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Business Week August 22, 2005
A New World Economy; The balance of power will shift to the East as China and India evolve BYLINE: By Pete Engardio SECTION: China and India -- The Challenge: The Shape of t; Pg. 52 Vol. 3948 LENGTH: 3433 words
It may not top the must-see list of many tourists. But to appreciate Shanghai's ambitious view of its future, there is no better place than the Urban Planning Exhibition Hall, a glass-and-metal structure across from People's Square.The highlight is a scale model bigger than a basketball court of the entire metropolis -- every skyscraper, house, lane, factory, dock, and patch of green space -- in the year 2020. There are white plastic showpiece towers designed by architects such as I.M. Pei and Sir Norman Foster. There are immense new industrial parks for autos and petrochemicals, along with new subway lines, airport runways, ribbons of expressway, and an elaborate riverfront development, site of the 2010 World Expo. Nine futuristic planned communities for 800,000 residents each, with generous parks, retail districts, man-made lakes, and nearby college campuses, rise in the suburbs. The message is clear. Shanghai already is looking well past its industrial age to its expected emergence as a global mecca of knowledge workers. ``In an information economy, it is very important to have urban space with a better natural and social environment,'' explains Architectural Society of Shanghai President Zheng Shiling, a key city adviser. It is easy to dismiss such dreams as bubble-economy hubris -- until you take into account the audacious goals Shanghai already has achieved. Since 1990, when the city still seemed caught in a socialist time warp, Shanghai has erected enough high-rises to fill Manhattan. The once-rundown Pudong district boasts a space-age skyline, some of the world's biggest industrial zones, dozens of research centers, and a bullet train. This is the story of China, where an extraordinary ability to mobilize workers and capital has tripled per capita income in a generation, and has eased 300 million out of poverty. Leaders now are frenetically laying the groundwork for decades of new growth. INVALUABLE ROLE Now hop a plane to India. It is hard to tell this is the world's other emerging superpower. Jolting sights of extreme poverty abound even in the business capitals. A lack of subways and a dearth of expressways result in nightmarish traffic. But visit the office towers and research and development centers sprouting everywhere, and you see the miracle. Here, Indians are playing invaluable roles in the global innovation chain. Motorola, Hewlett-Packard, Cisco Systems,
Page 2 A New World Economy; The balance of power will shift to the East as China and India evolve Business Week August 22, 2005 and other tech giants now rely on their Indian teams to devise software platforms and dazzling multimedia features for next-generation devices. Google principal scientist Krishna Bharat is setting up a Bangalore lab complete with colorful furniture, exercise balls, and a Yamaha organ -- like Google's Mountain View (Calif.) headquarters -- to work on core search-engine technology. Indian engineering houses use 3-D computer simulations to tweak designs of everything from car engines and forklifts to aircraft wings for such clients as General Motors Corp. and Boeing Co. Financial and market-research experts at outfits like B2K, OfficeTiger, and Iris crunch the latest disclosures of blue-chip companies for Wall Street. By 2010 such outsourcing work is expected to quadruple, to $56 billion a year. Even more exhilarating is the pace of innovation, as tech hubs like Bangalore spawn companies producing their own chip designs, software, and pharmaceuticals. ``I find Bangalore to be one of the most exciting places in the world,'' says Dan Scheinman, Cisco Systems Inc.'s senior vice-president for corporate development. ``It is Silicon Valley in 1999.'' Beyond Bangalore, Indian companies are showing a flair for producing high-quality goods and services at ridiculously low prices (page 64), from $50 air flights and crystal-clear 2 cents-a-minute cell-phone service to $2,200 cars and cardiac operations by top surgeons at a fraction of U.S. costs. Some analysts see the beginnings of hypercompetitive multinationals. ``Once they learn to sell at Indian prices with world quality, they can compete anywhere,'' predicts University of Michigan management guru C.K. Prahalad. Adds A. T. Kearney high-tech consultant John Ciacchella: ``I don't think U.S. companies realize India is building next-generation service companies.'' SIMULTANEOUS TAKEOFFS China and India. Rarely has the economic ascent of two still relatively poor nations been watched with such a mixture of awe, opportunism, and trepidation. The postwar era witnessed economic miracles in Japan and South Korea. But neither was populous enough to power worldwide growth or change the game in a complete spectrum of industries. China and India, by contrast, possess the weight and dynamism to transform the 21st-century global economy. The closest parallel to their emergence is the saga of 19th-century America, a huge continental economy with a young, driven workforce that grabbed the lead in agriculture, apparel, and the high technologies of the era, such as steam engines, the telegraph, and electric lights. But in a way, even America's rise falls short in comparison to what's happening now. Never has the world seen the simultaneous, sustained takeoffs of two nations that together account for one-third of the planet's population. For the past two decades, China has been growing at an astounding 9.5% a year, and India by 6%. Given their young populations, high savings, and the sheer amount of catching up they still have to do, most economists figure China and India possess the fundamentals to keep growing in the 7%-to-8% range for decades. Barring cataclysm, within three decades India should have vaulted over Germany as the world's third-biggest economy. By mid-century, China should have overtaken the U.S. as No. 1. By then, China and India could account for half of global output. Indeed, the troika of China, India, and the U.S. -- the only industrialized nation with significant population growth -- by most projections will dwarf every other economy. What makes the two giants especially powerful is that they complement each other's strengths. An accelerating trend is that technical and managerial skills in both China and India are becoming more important than cheap assembly labor. China will stay dominant in mass manufacturing, and is one of the few nations building multibillion-dollar electronics and heavy industrial plants. India is a rising power in software, design, services, and precision industry. This raises a provocative question: What if the two nations merge into one giant ``Chindia?'' Rival political and economic ambitions make that unlikely. But if their industries truly collaborate, ``they would take over the world tech industry,'' predicts Forrester Research Inc. analyst Navi Radjou. In a practical sense, the yin and yang of these immense workforces already are converging. True, annual trade between the two economies is just $14 billion. But thanks to the Internet and plunging telecom costs, multinationals are having their goods built in China with software and circuitry designed in India. As interactive design technology makes it easier to perfect virtual 3-D prototypes of everything from telecom routers to turbine generators on PCs, the distance
Page 3 A New World Economy; The balance of power will shift to the East as China and India evolve Business Week August 22, 2005 between India's low-cost laboratories and China's low-cost factories shrinks by the month. Managers in the vanguard of globalization's new wave say the impact will be nothing less than explosive. ``In a few years you'll see most companies unleashing this massive productivity surge,'' predicts Infosys Technologies CEO Nandan M. Nilekani. To globalization's skeptics, however, what's good for Corporate America translates into layoffs and lower pay for workers. Little wonder the West is suffering from future shock. Each new Chinese corporate takeover bid or revelation of a major Indian outsourcing deal elicits howls of protest by U.S. politicians. Washington think tanks are publishing thick white papers charting China's rapid progress in microelectronics, nanotech, and aerospace -- and painting dark scenarios about what it means for America's global leadership. Such alarmism is understandable. But the U.S. and other established powers will have to learn to make room for China and India (page 134). For in almost every dimension -- as consumer markets, investors, producers, and users of energy and commodities -- they will be 21st-century heavyweights. The growing economic might will carry into geopolitics as well. China and India are more assertively pressing their interests in the Middle East and Africa, and China's military will likely challenge U.S. dominance in the Pacific. One implication is that the balance of power in many technologies will likely move from West to East. An obvious reason is that China and India graduate a combined half a million engineers and scientists a year, vs. 60,000 in the U.S. In life sciences, projects the McKinsey Global Institute, the total number of young researchers in both nations will rise by 35%, to 1.6 million by 2008. The U.S. supply will drop by 11%, to 760,000. As most Western scientists will tell you, China and India already are making important contributions in medicine and materials that will help everyone. Because these nations can throw more brains at technical problems at a fraction of the cost, their contributions to innovation will grow. CONSUMERS RISING American business isn't just shifting research work because Indian and Chinese brains are young, cheap, and plentiful. In many cases, these engineers combine skills -- mastery of the latest software tools, a knack for complex mathematical algorithms, and fluency in new multimedia technologies -- that often surpass those of their American counterparts. As Cisco's Scheinman puts it: ``We came to India for the costs, we stayed for the quality, and we're now investing for the innovation.'' A rising consumer class also will drive innovation. This year, China's passenger car market is expected to reach 3 million, No. 3 in the world. China already has the world's biggest base of cell-phone subscribers -- 350 million -- and that is expected to near 600 million by 2009. In two years, China should overtake the U.S. in homes connected to broadband. Less noticed is that India's consumer market is on the same explosive trajectory as China five years ago. Since 2000, the number of cellular subscribers has rocketed from 5.6 million to 55 million. What's more, Chinese and Indian consumers and companies now demand the latest technologies and features. Studies show the attitudes and aspirations of today's young Chinese and Indians resemble those of Americans a few decades ago. Surveys of thousands of young adults in both nations by marketing firm Grey Global Group found they are overwhelmingly optimistic about the future, believe success is in their hands, and view products as status symbols. In China, it's fashionable for the upwardly mobile to switch high-end cell phones every three months, says Josh Li, managing director of Grey's Beijing office, because an old model suggests ``you are not getting ahead and updated.'' That means these nations will be huge proving grounds for next-generation multimedia gizmos, networking equipment, and wireless Web services, and will play a greater role in setting global standards. In consumer electronics, ``we will see China in a few years going from being a follower to a leader in defining consumer-electronics trends,'' predicts Philips Semiconductors Executive Vice-President Leon Husson. For all the huge advantages they now enjoy, India and China cannot assume their role as new superpowers is assured. Today, China and India account for a mere 6% of global gross domestic product -- half that of Japan. They
Page 4 A New World Economy; The balance of power will shift to the East as China and India evolve Business Week August 22, 2005 must keep growing rapidly just to provide jobs for tens of millions entering the workforce annually, and to keep many millions more from crashing back into poverty. Both nations must confront ecological degradation that's as obvious as the smog shrouding Shanghai and Bombay, and face real risks of social strife, war, and financial crisis (page 60). Increasingly, such problems will be the world's problems. Also, with wages rising fast, especially in many skilled areas, the cheap labor edge won't last forever (page 122). Both nations will go through many boom and harrowing bust cycles. And neither country is yet producing companies like Samsung, Nokia, or Toyota that put it all together, developing, making, and marketing world-beating products. Both countries, however, have survived earlier crises and possess immense untapped potential. In China, serious development only now is reaching the 800 million people in rural areas, where per capita annual income is just $354. In areas outside major cities, wages are as little as 45 cents an hour. ``This is why China can have another 20 years of high-speed growth,'' contends Beijing University economist Hai Wen. Very impressive. But India's long-term potential may be even higher. Due to its one-child policy, China's working-age population will peak at 1 billion in 2015 and then shrink steadily. China then will have to provide for a graying population that has limited retirement benefits. India has nearly 500 million people under age 19 and higher fertility rates. By mid-century, India is expected to have 1.6 billion people -- and 220 million more workers than China. That could be a source for instability, but a great advantage for growth if the government can provide education and opportunity for India's masses. New Delhi just now is pushing to open its power, telecom, commercial real estate and retail sectors to foreigners. These industries could lure big capital inflows. ``The pace of institutional changes and industries being liberalized is phenomenal,'' says Chief Economist William T. Wilson of consultancy Keystone Business Intelligence India. ``I believe India has a better model than China, and over time will surpass it in growth.'' For its part, China has yet to prove it can go beyond forced-march industrialization. China directs massive investment into public works and factories, a wildly successful formula for rapid growth and job creation. But considering its massive manufacturing output, China is surprisingly weak in innovation. A full 57% of exports are from foreign-invested factories, and China underachieves in software, even with 35 software colleges and plans to graduate 200,000 software engineers a year. It's not for lack of genius. Microsoft Corp.'s 180-engineer R&D lab in Beijing, for example, is one of the world's most productive sources of innovation in computer graphics and language simulation. While China's big state-run R&D institutes are close to the cutting edge at the theoretical level, they have yet to yield many commercial breakthroughs. ``China has a lot of capability,'' says Microsoft Chief Technology Officer Craig Mundie. ``But when you look under the covers, there is not a lot of collaboration with industry.'' The lack of intellectual property protection, and Beijing's heavy role in building up its own tech companies, make many other multinationals leery of doing serious R&D in China. China also is hugely wasteful. Its 9.5% growth rate in 2004 is less impressive when you consider that $850 billion -- half of GDP -- was plowed into already-glutted sectors like crude steel, vehicles, and office buildings. Its factories burn fuel five times less efficiently than in the West, and more than 20% of bank loans are bad. Two-thirds of China's 13,000 listed companies don't earn back their true cost of capital, estimates Beijing National Accounting Institute President Chen Xiaoyue. ``We build the roads and industrial parks, but we sacrifice a lot,'' Chen says. India, by contrast, has had to develop with scarcity. It gets scant foreign investment, and has no room to waste fuel and materials like China. India also has Western legal institutions, a modern stock market, and private banks and corporations. As a result, it is far more capital-efficient. A BusinessWeek analysis of Standard & Poor's Compustat data on 346 top listed companies in both nations shows Indian corporations have achieved higher returns on equity and invested capital in the past five years in industries from autos to food products (page 73). The average Indian company posted a 16.7% return on capital in 2004, vs. 12.8% in China. SMALL-BATCH EXPERTISE
Page 5 A New World Economy; The balance of power will shift to the East as China and India evolve Business Week August 22, 2005 The burning question is whether India can replicate China's mass manufacturing achievement. India's info-tech services industry, successful as it is, employs fewer than 1 million people. But 200 million Indians subsist on $1 a day or less. Export manufacturing is one of India's best hopes of generating millions of new jobs. India has sophisticated manufacturing knowhow. Tata Steel is among the world's most-efficient producers. The country boasts several top precision auto parts companies, such as Bharat Forge Ltd. The world's biggest supplier of chassis parts to major auto makers, it employs 1,200 engineers at its heavily automated Pune plant. India's forte is small-batch production of high-value goods requiring lots of engineering, such as power generators for Cummins Inc. (page 82) and core components for General Electric Co. CAT scanners. What holds India back are bureaucratic red tape, rigid labor laws, and its inability to build infrastructure fast enough. There are hopeful signs. Nokia Corp. is building a major campus to make cell phones in Madras, and South Korea's Pohang Iron & Steel Co. plans a $12 billion complex by 2016 in Orissa state. But it will take India many years to build the highways, power plants, and airports needed to rival China in mass manufacturing. With Beijing now pushing software and pledging intellectual property rights protection, some Indians fret design work will shift to China to be closer to factories. ``The question is whether China can move from manufacturing to services faster than we can solve our infrastructure bottlenecks,'' says President Aravind Melligeri of Bangalore-based QuEST, whose 700 engineers design gas turbines, aircraft engines, and medical gear for GE and other clients. However the race plays out, Corporate America has little choice but to be engaged -- heavily. Motorola illustrates the value of leveraging both nations to lower costs and speed up development. Most of its hardware is assembled and partly designed in China. Its R&D center in Bangalore devises about 40% of the software in its new phones. The Bangalore team developed the multimedia software and user interfaces in the hot Razr cell phone. Now, they are working on phones that display and send live video, stream movies from the Web, or route incoming calls to voicemail when you are shifting gears in a car. ``This is a very, very critical, state-of-the-art resource for Motorola,'' says Motorola South Asia President Amit Sharma. Companies like Motorola realize they must succeed in China and India at many levels simultaneously to stay competitive. That requires strategies for winning consumers, recruiting and managing R&D and professional talent, and skillfully sourcing from factories. ``Over the next few years, you will see a dramatic gap opening between companies,'' predicts Jim Hemerling, who runs Boston Consulting Group's Shanghai practice. ``It will be between those who get it and are fully mobilized in China and India, and those that are still pondering.'' In the coming decades, China and India will disrupt workforces, industries, companies, and markets in ways that we can barely begin to imagine. The upheaval will test America's commitment to the global trade system, and shake its confidence. In the 19th century, Europe went through a similar trauma when it realized a new giant -- the U.S. -- had arrived. ``It is up to America to manage its own expectation of China and India as either a threat or opportunity,'' says corporate strategist Kenichi Ohmae. ``America should be as open-minded as Europe was 100 years ago.'' How these Asian giants integrate with the rest of the world will largely shape the 21st-century global economy.
A Profile Of Youth In India And China CHINA: 66% OF YOUNG CHINESE ADULTS REGARD THEMSELVES AS INDIVIDUALISTS
Page 6 A New World Economy; The balance of power will shift to the East as China and India evolve Business Week August 22, 2005 23% OF YOUNG CHINESE ADULTS SAY IT IS NOT IMPORTANT TO HAVE A CHILD 64% OF YOUNG ADULTS SAY MARRIED MEN SHOULD DO HOUSEWORK INDIA: 62% OF YOUNG SINGLE WOMEN SAY IT IS O.K. TO HAVE FAULTS THAT OTHERS CAN SEE 76% OF YOUNG SINGLE WOMEN SAY THEY SHOULD DECIDE WHEN TO HAVE A CHILD 51% OF YOUNG URBAN WOMEN SAY A BIG HOUSE AND CAR ARE KEY TO HAPPINESS Data: Grey Global Group LOAD-DATE: August 18, 2005 LANGUAGE: ENGLISH GRAPHIC: illustration, Illustration: Chart: The Strengths and Weaknesses CHARTS BY ALBERTO MENA/BW illustration, Illustration: Chart: The Strengths and Weaknesses CHARTS BY ALBERTO MENA/BW illustration, Illustration: Chart: Handicapping the Race CHARTS BY ALBERTO MENA/BW illustration, Illustration: Chart: Surging in Tech Adoption CHARTS BY ALBERTO MENA/BW illustration, Illustration: Chart: China's Hunger For Raw Materials CHARTS BY ALBERTO MENA/BW illustration, Illustration: Chart: Booming Growth In Young Professionals CHARTS BY ALBERTO MENA/BW illustration, Illustration: Chart: Reshaping The Global Economy CHARTS BY ALBERTO MENA/BW photograph, Photograph: A model of Shanghai in 2020 at the Urban Planning Exhibition Hall PHOTOGRAPH BY DAVID HARTUNG photograph, Photograph: SOUTHWEST STYLE: Shanghai's Rancho Santa Fe subdivision PHOTOGRAPH BY DAVID HARTUNG photograph, Photograph: CHINA: WHAT'S COOL: Bar Rouge It's 4 a.m. Do you know where the A-listers are? For Shanghai insiders, Party Headquarters these days is Bar Rouge on the waterfront Bund. With its scarlet upholstered alcoves draped with billowing curtains, the room looks like a cross between an Austin Powers movie and a belle epoque salon. The bartenders are known for dousing the 33-foot-long bar with vodka and setting it alight, and there's a terrace with spectacular views. By 2 a.m. the place is in full wail, but unless you're on the A-list, you'll be seven floors below, stranded on the street. For those with their party credentials in order, the action stretches till dawn. PHOTOGRAPH BY DAVID HARTUNG photograph, Photograph: FASHIONABLE: Shopping in a Bombay suburb PHOTOGRAPHS BY ROB ELLIOTT/AFP/GETTY IMAGES photograph, Photograph: NO DRAB LAB: Scientist Bharat at Google India in Bangalore PHOTOGRAPH BY NAMAS BHOJANI PUBLICATION-TYPE: Magazine JOURNAL-CODE: BW
Page 7 A New World Economy; The balance of power will shift to the East as China and India evolve Business Week August 22, 2005 Copyright 2005 The McGraw-Hill Companies, Inc. http://www.mcgrawhill.com All Rights Reserved
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Business Week August 22, 2005
What America Must Do To Compete with 'Chindia'; The sheer amount of brainpower in China and India gives them an edge BYLINE: Staff SECTION: Ideas: Editorials; Pg. 144 Vol. 3948 LENGTH: 813 words
Ever since the collapse of the Soviet Union, Americans could reasonably dream of a world dominated by a single superpower: the U.S. No longer. The rapid transformation of China into an economic powerhouse, and the likelihood that India will follow in its footsteps, means the U.S. must prepare for a far different future, one where it must learn to share economic power as never before. Such change won't be welcome or easy. But as America's economic dominance is challenged -- China could surpass the U.S. as the world's largest economy by mid-century, with China and India combined accounting for roughly half of all global output -- Washington must craft fresh strategies that will still allow the U.S. to thrive in this new tripartite world order. First, America must renew its commitment to innovation, allowing U.S. companies to keep creating new products and services that customers around the world want. The U.S. has long shown a knack for producing the kind of high-margin manufactured goods (aircraft, construction gear), branded consumer products (Coca-Cola, iPods), and smart intellectual property (movies, drugs) that are hot sellers from Boise to Bangalore to Beijing. But today's Asian competitors are quickly acquiring the technical skills that underlie much of American innovation. For instance, China and India graduate a combined half-million engineers and scientists a year, vs. 60,000 in the U.S. It's the same lopsided story in life sciences. Even if training in the U.S. is better -- a debatable point -- the sheer amount of low-cost brainpower that China and India will have at their disposal will eventually give them an edge. That's why it's time for Washington and the states to set more rigorous standards for instruction in such key subject areas as science and math, where Asian students consistently outperform. It will take years to see the payoff there. In the interim, the government needs to rethink visa changes that, since the September 11 attacks, have made it more difficult for foreign students majoring in technology fields to attend college or graduate school in the U.S. Many of those students go to work for American companies after graduation, invaluably bolstering our technical competitiveness. But there's a lot more than schooling that needs to change. For one, the U.S. has dominated global commerce and culture for so long that few Americans study any language other than English. Indeed, only about 9% of Americans speak a second language. More worrisome: Although college enrollment in Chinese language classes has grown 20% in
Page 9 What America Must Do To Compete with 'Chindia'; The sheer amount of brainpower in China and India gives them an edge Business Week August 22, 2005 the last decade, the 2000 census found that less than 1% of the U.S. populace speaks Chinese. That's fine today, when America still rules the global roost. But given the eastward shift of design and manufacturing and the Asian expansion hopes of many U.S. companies, more Americans must become proficient in local languages. To be sure, the ascendancy of China and India is not assured. Both countries face a host of challenges that could have big destabilizing effects on the global economy if not handled smoothly. For example, if China's growth slows and its unemployment rises, it could face political unrest from both those who lose their jobs and the hundreds of millions of peasants still in the countryside. That would surely put a chill on foreign investment and could even disrupt shipments for the hundreds of foreign manufacturers who now use it as a production venue. And China's fragile banking system, only now starting to face competition from foreign firms, could still implode and roil world markets. Meanwhile, India's public finances are a mess -- budget deficits at the federal and state level are near 10% of gross domestic product -- and its historical rivalry with neighboring Pakistan could escalate into a military conflict that could stall growth. But counting on China and India to falter is foolhardy. Beijing has proven surprisingly adept at managing its economy, tripling per capita income in a generation and attracting tens of billions annually in foreign investment. Likewise, India is putting in place the infrastructure upgrades and reduced bureaucracy to shift it from a services-outsourcing specialist into a broad-based manufacturer in the China mold. That's why the emergence of China and India as economic giants should be a wake-up call for America -- and the rest of the developed world, for that matter. The ``Chindia'' region's mix of cheap skilled labor, capital-friendly governments, and huge domestic markets is simply too potent to be dismissed. So the U.S. must continue vigorously engaging India and China as trading partners who just may fuel its future growth along with their own. Otherwise, America risks becoming the next Old Europe: desperately trying to slow the march of global progress in a vain effort to retain past glories. LOAD-DATE: August 18, 2005 LANGUAGE: ENGLISH PUBLICATION-TYPE: Magazine JOURNAL-CODE: BW
Copyright 2005 The McGraw-Hill Companies, Inc. http://www.mcgrawhill.com All Rights Reserved
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Business Week August 22, 2005
THE CRITICAL ROLE OF CREATIVITY BYLINE: Staff SECTION: Readers Report; Pg. 18 Vol. 3948 LENGTH: 748 words
``Get creative!'' (Special Report, Aug. 1) does an excellent job of describing advances at one end of the value chain: the original equipment manufacturer (OEM) and its customers. Unfortunately, it ignores the other end: the firm's supply base. In our study of supply chain innovation, we found that only a small percentage of companies recognized their suppliers as a source of innovation, and even fewer bothered to measure their value. What's most perplexing about this myopia is that the innovation derived from the supply chain is typically the least costly and least risky investment, and often the fastest to market. Those few companies that did use their supply chain as a source of innovation were market leaders. Procter & Gamble Co. is aiming to gain 50% of its innovation from outside its castle walls, much from its suppliers. Toyota Motor Corp. gets more than half of its innovations from its supply base. Cisco Systems Inc. joins forces with other suppliers to provide innovative solutions to Internet customers. David N. Burt Supply Chain Management Institute University of San Diego San Diego Robert Porter Lynch, CEO Warren Co. Providence Editor's note: Writer Lynch is chairman emeritus of the Association of Strategic Alliance Professionals. You state: ``Marketing has too few tools for ferreting out the unarticulated needs of consumers.'' I wholeheartedly
Page 11 THE CRITICAL ROLE OF CREATIVITY Business Week August 22, 2005
agree. At IBM, we used creative workshops with customers to empower them to express their latent wants and needs. These brainstorming sessions were not aimed at finding solutions but rather at identifying challenges for us to improve our delivery of innovative products and services that met customer needs and raised our market acceptance rate. They also prevented us from making some marketing investment mistakes. Robert W. Burian Fairfield, Conn. Everyone in our company read ``Get Creative!'' It was a thought-provoking article and led to reflections on how many of these ideas may have been spawned by Tom Peters. For example, in 1995, Peters was ranting about how ``Innovation is everything!'' In 2000, he restated it as ``Design is everything.'' The five steps on the evolution of the creative company are succinctly covered in his recent book, Re-imagine! Cirque du Soleil is a ``wow'' experience...a description right out of Peters' book, The Pursuit of Wow! The only way to effect true innovation is for it to be on the agenda of every meeting, in every single department, in every division, and in the boardroom. If Peters didn't spawn it, he certainly fueled it with his technicolor definitions of ``excellence.'' As you so well highlighted, innovation is the differentiating factor, and companies that ignore the power of elegant and functional innovation will lose. Juli Ann Reynolds President & CEO Tom Peters Co. Boston While it is true that the innovation-to-imitation cycle has shrunk to zero and globalization might as well be called commoditization, you can't adopt an innovation-led strategy for one part of the world -- the West -- and a different strategy (e.g., pushing products) for another part of the world -- India or China -- especially when the majority of your future customers reside there. First, if you adopt a split strategy (one for the West and another for India), you're going to alienate your customers in India (or China). Indians don't want to be treated as second-rate consumers in their own country, especially by a foreign multinational. Second, if you take the innovation-led paradigm to India, consumers will love it, but competitors (domestic Indian firms) won't let you steal their customers. They will lift up their game by using the bar you have set. Indians might not know how to innovate for the Western customer, but they know how to do it in their own backyard. When someone attacks your livelihood, people become amazingly innovative. Aseem Prakash Brampton, Ont. I applaud the trend toward better design and creative problem solving being embraced at large companies. But most of it is still focused on the short-term ``next big thing'' consumable product with little regard for environmental impact. If global corporations are excited by the prospects of marketing to 3 billion more people in fast-growing developing countries, they had better get serious about cradle-to-cradle product design or the entire planet will soon be buried under
Page 12 THE CRITICAL ROLE OF CREATIVITY Business Week August 22, 2005
a pile of its own wasteful ``innovation.'' James Witkins Madison, Wis. LOAD-DATE: August 18, 2005 LANGUAGE: ENGLISH PUBLICATION-TYPE: Magazine JOURNAL-CODE: BW
Copyright 2005 The McGraw-Hill Companies, Inc. http://www.mcgrawhill.com All Rights Reserved
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Business Week August 22, 2005
Asking The Right Questions; These Indian companies realized Western models won't work BYLINE: By Manjeet Kripalani SECTION: China and India -- The New Corporate Model: Inno; Pg. 64 Vol. 3948 LENGTH: 1914 words
The main hall of the Science & Technology Museum in Shanghai was packed. More than 150 top executives of multinational companies had arrived at the invitation of IBM Chief Sam Palmisano to participate in IBM's Business Leadership Forum, a high-level conference held on a different continent every May for the past three years. On the dais, Palmisano introduced the day's speaker: Sunil Mittal, chairman and CEO of India's premier mobile-services provider, Bharti Tele-Ventures Ltd. This company, said Palmisano, ``is on a rocket to the moon.'' Why would IBM's chief be in China lauding an Indian telco that few outside India had even heard of a short time ago? It's not just because Bharti did a 10-year $750 million IT-outsourcing deal with IBM. It's also because Bharti -one of the world's fastest-growing telcos and the most capital-efficient -- is one of the many Indian companies proving to be visionary in their fields. We're not talking about the champions of Bangalore, innovative as they are. These trendsetters range from telco newcomers such as Bharti to established giants like the $18 billion Tata Group and even former state-run players like ICICI Bank. All are rethinking the way they manage assets, distribute products, and use technologies to create new services. India's ``rapid, incremental innovations,'' in the words of John Hagel III, a business-strategy consultant and author of a recent book on India and China, The Only Sustainable Edge, can provide lessons to companies everywhere. What characterizes the best of the Indian outfits? They've learned to question the basic concepts of their industries, an attitude born of collective experience. For decades after achieving independence in 1947, India imposed severe restrictions on the capital private companies could tap, the technologies they could import, and the foreign exchange they could hold. So the best ones learned how to devise ingenious, low-cost solutions to their problems and even reimagine industries such as software services. Since Indian industry was unshackled from state strictures in 1991, it has accelerated the process of innovation to stress affordability and quality. Bharti is the largest mobile operator in India, with 12 million subscribers and a 22% market share. It earned a net profit of $330 million on sales of $1.8 billion for the fiscal year ending Mar. 31. CEO Mittal, 48, likes to tell investors that Bharti charges just 2 cents a minute for phone calls on its Airtel service -- and pockets 1 cents of that. Mittal realized that the Western model for mobile-phone businesses -- building and maintaining huge, expensive
Page 14 Asking The Right Questions; These Indian companies realized Western models won't work Business Week August 22, 2005 cellular networks -- wasn't for Bharti, which wanted to keep costs down in any way possible while providing reliable service. So in February, 2004, Bharti became the largest telco in the world to try something truly radical. It outsourced its entire cellular network to its three existing equipment suppliers: Ericsson, Nokia, and Siemens -- a $725 million, three-year deal. The move to ``deep outsourcing'' was revolutionary. Networks are as crucial to telecom players as engines are to auto makers. But it worked, and the effect on Bharti was profound. With executives no longer focused on managing the network, Bharti has turned its attention to marketing and customer service. In a year it has added 6 million subscribers -- one-fourth of India's annual subscriber growth and by far the fastest sign-up rate in India's history. ``It's a big transformation, and it's becoming a global model,'' says Erik Oldmark, who runs marketing strategy worldwide for Ericsson. On Aug. 8, Bharti took its model one step further by outsourcing its call-center operations. CARS ON DEMAND Bharti was able to tap outside expertise to remake its business. The $18 billion Tata Group relies on outside knowhow as well -- but in this case, it's the traditional skills of India's working class. Tata, a conglomerate, has long made sturdy trucks. But four years ago, Chairman Ratan Tata plunged into the passenger-car business despite much skepticism. The result was India's first indigenously designed, developed, and produced car -- the $6,600 Indica. Tata used all of India's low-cost engineering skills to develop the car, at 60% of the usual cost of launching a new model. Now he has put his team to work on his dream project: a car that will sell for only $2,200. ``I wanted to change the rules of the game,'' Tata says. ``I wanted to change the way business is done.'' The ``people's car'' will use a combination of steel and composite plastic for its body, put together with industrial adhesive along with nuts and bolts. But what's the business changer? Tata will attempt to do away with the traditional model of manufacturing solely in a factory and distributing exclusively through established dealers. The plan is to make the basic components of the car in Tata plants -- and then to send the car off the company's assembly line much like a bicycle, in a knocked-down kit form. These will be shipped across the country to Tata-trained franchisees. Some of them will be Tata Motors car dealers. But other franchisees may be any of India's thousands of roadside garages. The mechanics will keep the kits in their garages and assemble them on demand for customers -- then service them as needed. ``It will give an opportunity to young, capable people to create an enterprise,'' says Tata. But the move will also save an estimated 20% of an auto's production, experts say. ``Tata's plan makes the car a commodity,'' says Kumar Bhattacharyya, director of Warwick Manufacturing Group at the University of Warwick in Britain. If Ratan Tata's plan works, he will have stripped away a layer of distribution and manufacturing costs. Other Indian companies are tackling different kinds of distribution costs -- and blowing away traditional assumptions in the process. In the case of Indian Tobacco Co. (ITC), managers are aggressively seeking ways to eliminate the exploitative middlemen who buy, transport, and market Indian farmers' produce. Calcutta-based ITC is best known as a hotelier and as India's largest producer of cigarettes. But it also sells fertilizer to farmers and buys their grain to make processed foods. For years, ITC conducted its business with farmers through a maze of intermediaries, from brokers to traders. So ITC's head of international business, S. Sivakumar, thought of using e-commerce as a way to break the unhealthy hold of traders over the supply chain. In the initial experiment -- begun four years ago in the central Indian state of Madhya Pradesh -- Sivakumar set up computer kiosks in 20 villages and hired a well-known local farmer to run each kiosk. He and other farmers would access the company's intranet -- dubbed e-chaupal, for electronic ``town square'' -- twice a day to check ITC's own offer price for produce, as well as prices in the closest village market, in the state capital, in New Delhi, and on the Chicago commodities exchange. The site relayed daily weather conditions and educated users about new farming techniques worldwide. In the evening, the local children took free lessons on the computer. In return, the farmers would usually give ITC first dibs on their crops, thus eliminating the middlemen. RISING INCOMES
Page 15 Asking The Right Questions; These Indian companies realized Western models won't work Business Week August 22, 2005 How well the model works can be seen in the life of farmers such as 38-year-old Gulab Singh Varma. His two-room house is well-appointed by the standards of Bhaukhedi, the village of 3,000 where he lives in Sehore district, Madhya Pradesh. In pride of place, next to a bright-red velvet sofa, is the e-chaupal computer, complete with speakers, printer, a satellite connection, and two sets of solar-powered batteries. Before e-chaupal was set up, he says, farmers would spend three days traveling to the nearest market to sell their produce and never got a fair price. Then they would buy fertilizer and pesticides at premium rates and return home feeling cheated. ``Now it takes a few hours to make a sale in the local market,'' Varma says, ``because we know the prices a day ahead of time, and we negotiate with the local market on the Web site.'' Selling produce to ITC, thanks to the direct connection, nets the farmers 5% to 15% more than in the traditional marketplace. ITC is now building large, rural Wal-Mart-like supermarkets where farmers come to sell their produce and buy everything they need, from tractors to cell phones. ``Since e-chaupal began, the farmers' incomes have increased by 25% to 30%,'' estimates Varma. Through 2010, when ITC hopes to reach its goal of 100,000 villages participating in e-chaupal, the company will spend $100 million a year on developing this network. None of the competition, including U.S. rival Cargill Corp., can match this head start. Consultant Hagel worries that Western companies are ``far too complacent about the changes and won't have the capabilities to respond'' to such business models. Will Western multinationals find themselves confronting model Indian companies outside India as well? For now, Indian companies are venturing overseas more slowly and cheaply than their state-backed Chinese counterparts. The Indians are making $1 million to $100 million acquisitions to learn about foreign markets or to tap capabilities for their own operations. But that doesn't mean there won't be surprises. ``Companies out of India and China will be disruptive business models, coming at you in ways you can't anticipate,'' says Jayant Sinha, author of a recent McKinsey & Co. study of globalizing companies from the developing world. Already, India's ICICI Bank, with $42 billion in assets, is adapting the outsourcing model to finance. It has turned itself into a low-cost consumer bank by building its own high-tech back office and is expanding in rural India by setting up automated teller machines in villages. Now, ICICI is using that technological edge abroad, opening up a wholly owned bank subsidiary in Canada. By operating its low-cost back end in India, the bank is passing on those benefits to locals who bank through the Internet in the form of interest some 35 to 75 basis points higher than what's available at other Canadian banks. The product has been so popular that the bank already has 22,000 customers, with 1,500 new ones signing up every week. Indian companies like ICICI can successfully take their models overseas because they are firmly anchored to their home market. A home market that is constantly being reinvented.
India's Corporate Innovators Bharti Tele-Ventures (Cellular operator) REVENUES (BILLIONS)**: $1.8 PROFITS (MILLIONS)**: $330 INNOVATION: Outsourced core networking services so management could focus on marketing and sales Tata Motors (Auto maker)
Page 16 Asking The Right Questions; These Indian companies realized Western models won't work Business Week August 22, 2005 REVENUES (BILLIONS)**: 4.5 PROFITS (MILLIONS)**: 318 INNOVATION: Developing a $2,200 passenger car, to be distributed in a kit and assembled at point of sale ITC (Agribusiness) REVENUES (BILLIONS)**: 3.0 PROFITS (MILLIONS)**: 503 INNOVATION: Employing e-commerce to produce and procure raw materials in rural areas ICICI Bank* (Banking) REVENUES (BILLIONS)**: 22.8* PROFITS (MILLIONS)**: 460 INNOVATION: Using lower-cost business processing in India to offer higher interest rates to foreign customers TCS (Software) REVENUES (BILLIONS)**: 2.2 PROFITS (MILLIONS)**: 471 INNOVATION: Constructed a computer-aided adult-literacy program that uses symbols to teach 500 words in 10 weeks * Deposits ** Fiscal year ended Mar. 31, 2005 Data: BusinessWeek LOAD-DATE: August 18, 2005 LANGUAGE: ENGLISH GRAPHIC: photograph, Photograph: IN A FLASH: ITC's intranet changed the way farmers sell their produce PHOTOGRAPH BY SATYAKI GHOSH photograph, Photograph: INDIA: WHO'S COOL? Sania Mirza. An ace on the court, a draw on the tube. Tennis tops cricket. It's true even in India, when the star is 18-year-old Sania Mirza. While she's ranked just 48th globally, the student from Hyderabad rocketed to the top of India's sporting world when she made it into the third round of the Australian Open in January. Then in February, she won the World Tennis Association Hyderabad Open -- and the tournament's TV ratings soared higher than the levels typically registered for cricket. Now Mirza is something of a youth icon, with many Indian teens coveting -- and copying -- her nerdy black-rimmed glasses and nose ring. PHOTOGRAPH BY STEVE CRISP/REUTERS/CORBIS
Page 17 Asking The Right Questions; These Indian companies realized Western models won't work Business Week August 22, 2005 photograph, Photograph: TALK IS CHEAP: To cut costs, Bharti outsourced its entire network PHOTOGRAPH BY NAMAS BHOJANI PUBLICATION-TYPE: Magazine JOURNAL-CODE: BW
Copyright 2005 The McGraw-Hill Companies, Inc. http://www.mcgrawhill.com All Rights Reserved
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Business Week August 22, 2005 Correction Appended
How Cummins Does It; The engine maker runs different game plans in India and China BYLINE: By Pete Engardio and Michael Arndt SECTION: China and India -- The New Corporate Model: A Ca; Pg. 82 Vol. 3948 LENGTH: 1828 words
In an age of just-in-time delivery, it's probably not the best place to put an engine plant. Until recently, reaching the Dongfeng Cummins Engine Co. Ltd. complex from Wuhan, the nearest city with daily flights from Beijing, required a 5 1/2-hour drive on a two-lane highway winding through the hills of rural Hubei Province to the dusty industrial city of Xiangfan. Even today, heaps of freshly picked watermelons lie along the road into town in the summer. For plant manager Jerry Gantt, 57, Xiangfan's only African American and a former offensive lineman for the Buffalo Bills football team, the five-year assignment has meant many tough adjustments to culture, business practices, and diet. ``It's been a challenge,'' says Gantt, a 15-year Cummins Inc. veteran. His happiest day, he jokes, was when the first McDonald's restaurant opened in Xiangfan two years ago. Cummins Inc. didn't have a choice where to locate the diesel-engine plant when it opened in 1995 -- two decades after then-Chairman J. Irwin Miller was one of the first U.S. executives to visit Beijing. That was the decision of the Chinese government and Cummins' 50-50 partner Dongfeng Motor Co., a state-owned maker of cars and trucks. But like many multinationals that decided to get into China early, Cummins has learned to play the cards it was dealt. That's been true in India, too. The Columbus (Ind.) company opened its first diesel engine venture in India in 1962. But for three decades sales were limited by bureaucratic controls on everything from pricing to product lines. Yet their persistence has paid off. China and India now account for $1.9 billion of Cummins' $8.4 billion in annual sales -- and are expected to reach $5 billion by 2010. Dongfeng is now Cummins' No. 2 customer, after DaimlerChrysler, and has proved to be a valuable partner. The Xiangfan factory, profitable from the outset, churns out 120,000 truck engines a year. It has boosted output fourfold since 2001 while trimming the workforce by 10%, to 1,900. Meanwhile, Indian partner Tata Motors Ltd. is Cummins' No. 3 global customer, and a Cummins engineering center in Pune is becoming vital in designing engines, power generators, and components. Cummins is also winning orders in promising niches. For example, it is fitting thousands of buses in Beijing and New Delhi with hybrid engines that burn liquefied-natural gas. In both nations, Cummins is expanding aggressively in every line of business. ``Both China and India are probably the largest growth opportunities for Cummins,'' says Chief Executive Officer Theodore M. Solso. Cummins needs the lift. In North America its potential market for big truck engines is shrinking as customers such as DaimlerChrysler, Volvo, and Navistar shift orders to their own affiliates. In 16 months, Cummins will confront
Page 19 How Cummins Does It; The engine maker runs different game plans in India and China Business Week August 22, 2005 Correction Appended a new challenge when new U.S. emission standards kick in, which could raise costs. This makes expansion in China and India ``particularly important,'' says Citigroup analyst David M. Raso. Cummins has succeeded in nations renowned for being tough for foreign investors. It has pushed to localize manufacturing. By nurturing solid partnerships, it has minimized capital costs and gained a marketing edge. It has put a high priority on training and empowering local managers. Seven of Cummins' top 10 China managers are mainlanders. Top expatriates stay for long stints rather than use posts as two-year stepping stones. Cummins also has moved 100 Asian managers and their families to Columbus, where they are climbing the corporate ladder. Beyond that, Cummins plays India and China differently, highlighting the two economies' diverging structures and strengths. Some major contrasts: PARTNERSHIPS When Cummins entered India in 1962, it formed a venture to make heavy engines and power generators in Pune in which it owned 50%. India's Kirloskar family owned 25%, and the rest floated on the Bombay Stock Exchange. When the Kirloskars sold much of their stake in the mid-'90s, more liberal investment rules allowed Cummins to boost its share to 51% in what now is called Cummins India Ltd. That gave Cummins clear management control and more flexibility to invest in new opportunities. It operates a fleet of rental trucks and a truck-stop chain, and sets up and helps run power plants. It also does back-office accounting, human-resource, and info-tech support work for Cummins worldwide. It even owns a $50 million company providing IT services to clients like Unilever and BNP Paribas. Otherwise, Cummins is sticking with its original partners. It still shares ownership of another Indian venture formed in 1996 to make lighter truck engines with Tata Motors, India's premier maker of cars and trucks. And in China, it says it is committed to keeping its 50% stake with Dongfeng. Cummins' Fleetgard Division also has a 50-50 venture with Dongfeng in Shanghai making fuel and air filters. Plus, Cummins has a new joint venture with Shaanxi Automobile Group to make engines for heavy-duty trucks. The eagerness to share ownership is unusual. Many multinationals that Beijing pushed into marriages with state companies in the '80s and '90s have since maneuvered for full control. ``Most foreign companies think it's a mistake'' not to have clear control of their Chinese operations, says Steven M. Chapman, who ran Cummins' China operations for six years before recently assuming his new U.S. post as group vice-president for emerging markets. ``But I really insist we be able to trust each other as absolute peers.'' Chapman, a Mandarin speaker, negotiated Cummins' first deal to assemble engines under license in 1985 and has worked with five Dongfeng chairmen. There is an obvious reason to stay with Dongfeng. As China's top truckmaker, it buys 70% of the plant's engines. Dongfeng also has the funds for rapid expansion. In three years, sales at the Xiangfen venture have zoomed from $63 million to $554 million, yielding $89 million in operating earnings for Cummins. Another big expansion is in the works. In a nation where relationships are paramount, an ally like Dongfeng can be invaluable. Over the years, Cummins executives say they've developed deep connections at many levels in the company. ``Our partner is very good at working through the red tape and speeding up approvals, which helps us ramp up quickly,'' says Cummins East Asia Managing Director John Watkins. Dongfeng's business acumen also helps. Cummins sells an array of engines and parts to local vehicle and equipment makers. Its toughest competitors are mainland manufacturers that are improving quality and service -- and undercut Cummins by up to 40%. Fleetgard competes against 1,600 other makers of filters in China. ``We have the products and the technology, but we need a partner to get access to the market,'' says Ivan Lok, manager of the fast-expanding Fleetgard plant in Shanghai. Cummins has 100% control of its network of 200 distributors and service centers, however. LOCAL R&D
Page 20 How Cummins Does It; The engine maker runs different game plans in India and China Business Week August 22, 2005 Correction Appended In China, Cummins is about to open its first development center, also a 50-50 tie-up with Dongfeng. It will focus mainly on custom-designing engines for China. There also is talk of developing emerging markets. In India, the two-year-old Cummins Research & Technology India center in Pune is playing an important role in helping the company slash development costs and time in its bid to best such arch-rivals as Caterpillar Inc. in building a new generation of diesel engines. Cummins is tapping India's immense pool of skilled, low-cost engineers. Pune is a software and auto hotbed, where pristine industrial parks abut narrow streets jammed with cars, cattle, and rickety three-wheel taxis. The center's 100 engineers specialize in 3-D computer modeling and simulated testing of engines and components. They collaborate with R&D teams in each of Cummins' 20 other development centers worldwide. ``We're involved in just about everything Cummins is doing,'' says John O'Halloran, a 12-year Cummins veteran dispatched in June, 2003, to build and staff the center. In one area, a computational fluid dynamics team led by Ritesh Dungarwal, 26, an aerospace engineering graduate from the Indian Institute of Technology Bombay, simulates the combustion process inside a virtual prototype of a future engine. By mapping the movement of each fuel particle after it is ignited, they learn the size of droplets, how many are burned up, and how many are kicked out in the exhaust. Such data help determine fuel efficiency and emissions. At other pods, staff test engine components to see how they hold up to stress and whether fuel and air flow past at optimal levels. They tweak designs, and U.S. engineers review the work overnight. Cummins engineers in the West do similar work, of course. But because such labor is so expensive, ``we had to be very selective in the past,'' says O'Halloran. ``You can come up with hundreds of things to simulate in a computer. But we were constrained by the number of engineers, so you had to decide which tasks were most critical.'' Now, hundreds of parts can be modeled, tested, and perfected. That should translate into higher performance, lighter engines, and lower costs. Another benefit is that Cummins now builds half as many physical prototypes as it used to, thus cutting development time by up to two-thirds. Pune ``eventually will play a significant role in developing major engine platforms,'' he says. EXPORTS Given America's lopsided trade deficit with China, you would assume Cummins uses it as a major export base. Just the opposite. Cummins ships up to $400 million worth of engines from the U.S. to China a year -- four times more than it imports. China's booming market absorbs all of the engines it makes there. India, however, is a great base for exports. The Pune factory ships one-third of its generators to the U.S., Britain, China, South Africa, and other nations. It also exports engines for everything from mining equipment to marine frigates. Why use India, with its clogged roads and seaports, rather than China's superefficient industrial zones? For one, Cummins and its partners have been designing products for the price-conscious Indian market for years, providing an edge in developing nations. And while China is unbeatable in mass-volume manufacturing, India is well-suited for low-volume production of complex industrial goods. ``In any component, subsystem, or piece of machinery that requires a high engineering content, India has the advantage,'' says Cummins India Chairman Anant Talaulicar. Investing in local manufacturing. Grooming managers for the long term. Exporting when it makes sense, and tapping local engineering brainpower. Many multinationals are now emulating these strategies in China and India. Cummins figured it out well before the competition.
Engines For Growth CUMMINS REVENUE (U.S. $BILLIONS) CHINA
Page 21 How Cummins Does It; The engine maker runs different game plans in India and China Business Week August 22, 2005 Correction Appended
2004 $1.1 2010* $3.0 INDIA 2004 $0.8 2010* $2.0 * Estimates Data: Cummins Inc. LOAD-DATE: August 18, 2005 LANGUAGE: ENGLISH CORRECTION-DATE: September 12, 2005; September 19, 2005
CORRECTION: While Cummins Inc. financial statements report $8.4 billion in consolidated revenue in 2004 (``How Cummins does it,'' Special Report, Aug. 22/29), the number is $10.7 billion when unconsolidated revenue from joint ventures is included. Also, the 2004 operating earnings of Cummins' joint venture with Dongfeng Motor Co. in China were $86 million (not $89 million), and we should have clarified that Cummins' share was $43 million. While Cummins Inc. financial statements report $8.4 billion in consolidated revenue in 2004 (``How Cummins does it,'' ``China & India,'' Special Report, Aug. 22/29), the number is $10.7 billion when unconsolidated revenue from joint ventures is included. Also, the 2004 operating earnings of Cummins' joint venture with Dongfeng Motor in China was $86 million (not $89 million), and we should have clarified that Cummins' share was $43 million. GRAPHIC: photograph, Photograph: LINEMAN GANTT: The ex-Buffalo Bill manages the Xiangfan plant PHOTOGRAPH BY GREG GIRARD/DOCUMENTCHINA photograph, Photograph: PUNE: The two-year-old Research & Technology Center is helping Cummins cut costs PHOTOGRAPHS: NAMAS BHOJANI photograph, Photograph: CHINA WHAT'S COOL: Peak Experience. But don't count on the apres-ski. It's cool, sub-zero, and remote. It's Yabuli, China's biggest ski resort. Nestled in the Changbai mountains 120 miles north of the city of Harbin, Yabuli is a reach. Yet China's small, but growing, ranks of ski fanatics regularly make the trek. Yabuli's nine lifts haul skiers up a peak that offers a respectable 3,900-ft. vertical drop. Although Yabuli was the site of the 1996 Asian Winter Games, Aspen it's not. Hotels often lack hot water, and the nightlife is...well, there isn't any. But it is a deal. A day of skiing -- including equipment rental -- will set you back just $35. At that price, even the weather isn't so hard to take. PHOTOGRAPH BY ZHANG/IMAGINECHINA.COM PUBLICATION-TYPE: Magazine JOURNAL-CODE: BW
Page 22 How Cummins Does It; The engine maker runs different game plans in India and China Business Week August 22, 2005 Correction Appended
Copyright 2005 The McGraw-Hill Companies, Inc. http://www.mcgrawhill.com All Rights Reserved
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Business Week August 22, 2005
Asian Competition: Is The Cup Half Empty -- Or Half Full?; How America could beat the gloomy projections BYLINE: By Peter Coy, with Michael Arndt in Chicago SECTION: China and India -- Final Word; Pg. 134 Vol. 3948 LENGTH: 1955 words
Take a ruler out of your desk drawer, lay it down on top of some economic trend graphs, and extend the lines out to 2015. What you're seeing is one vision of what lies ahead for the U.S. as China and India rise, and it ain't pretty. Three million U.S. manufacturing jobs have been lost in the past half-decade, so by the ruler method 6 million more will go poof in the coming 10 years. The U.S. merchandise trade deficit with China has been growing 20% a year, so the ruler says it should surpass a trillion bucks by 2015. By straight-line projection, China stands to trounce Detroit in autos and Silicon Valley in infotech, while India captures software and high finance. That would leave Americans to export raw materials, colony-style, and give each other haircuts. No wonder Paul Craig Roberts, a senior fellow at the conservative Hoover Institution, says that the U.S. is heading toward becoming a ``Third World country.'' Now put away the ruler, because real life rarely goes in straight lines for long. Remember the predictions about Japan's coming dominance in the 1980s? Or how Britain was called the sick man of Europe in the 1970s? Again today, the world economy may be on the verge of changes that will twist current patterns beyond recognition. The rise of China and India will be better for the U.S. than the direst predictions hold -- yet worse than the Panglossian projections of boosters in America and Asia. On the upside, American consumers will clearly benefit from the availability of inexpensive goods and services. American shareholders of well-positioned multinationals will enjoy higher profits. And Americans employed in successful U.S. export sectors will benefit because China and India will buy more Western-style goods and services -- from cosmetics to jets to banking -- as they get richer and increase their consumption. On the downside, life will be tough for those who are less skilled, less educated, and less able to adapt as the world changes around them. Even many highly skilled American service workers, from programmers to financial analysts, will suffer as low-cost Asian giants target U.S.-dominated businesses. ``The individuals who are able to take advantage of the new opportunities do extremely well. Those who are poorly situated get hammered,'' sums up Gordon H. Hanson, an economist at the University of California at San Diego. While it's impossible to say exactly who will feel the blow, it would be a mistake to assume that the trends of recent years will persist unchanged. For one thing, the U.S. won't keep producing less than it consumes forever. The winds of change blew this spring when the U.S. trade deficit shrank in the April-June quarter. That boosted GDP growth
Page 24 Asian Competition: Is The Cup Half Empty -- Or Half Full?; How America could beat the gloomy projections Business Week August 22, 2005 by 1.6 percentage points, trade's biggest contribution to economic growth since 1996. In coming years, India and China will consume more goods and services from the U.S. and elsewhere -- both because they will be richer and because they will shift somewhat from export-led growth toward meeting serious domestic needs (chart). In China, the shift will mean more money for health care, housing, and the environment, and less for steel and chemical plants. China's health-care spending per dollar of GDP is only one-third that of the U.S., so there's lots of room for improvement. India, too, will divert more of its newfound wealth toward uplifting its poor. This will create opportunities to sell American products and services. The beginnings of the new Asian opportunities are already apparent. As China modernizes, it needs more of the high-tech stuff the U.S. specializes in. Tech accounted for 22% of U.S. exports to China last year, up from 14% a decade earlier. American culture is a highly successful export to Asia. Such icons as Baywatch, The Apprentice, and American Idol have been licensed to satellite broadcasters in China and India. And America's financial giants like American Express Co. are positioning themselves to provide sophisticated products and advice ranging from mortgages to brokerage accounts to retirement planning. Deals of this kind benefit American workers indirectly by creating a bigger market for products and services developed in the U.S. American farmers are some of the clearest beneficiaries. U.S. agricultural exports to China tripled from 2000 to 2004, to $5.5 billion. Exports to India are also up. Mohnish Seth immigrated with his family from New Delhi to Chico, Calif., in 1990 to grow almonds for customers back home. Now family-owned Farmers International Inc. has thousands of acres of almonds and employs around 70 people, half of them fulltime. Says Seth: ``This market is going to grow further because of the rising purchasing power in Asia.'' There will also be plenty of jobs for Americans in meshing the U.S. economy with those of China and India. Tom Manning, a part-time resident of Hillsborough, Calif., has carved out a niche as a board director for Chinese companies that need American representation. He speaks fluent Mandarin, has lived in Hong Kong most of the time since 1995, and ran the Asian operations of several U.S. outfits. He and some partners even created a company called China Board Directors LLC. Participating in China's development miracle, Manning says, ``has been a phenomenally supercharged growth experience.'' But while China and India are opportunities, they are also threats. In Forest Grove, Ore., the library's budget had to be cut recently after one local electronics plant closed and another cut jobs under competition from Asia. In Casey County, Ky., the Economic Development Authority has stopped trying to attract call centers because it cannot match the low wages of rival operations in India. In North Canton, Ohio, Maytag Corp.'s Hoover vacuum cleaner factory is laying people off under pressure from cheap Chinese vacuum cleaners. Melissa Knight, 28, a single mother, was laid off in June from a $15-an-hour job at the Hoover plant. She's collecting unemployment while hoping to be rehired. ``It's all our fault,'' she says. ``The American economy wants cheaper things... I'm guilty of this, too.'' `TRADABLE' OCCUPATIONS Factory workers have been fully exposed to low-wage competition for years. Service-sector workers are just waking up to the threat. J. Bradford Jensen and Lori G. Kletzer, economists at the Institute for International Economics in Washington, say other economists have vastly underestimated the number of U.S. service jobs that could -- at least in theory -- be performed overseas. In new, little-noticed research, Jensen and Kletzer calculate how many people in the U.S. work at a distance from their customers, figuring that if their jobs can be done, say, 200 miles from the customer, they could almost as easily be done half a world away by people in Shanghai or Bangalore. By the distance criterion, they calculate that half of U.S. jobs are in occupations or industries that are ``tradable.'' Sure, not all 'tradable'' jobs will go offshore. But under pressure to increase profits, American companies from General Electric Co. to IBM are changing their business processes so they can take advantage of cheaper foreign labor wherever it is possible. Because their high salaries make a fat target, certain skilled employees can be highly vulnerable. Says Allen L. Weinberg, a McKinsey & Co. principal: ``We are seeing a surprising amount of activity for some
Page 25 Asian Competition: Is The Cup Half Empty -- Or Half Full?; How America could beat the gloomy projections Business Week August 22, 2005 higher-end functions'' that are easy to carve out and send offshore, including equity research and credit-card fraud detection. For Americans, offshoring of such jobs knocks out the lower rungs on the career ladder. Among economists, the mainstream view continues to be that the full entry of China and India into the global economy is a plus for the U.S. as a whole, while producing some individual losers. A 2004 study that economic researcher Global Insight Inc. of Lexington, Mass., conducted for the Information Technology Assn. concluded that offshoring of computer software and services would add $124 billion to U.S. gross domestic product by 2008 by lowering inflation and interest rates and by increasing productivity and economic activity. And McKinsey Global Institute estimated that America gains $1.14 for each dollar of output that it sends offshore. But those studies have come under criticism for being too optimistic. In a briefing paper this month, L. Josh Bivens, an economist with the Economic Policy Institute, says that the Global Insight study overestimates how much offshoring will reduce the cost of software in the U.S. The study by McKinsey, Bivens writes, incorrectly assumes that what's good for individual outsourcers is equally good for the American economy as a whole. The U.S. benefits the most from trade when it and its partners specialize in very different things. The problem is that China and India are concentrating their efforts on the same areas that the U.S. already specializes in, like high tech, says New York University economist William J. Baumol. It could get worse, according to a collaborator of Baumol, mathematician Ralph E. Gomory, president of the Alfred P. Sloan Foundation, who is a former chief scientist for IBM. Using linear programming, Gomory demonstrated that a rich country like the U.S. can in certain circumstances lose from outsourcing industries to a poor but rising country like China or India. Gomory's work is built on the common-sense notion that a country's share of global buying power depends on its share of global output -- and America's share of output is shrinking. Says Gomory: ``If your trading partner is sufficiently underdeveloped, then if you lose industries to it, it's good for them and it's good for you. As the other country becomes more developed, the situation starts to turn around.'' While that's still a minority view, economists are beginning to grasp the possibility. INNOVATION TRUMPS BRAWN The good news? Even Gomory and Baumol say that the U.S. can still thrive if it invents new industries to stay one step ahead. So far, the surprise is not that China and India are pressuring American workers. The surprise is that the pressure hasn't been worse. Over the past two years, the U.S. has added 3.7 million jobs. Some of the fields most vulnerable to foreign competition have seen healthy gains because demand growth has more than offset the effects of offshoring. The number of jobs in computer systems design rose 6.9% from July, 2003, through July, 2005, the government says. In the graduating class of '05, the average salary offer this spring for computer science majors was nearly $51,000, up 2.3% from a year earlier and among the highest for any major, says the National Association of Colleges & Employers. Even manufacturing is doing better than one might expect. Although the field continues to lose jobs, pay for those who remain is rising -- in part because workers are earning higher pay through higher productivity. Wages and benefits for blue-collar workers in manufacturing rose 3.7% over the past two years after adjusting for inflation. Many Indians and Chinese are more confident about Americans' future than Americans are themselves. ``By focusing on innovation rather than brawn, and ensuring labor and regulatory conditions are attractive...the U.S. will continue to attract and retain the best and brightest,'' says Manoj Singh, the Hong Kong-based chief executive of Deloitte Asia Pacific. Singh participated in a recent BusinessWeek Online roundtable of international experts on India and China, which is posted at businessweek.com/go/china-india/. China and India are undeniably on the rise. Whether the U.S. can match Asia's dynamism is in America's own hands.
Page 26 Asian Competition: Is The Cup Half Empty -- Or Half Full?; How America could beat the gloomy projections Business Week August 22, 2005 LOAD-DATE: August 18, 2005 LANGUAGE: ENGLISH GRAPHIC: illustration, Illustration: Chart: The Impact Of India And China CHARTS BY ALBERTO MENA/BW photograph, Photograph: FALLOUT: Knight, laid off from a Hoover plant in Ohio, blames consumers like herself for wanting cheap foreign goods PHOTOGRAPH BY BRUCE ZAKE photograph, Photograph: NICE NICHE: California's Manning serves on several Chinese boards PHOTOGRAPH BY THOMAS BROENING PUBLICATION-TYPE: Magazine JOURNAL-CODE: BW
Copyright 2005 The McGraw-Hill Companies, Inc. http://www.mcgrawhill.com All Rights Reserved
Page 27
7 of 14 DOCUMENTS
Business Week August 22, 2005
The Rise of Chindia BYLINE: By Bob Dowling Managing Editor, International SECTION: Editor's Memo; Pg. 16 Vol. 3948 LENGTH: 342 words
At an elite tech school near Calcutta, someone is trying to invent the next BlackBerry, but one that will sell at a fraction of the U.S. price. Outside Bombay, they're putting the finishing touches on a $2,200 people's car. In a world-class Shanghai lab, a Chinese team is mapping breakthrough cancer research. Now go to the infamous Dharavi slum in Bombay, and see teachers combating a staggering national illiteracy rate of 37%. At a workers' rights center in Guangzhou, hear the strident voices of an embryonic union movement that alarms Beijing's authoritarian leaders. The next superpowers? Societies on the brink of chaos? The countries that will take all of our jobs? Since India and China have one-third of the world's people, almost anything you say about them will be partly right. With this special double issue, we've reached beyond the fray to envision China, India, and the U.S. evolving into a global triumvirate that will dominate the century. China and India will be both allies and counterweights to America -- at the expense of Japan and Europe. China's competitive edge is shifting from low-cost workers to state-of-the-art manufacturing. India is creating world-class innovation hubs, and its companies are far better performers than China's. And a market-driven ``Chindia'' is fast emerging. Led by Senior Writers Pete Engardio and Rose Brady and Asian Regional Editor Brian Bremner, our team of Dexter Roberts, Bruce Einhorn, Frederik Balfour, Manjeet Kripalani, Josey Puliyenthuruthel, Steve Hamm, Michael Arndt, Peter Coy, James Mehring, and John Carey spent five months on the special. Chris Power led editors David Rocks, Michael Serrill, Elizabeth Weiner, and Peter Elstrom in New York. The striking photos were assembled by Mindy Katzman and her colleagues. Art directors Chris Silver and Steve Taylor designed the issue. And researcher Susan Zegel mined the data for everyone. We hope these stories, and many other special features on businessweek.com, will surprise and provoke you, and help you plan for the future. LOAD-DATE: August 18, 2005 LANGUAGE: ENGLISH PUBLICATION-TYPE: Magazine
Page 28 The Rise of Chindia Business Week August 22, 2005
JOURNAL-CODE: BW
Copyright 2005 The McGraw-Hill Companies, Inc. http://www.mcgrawhill.com All Rights Reserved
Page 29
8 of 14 DOCUMENTS
Business Week August 1, 2005
Get Creative!; How to build innovative companies BYLINE: By Bruce Nussbaum With Robert Berner in Chicago and Diane Brady in New York SECTION: Special Report -- Get Creative!; Pg. 60 Vol. 3945 LENGTH: 3896 words
Listen closely. There's a new conversation under way across America that may well change your future. If you work for Procter & Gamble Co. or General Electric Co., you already know what's going on. If you don't, you might want to stop what you're doing and consider this: The Knowledge Economy as we know it is being eclipsed by something new -- call it the Creativity Economy. Even as policymakers and pundits wring their hands over the outsourcing of engineering, software writing, accounting, and myriad other high-tech, high-end service jobs -- not to mention the move of manufacturing to Asia -- U.S. companies are evolving to the next level of economic activity. What was once central to corporations -- price, quality, and much of the left-brain, digitized analytical work associated with knowledge -- is fast being shipped off to lower-paid, highly trained Chinese and Indians, as well as Hungarians, Czechs, and Russians. Increasingly, the new core competence is creativity -- the right-brain stuff that smart companies are now harnessing to generate top-line growth. The game is changing. It isn't just about math and science anymore. It's about creativity, imagination, and, above all, innovation. What is unfolding is the commoditization of knowledge. We have seen global forces undermine autos, electronics, and other manufacturing, but the Knowledge Economy was expected to last forever and play to America's strengths: great universities, terrific labs, smart immigrants, an entrepreneurial business culture. Oops. It turns out there are a growing number of really smart engineers and scientists ``out there,'' too. They've learned to make assembly lines run efficiently, whether they turn out cars or code, refrigerators or legal briefs. So U.S. companies are moving on to creating consumer experiences, not just products; reconceiving entire brand categories, not merely adding a few more colors; and, above all, innovating in new and surprising arenas. The U.S. has a lead in this unfolding Creativity Economy -- for the moment. The new forms of innovation driving it forward are based on an intimate understanding of consumer culture -- the ability to determine what people want even before they can articulate it. Working in what is still the largest consumer market in the world gives U.S. companies a huge edge. So does being able to think outside the box -- something Americans still do better than most. But Toyota Motor Corp. has a feel for U.S. consumers, and Samsung Group can be pretty creative, too. Competition
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will surely be intense. A New Dance For managers, the biggest challenge may be making the leap from their Six Sigma process skills to new ways of thinking. For corporations, transforming themselves will require new sets of values and organizational principles. Have you heard of design strategy? It's probably the Next Big Thing after Six Sigma. How about consumer-centric innovation? It may be the most powerful way to raise a company's innovation success rate. Do you know what innovation metrics your company needs? Have you heard of CENCOR (calibrate, explore, create, organize, and realize)? It's the post-Six Sigma dogma GE is spreading far and wide among its managers. Are B-schools on top of all this change? Not really, but Stanford University is starting a ``D-school'' -- a design school where managers can learn the dynamics of innovation (page 80). Teaching elephants to dance is never easy, but that's the task ahead if you want your company -- and your career -- to prosper. You're thinking ``this is all hype,'' aren't you? Just another ``newest and biggest'' fad, right? Wrong. Ask the 940 senior executives from around the world who said in a recent Boston Consulting Group Inc. survey that increasing top-line revenues through innovation has become essential to success in their industry. The same BCG survey showed that more than half of the execs were dissatisfied with the financial returns on their investments in innovation. They should be. By one measure, from innovation consultant Doblin Group, nearly 96% of all innovation attempts fail to beat targets for return on investment. No wonder innovation frustration is the talk of corner offices. BusinessWeek is joining this growing conversation about getting creative by launching a new online Innovation & Design portal -- www.businessweek.com/innovate -- to present the best research and thinking on the subject. Take a look at the interactive self-assessment feature developed by Larry Keeley's Doblin Group. There are six innovation metrics available. Keeley is the guru of the evolving field of innovation science. Some compare him to W. Edwards Deming, who revolutionized the field of quality measurement. There is, in fact, a whole new generation of innovation gurus. They are not the superstars of the '90s, such as Clayton Christensen, who focused on what might be called macro-innovation -- the impact of big, unexpected new technologies on companies. The new gurus focus more on micro-innovation -- teaching companies how to connect with their customers' emotions, linking research and development labs to consumer needs, recalibrating employee incentives to emphasize creativity, constructing maps showing opportunities for innovation. When creative mojo gets going, it can explode into innovation. An example: the mundane mop. Cleaning used to be done with mops and water. Design Continuum Inc. in West Newton, Mass., researched cleaning for P&G and observed that water tends to slop dirt around, while dry rags pick it up (thanks to electrostatic attraction). Ergo, the Swiffer. In the design-speak of the Creativity Economy, this is paradigm shifting. Design Continuum helped P&G shift the cleaning paradigm. Now the Swiffer may become P&G's newest $1 billion brand. Think out-of-the-box consumer experiences, and you get the idea of paradigm shifting. Old paradigm: corner coffee shops. New paradigm: Starbucks. Old: radio. New: satellite radio. Old: crowded electronics stores. New: Apple Computer stores. Old: grungy, smelly circuses. New: Cirque du Soleil. Old: any airline. New: JetBlue Airways. Old: Macy's. New: Target. Old: Earth-toned Birkenstock sandals. New: colorful beach ``Birkis.'' The evolution of the economy toward creativity has been underway for some time. Steve Jobs, of course, has turned Apple into the paragon of the creative corporation. Companies throughout the world are deconstructing Apple's success in design and innovation, and learning the lessons. Today all kinds of blue-chip CEOs are signing on to creativity. A.G. Lafley, P&G's CEO, and Jeffrey R. Immelt, GE's CEO are at the core of the new movement. Lafley started it when he took over in 2000, but Immelt's conversion to creativity when he became chief executive in 2001 is giving the shift to creativity more momentum. Because of GE'S
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size and scope, when it moves, the economy moves with it. The vocabulary of business may be changing as well. It's hard to imagine former GE boss Jack Welch saying: ``Creativity and imagination applied in a business context is innovation,'' as Immelt recently did. Or ``we're measuring GE's top leaders on how imaginative they are. Imaginative leaders are the ones who have the courage to fund new ideas, lead teams to discover better ideas, and lead people to take more educated risks,'' as he added. That's a sea change from rewarding GE managers for a career of floating from operation to operation, massaging the process for incremental improvements. Lafley sits on GE's board, so two of America's most powerful and effective CEOs now meet regularly, talk about creativity, discuss which of the new breed of innovation gurus is offering the best advice, and exchange notes on what works and what doesn't. When the history of the transition from the Knowledge Economy to the Creativity Economy is written, these two will probably get much of the credit. To understand why the creativity movement is becoming so important, you need to go back to its roots at P&G. By harnessing the power of design, P&G has transformed itself from a stagnant brand manager into a model of innovation efficiency that outperforms industry rivals. Before Lafley, P&G's volume growth was basically flat. The company cared more about how its products functioned than it did about how customers felt about them. ``P&G had the best chemical engineering and marketing operations in the country,'' says Patrick Whitney, director of the Institute of Design at Illinois Institute of Technology. ``It didn't care about the user experience.'' P&G could tell retailers to stock eight kinds of Crest, and they did. As power shifted to big retailers, P&G couldn't do that. ``It had to create new products, and to do that, P&G had to get closer to the consumer,'' says Whitney. Fresh Eyes Lafley turned to design. In 2001 he established a new executive post: vice-president for design, innovation, and strategy, naming Claudia B. Kotchka, now 53, to fill it. She and Lafley knew they couldn't change P&G's culture without fresh eyes from the outside. So they made a major decision: Even as P&G began laying off thousands of top executives, middle managers, scientists, and others, it quadrupled its design staff. For the first time it hired a legion of designers who had worked at other companies and in other industries. In a second crucial decision, Kotchka dispatched designers to work directly with R&D staffers to help to conceive new products. This changed P&G's entire innovation process, making it consumer-centric rather than driven by new technology. To open up the company further, P&G started hiring different kinds of consultants. Among them were Design Continuum; ZIBA Design in Portland, Ore.; Chicago's Doblin Group; and IDEO in Palo Alto, Calif. Here's how it works at P&G: Kotchka contacts P&G's divisional heads, asking for a list of possible opportunities designers might address. Recently, the head of home care said it was time to look at bathroom cleaning. Kotchka brought in IDEO with the goal of helping out. IDEO and P&G's designers went out and observed people cleaning bathrooms around the world. In South America they saw women using brooms to clean walls and showers effectively and built a prototype combining a small hand cleaner with a long pole. P&G tested the idea via a survey. People hated it. But P&G hung in there. What is fast becoming the Holy Grail of innovation -- the ``unmet, unarticulated'' needs of consumers -- didn't show up in the survey. Instead, P&G relied on the informed intuition of designers and tested the idea again, using working prototypes. People loved the real thing. P&G then broke down the walls of its Mr. Clean brand, reached in and used the Mr. Clean detergent for the new product. The Mr. Clean MagicReach was introduced in April -- with a four-foot detachable pole. Mundane as this example may be, it shows how design strategy can generate innovative new products and sales. To build a design infrastructure, Lafley also established what he calls his innovation ``gym,'' a place to train
Page 32 Get Creative!; How to build innovative companies Business Week August 1, 2005
managers in the new design thinking. And he created a Design Board of non-P&Gers who provide an independent perspective on products, brand extensions, and marketing. Jeff Immelt inherited one of America's most successful companies. GE's incredible process culture, which brought so much to the bottom line in the '90s, was no longer enough to maintain its leadership in the 21st century. Like Lafley, Immelt needed to create an innovation culture quickly. One of his major goals was to raise GE's average organic growth to 8% from the 5% of the past decade. The skills Jack Welch prized -- cost-cutting, efficiency, the continual improvement of operations -- couldn't deliver that. Big Bets Immelt launched a series of what he calls Imagination Breakthrough projects, investing more than $5 billion in 80 initiatives that take GE into new markets, product areas, and industries. He told his managers to connect with consumers, learn to take risks, and place big bets. GE is already reaping major benefits from previous bold moves. Its latest quarterly profit surge of 24% is due in part to reframing the idea of power generation. The company expanded it from gas turbines to wind and solar, which paid off. Also like Lafley, Immelt is pushing to change the corporate structure to spur creativity. He appointed Beth Comstock to the newly created position of chief marketing officer in charge of generating innovation and creativity. He's bringing in many of the same design and innovation gurus Lafley uses so effectively. And GE being GE, has its new acronym, CENCOR, for its innovation process. Call it CENCOR, creativity, or imagination, GE is doing it. Comstock recently held a ``China market discovery'' session, bringing together some 90 people for three days. Outside innovation consultants pushed the envelope. ``We forced the group to get outside itself, to look at China with new eyes,'' says Comstock. The effort appears to be working: Sales to China soared in the latest quarter. What is the methodology of the new design strategy that Lafley, Immelt, and others are adopting? The basics are simple. They start with observation -- going out and directly seeing customers shop at malls, families eating in restaurants, or patients being treated in hospitals. Gap Inc. and others have found that social shopping -- in pairs and threesomes -- is the norm in its stores, so it's making dressing rooms bigger. Trying out lots of ideas fast by making models or videos (prototyping) is the next step. This lets managers visualize concepts, make decisions on which to improve and which to discard, and launch products faster. Storytelling is very important. Designers have found that placing a potential new product within an emotional story that connects with consumers raises the chances of success. The design of the new line of MINI_motion watches and driving shoes, for example, captures the story of the Mini Cooper's cool urban driving experience. It's about the driver, not the car. The final ingredient in design strategy is building an organizational process that does these things all the time. This kind of change can be wrenching for a company, but the payoffs are enormous. ``You can build a kind of culture of routine innovation through design thinking,'' says one of the pioneers of the new discipline, David Kelley, co-founder of IDEO and head of the new D-school at Stanford. So watch out, consultants. A whole new cadre of advisers is out to lead CEOs into the Creativity Economy. They speak a language different from Establishment consultants' (more anthropology, less technology) and advise differently (more hands-on workshops, fewer companywide surveys). Mainstream consultants, such as BCG, are building their innovation expertise, but they'd better hurry. The new gurus have emerged from the depths of the late '90s meltdown and the shock of Asian competition to show CEOs a path beyond the Knowledge Economy to an even higher-value-added business model. They say they have
Page 33 Get Creative!; How to build innovative companies Business Week August 1, 2005
found a way to play a high-margin game in a low-priced world, a means of differentiating products in a commoditized marketplace and a methodology for staying ahead of Asian rivals. They are the keepers of creativity in a world awash in technology, the champions of innovation in a globe drowning in commodities. Meet seven of them on page 76 and many more on our new site. There's a lot of talk about America becoming a 97-pound weakling. But the naysayers don't get the strength inherent in a truly Creative Economy. This revolution has barely begun, and building creative, innovative companies is the great task ahead. In the pages that follow and online, you'll find the tools, methods, and metrics to help make it happen.
Old vs. New Old: COTTON MOP P&G studied the art of cleaning in search of something better than a wet mop, which spreads as much dirt as it picks up. New: SWIFFER P&G came up with a whole new way to clean -- using electrostatic attraction. A revolutionary dry mop was born.
Old: CIRCUS Traditional animal acts, painted clowns, and high-wire stunts make for a very tired form of entertainment. New: CIRQUE DU SOLEIL A dramatic rethinking of what a circus can be, with amazing costumes, moving music, and beautiful gymnastics that provide a ``wow'' experience.
Old: BIRKENSTOCK The '60s icon of the ergonomic and eco-friendly lifestyle needed a modern update. New: BIRKIS Designers kept the core values and added new models, including colorful slip-ons for the beach.
Old: RADIO Same old, same old ad-choked, pre-programmed music and talk, from big national chains.
Page 34 Get Creative!; How to build innovative companies Business Week August 1, 2005
New: SIRIUS Subscriber model brings a rich variety of content via satellite to your car and your handheld.
Old: BIG BOX Crowded shelves, overwhelming choice, and standard sales pitches. New: APPLE STORE Spare, elegant, and appealingly interactive -- a hip place to be on a Saturday night.
Old: VIDEO STORES Standard retail shopping -- pick it up, drop it off, and, sometimes, pay late fees. New: NETFLIX Subscriber service offering vast inventory, one-click Web shopping, delivered to you.
Old: PRESCRIPTION BOTTLE Hard to open, impossible to read, infuriating to use. New: TARGET PRESCRIPTION BOTTLE Color-coded to specific medicines, easy to open and read.
The Evolution of the Creative Company A new corporate model is taking shape. By focusing on creativity and innovation, it could provide new pathways to growth: STEP 1 Technology and information become commoditized and globalized. Suddenly, the advantage of making things ``faster, cheaper, better'' diminishes, and profit margins decline. STEP 2 With commoditization, core advantages can be shipped abroad. Outsourcing to India, China, and Eastern Europe sends a growing share of manufacturing and even the Knowledge Economy overseas.
Page 35 Get Creative!; How to build innovative companies Business Week August 1, 2005
STEP 3 Design Strategy begins to replace Six Sigma as a key organizing principle. Design plays key role in product differentiation, decision-making, and understanding the consumer experience. STEP 4 Creative innovation becomes the key driver of growth. Companies master new design thinking and metrics and create products that address consumers' unmet, and often unarticulated, desires. STEP 5 The successful Creative Corporation emerges, with new Innovation DNA. Winners build a fast-moving culture that routinely beats competitors because of a high success rate for innovation.
Some Innovation Myths There are many mistaken views about how innovation works. Here are some of the most pervasive: MYTH: Innovation is only about creating hot new products REALITY: Not always. Some companies have that kind of creative cultural DNA, and others don't. Innovation audits often reveal hidden strengths in areas such as brand recognition and service delivery. MYTH: Innovation is about crazy creativity REALITY: Not at all. Creativity is an essential part of the innovation process, but metrics, discipline, focus, and leadership are just as crucial. MYTH: Innovation is expensive and takes time REALITY: Failing to innovate is far more expensive. This is especially true at a time when technology and information are being commoditized and globalized. MYTH: You need hundreds of ideas because the failure rate for innovation is high REALITY: Maybe. Companies that have innovation architecture in place can handle many concepts at one time. Most don't and would do better to focus on fewer, bolder ideas that shift product strategies, reframe brands, and meet consumer needs. MYTH: Metrics guarantee higher innovation success rates REALITY: You can measure your way to mediocrity. The right financial hurdle rates and other metrics are essential but they are only part of a larger innovation process. Design strategies such as early prototyping and customer
Page 36 Get Creative!; How to build innovative companies Business Week August 1, 2005
observation are as important as measurement for innovation productivity. Top 20 Innovative Companies in the World 2005 poll of 940 senior executives in 68 countries by Boston Consulting Group COMPANY RESPONSES APPLE
24.84%
WHY: Delivers great consumer experiences with outstanding design; steady flow of new ideas that redefine old categories, such as music players; continual evolution of business model and brand. 3M
11.77
WHY: Strong internal culture of creativity with formal incentives to innovate. Results in a high success rate in turning ideas in health care, industrial components, and other areas into profitable products. Microsoft
8.53
WHY: Strong management pushes continuous improvement of products, expansion into new markets and rapid strategy changes when necessary. GE
8.53
WHY: Management practices that are ahead of competition, along with strong training, are allowing CEO Immelt to reinvent GE's business model and culture to promote innovation. Sony
5.94
WHY: Understands the importance of media convergence; creates new user-friendly electronic
products with great design.
Dell
5.62
WHY: Superior business-process model built on ruthless cost-cutting and innovations in supply-chain management. IBM
5.29
WHY: Wants to use its powerful IT base to solve customers' problems and even run their businesses. Google WHY: Steady stream of new tools and services provide simple solutions to complex problems. Dominates online search and is growing fast in advertising; strong connection with customers.
5.18
Page 37 Get Creative!; How to build innovative companies Business Week August 1, 2005
P&G
4.21
WHY: Continuous product innovation based on understanding of changing consumer lifestyles. In a switch, now seeks outside partners for new expertise, ideas, and even products. Nokia
4.21
WHY: Sharp design, changes models rapidly, and adds features effortlessly, based on a close reading of customer desires in the emerging mobile lifestyle. Virgin
4.00
WHY: Reframed air travel as a lifestyle brand and extended the brand into retail stores, cell-phone service, and other products; takes risks; attacks weak spots of traditional service providers. Samsung
3.89
WHY: Catches the pulse of the consumer; good design; understands emotion; moved from commodity producer to brand leader; generates a flow of new products from cell phones to stunning flat-screen TVs. Wal-Mart
3.24
WHY: Uses supply-chain and logistics superiority to move into new markets and product areas. Data mining tracks customer preferences on a daily basis, contributing to fast growth despite its size. Toyota
3.02
WHY: Quality and manufacturing efficiency are constantly upgraded. Strategic use of advanced technology yields big market advantages in areas such as hybrid cars. eBay
2.92
WHY: Forged a new retail business model based on customer power, cheap prices, and community. Intel
2.70
WHY: Dynamic business model with the ability to disrupt itself to meet competition in areas such as wireless computing. Amazon WHY: Overturned retail distribution with Internet technology and a focus on the consumer experience.
2.70
Page 38 Get Creative!; How to build innovative companies Business Week August 1, 2005
IDEO
2.16
WHY: Top consultant on the process of innovation; uses design principles to guide companies through strategy changes that focus on consumer experience. Starbucks
2.05
WHY: Reframed the coffee business as a lifestyle brand by watching customers; created a strong consumer affinity to the brand and uses that affinity to sell new products, such as music. BMW
1.73
WHY: Combines sleek design, advanced technology, and Web-based marketing to increase brand leadership and move into extensions, such as the the revived MINI Cooper. LOAD-DATE: July 28, 2005 LANGUAGE: ENGLISH PUBLICATION-TYPE: Magazine JOURNAL-CODE: BW
Copyright 2005 The McGraw-Hill Companies, Inc. http://www.mcgrawhill.com All Rights Reserved
Page 39
9 of 14 DOCUMENTS
Business Week August 1, 2005
Raising the Bar At Siemens; First, Kleinfeld sold the handset biz. That leaves just 13 other big problems to solve BYLINE: By Jack Ewing in Frankfurt SECTION: Manufacturing: Management; Pg. 10 Vol. 3945 LENGTH: 1183 words
Siemens CEO Klaus Kleinfeld has always been known as a hard worker, but since becoming boss he seems to have shifted to warp speed. The change started just before he took over the $91 billion German engineering and electronics giant on Jan. 27. Kleinfeld spent a weekend at his Munich home writing letters to the company's 450 biggest customers. Then he decided to visit the top 100 himself, traveling to Britain to meet with BT Group PLC Chairman Christopher Bland and to China for face time with top managers of steelmaker Shanghai Baosteel Group Corp. Kleinfeld, who likes to compete in marathons, makes it sound as though he barely broke a sweat as he managed to visit all 100 key accounts in his first 100 days as CEO. ``It was very ambitious, but once you set the goal you realize how easy it is to reach it,'' he said. Kleinfeld has already achieved another goal that eluded his predecessor, Heinrich von Pierer: He found a decisive solution for the struggling mobile-phone business. On June 7 he unloaded Siemens' money-losing cellular handset unit to Taiwan's BenQ Corp. The deal, which will cost Siemens $425 million in write-offs, integration costs, and payments to BenQ, surprised some who thought Kleinfeld would find a less radical solution. He could have put the business into a joint venture, retaining some control. Instead, the deal showed that Kleinfeld isn't kidding when he says problem businesses will be fixed, sold, or closed. Sure, von Pierer said that, too, and spun off Siemens' semiconductor and components businesses in the late 1990s because of their volatile earnings. But selling the whole mobile handset business, headquartered in the middle of Siemens' sprawling corporate campus outside Munich, was something new. ``He's willing to take action, and he's willing to take risks,'' says Peter Schneidewind, a principal at Munich's Roland Berger Strategy Consultants, who deals with Siemens. It's already paying off: Since early May, when rumors started to circulate that Siemens would exit mobile handsets, the share price has risen over 8%, to $77. By contrast, BenQ's stock price fell as investors looked askance at the deal. LAGGARDS One goal achieved, many others to meet. In April, the 47-year-old Kleinfeld vowed that all 13 Siemens business divisions will meet their profit targets within two years. That was a brash statement, considering that only rarely has Siemens managed to get all divisions humming at once. Siemens Transportation Systems, which makes trains, subways,
Page 40 Raising the Bar At Siemens; First, Kleinfeld sold the handset biz. That leaves just 13 other big problems to solve Business Week August 1, 2005 and streetcars, is aiming for a profit margin of 5% to 7%. But in the most recent quarter it barely broke even, reporting operating profit of just $5 million on sales of $1.1 billion. Some think Kleinfeld could be setting himself up for failure by setting such ambitious milestones, but he disagrees. ``I would not call it a risk. It's just a question of consistency,'' he says, pointing out that the targets were set in 2000 under von Pierer but never met. Siemens' overall profit also leaves something to be desired. Net profit slipped 3% in the quarter ended Mar. 31, to $945 million on sales of $22.5 billion. The sale to BenQ rids Siemens of its most visible problem area. But there are plenty of other headaches. Siemens Business Services (SBS), the company's IT outsourcing arm, lost $156 million in the quarter ended Mar. 31. Analysts expect Siemens to sell a piece of SBS if it can find a buyer. (A spokesman for SBS declined to comment.) Other groups are only marginally profitable, such as Siemens Building Technologies, which provides security and climate control for large buildings. It reported a profit of $27 million in the quarter ended Mar. 31 on sales of $1.25 billion. Such uneven performance has dogged Siemens for years. Time and again, impressive quarterly numbers at places such as Erlangen, Germany-based Siemens Medical Solutions, which provides equipment and services for hospitals, have been canceled out by crises at other groups, such as last year's $350 million recall of defective streetcars. The inconsistency is one reason why Siemens still suffers a so-called conglomerate discount. Merrill Lynch & Co. estimates the company is worth about 15% less as a group than it would be broken up. As Kleinfeld pushes harder to fix things, resistance from the rank and file is bound to stiffen. Already, there is grumbling that Kleinfeld is too demanding, too quick to punish perceived incompetence. ``He is very impatient,'' says one departing executive. Asked whether this is true, Kleinfeld says: ``I've always believed in high-performance organizations.'' Still, Kleinfeld can probably count on the support of many executives and engineers keen to be more competitive with the likes of General Electric Co. ``Managers can already see results,'' says Matthias Bellmann, a former group vice-president for human resources at Siemens Information & Communication Networks in Munich, where he worked closely with Kleinfeld. How will Siemens get all cylinders firing? Part of Kleinfeld's plan, which he calls Fit 4 More, aims to boost sales via acquisitions. Siemens has already bought companies worth $3.6 billion this year, including Austrian engineering firm VA Tech and CTI Molecular Imaging Inc., a Knoxville (Tenn.) maker of diagnostic equipment. Kleinfeld says such purchases will help the company latch on to global trends such as rising spending on health care in developing countries or the growing use of wind power. ``We are surfing big-time on a number of megatrends,'' he says. Kleinfeld's toughest task may be to remold the mind-set of Siemens' managers and employees so that they can keep up with the accelerating pace of technological change as well as the emergence of new economic powers such as India and China. ``The landscape of our customers and competitors is changing drastically,'' he says, ``You have to adapt to that.'' Kleinfeld is leading by example, documenting his frenetic schedule on a daily internal quasi-blog. ``Spent a few days in Mumbai, Kalwa, and Delhi,'' he wrote during a trip to India in April. ``The energy and sheer potential in this region are tremendous.'' People who know Kleinfeld say he prefers to get along with people, not crack down on them. ``You have to be hard in the beginning in order to be soft later on,'' says Hermann Simon, chairman of Bonn consulting firm Simon-Kucher & Partners, paraphrasing General Electric Co. ex-CEO Jack Welch. Kleinfeld still has plenty of problems to solve before he gets to play nice. Wish List Siemens' chief executive has set ambitious targets for problem groups UNIT CURRENT PROFIT
GOAL
Page 41 Raising the Bar At Siemens; First, Kleinfeld sold the handset biz. That leaves just 13 other big problems to solve Business Week August 1, 2005
MARGIN COMMUNICATIONS
-0.5%
8%-11%
-10%
5%-6%
3.5%
4%-6%
1.3%
7%-9%
2.1%
7%-9%
0.4%
5%-7%
telco infrastructure SIEMENS BUSINESS SERVICES IT services and outsourcing INDUSTRIAL SOLUTIONS AND SERVICES manufacturing technology LOGISTICS AND ASSEMBLY SYSTEMS postal automation, airport baggage handling BUILDING TECHNOLOGIES climate control and security systems TRANSPORTATION SYSTEMS trains, streetcars, subways * Quarter ended Mar. 31, 2005 (Siemens fiscal second quarter) Data: Siemens LOAD-DATE: July 28, 2005 LANGUAGE: ENGLISH GRAPHIC: photograph, Photograph: TRAIN IN VAIN: The company's transportation business is barely turning a profit PHOTOGRAPH BY STEFAN BONESS/IPON photograph, Photograph: MAN OF ACTION: Critics say Kleinfeld's lofty goals could trip him up PHOTOGRAPH BY ALEXANDRA WINKLER/REUTERS PUBLICATION-TYPE: Magazine JOURNAL-CODE: BW
Copyright 2005 The McGraw-Hill Companies, Inc. http://www.mcgrawhill.com All Rights Reserved
Page 42
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Business Week August 1, 2005
Is AIG Turning a Corner? BYLINE: By Gene G. Marcial SECTION: Inside Wall Street; Pg. 102 Vol. 3945 LENGTH: 272 words
Seasoned large-cap value investor Saul Eisenberg loves a real bargain, especially those that the Street has cast aside -- such as American International Group (AIG), which New York Attorney General Eliot Spitzer and the Securities & Exchange Commission are investigating for accounting fraud. Since the massive probe began in February, shares of the giant global insurer have plunged -- from 73 on Feb. 11 to 50 by Apr. 22. Eisenberg, of M&R Capital Management, started buying in March, when AIG was at 56. Although most investors still view it as fraught with risks, Eisenberg sees AIG as a steal. ``Crunching the numbers to get the probe's worst-case impact, we saw that AIG was way oversold,'' he says. He sees the stock, now at 60, hitting 75 in a year. Prior to AIG's five-year restatement of its financial results, the Street had expected the company to earn $5.24 a share in 2005. Recently, William Wilt of Morgan Stanley (which did banking for AIG) upped his 2005 forecast to $5 a share from $4.80, and his 2006 forecast to $5.40 from $5.35. He says it is increasingly likely that AIG will recapture business momentum. Bijan Moazami of investment firm Friedman, Billings, Ramsey Group says the foreign life/retirement services unit -- 29% of AIG's total revenues -- will be a key driver in its overall growth. Overseas operations are growing fast, particularly in Japan, India, and China. Note: Unless otherwise noted, neither the sources cited in Inside Wall Street nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.
LOAD-DATE: July 28, 2005 LANGUAGE: ENGLISH GRAPHIC: illustration, Illustration: Chart: THAT'S WHAT A PROBE DOES CHARTS BY ALBERTO MENA/BW PUBLICATION-TYPE: Magazine JOURNAL-CODE: BW
Copyright 2005 The McGraw-Hill Companies, Inc. http://www.mcgrawhill.com
Page 43 Is AIG Turning a Corner? Business Week August 1, 2005
All Rights Reserved
Page 44
11 of 14 DOCUMENTS
Business Week August 1, 2005
Ready. Set. Innovate BYLINE: By Stephen J. Adler, Editor-in-Chief SECTION: Editor's Memo; Pg. 14 Vol. 3945 LENGTH: 314 words
The creativity economy may sound like another overhyped catch-phrase, but companies that have embraced the concept are gaining a bottom-line edge over those who haven't. In this issue and the July 21 launch of an exciting Innovation & Design channel at BusinessWeek Online, we're embracing it, too. What we're saying is that innovation and design point the way out of a lot of the difficulties U.S. companies face as high-paying jobs in tech and manufacturing shift overseas. It may be less expensive to build computers or cars in India, China, or Eastern Europe. But the smartest U.S. companies are learning that they can still lead the way if they listen closely to their customers and rethink product design. That's how Starbucks can charge so much for a cappuccino and why the Swiffer is eclipsing the mop. This Special Report by our own design guru, Bruce Nussbaum, charts the rise of the Creativity Economy and details how executives can build their own creative corporations. Few writers are better equipped to introduce you to the innovative future than Nussbaum, who was recently named one of the 40 most significant people in design by I.D. magazine. Meanwhile, at BusinessWeek Online, you'll find our brand-new Innovation & Design channel, conceived by Nussbaum and created by a team led by Online Editor-in-Chief Kathy Rebello and channel editor Jessie Scanlon. Jessie joins us from Wired, where she wrote extensively and impressively on design and technology. The I&D channel will bring you the latest in innovation ideas, tools, and methods from top researchers, designers, consultants, and analysts around the world. It will also offer sub-channels on cars, branding, architecture, and gaming (for all those secret Xboxers and PlayStation maniacs). Our goal is to create a community where people can engage in a lively conversation and, of course, get creative! LOAD-DATE: July 28, 2005 LANGUAGE: ENGLISH GRAPHIC: photograph, Photograph: NUSSBAUM: Design guru PHOTOGRAPH BY ANDREW POPPER PUBLICATION-TYPE: Magazine
Page 45 Ready. Set. Innovate Business Week August 1, 2005
JOURNAL-CODE: BW
Copyright 2005 The McGraw-Hill Companies, Inc. http://www.mcgrawhill.com All Rights Reserved
Page 46
12 of 14 DOCUMENTS
Business Week June 27, 2005
SIEMENS' TOUGH GUY GETS GOING; CEO Kleinfeld's first big move was to sell the troubled handset biz. That leaves just 13 other big problems to solve BYLINE: By Jack Ewing in Frankfurt SECTION: European Business: GERMANY; Pg. 30 Vol. 3940 LENGTH: 1227 words
Siemens CEO Klaus Kleinfeld has always been known as a hard worker, but since becoming boss he seems to have shifted to warp speed. The change started just before he took over the $91 billion German engineering and electronics giant on Jan. 27. Kleinfeld spent a weekend at his Munich home writing letters to the company's 450 biggest customers. Then he decided to visit the top 100 himself, an odyssey that took him to Britain to meet with BT Group PLC Chairman Christopher Bland and to China for face time with top managers of steelmaker Baosteel. Kleinfeld, who likes to compete in marathons, makes it sound as though he barely broke a sweat as he managed to visit all 100 key accounts in his first 100 days as CEO. ``It was very ambitious, but once you set the goal you realize how easy it is to reach it,'' he told BusinessWeek. Kleinfeld has already achieved another goal that eluded his predecessor, Heinrich von Pierer, ending the struggle to turn around the mobile-phone business. On June 7 he unloaded Siemens' money-losing cellular handset unit to Taiwan's BenQ Corp. The deal, which will cost Siemens $425 million in write-offs, integration costs, and payments to BenQ, surprised some who thought Kleinfeld would find a less radical solution. He could have put the business into a joint venture, retaining some control. Instead, the deal showed that Kleinfeld isn't kidding when he says problem businesses will be fixed, sold, or closed. Sure, von Pierer said that, too, and spun off Siemens' semiconductor and components businesses in the late 1990s because of their volatile earnings. But selling the whole mobile handset business, headquartered in the middle of Siemens' sprawling corporate campus outside Munich, was something new. ``He's willing to take action, and he's willing to take risks,'' says Peter Schneidewind, a principal at Munich's Roland Berger Strategy Consultants, who deals with Siemens. It's already paying off. Since early May, when rumors started to circulate that Siemens would exit mobile handsets, the share price has risen 8%, to $74. By contrast, BenQ's stock price fell as investors looked askance at the deal. One goal achieved, many others to meet. In April the 47-year-old Kleinfeld vowed that all 13 Siemens business divisions will meet their profit targets within two years. That was a brash statement, considering that only rarely has Siemens managed to get all divisions humming at once. Siemens Transportation Systems, which makes trains, subways, and streetcars, is aiming for a profit margin of 5% to 7%. But in the most recent quarter it barely broke even, reporting operating profit of just $5 million on sales of $1.1 billion. Some think Kleinfeld could be setting himself up for failure
Page 47 SIEMENS' TOUGH GUY GETS GOING; CEO Kleinfeld's first big move was to sell the troubled handset biz. That leaves just 13 other big problems to solve Business Week June 27, 2005 by setting such ambitious milestones, but he disagrees. ``I would not call it a risk. It's just a question of consistency,'' he says, pointing out that the targets were set in 2000 under von Pierer but never met. Siemens' overall profit also leaves something to be desired. Net profit slipped 3% in the quarter ended Mar. 31, to $945 million on sales of $22.5 billion. LAGGARDS The sale to BenQ rids Siemens of its most visible problem area. But there are plenty of other headaches. Siemens Business Services (SBS), the company's IT outsourcing arm, lost $156 million in the quarter ended Mar. 31. Analysts expect Siemens to sell a piece of SBS if it can find a buyer. (A spokesman for SBS declined to comment.) Other groups are only marginally profitable, such as Siemens Building Technologies, which provides systems to manage temperature and security for large buildings. It reported a profit of $27 million in the quarter ended Mar. 31 on sales of $1.25 billion. Such uneven performance has dogged Siemens for years. Time and again, impressive quarterly numbers at places such as Erlangen, Germany-based Siemens Medical Solutions, which provides equipment and services for hospitals, have been canceled out by crises at other groups, such as last year's $350 million recall of defective streetcars. The inconsistency is one reason why Siemens still suffers a so-called conglomerate discount. Merrill Lynch & Co. estimates the company is worth about 15% less as a group than it would be broken up. As Kleinfeld pushes harder to fix the problems, resistance from the rank and file is bound to stiffen. Already, there is grumbling that Kleinfeld is too demanding, too critical, and too quick to punish perceived incompetence. ``He is very impatient,'' says one executive who left voluntarily as his unit faced downsizing. Asked whether this it true, Kleinfeld says: ``I've always believed in high-performance organizations.'' No doubt Kleinfeld will face foot-dragging from people reluctant to change. But he can probably also count on the support of many executives and engineers keen to be more competitive with the likes of General Electric Co. ``Managers can already see results,'' says Matthias Bellmann, former group vice-president for human resources at Siemens Information & Communication Networks in Munich. Bellmann, who worked closely with Kleinfeld, is now a member of the management board of Essen-based retailer KarstadtQuelle. How will Siemens get all cylinders firing? Part of Kleinfeld's plan, which he calls Fit 4 More, calls for boosting revenues via acquisitions. Siemens has already bought companies worth $3.6 billion this year, including Austrian engineering firm VA Tech and CTI Molecular Imaging Inc., a Knoxville (Tenn.) maker of diagnostic equipment. Kleinfeld says such purchases will help the company latch on to big global trends such as increased spending on medical care in developing countries or the growing use of wind power. ``We are surfing big-time on a number of megatrends,'' he says. NOT TOO BUSY TO BLOG Kleinfeld's toughest task may be to remold the mind-set of Siemens' managers and employees so that they can keep up with the accelerating pace of technological change as well as the emergence of new economic powers such as India and China. ``The landscape of our customers and competitors is changing drastically, and you have to adapt to that,'' he says. Kleinfeld is leading by example, documenting his frenetic schedule on a daily internal quasi-blog. ``Spent a few days in Mumbai, Kalwa, and Delhi,'' he wrote during trip to India in April. ``The energy and sheer potential in this region are tremendous.'' People who know Kleinfeld say he prefers to get along with people, not crack down on them. ``You have to be hard in the beginning in order to be soft later on,'' says Hermann Simon, chairman of Bonn consulting firm Simon-Kucher & Partners, paraphrasing General Electric Co. ex-CEO Jack Welch. Kleinfeld still has plenty of problems to solve before he gets to play nice.
Page 48 SIEMENS' TOUGH GUY GETS GOING; CEO Kleinfeld's first big move was to sell the troubled handset biz. That leaves just 13 other big problems to solve Business Week June 27, 2005 Wish List Siemens' chief executive has set ambitious targets for problem groups UNIT CURRENT GOAL PROFIT MARGIN COMMUNICATIONS
-0.5%
8%-11%
-10%
5%-6%
INDUSTRIAL SOLUTIONS AND SERVICES 3.5%
4%-6%
(telco infrastructure) SIEMENS BUSINESS SERVICES (IT services and outsourcing) (manufacturing technology) LOGISTICS AND ASSEMBLY SYSTEMS
1.3%
7%-9%
2.1%
7%-9%
0.4%
5%-7%
(postal automation, airport baggage handling) BUILDING TECHNOLOGIES (climate control and security systems) TRANSPORTATION SYSTEMS (trains, streetcars, subways) * Quarter ended Mar. 31, 2005 (Siemens fiscal second quarter) Data: Siemens LOAD-DATE: June 23, 2005 LANGUAGE: ENGLISH GRAPHIC: photograph, Photograph: TRAIN IN VAIN The company's transportation business is barely turning a profit PHOTOGRAPH BY STEFAN BONESS/IPON photograph, Photograph: RAISING THE BAR Critics say Kleinfeld's lofty goals could trip him up PHOTOGRAPH BY ALEXANDRA WINKLER/REUTERS PUBLICATION-TYPE: Magazine JOURNAL-CODE: BW
Copyright 2005 The McGraw-Hill Companies, Inc. http://www.mcgrawhill.com All Rights Reserved
Page 49
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Business Week June 20, 2005
HYUNDAI: CROWDING INTO THE FAST LANE; The Korean car manufacturer is making a powerful push into emerging markets BYLINE: By Moon Ihlwan in Seoul, with Jason Bush in Moscow SECTION: BusinessWeek International Editions: Asian Busin; Pg. 26 Vol. 3938 LENGTH: 791 words
When Moscow construction foreman Anatoly Berestovoi started shopping for a new car, he didn't want to go with a Russian-made model. ``It would be patriotic, but unfortunately the quality leaves a lot to be desired,'' he says. Instead he settled on a $15,390 Hyundai Elantra compact built in Korea. He liked the air conditioner, air bag, stereo, and antilock brakes -- and the fact that it was cheaper than similarly equipped Japanese models. ``The trade-off between price and quality is definitely in this car's favor,'' Berestovoi says. Auto buyers in developing markets worldwide are making that same calculation -- and coming up with the same answer -- more and more often. Although Hyundai Motor Co. was a latecomer to many emerging markets, this year it is trouncing more established rivals. In India, Maruti Udyog Ltd. (controlled by Japan's Suzuki Motor Corp.) held 80% of the market until the late 1990s. Today, Hyundai is a strong No. 2 and is vying for leadership in small cars. In China, where Hyundai began selling cars in earnest only in 2003, the company skyrocketed to the top spot in the first quarter of 2005 by moving 56,064 Elantras and Sonata sedans off its showroom floors -- more than double what it sold a year earlier. In Russia, Hyundai jumped into the lead among foreign brands last year. Hyundai's steady rise in the U.S. has commanded the attention of investors and rivals alike. But its drive into emerging markets may prove just as important to the company's goal of becoming the world's fifth-largest auto maker -and just as disruptive to competitors' plans. The Korean company is trying to outflank its rivals and take over smallish markets before they grow, building large, modern plants to give it and its suppliers the economies of scale they need to operate profitably. HARD LESSONS The risk is huge. The plants aren't cheap to build, and Korean rival Daewoo Motor followed a similar strategy in the 1990s, adding new plants in far-flung locations such as Uzbekistan and Vietnam before going belly-up in 1999. Hyundai, though, has focused on more promising markets, and it's not racking up huge losses. In fact, its margins in India and China are higher than its overall operating margin. ``Once we decide to enter a market, we make an all-out push,'' says Kim Jae Il, who heads Hyundai's international business.
Page 50 HYUNDAI: CROWDING INTO THE FAST LANE; The Korean car manufacturer is making a powerful push into emerging markets Business Week June 20, 2005 That strategy stands in stark contrast to many bigger rivals. In India, for example, U.S. and Japanese carmakers tiptoed into the market in the '80s and '90s with tired offerings built from imported kits. Hyundai held off until 1998, but then set up a plant capable of building 100,000 of its latest-model cars a year and established a network of dealerships and service stations. ``It was a no-brainer for Indian customers to figure out who offered the most up-to-date technologies,'' says Min Wang Sik, who oversees Hyundai's sales and marketing in India. As India's economy boomed, sales from plants there rose to 215,630 last year from 111,051 in 2002, and the factory has since been expanded to a capacity of 250,000. There's plenty of homework, though, that precedes Hyundai's assault on any market. The company floods each country with engineers, who spend months studying consumer habits and potential pitfalls. This followed a hard lesson in Canada, where Hyundai assembled Sonata sedans in the late 1980s, losing some $1 billion and shuttering the plant three years after it opened. ``It almost looks like Hyundai is in a sprint once it sets up shop, but following the [Quebec] experience they carry out extensive studies when they make new investments,'' says Ahn Soo Woong, auto analyst at Hanwha Securities Co. in Seoul. That's one reason why Hyundai hasn't done much in Brazil, an emerging market often coveted by auto makers. Hyundai officials say Brazil is too crowded, with 14 manufacturers operating at less than half their capacity on average. So the company has bided its time, though it plans to let a local partner assemble its cars there next year. It's the method the company relies on for two models sold in Russia, where uncertainty lingers even though the Korean company doubled sales, to 22,418 vehicles, in the first four months of 2005. Although Hyundai is still considered a low-end car in many developed countries, in emerging markets it's seen as a high-quality manufacturer -- and it doesn't want to blow that image. So this year, it's launching a revamped Sonata in China, India, and Russia just a few months after the car is introduced in the U.S. It's a formula that so far has added up to booming sales from Moscow to Madras. If Hyundai muscles its way into the Top Five of global auto makers, it will have consumers like Anatoly Berestovoi to thank. LOAD-DATE: June 16, 2005 LANGUAGE: ENGLISH GRAPHIC: illustration, