £72mil (RM349mil) in its budgetary plans. This will further burden expenses for next year’s move of sports, children’s and live radio shows to spanking new studios in Greater Manchester.

Sometimes the BBC can be its own worst adversary. In 2008, the BBC Trust censured bbc.co.uk for overspending nearly 50% of its original £74.2mil (RM360mil) budget.

Last year, BBC director-general Mark Thompson announced £400mil (RM1.9bil) in budget cuts over three years. The decision to avoid seeking a licence fee hike was timely, particularly given Britain’s troubled economy.

The scale of funding and job cuts is nothing if not massive for the world’s largest broadcaster, shedding some 8,000 jobs in recent years. BBC News alone has a budget of £350mil (RM1.7bil) with 3,500 staff, 57% of them journalists.

Now the government wants deeper cuts in direct funding besides a freeze in the licence fee. This is feared to hobble further the BBC’s popular World Service in particular, which is funded directly by the government.

As the world’s oldest public broadcaster, the BBC (the “Beeb”, or “Auntie”) is no stranger to government budget cuts, particularly by Conservative governments. There were Margaret Thatcher’s crippling cuts in 1979, John Major’s heady cuts in 1996 and now Cameron’s sweeping cuts are on the way.

This has less to do with Labour governments’ affinity with public broadcasting, but Conservatives’ lack of understanding of national branding through creditable international media as a world presence. There had been cuts in 2007 under Labour, but times were better then.

Problems with the Blair government surfaced when the BBC attempted to question its rationale for invading Iraq, the “Beeb’s” supposed independence notwithstanding. Blair then reportedly threatened to pull the licence fee.

Thus an ironic contradiction: the BBC World Service is renowned internationally for professional impartiality, yet the BBC habitually canvasses the government for more funds by citing its service to vital British interests abroad. These interests can seem humanitarian – in racist Rhodesia as in today’s Myanmar, the World Service has provided an alternative source of reportage contrary to official rhetoric.

A result has been the BBC’s global reputation for truth, accuracy and integrity, even if that can be oversold. The strength of this reputation is ultimately relative, deriving less from the intrinsic qualities of BBC content as with the more questionable content of competitors.

Over many years, the World Service’s chief competitor is said to be the Voice of America (VoA). Given VoA’s Cold War purpose and CIA links, a solid reputation for the BBC should come by default.

Meanwhile, Anglophiles have helped maintain the World Service’s reputation. But retaining the younger generation’s faith requires continuing investment.

In recent years, CNN Inter­national (CNNI) and al-Jazeera English (AJE) have given the World Service’s BBC World a run for its money. And money is what the BBC is short of now.

Still, the Trust’s 2008 criticisms of “poor financial accountability” and “lack of management control” could still be pertinent in the meagre allocations for the BBC’s popular online services. Funding cuts also tend to hit more innovative output disproportionately.

Among the BBC’s strengths are its focus on the public interest as a public service broadcaster. But despite its reputation for relative impartiality, its broader character still reflects implicit Western interests as evident in placing priority on Arabic and Persian (for Iranians) languages.

With a preoccupation with the “petrodollars” and “petropolitics” of West Asia, the BBC started a commercially funded Arabic television station in 1994, closing it in 1996 over differences with its Saudi distributor. Staff then left to join al-Jazeera, yet emphasis in the World Service was still on West Asia.

By 2005, plans to expand in Russia, South America, South Asia and West Asia saw £35mil (RM168mil) for its Arabic and Persian services alone. There was nothing of the kind for East Asia, whose booming economies included two of the world’s biggest in Japan and China.

With CNNI’s routine coverage of West Asia and AJE’s specialisation there, the BBC persisted in focusing on the region at the expense of adequate coverage even in places with little competition over headline issues.

North Korea and Myanmar occasionally make waves in East Asia, but Iran, oil politics, Arab intrigue and Israel hold sway in news priorities. BBC Burma is a small and low-cost unit, and the current battle over funding centres symbolically on its future.

One result of cuts is outsourcing production to external parties, which can make for questionable material as the controversy over a feature on Nigeria showed last April. Outsourced programmes do not share production or oversight procedures with standard BBC fare.

