Dartmouth Business Journal Winter 2009

April 3rd, 2009

DARTMOUTH BUSINESS JOURNAL

“Changing times in a changing economy”

Winter Issue Table of Contents Evolution of Subprime: The Politics of Home Finance

Kunal Arya

A Misplaced Grab at Power

Alex Lucey

The burgeoning downfall of the credit market has brought the American economy and worldwide banks to its knees. When a growing Russia shut off the flow of natural gas to the Ukraine and most of Europe in 2006, the world witnessed an audacious grab for power.

A New Spark for Solar: Something New on the Horizon Kunal Arya

The solar sector represents an attractive, alternative solution for large scale energy production due to its environmentally friendly nature and potential to achieve economies of scale.

Funding Crunch at Bank of America

David Kellenberger

Bank of America has recently been infused with $20 billion dollars from the government to make up for major losses from its acquisition of Merrill Lynch.

Interdependence: The Bane of Asian Markets

Michael Joseph

Tato Nano: India’s new

Kedar Mulpuri

Interview with Pier Carlo Trucco of Keydos

Giulia Siccardo  

A few years ago, the rage on Wall Street had been the “Emerging Markets.” Investors were buying into companies such as the Aluminum Corporation of China, Yanzhou Coal Mining Company, and Chinese Life Inurance. With its sleek design, eco-friendly emissions and highly affordable price, the Tata Nano stands to be one of the most memorable auto inventions by an Indian car manufacturer. Pier Carlo Trucco is the current managing director, co-founder and main shareholder of Keydos, a management-consulting firm based in Milan and Rome, Italy. He holds an MBA from UCLA and made his career as a partner in large multinational consulting firms including Ernst & Young and Deloitte Consulting.

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Evolution of Subprime: The Politics of Home Finance By Kunal Arya

The burgeoning downfall of the credit market has brought the American economy and worldwide banks to its knees. Massive criticism of corporate greed and misguided policies have left many citizens wondering about the health of the once vaunted American capitalist system. The evolution of the credit crisis was a result of a set of growing trends in political and financial thought. Although there is considerable dissent among economists as to how large a role the subprime market played in the financial collapse, it was clearly responsible for the failure of Bear Stearns’ hedge funds and the erosion of general business confidence that has led to current market volatility. Thus, an examination of the policies that the Clinton and Bush presidential administrations set into place is critical to fully understand the current economic crisis. In a recent article, Joseph R. Mason, a Senior Fellow at the Wharton School, explained the political concept that drove pro-homeownership mortgage credit policies. For Bill Clinton, politics was all about “the economy, stupid,” and promoting homeownership was the way to show Americans how hard he was fighting for their standard of living. When President Bush came into office, he brought along the ideological framework of an American “Ownership Society,” into which encouraging homeownership fit perfectly. Therefore, the political framework for the housing boom was bipartisan in nature. Based on these political motives, the Clinton administration began a policy push to increase homeownership. In 1994, the U.S. Department of Housing and Urban Development (HUD) under the direction of Secretary Cisneros, devised the “National Homeownership Strategy,” an unprecedented cooperation

between government and a myriad of participants in the housing market, including Fannie Mae and Freddie Mac. Its goal was to achieve “an all-time high level of homeownership in America within the next 6 years” (Rosner 2001). A central component of the strategy was “creative financing,” which would allow borrowers to purchase homes even if they lacked income to make the payments. The strategy lauded recent strides to reduce down payments for low-income homebuyers, who often had insufficient saving patterns impeded them from accumulating enough cash to cover the down payment. Those who formulated the plan realized the possibility for the abuse of its stipulations. Therefore, they created a list of over a hundred action items that contained prerequisite warnings of possible ill effects and advice on preventative measures to combat them. Unfortunately, the coalition of public and private firms that finance, service and sell mortgages ignored these suggestions. Despite the warning of politicians, the “siren song of homeownership” and its political benefits seduced the lenders into ignoring the safeguards (Mason 2008).

politicalhumor.about.com

To be fair to the politicians, on the surface it looked like the strategy was working perfectly. Homeownership was booming: up to 67% in 2000, well on its way to reaching the record highs seen in 2007. However, the Strategy created three categories of borrowers. The first category was the one it was originally aimed at: renters who could now afford their dream of homeownership. The two other categories, however, were abuses of the strategy. Some used the lax regulation to misrepresent loans and defraud the system, showing that stricter oversight was clearly necessary. Perhaps more importantly, homeowners would use the financial leverage present in the new creative financing tools to either supplement their income with a cash-out refinance or trade up to a larger house before they could actually afford it. (Mason 2008) This trend was a large demand driver for the housing bubble that would form in the late 1990s and eventually burst in 2008. As demand for housing grew due to the availability of mortgages, the housing sector boomed. When the Federal Reserve under Greenspan

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further cut interest rates to avoid a deep recession after the tech bubble burst, a first or larger home became an even more appealing investment for many Americans. This massive growth in demand prompted innovation in finance markets to be able to supply capital to all of these homeowners, some of who were not exactly traditional low-risk borrowers (Goldfarb and Klein 2008). With demand outstripping available capital, along with lax regulations and the desire of lower-income Americans to avoid down payments, the subprime market was born. The idea was to sell home loans to people at higher interest rates who would not be eligible for traditional prime rates, then package large amounts of loans together and sell them as securities on Wall Street in order to raise

the necessary capital. Mistakes in the valuation of these assets were partly due to a lack of information about borrowers, caused by looser regulation, and partially due to corporate conflicts of interests in the rating agencies. These mistakes along with lack of oversight led to massive write-downs when their values were corrected and the market for subprime securities collapsed (Mason and Rosner 2007). Since these securities leveraged other debts, lenders were left with a significant amount of subprime mortgage backed debt they were unable to valuate. Thus the hedge funds that invested heavily in subprime debt had to be bailed out by their investment banks. For Bear Stearns, this sapped its cash cushion to the point that lenders became fearful. Its credit rating was downgraded and investors made a run on the bank,

prompting its sale to J.P. Morgan with a government guarantee on its debt (Goldfarb and Klein 2008). The impact the housing bubble had on setting off the crisis of business confidence that stopped the flow of capital into the economy remains a point of debate, but the subprime crisis is undeniably largely responsible for the current economic problems and financial meltdown. While many people can be blamed, from unscrupulous lenders to Greenspan to borrowers who did not fully understand the loans they were taking, the root cause of the subprime crisis traces back to the Clinton era “National Homeownership Strategy,” and Bush’s continued support for it.

A Misplaced Grab at Power By Alex Lucey

When a growing Russia shut off the flow of natural gas to the Ukraine and most of Europe in 2006, the world witnessed an audacious grab for power. Several times since then—for instance, during the invasion of Georgia or the 2009 shutdown of gas to the Ukraine— Russia has shown its muscle and dared the international community to challenge its actions. Up until recently, it has done so with impunity. Facing only the divided powers of the European Union, a United Nations made impotent by Russia’s permanent Security Council seat, and a US lacking international support with a consumer sector that would not tolerate further increases in gas prices. Through the summer of 2008, Russia had nothing and no one to fear—its former superpower status seemed within reach. The current financial downturn, however, has revealed one thing Russia does have to fear: itself. When Russia cut off the gas supply to Ukraine and the rest of Europe in

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early January 2009, state officials claimed, as they did in 2006, that Ukraine was refusing to accept market prices. The Russian government was forcing Gazprom, the primary natural gas provider in Russia, to lower its prices for Russian citizens, so the company raised the prices of its exports in order to recoup its losses. While it was true that Ukraine did not want to accept higher prices—the cutoff was hardly the simple cancellation of energy services to a delinquent customer that Russia led the world to believe. Just as it did in 2006 in

“The current financial downturn, however, has revealed one thing Russia does have to fear: itself.”

Ukraine and in 2008 in Georgia, Russia was trying to show the world just how much power it had. In 2006, Europeans panicked as the natural gas supply from Russia abruptly stopped. Though it was renewed by Gazprom within a few days (Jolly 2009, Thatch 2007), Russia had made its point: the rest of Europe was heavily dependent on its energy production. The recent January gas cutoff, however, had consequences that Russia did not expect. While many Eastern European countries reeled from the 2009 gas

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cutoff, several of the major Western European countries had prepared for such an event with three- and fourmonth stockpiles of natural gas. German officials told reporters on December 23rd that its stockpiles were almost completely full (Deutsche Welle 2008). While this is not to say that Europe can now scoff at Russia’s energy exports, Russia’s recent behavior has certainly not achieved the panicked response that it hoped to hold over the heads of the EU member states (Thatch, 2007). Why did Russia feel the need to “flex its muscles” so soon after its successful intimidation of the world through its actions in Georgia? Russia’s power surge was probably a response to the singularly huge hit that its undiversified economy took this past fall. While the Dow Jones Industrial Average lost a record 34% in 2008, the Russian stock market lost more than 70% over the same time period (BBC 2008, Kramer 2008). Much of this stemmed from the subprime mortgage crisis that has plagued the world. Just as crippling, however, has been the plummet in oil and natural gas prices that so much of Russia’s market depends on. Such a drastic fall in the Russian stock market and in the prices of its largest exports has led and continues to

lead to a diminished status in a world now ruled more by money than by the size of one’s military. On top of this diminished international standing, Prime Minister Putin’s support has decayed, because it is largely derived from his past success in maintaining rapid economic growth. When the financial crisis hit, Mr. Putin readjusted the 2009 8.1% projected GDP growth to a lower 6.7% projection. Since then, 6.7% growth became a distant dream, and Russia has been forced to acknowledge that it is in a recession (Kramer 2008). The 2009 Russian gas shutoff also highlighted the weakening effects of dependence on foreign gas in Europe. Even the countries that felt less threatened by this are becoming more wary of an ever-desperate, disturbingly corrupt Russian energy sector. This may manifest itself in an unexpected way: the development of sustainable or “alternative” energies. In Europe, where gasoline consistently costs more than $8 per gallon, the prospect of similarly high natural gas prices has made the value of energy independence skyrocket. The timing could not be better: Barack Obama’s energy-focused stimulus plan could provide for collaboration with Europe on research into improved efficiency and lower prices of

alternative-energy sources, jumpstarting their use around the world. In light of all of this, it is easy to see why Russia felt the need to put on another display of power: it was trying to show that it will maintain its economic growth and dominance through any means possible. However, this aggressive attitude—coupled with the charges of corruption made against Gazprom and uncertainty about the Russian government’s economic policies —will end up further damaging Russia’s economy. A United States-European Union joint force to develop alternative energy would be devastating to Gazprom and Russia, sharply diminishing demand for their natural gas. Consequently, investing in Russian energy production and exports is very risky. Today’s markets are ruled by riskaversion, and Mr. Putin may have further crippled his country’s economy—and its power—in his haste to show just how strong Russia is.

DARTMOUTHBUSINESS JOURNAL April 3rd, 2009

“The future of solar power depends upon its price competitive technologies in centralized power generation”

A New Spark for Solar Something New on the Horizon By Kunal Arya

The solar sector represents an attractive, alternative solution for large scale energy production due to its environmentally friendly nature and potential to achieve economies of scale. The capability to scale solar energy production to meet all of humanity’s electricity generation needs is enormous; the sun radiates 3.8 million EJ of energy to the earth every year, 200 times our current rate of use (Boyle, Everett, and Ramage 2003). However, other sources of alternative energy like wind and hydroelectric power presents considerable competition for investor capital. In order for the solar sector to withstand the competition, the future of solar power depends upon its price competitive technologies in centralized power generation. Currently, Concentrating Solar Thermal (CST) system presents the only viable solution, which still remains more expensive

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than other sources of alternative energy. This economic equation will soon change due to SkyFuel Corporation’s development of the SkyTrough™. SkyFuel’s inventions have allowed it to reduce the cost of CST arrays by 35% and will allow CST plants to deliver electricity at rates lower than those of wind or other forms of solar technology (Worldwide Videotex 2008). CST systems use long parabolic mirrors to focus sunlight on a vacuum pipe that runs through the trough of each mirror. The mirrors and pipe move throughout the day to maintain the focus on the pipe. The pipe contains a heat transfer fluid (traditionally an oil derivative) that carries the collected heat energy to a heat exchange system, effectively converting water into steam. The steam drives steam turbines

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and produce electricity (NREL 2009). One major advantages of CST lies in its applicability to current turbine systems present in most power plants. “Recycling” turbines in this manner enables conversions from fossil fuel to CST plants at very low cost, making CST easily scalable if energy demand increases (NREL 2009). CST can also easily and cheaply store energy in the heat transfer fluid with almost 100% efficiency. A CST power plant can thus draw on the heat in the fluid (stored during the day) at night to continuously produce electricity (SkyFuel Inc. N.d.). Solar panels only produce electricity during the day and wind power is naturally intermittent, hence disqualifying both from becoming major supports of a power grid. Furthermore, CST has proven its reliability: CST has been used in the United States since the parabolic collectors at the SEGS plants in California for nearly 20 years. Among the options for alternative energy production, CST plants may prove to be the primary means of producing the constant power supply necessary to become a substantial part of electricity production. Because of these advantages, CST is projected to grow massively, with research reports predicting that 12 GW of CST capacity will be installed by 2020, almost all of it in large plants over 100MW (Bradford, Wayman, and Grama 2008). Recently, political concerns about high natural gas prices, pollution from coal plants and climate change have led to many states passing renewable energy mandates. This assures demand for new CST plants as utilities search to meet environmental policies like the California Renewable Portfolio Standard, which mandates that 20% of the state’s electricity must come from renewable sources by 2010 (CPUC N.d.). However, the problem with CST systems lies with its cost, not its efficiency. Fields of huge, precisely shaped, breakable glass mirrors are extremely expensive to build and

“SkyFuel [is] cheaper to build and significantly cheaper to operate than any other CST system on the market today."

maintain. And even a cutting-edge CST plant must charge more than 13 cents per kWh, a standard price for wind power (Francis 2008). SkyFuel is positioned to capitalize on CST growth because it presents an ingenious solution to the cost problem. SkyFuel’s system, SkyTrough™, uses its patented Reflectech™ mirror film in the parabolic reflector troughs instead of traditional glass mirrors (NREL 2009). Reflectech™ mirror films are similar to plastic, consisting of many polymer layers over an inner layer of pure silver that gives it reflectance equal to a parabolic mirror (NREL 2009). Furthermore, Reflectech™ is shatterproof and significantly lighter than heavy glass mirrors (NREL 2009). Reflectech™ is so light that it can be laminated to aluminum sheets to create larger panels than the largest feasible glass mirrors, increasing accuracy of light concentration (and thus efficiency), while decreasing assembly costs (Worldwide Videotex 2008). Since the support apparatus of SkyTrough™ can maintain lower weight than glass mirrors, engineers could use a tubular aluminum space frame that is 30%

lighter (Worldwide Videotex 2008). The space frame not only lowers weight strains, but also allows easier installation, hence reducing labor costs (Worldwide Videotex 2008). These benefits aggregate to make SkyTrough™ 35% cheaper to build and significantly cheaper to operate than any CST system on the market today. Additionally, Reflectech™ films eliminate the bottleneck in the parabolic trough production process (making the sagged glass mirrors) allowing SkyFuel to rapidly produce SkyTroughs™ and reducing lead time for orders (Worldwide Videotex 2008). Armed with this innovative solution to its cost problems, CST power is positioned to supplement the conventional means of electricity production in the United States.

DARTMOUTHBUSINESS JOURNAL April 3rd, 2009

Funding Crunch at Bank of America By David Kellenberger

Bank of America has recently been infused with $20 billion dollars from the government to make up for major losses from its acquisition of Merrill Lynch. However, with the company’s valuation plummeting $20 billion more in midJanuary due to worsening write-offs from the merger, Bank of America's ability to raise capital becomes increasingly limited (Hall). With a market capitalization currently below $50 billion, down from $350 billion in 2007 (Google), raising capital through equity quickly becomes ineffective. . Bank of America is also very limited in debt options. . While Bank of America still has a large asset base, its short term situation looks increasingly scary. If the company cannot absorb its own write-offs as well as that of Merrill Lynch’s, the only suitable option may be another major government bailout. That would add another $20 billion to the already received $118 billion from the government as a backstop for bad debts (Moore). It is a bad sign for the U.S. economy when our largest bank, a pillar of capitalism, stands to fail. The consolidation of banks only works so long as the largest players have the ability to keep their own heads above the water. While the government could not and would not let Bank of America fail,

“Our largest bank, a pillar of capitalism, stands to fail”

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Bank of America will need more help to survive, if the economy plunges further than expected. Publically traded companies can be made vulnerable through their stock valuations, and this has dangerous implications for Bank of America. Though previously thought of as impenetrable in terms of assets, even the largest of corporations have proven to be vulnerable to the tides of the markets. Even corporations as large as Bank of America can be exposed to the fury of the markets. We have recently seen many large financial corporations go under or need the government to take control to step in with major plans to reinvigorate the company. Now it seems quite absurd that However it is absurd that Bank of America, a bedrock of American banking that helped the government to refinance the banking industries in past crisis, is in danger of failing. In the past the government turned to Bank of America to consolidate and refinance the banking industry when a crisis struck. However now we see that Bank of America itself is threatened. The severe lack of investor confidence in the current economy threatens the core of Bank of America's finance. The problem that lack of investor confidence poses to Bank of America’s business model are quite

severe. This coupled with its recent below-par performance, Bank of America lacks the ability to raise cash to cover With tight credit markets as well as a low stock price it will be hard for Bank of America to raise cash to cover short term losses. While past their balance sheet has performed admirably, been historically strong, the bank's current assets stands to fail. currently their short term situation is a dangerous one. If they cannot pay the monthly bills, then the loss would be sent to the government. We’re going to see more government aid. Unless steps are taken privately to recoup the losses and reinvigorate Bank of America in the short term, we will once again see the government respond. The majority of the losses are already inevitable, yet Bank of America must maintain still work hard to keep their current operations as steadily and efficiently as clean and efficient as possible.

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Interdependence – The Bane of Asian Markets By Michael Joseph

A few years ago, the rage on Wall Street had been the “Emerging Markets.” Investors were buying into companies such as the Aluminum Corporation of China, Yanzhou Coal Mining Company, and Chinese Life Inurance. As recently as May of 2008, officials at JP Morgan’s Asset Management division recommended raising exposure to Asian markets (Pichardo). Yet the financial crisis on Wall Street seems to be making its way over to Asian markets as regional economies experience their own slumps. How did these once “hot” emerging markets slow down and will they make a come back? In 2003, Horst Kohler, Managing Director of the International Monetary Fund, stated in a conference Malaysia, “…Asia is poised…to grow faster than any other region in the world.” He went on to comment, “Emerging market countries in Asia have clearly benefited enormously from economic globalization…There is tremendous potential for further long-term growth in the global economy… [Asian markets] are well-placed to…seize opportunities in the international market place to become a major engine of growth in the global economy (Kohler).” David Burton, Director of the Asia and Pacific Department of the IMF, expressed the same sentiments at the 2004 IMF conference in Hong Kong (Burton). The obvious outlook for the future in these Asian markets was a bright one. Yet concerns were expressed even back at the 2003 IMF conference. Kohler stressed the importance of economic dependence of Asian markets on growth in the US and the possible spillovers of economic shocks across country borders because of this growing globalization and interdependence. Yet more importantly, there has been growing interdependence in the local region and dependence on foreign markets. China’s economic performance had significant impact on other local economies. This is noticeable in the fact that Chinese exports to other countries in the region have risen from 20% in 1970 to 40% in 2002. As Burton states though, “…perhaps only about half of this trade is going to meet intra-regional final demand. Thus a bulk of the exports of Asian countries is still linked

“Interdependence on local and foreign economies has led to a crash in the rapid growth of Asian markets.” to economic activity outside of the region (Burton).” This interdependence on local and foreign economies has led to a crash in the rapid growth of Asian markets. Tokyo’s Nikkei Index has fallen to its lowest levels in nearly five years coupled with huge drops in the Hong Kong and Indonesian Indexes and Chinese Banks. The financial crisis in the US has greatly affected Asian markets, especially China, because of this interdependence effect, which has caused a spillover effect into all regional countries (Pylas). According to Mark Tan, a managing director at UOB Asset Management in Singapore, “Everyone is losing confidence…The problem now is that the lack of foreign confidence could affect the Asian consumer, which would lead to a bigger slowdown in Asia than expected (Pylas).” It would seem the global economy is crashing and burning and Asian markets, inevitably dependent on the rest of the world, are following suit. Yet in the long run, these emerging markets still seem to be highly lucrative. The GDPs of developing countries are not expected to slow substantially from recent years. Emerging markets have historically tracked with G7 economic indicators. The G7 is a financial gathering of seven industrialized countries, including the USA and UK. Because these emerging markets have closely followed the economic trends of the G7 countries, they are highly dangerous with the apparent recession of the US and Europe (Demos). But Asian markets also hold the greatest promise for recovery with industrializing nations and an impressive labor force. Asian markets may even emerge from this financial crisis as the dominant force in the global economy but only time can tell. For now, all we can do is wait.

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“Other car companies are certainly impressed with the Tato Nano’s ingenuity in design and are looking to emulate the affordability of the car in their models.”

Tato Nano India’s Latest Pride By Kedar Mulpuri

With its sleek design, eco-friendly emissions and highly affordable price, the Tata Nano stands to be one of the most memorable auto inventions by an Indian car manufacturer. On January 10th, 2008, Tata Motors Limited, a subsidiary of the renowned Tata group, dazzled the world with the design for the Tata Nano at the 9th annual Auto Expo held at the Pragati Maidan in New Delhi, India (Mohanty). Since its debut, the Tata Nano has gathered international attention for its production. On the day of its introduction to the international community, Mr. Ratan N. Tata was quoted saying, “Tata Motors’ engineers and designers gave their all for about four years to realise [sic] this goal. Today, we indeed have a People’s Car, which is affordable and yet built to meet safety requirements and emission norms, to be fuel efficient and low on emissions. We are happy to present the People’s

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Car to India and we hope it brings the joy, pride and utility of owning a car to many families who need personal mobility.” (BBC) Holding the Guinness Book of World Records position for cheapest car at a starting price of Rs. 100,000 (~$2000 USD), the Tata Nano was designed for the working class in India. (Majumbdar). Currently, there are more two-wheelers (motorcycles, scooters, and mopeds) on the road than cars in India. Tata Motors seeks to change that by targeting a crowd that would otherwise purchase twowheelers. In addition to its affordability, the car is also known for its fuel efficiency, boasting a gas mileage of 20 km/liter (~56 mpg). (Autocar). The production of the Tata Nano holds many promises for both domestic and international markets. Firstly, the Tata Nano is projected to expand the Indian car market by 65% according to the rating agency CRISIL. (India Times). In fact, in anticipation of the

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Tata Nano, the market for two-wheelers has plummeted as buyers look to purchase this new four-wheeled vehicle. The car's fuel efficiency seems to be a main attractors in a nation where diesel prices still remain around 50 rupees per liter (~$3.86 per gallon). With the current energy crisis across the world, the Tata Nano just might become world's cure for international consumers. . With its trendy design, fuel efficiency and affordability, the Tata Nano will likely spread to international markets, thus allowing India an entrance into the car export market. However, it is unlikely that the car will hit American or British markets because of its relatively poor emissions and safety standards. In fact, the vehicle is receiving much backlash from critics due to its poor emissions from using diesel fuel. In a country where air pollution has already reached intolerable levels, any additional air pollution is unacceptable. Daniel Esty, an environmentalist at Yale University, sees the Tata Nano as a source of huge destructive potential. “This car promises to be an environmental disaster of substantial proportions” Esty said (Overdorf). In response to this criticism, Tata announced its plans to produce a gas- or electric-variant as soon as the current model hits the market (Left Lane). Countries have also cited the safety standards of the Tata Nano as hazardous, calling it a potential deathtrap. However, in a country where lorries and other large

As the number of cars increases, the risk of auto-related accidents would also increases, especially due to India's poor road conditions and the lack of traffic signals

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vehicles dominate the roads in big cities and villages, accidents will always be a problem; auto-accidents claim the lives of about 90,000 people per year in India (The Times). As the number of cars increases, the risk of auto-related accidents would also increases, especially due to India's poor road conditions and the lack of traffic signals. Despite these speculations, Tata Nano has passed the international guidelines for the full frontal crash test, the offset, and side-crash test (Krishnakumar). So even if the Tata Nano is not exported to the international market and produced exclusively for India, other car companies are certainly impressed with its ingenuity in design and are looking to emulate the affordability of the car in their models. When asked about the Tata Nano, CEO of Renault-Nissan Carlos Ghosn said, “This is really fantastic. This is what we should try and achieve.” (Tata Motors). Already, Bajaj Autos is working with Renault Nissan to produce a competitor vehicle of nearly the same specifications (Green Car Congress). As of now, Tata has yet to announce a release date for the vehicle (Ray). Unfortunately, there exist quite a few setbacks for production. With increasing material costs, the price of Tata Nano could be higher once in commercial production. Because Tata's most unique quality lies in its affordability, an increase in price could and would its expected sale figures. As such, Tata must either use cheaper materials or

ask the Indian government for tax-breaks and subsidies in order to lower the prices (Ireson). Whatever the future of the Tata Nano, the hype surrounding this car has made a clear statement to to automotive makers around the world: a car's price tag – not safety or luxury – will ultimately drive its dominance in developing countries.

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Interview with Pier Carlo Trucco of Keydos

“What is difficult and stressing is also the most rewarding: client satisfaction is the key. This is a very difficult and moving target, especially since competitors do exist.”

By Giulia Siccardo

What  led  you  to  choose  a  career  in  management consul3ng?

For a young MBA, that was probably the most sought-after profession in Italy and Western Europe. I’m not sure it still is… Which  do you feel  was most  valuable to  the  success  of your  career: your  college  and  post‐college  studies  or  the  experience  you  picked  up  on  the  job?  What  does  an  average  day  of  work  at  your consul3ng firm entail? 

Frankly: in my Country, a U.S. degree is quite appreciated in the job market. That means you get a good start, which is essential. But, overall, I should say that what you learn on the field is way more valuable. Each day, we focus on results and on project deadlines. This may, and usually does, result in long workdays, including weekends. I have seen American colleagues getting home at 5 p.m. on a regular basis, though. This may have many explanations, including a more efficient way of organizing work on that side of the Atlantic.

What is difficult and stressing is also the most rewarding: client satisfaction is the key. This is a very difficult and moving target, especially since competitors do exist.

What, in your opinion is the most difficult  or  stressful  part  of  the  management  consul3ng  profession?  What  do  you  find  most rewarding about it?

I have worked for the airline industry and for Alitalia. The projects I’ve been involved in focused the matter of alliances and strategic development of routes.

Has  your  consul3ng  firm  been  involved  with  the  airline  industry  in  Italy? What,  in your opinion, led to Alitalia’s decline?

Alitalia’s decline has come a long way. We can date it back some 20 years. I know this may seem like an exaggeration, but we must keep in mind that Alitalia, like many European flagcarriers, used to be a subsidized, stateowned company. Failure to cope with the changing market was its main problem. As the European Union acted against national monopolies, starting in the early nineties, two types of competitors emerged. The first type would be a European company with a similar cost structure but possessing a stronger hold on the market, granting it a lead in the business traveler segment. Examples are British Airways or Lufthansa. T he second type of competitor was the emerging low-cost

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airline, such as Ryan Air or EasyJet. These names may mean little to an American, as they are point-to-point carriers dedicated to serving the European market. Think of Southwest, to give you an idea. While the dominant f lag car riers weakened Alitalia’s competitive position with the European business passengers and on the intercontinental routes, the low-cost airlines hit the economy class passenger market. Alitalia found itself with an unchanged cost structure but with declining revenues. As we know, this is the path to bankruptcy, unless the government rescues you. However, the EU rules now prevent governments from rescuing airlines. So you can guess what happened then. So, it went bankrupt?

It underwent a procedure similar to that involved in Chapter 11 Bankruptcy in the United States. Then, an industrial group came and bought the majority of assets. The US press has covered this rescue you refer to of Alitalia Airlines by an Italian industry group and an impending investment in Alitalia by Air France. How is the new Alitalia planning to stay afloat?

DARTMOUTHBUSINESS JOURNAL April 3rd, 2009

There are controversial opinions on the price paid for the so-called rescue. Most analysts believe that the price paid was too low. Furthermore, the government has suspended the anti-trust regulation for a period of six months in order to favor the new company’s take-off. European competitors are not exactly happy and have appealed to the EU. To answer your question, I would say that the new Alitalia heavily counts on preferential treatment and the ability to take its first steps in a protected environment.

Motors and Italian automaker Fiat S.p.A. to form a nonbinding, albeit strong connection between the two companies. What is the role of consulting firms in laying out the stipulations for this type of agreement?

Fiat has regained market share in the past few years, and profitability has come back. This has been the result of a more focused strategy, concentrating efforts on the automobile, as opposed to other traditional Fiat interests such as aerospace and industrial automation, as well as a renewed focus on domestic markets. I wouldn’t call this a longlasting recovery though. In my opinion, Fiat’s thrust was on the downward slope even before the present global crisis. However, it is difficult to support this opinion with conclusive evidence since the European market is currently down 40% and Fiat’s stock is performing accordingly.

With regard to the management consulting industry, in theory we should be well-off, the same way as physicians prosper when you have some epidemic. In fact, we may meet the profound need for reorganization of companies affected by the crisis. The unanswered question is: will the patient have money left to pay for the doctor?

I can only guess, having not been involved directly. I suppose management consulting firms may have advised on strategy, especially helping define the relative roles of the two partners in the future market. Some organization and project management consulting may follow. This should take one or more What,  if  anything,  is  fundamentally  consulting firms that have strong What  is  the  one  piece  of  advice  you  different  in  the  new  Alitalia  that  will  expertise in the automotive industry. would  give  to  a  college  student  make it successful? How  has  the  global  economic  crisis  we  interested  in  pursuing  a  career  in  management consul3ng?  The financial ratios of the new company are currently  experiencing  affected  your  are definitely better than in the previous field  of  work? Do you think the crisis has  It takes a real interest in the client to be version. Now, there appear to be decent hit  Italy  as  hard  as  it  has hit  the United  a management consultant. So, take this profitability ratios, and the fleet is States? test: if your dream is to spend your life adequate with respect to the company’s in your beautiful office, don’t go for this operations. The routes will be focused I will begin by answering the second job. Pursue management consulting only on one main hub (Rome) while question. Analysts say that Italy may if your dream is to spend your life in previously there was an ill-optimized perform better than other countries in constant contact with your client and on strategy based on two hubs (Milan and the present global crisis due to its location in your client’s office. Rome), which constituted too many for peculiar business environment. We are a medium-sized airline. Furthermore, the stronger in the so-called real economy alliance with Air France will help to offer (1) than in financial institutions. Alitalia passengers a truly global network Although this used to be an issue, it no w i t h l o t s o f d e s t i n a t i o n s a n d longer is. Our industrial structure is composed of a huge number of small frequencies. and medium enterprises. Many Has  your  consul3ng  firm  been  involved  observers make the point that this will with  the  Italian  automo3ve  industry?  dilute the risk of corporate failures, if What, in your opinion, led to Fiat Group’s  adequate liquidity is provided to the system. recent successes in that market?

The US press has covered the agreement between American automaker Chrysler

12

Given the leading role of the American economy, any event developing in the U S w i l l c l e a r l y a f f e c t E u r o p e. Nevertheless, I believe that the crisis will take different paths on the two sides of the Atlantic (and on the two sides of the British Channel). Continental Europe will suffer more from the recession than from “toxic finance”(2). The point of junction will undoubtedly be the liquidity crunch. However, I believe that from now on Obama’s actions will mainly be an American matter, i.e. they will have limited impact on Europe.

How  is  President  Obama  perceived  by  the  Italian  business  world?  President  Obama  and  his  administra3on  have  announced  plans  to  unfreeze  the  credit  m a r k e t  a n d  h e i g h t e n  fi n a n c i a l  regula3ons. What  kind  of  effect  do  you  think Obama’s new policies  will  have on  Italian industry, if any? 

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Works Cited Evolution of Subprime: The Politics of Home Finance A Misplaced Grab at Power

1. Jolly, David. "Deal Struck to End Gas Cutoff." New York Times World. 8 Jan. 2009. NYT. 22 Jan. 2009  <www.nyt.com>.  2. Kramer, Andrew E. "Russian Stock Market Slides." Business with Reuters. 11 Sept. 2008. InternaPonal  Herald Tribune. 22 Jan. 2009 <www.iht.com>.  3. "Record Stock Market Falls in 2008." BBC News. 31 Dec. 2008. BriPsh BroadcasPng Company. 22 Jan.  2009 <www.bbc.co.uk>.  4. Thatch, Marcel. "Gas Cut‐Off Will Cost Russia." 9 Jan. 2007. The Henry Jackson Society. 22 Jan. 2009  <www.henryjacksonsociety.org>. 5. "Germany Stockpiles Natural Gas as Dispute with Russia Heats Up." Deutsche Welle. 23 Dec. 2008. 22  Jan. 2009 .

A New Spark for Solar: Something New on the Horizon

California Public UPliPes Commission. “California Renewables Por`olio Standard.” No Date. hbp:// www.cpuc.ca.gov/puc/energy/electric/renewableenergy/ (January 14, 2009). Gddfrey Boyle, Bob Evereb, and Janet Ramage. Energy Systems and Sustainability (Oxford: Oxford  University Press, 2003). NaPonal Renewable Energy Laboratory. New Solar Technology Concentrates on Cost, Efficency. Jan. 9  2009. hbp://www.nrel.gov/features/20090109_mesa_solar.html (January 14, 2009). SkyFuel Inc. SkyFuel Website: Technology. No Date. hbp://www.skyfuel.com/#/TECHNOLOGY/ (January 14,  2009). Travis Bradford, Elizabeth Wayman and Sorin Grama. “ConcentraPng Solar Power – Technologies, Cost, and  Markets,” Market Research Report (Cambridge, MA: The Prometheus InsPtute for Sustainable  Development, March 2008).  William Francis. “Self‐Contained Hydraulic System in New Solar Energy Field,” Power Engineering (October  2008): 88‐90. Worldwide Videotex. “SkyFuel Unveils SkyTrough UPlity‐Scale Power System,” Worldwide Energy 19, no.  10 (November 2008).

Funding Crunch at Bank of America

Moore, Heidi. Wall Street Journal. 1/20/09  Hall, Kevin. McClatchy Newspapers. 1/16/09   Google Finance. 1/23/09. hbp://finance.google.com/finance?client=ob&q=NYSE:BAC

Interdependence: The Bane of Asian Markets

1. Pichardo, Raquel, “Emerging Markets in Asia Good in Long Run,” in Pensions & Investments, , May 26,  2008 (accessed October 20, 2008). 2. Köhler, Horst, “Asia’s Emerging Markets: a Growing Force in the World Economy,” , September 3, 2003 (accessed October 20, 2008).  3. Burton, David, “What Lies Ahead for Asia’s Emerging Markets?” , March 23, 2004 (accessed October 20, 2008). 

4. Pylas, Pan, “World Markets Rise but SenPment Remains Fragile,” in Yahoo News, , February 19, 2008 (accessed October  20, 2008). 5.  Demos, Telis, “The Case for Emerging Markets,” in Fortune Investor Daily, , October 23, 2008 (accessed  October 23, 2008).

Tato Nano: Indiaʼs new

Mohanty, MriPunjoy. “Why criPcising the Rs 1‐lakh car is wrong” Rediff. 04 Jan 2008.  HYPERLINK "hbp://www.rediff.com/money/2008/jan/04tatacar.htm"hbp://www.rediff.com/money/ 2008/jan/04tatacar.htm “World's cheapest car goes on show.” BBC. 10 Jan 2008.  HYPERLINK "hbp://news.bbc.co.uk/2/hi/business/7180396.stm"hbp://news.bbc.co.uk/2/hi/business/ 7180396.stm Majumbdar, Arunoday. “Latest Guinness Book celebrates Tata Nano Car.” IBN‐CNN. 18 Sep 2008.  HYPERLINK "hbp://ibnlive.in.com/news/latest‐guinness‐book‐celebrates‐tata‐nano‐car/ 73807‐2.html"hbp://ibnlive.in.com/news/latest‐guinness‐book‐celebrates‐tata‐nano‐car/73807‐2.html “Nano Mania.” Autocar.   HYPERLINK "hbp://www.autocarindia.com/new/InformaPon.asp?id=2002"hbp://www.autocarindia.com/ new/InformaPon.asp?id=2002 “Tata Nano may expand market by 65%: CRISIL.” India Times. 12 Jan 2008.  HYPERLINK "hbp://economicPmes.indiaPmes.com/arPcleshow/2694186.cms"hbp:// economicPmes.indiaPmes.com/arPcleshow/2694186.cms Riley, Catherine. "Corners cut on cost – and safety with the Tata Nano." The Times. 11 Jan 2008.  HYPERLINK "hbp://www.Pmesonline.co.uk/tol/driving/news/arPcle3168303.ece"hbp:// www.Pmesonline.co.uk/tol/driving/news/arPcle3168303.ece Krishnakumar, K. “This is what the Tata Rs 1‐lakh car looks like!” Rediff. 10 Jan 2008.  HYPERLINK "hbp://www.rediff.com/money/2008/jan/10tatacar.htm"hbp://www.rediff.com/money/ 2008/jan/10tatacar.htm Overdorf, Jason and Guterl, Fred. “How Green is a Mini?” Newsweek. 11 Jan 2008.  HYPERLINK "hbp://www.newsweek.com/id/91380"hbp://www.newsweek.com/id/91380 “Tata Nano to get diesel, hybrid engines in addiPon to gasoline.” Lez Lane. 24 July 2008.  HYPERLINK "hbp://www.lezlanenews.com/tata‐nano‐to‐get‐diesel‐hybrid‐engines‐in‐addiPon‐to‐ gasoline.html"hbp://www.lezlanenews.com/tata‐nano‐to‐get‐diesel‐hybrid‐engines‐in‐addiPon‐to‐ gasoline.html Ireson, Nelson. “Rising costs could eat Tata Nano's profits.” Motor Authority. 05 Aug 2008.  HYPERLINK "hbp://www.motorauthority.com/rising‐costs‐could‐eat‐tata‐nanos‐profits.html"hbp:// www.motorauthority.com/rising‐costs‐could‐eat‐tata‐nanos‐profits.html

Interview with Pier Carlo Trucco of Keydos

(1) Heavy industry ‐ HurPng the real economy. Oct 15th 2008. From Economist.com  HYPERLINK "hbp://www.economist.com/business/displayStory.cfm? story_id=12414753&source=features_box_main" hbp://www.economist.com/business/displayStory.cfm? story_id=12414753&source=features_box_main (2) The Economist, Sep 4th 2003 “Toxic finance”