In Britain, broadcasting careers often start at the BBC for expertise before moving to private networks for the money. Abroad, the BBC has contributed expertise not only to AJE but also to Brunei when head of news gathering Chris Cramer was seconded there in 1974, before he moved to CNN in 1996 eventually to head CNNI, taking some of his former BBC colleagues with him.

Last week, BBC chairman Sir Michael Lyons haggled with Downing Street for more money, advocating the World Service as a “cost-effective” way for Britain to influence world opinion. He is probably right.

But the BBC cannot have both its reputation for impartiality and the government money needed to propagate it. Meanwhile, the brain drain to rival networks could worsen.

Malay School for pregnant teenagers, but no takers yet !

School for pregnant teenagers opens in Malaysia


Mila gave her baby up for adoption  
Anonymity is crucial as police believe it is mainly unmarried couples who are abandoning their babies
 
The first school for pregnant teenagers in mainly-Muslim Malaysia has opened, as part of an attempt to curb the rising number of abandoned babies.

Officials hope that the school in the southern state of Malacca will help young women to overcome the stigma of having children outside marriage.

As well as medical check-ups, students will receive religious counselling.
About 70 babies have been left on doorsteps, in rubbish bins and public toilets in Malaysia this year.
Social stigma
 
The school promises privacy and protection to pregnant teens as well as providing an education.
Anonymity is considered crucial as police believe it is mainly unmarried couples who are abandoning their babies in a desperate attempt to hide the fact that they had pre-marital sex.

Young people in Malaysia, especially Muslims, are expected to abstain until marriage.
Religious officials in Malacca also say they will approve the marriages of more girls under the age of 16, in order to legitimise their sexual relationships.

The stigma of pre-marital sex has even driven older women, like 28-year-old Mila, to give up babies for adoption.

"Even though I'm getting married soon, having sex before marriage is against Islamic tradition. If the baby knew he was born out of wedlock he will carry the shame for the rest of his life," she says.

But the Malaysian women's minister has come out against the idea of schools for pregnant teens.
Separating them from the mainstream school system will further stigmatise them, she told the BBC.
The root of the problem is the lack of sex education in schools.

The women's ministry has for years advocated that students be taught a health and reproductive course.
But religious groups have blocked the idea, saying it will only encourage more teens to get pregnant.

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School for pregnant teens opens, but no takers yet

Saturday September 18, 2010

JASIN: After a lot of media hype about the country’s first school for pregnant teens, Sekolah Harapan opened its doors yesterday without much fanfare – and no enrolment.

Present on its first day were only a group of inquisitive journalists from both the local and foreign press who came for a media briefing by the school’s upbeat chairman, Datuk Abdul Rahman Abdul Karim.

The brainchild of the Malacca Islamic Affairs Council, the idea caused a stir when Chief Minister Datuk Seri Mohd Ali Rustam announced two months ago that RM500,000 had been set aside for the School of Hope to provide free education as well as maternity and delivery care for pregnant teens, whether they are married or not.

He defended the move as a way to help prevent incidents of baby dumping.

Empty beds: Abdul Rahman showing the new dormitory of the School of Hope at Jasin in Malacca yesterday.
 
Abdul Rahman said the lack of response would not deter the state from keeping the school open.
“This is something new, which takes time for society to accept.

“There may not be any students at the moment but we will keep the school open.
“Sooner or later there are bound to be girls coming here to seek help,” he told reporters during a tour of the school yesterday.

The school, he said, had received inquiries from Malacca, Johor and Penang.
“We are giving priority to local teens but will consider those from other states if there are vacancies,” he said, adding that the school could take in about 40 girls, mainly students between Form Two and Form Five.

The two-storey school once housed the office of the Malacca Water Corporation.
An adjacent block that used to be the state Kadi’s office was turned into a 15-bed dormitory.

Abdul Rahman said the students would attend regular classes for standard examination subjects during the day and be taught handicraft and parenting skills in the evening by trained educators.

Abdul Rahman said the school would take in both Muslim and non-Muslim girls, adding that it welcomed non-governmental orga­nisations to assist the teens in improving their lives and being good mothers.

“Islam and every other religion believes in giving a second chance to those who have made mistakes in their life to turn over a new leaf.

“And this is what the school has been set up for,” he said.
The school would be managed by the Malacca Islamic Affairs De­­partment and run by a staff of six.

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Saturday 18 September 2010

When it rains, it pours in court !

  Murphy's Law is having a riot at the new Kuala Lumpur Court Complex

Comment by Shaila Koshy
koshy@thestar.com.my

WHEN I was in school, I was taught that Taiping was the wettest town in Peninsular Malaysia but these days I wonder whether that title should go to all new government buildings, specifically the Kuala Lumpur Court Complex in Jalan Duta.

Unfortunately, one can’t blame this “rainfall” on global warming; this is the result of cutting corners or just plain ineptitude.

Floods are described as rising waters but on Monday it was parts of the fifth floor in 5cm of water.

This building cost the taxpayers RM290mil but it seems that even RM290mil doesn’t get you good work these days.

Surely, Key Performance Indica­tors means you not only finish your job on time but make sure you maintain it so it doesn’t fall apart later?

Or is the Government expecting the public to keep digging into its pocket for repairs and stay quiet?

The public wants a judicial system where the administration of justice flows smoothly, not one where water/sewage flow freely because of pipes that have burst or are blocked, and where ceiling panels can float down on your head at any time.

And the Judiciary is not amused. Chief Justice Tun Zaki Azmi has sent a report to the Chief Secretary on the matter.

This is one problem you cannot pin on the judges. The building is owned by the Legal Affairs Division in the Prime Minister’s Depart­ment, it was built by government-appointed contractors and should have been vetted by the Public Works Department’s (PWD) architects.

But the world’s second largest court complex hasn’t had a happy start – when it was handed over to then Chief Justice Tun Ahmad Fairuz Sheikh Abdul Halim on April 17, 2007, the then Works Minister noted it had been completed ahead of schedule, but a crack appeared on a wall the very next day.

Murphy’s Law (if anything can go wrong, it will) is having a riot.

The following happened in 2007 alone:

> APRIL 30 – two ceiling panels in a judge’s secretary’s room on the third floor fell from the weight of improperly installed downlights;

> MAY 3 – 3m long cracks appeared on a wall on the fourth floor, the day of the official launch;

> MAY 7 – air-conditioning malfunctioned in a court during a trial;

> MAY 8 – blackout caused several cases to be postponed;

> MAY 23 – a pipe burst, flooding the cafeteria on the basement floor in about 7cm of water because the end cap at a tee joint had not followed the original specifications;

> MAY 24 – a sewerage manhole in a basement storeroom overflowed, causing damage to some court files.

At the time, Minister in the PM’s Department Datuk Seri Nazri Aziz had cracked his whip and the main contractor Johawaki Development Sdn Bhd apologised and said it took responsibility for the problems.

The warranty ended in February 2008 but it was quite dry on the Duta front until June 24 this year when another water pipe burst, causing the ceiling to collapse and flooding the cafeteria, mini post office and bookstore located in the basement.

While this has been the first flood reported since 2007, puddles and drips are commonplace whenever it rains. The PWD was out there on Tuesday doing its darndest.

Maybe the Inland Revenue Board will allow regular visitors a tax deduction every three years for umbrellas, hard hats and galoshes (like Phua Chu Kang’s).

Whoever is doing the repairs/maintenance should remember that frequent floods may affect the e-Court system that cost RM69.84mil.

We can blame the Internet server being down on Aug 27 to outside factors but the case management system has been on the blink because of fluctuations in the voltage.

The Public Accounts Committee, seeing as it has first-hand knowledge of working a building that has had its own share of floods, should inquire into how much repair work was done during the defects liability period and since then and how much money has been wasted.

The leaks in Parliament House only started after 40 years; what excuse does the builder of the three-year-old court complex have?

Friday 17 September 2010

Small Business Can’t Get Loans From Bailed-Out Banks

By Bob Ivry
 
(Bloomberg) -- Chip Besse figured he could hire a dozen people once he got a $1.1 million small-business loan.

Wells Fargo & Co. turned him down.

U.S. taxpayers helped the San Francisco-based bank weather the 2008 financial crisis with a $25 billion loan and $9.5 billion of debt guarantees. By July 2009, when Besse wanted to buy and expand a Colorado snowmobile-rental business, Wells Fargo wasn’t sharing the wealth, he said.

Besse, 29, had little success with 16 other lenders in 2008 and 2009. His list included New York-based JPMorgan Chase & Co., which agreed to provide less than 70 percent of what he wanted, and Charlotte, North Carolina-based Bank of America Corp., which Besse said kept him hopeful for a month before rejecting his application.

“I was furious,” he said. “A lot of bankers are trying to justify their jobs and they waste everyone’s time.”
Besse, a Philadelphia native, was a partner in a London private equity firm with a credit score of 769 out of 850 and $185,000 in a checking account. His search for a loan shows how difficult it is for small companies, which the Small Business Administration says created 64 percent of net new jobs over the past 15 years, to get credit -- even from banks that accepted billions in taxpayer-funded bailouts.

Trading, Not Lending

The U.S. government helped Wells Fargo, JPMorgan Chase and Bank of America back to health with $189.3 billion in loans under the Troubled Asset Relief Program and debt guarantees through the Federal Deposit Insurance Corp. The rest of the country: not so much. That’s in part because of policies the Federal Reserve has instituted to help banks, said Peter Morici, an economist and professor at the Smith School of Business at the University of Maryland in College Park.

“We’ve created a system that encourages bankers to trade, not lend,” Morici said.

A record 41 percent of small business owners say they can’t get adequate financing, up from 22 percent two years ago, according to a July report by the National Small Business Association, a 150,000-member advocacy group founded in 1937 that has surveyed entrepreneurs since 1992. New small-business loans fell 33 percent last year from 2008 to $191.6 billion, the lowest total since 2000, according to the Federal Financial Institutions Examination Council.

Outstanding loans declined 16 percent as of June 30 compared with 2009, based on the council’s data. Tighter credit makes it tougher for entrepreneurs such as Besse to hire some of the 14.9 million Americans who are out of work.

No Data

Spokespeople for the three big banks that Besse approached said they didn’t track their small-business lending until last year, the middle of the longest economic downturn since the 1930s. It’s therefore impossible to gauge their recent volume against their performance before the credit contraction began.

JPMorgan Chase increased new small-business loans 36 percent to $4.5 billion in the first half of 2010 over the same period last year. Bank of America lent $8.2 billion, a 1 percent increase, the company said.

Wells Fargo lent $6.6 billion; it has no comparable number for 2009, according to Marc L. Bernstein, head of the bank’s Business Direct and Small Business Segment. Banks define small businesses as those with annual revenue of less than $20 million.

Little Demand

The three banks said they’re lending as much as they safely can in an environment with few creditworthy small businesses and soft demand.

“The last thing we want the banking system to be is excessively liberal in its lending standards,” said Bert Ely, a banking industry analyst in Alexandria, Virginia.

Entrepreneurs and their advocates counter that lending guidelines have become so strict that many business owners have given up trying to get credit.

“If the government had used the same lending criteria on the big banks that the big banks are using on us, the banks never would have gotten the TARP money,” said Carl Calhoun, who tapped $400,000 in home equity to finance his St. Petersburg, Florida-based mattress company, Commercial Bedding Co., after he couldn’t find a lender.

The credit crunch for small businesses has drawn the attention of President Barack Obama and Fed Chairman Ben S. Bernanke, who have both called for more lending.

With the U.S. unemployment rate stuck at more than 9.5 percent for the past year, the U.S. Senate today passed legislation that would provide $30 billion in loans to banks with less than $10 billion in assets. The bill, which now must go to the House for a final vote, includes incentives for the banks to extend credit to small businesses, along with tax breaks for eligible companies.

‘Still Struggling’

“At a time when small business owners are still struggling to make payroll and they’re still holding off hiring, we put together a plan that would give them some tax relief and make it easier for them to take out loans,” Obama said yesterday.

While they won’t disclose their investing strategies, JPMorgan Chase and Bank of America were among four banks that reported a “perfect quarter” in the first three months of this year. That means they made money trading every day. Wells Fargo wouldn’t reveal how its trading desk fared.

The Fed’s low-interest-rate policy makes it easy for banks to lend to the U.S. government rather than small businesses, said David Rosenberg, chief economist and strategist for Toronto-based Gluskin Sheff & Associates Inc., which manages $5.4 billion.

Safe Yields

Banks, which can borrow at the overnight rate of about 0.20 percent, can get safe yields of more than 2.5 percent buying 10- year Treasury bonds and other almost risk-free U.S. obligations, Rosenberg said.

Banks held a record $1.597 trillion of Treasury and government agency securities on Sept. 1, according to the Fed, 44 percent more than at the start of the recession in December 2007. The 10-year Treasury yield was 2.72 percent yesterday.

“The biggest risk in buying Treasuries is that interest rates will rise, and the Fed has repeatedly said short-term rates would remain close to zero as far as the eye can see,” Rosenberg said.

Lowering interest rates has been part of the Fed’s effort to facilitate small-business lending, said David W. Skidmore, a spokesman for the central bank in Washington.

Strengthening Banks

“Easier monetary policy encourages banks to lend to small businesses and other borrowers since the rates banks receive on alternative investments are lower,” Skidmore said. “And we have focused on strengthening the nation’s banks so that they can resume normal lending as quickly as possible.”

The Term Asset-Backed Securities Loan Facility, a Fed lending program established in November 2008, helped finance more than 850,000 small business loans, he said.

One option the central bank has to spur lending is cutting the 0.25 percent interest it pays banks on reserve accounts it holds for them, Bernanke said on Aug. 27. The central bank’s emergency lending and asset purchases since September 2008 have swelled those accounts to more than $1 trillion, according to Fed data, a more than 20-fold jump since the bankruptcy of Lehman Brothers Holdings Inc.

Senior loan officers at big banks reported loosening credit guidelines for small businesses this year for the first time since 2006, according to a July survey by the Fed. Still, small business owners complain that banks have reduced credit lines and increased interest charges.

‘Zero, Zippo’

“Bailing out Wall Street has done zero, zippo, nothing to help small business and create jobs,” said Dale R. Kluga, 50, president of Cobra Capital LLC, a finance company in Darien, Illinois, that funds about $40 million worth of equipment for small businesses.

Besse said he was eager to run his own outfit, so he left Clearbrook Capital Partners LLP when he found Grand Adventures LLC in Winter Park, Colorado. The company rents snowmobiles and arranges tours.
“It was a lifestyle decision,” he said. “I was thinking, how can I not work so much and have fun? Something where I can watch my kids grow up and be a part of the community.”

Since he had an account with Bank of America, he said he applied there first for a loan.

Jefferson George, a Bank of America spokesman -- like all representatives of banks Besse applied to -- declined to comment on Besse’s case specifically.

Bear Stearns

Besse approached Bank of America in June 2008, as financial institutions were tightening credit in the wake of the near- failure of Bear Stearns Cos. Since then, Bank of America’s lending to businesses with less than $20 million in annual revenue has fallen, according to regulatory filings. It had $15.9 billion in such loans outstanding at the end of June, down 12 percent from the same date last year and 20 percent from two years ago.

Though Bank of America said in a July 27 press release that it had loaned $45.4 billion in the first half of 2010 to small and mid-size businesses, about 80 percent of the loans went to companies with more than $20 million in sales.

“There’s very weak demand from the smallest businesses,” said Kathie Sowa, Bank of America’s small-business credit executive, who is based in Sacramento, California.

Demand only appears to have slackened because entrepreneurs are frustrated with lenders and have given up asking for money, said Galen Gondolfi, a senior loan counselor at Justine Petersen, a nonprofit microlender in St. Louis.

“I can tell you straight out: Small businesses are not getting the financing they need,” Gondolfi said. “We are experiencing unabated demand.”

Incomplete Statistics

Statistics on lending to small business aren’t always complete. Data collected by the Small Business Administration include only loans backed by the agency. The Federal Financial Institutions Examination Council, established in 1979 and consisting of the Fed, the FDIC and other bank regulators, tallies outstanding loans with original amounts of $1 million or less.

Loans backed by the SBA so far this year are down 14 percent compared with roughly the same period in 2007, according to the agency’s data. They increased 47 percent to $12.3 billion over last year, when the U.S. economy was contracting. SBA loans went to less than 1 percent of small businesses in 2009, according to data compiled by Bloomberg.

Besse took his quest for a loan to Wells Fargo in June 2008. After the bank’s underwriters said they wanted him to have experience in the snowmobile business, he went to work for the company he wanted to buy, he said.

In July 2009, Wells Fargo turned him down.

Went Snowmobiling

“I had a relationship with them,” Besse said. “They came out to Winter Park in January and went snowmobiling. They promised so many things and didn’t deliver anything.”

Wells Fargo’s Bernstein said the bank made $13 billion in new small-business loans last year, followed by $6.6 billion in the first half of 2010.

“We do everything we can to say yes,” Bernstein said in an interview. He declined to discuss Besse’s individual case.

Besse said a loan officer from JPMorgan Chase “moved faster than anyone else and operated the most honorably” and ended up offering a loan for $750,000 -- less than Besse needed.

The bank was looking to pare back risk, Besse said the loan officer told him.
Banks need cash cushions to insulate themselves against losses from the property bubble that they haven’t yet written off, said Christopher Whalen, co-founder of Torrance, California-based Institutional Risk Analytics.

Buybacks Possible

Such losses equal about one-third of the amount they’ve already written off as unrecoverable, Whalen said. For Bank of America, JPMorgan Chase and Wells Fargo, the total amount would be about $50 billion, he said, based on the banks’ regulatory filings.

Bank of America and JPMorgan Chase may be on the hook for as much as $78 billion in home loans they sold to buyers during the housing boom such as government-controlled Fannie Mae and Freddie Mac, according to an Aug. 17 report by Washington-based Compass Point Research & Trading LLC. Mortgage buyers can demand reimbursement for loans that violate underwriting guidelines or involve fraud.

Jerry Dubrowski, a spokesman for Bank of America, said credit quality is improving and he wouldn’t forecast charge- offs. Thomas Kelly, a JPMorgan Chase spokesman, said the bank is ready and willing and will continue to lend. Wells Fargo’s credit losses peaked in the third quarter of 2009 and the bank expects them to continue to decline, Chief Financial Officer Howard I. Atkins said Sept. 13.

Banks Under Pressure

Besse finally got an $850,000 loan from Collegiate Peaks Bank of Salida, Colorado. Collegiate Peaks, with four branches and $164 million in assets, borrowed $2 million in TARP funds, about .002 percent of the $95 billion in TARP money that went to Bank of America, JPMorgan Chase and Wells Fargo.

Banks with less than $10 billion in assets make 60 percent of the country’s small-business loans, according to the Independent Community Bankers of America. They’re under pressure to make fewer loans now, said Bob Hahn, chief executive officer of Community Valley Bank in El Centro, California, where the jobless rate is 30.3 percent, the highest in the U.S.

Small banks are failing at a rate of one every two days, according to FDIC data, and they’re facing greater regulatory scrutiny because of that, Hahn said.

“We’re being told to raise more capital or shrink assets,” said Hahn, whose bank has two branches and $60 million in assets. “What’s the primary asset of a community bank? Loans. That’s where the pressure is coming from.”

‘Financially Savvy’

Besse’s snowmobile business got credit in part because it had sufficient cash flow and the snowmobiles could be sold off in the event of missed payments, said Kim Palmer, the SBA lending manager at Collegiate Peaks.
“Chip is very financially savvy and has accomplished a great deal for someone his age and we saw this as a way to establish a relationship with someone like that,” Palmer said.

Besse hired 12 new employees by adding a guided back- country skiing business he called Powder Addiction.

Shawn Edmondson, 36, a husband and father of two boys, 9 and 7, was a carpenter in the area when work “slowed way down” because customers couldn’t get loans to renovate their homes, he said. He estimated that his 2008 income was $15,000.

Besse hired him last year as a ski guide. Edmondson said he earned about $200 in salary and tips every day on the slopes, surpassing his full-year 2008 pay in the six-month ski season.

“We don’t make a lot, but this is income that keeps us afloat,” Edmondson said. “We can pay our mortgage and stay on top of things.”

--With assistance from David Mildenberg in Charlotte, North Carolina, and John Tozzi and Susanne Walker in New York. Editors: John Voskuhl, Anne Reifenberg.

To contact the reporter on this story: Bob Ivry in New York at bivry@bloomberg.net.
To contact the editor responsible for this story: Gary Putka at gputka@bloomberg.net.

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Thursday 16 September 2010

Comparing Chinese And U.S. Capitalism

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Official presidential portrait of Barack Obama...

At the dawn of the new century, a new technology promised to fundamentally change global economics. Government leaders in the United States and China, the two largest economies in the world, believed that companies from their respective countries should lead in the development of this new technology. By 2010, two national champions, one from each country, had emerged.

Founded by a young entrepreneur in the mid-1990s with approximately $300,000 of capital, Company A had become a global leader over a 10-year period in a related field. In 2002, Company A went public, gaining additional capital by listing its shares on one of the world’s major stock exchanges. Then, in 2003, Company A decided to diversify beyond its original business and develop new products using the new, game changing technology.

By late 2008, Company A had attracted the interest of a prominent global investor, a cold-nosed, savvy industrialist who regularly saw the most promising investment opportunities from all over the world. Proclaiming Company A’s technology to be the best that he had seen, his company invested over $200 million in Company A. With a long history of commercial success and profitability, Company A achieved revenues of nearly $4.0 billion, and earnings of $150 million, in 2008.

On the other side of the world, Company B came into being just after the turn of the century. Convinced by the vast potential of the new technology, the founders were a group of individuals who based Company B’s products on research done by one of the country’s leading universities. By 2006, Company B had attracted the attention of the country’s government and business leaders, and began receiving development grants from an industry consortium that was working in collaboration with a large government agency. Incremental investments from several of the country’s largest companies followed.

Company B’s breakthrough came at the beginning of 2009 when it won a $250 million grant from a government agency to build a new production facility in an economically depressed part of the country. In addition to wanting its country to lead the world in this new technology, the government was motivated by its desire to create jobs for its citizens.

With strong government support, Company B went public in late 2009 and raised an additional $400 million of capital. In 2009, Company B had revenues of $91 million, and a net loss of $87 million. By the end of 2009, it had accumulated losses of $239 million and had never earned a profit.

If you are a United States politician or business leader, or just a plain ordinary American citizen who is alarmed by this story and concerned with the way in which “China, Inc.” is competing unfairly in the global economy, well, guess again.

As improbable as it may seem, Company A is none other than… BYD, the Chinese private company that quickly became the world’s largest rechargeable battery maker that decided to enter the market for passenger cars and electric vehicles several years ago. On the other hand, Company B, the recipient of the government largesse, is Massachusetts- based A123 Systems. Ironically, both companies received approximately the same amount of investment– at about the same time. BYD received a $230 equity investment from Warren Buffet’s Mid America Corporation in late 2008, while A123 received a $250 million grant from the U.S. Department of Energy in January 2009.

On Monday, September 13, 2010, A123 announced the opening of a large lithium-ion battery factory in Livonia, Michigan. The plant employs 300 workers, and is expected to employ up to 3,000 in several years.
President Barack Obama placed a congratulatory call to A123 executives and Michigan Governor Jennifer Granholm. “Thanks to the Recovery Act, you guys are the first American factory to start high-volume production of advanced vehicle batteries,” the President said. “This is about the birth of an entire new industry in America — an industry that’s going to be central to the next generation of cars. And it’s going to allow us to start exporting those cars, making them comfortable, convenient and affordable.”

The central planners in Washington must be feeling pretty good about themselves these days and the way in which they are single-handedly re-shaping the U.S. auto industry. The grant to A123 is part of a total of $1.4 billion of funding that the U.S. government is providing to nine Michigan companies to support advanced battery manufacturing and job training. This comes on top of the Department of Energy’s $465 million loan to Tesla, a maker of high priced electric vehicles, and the $50 billion bailout of General Motors. Now all the planners have to do is hope that these companies can produce products that customers want, and can afford.

Undoubtedly, the thinking on the part of the Obama Administration is that: “If China can use government funds to create national champions, so can we.” What they don’t understand is that this is not the way it works. Admittedly, state-owned banks still make loans to state-owned companies, but these behemoths are not the innovators in China 2010. Instead, hundreds of thousands of entrepreneurial Chinese companies, just like BYD, are driving innovation in the country in industry after industry.

China has obviously studied American economic history. Washington should do the same.

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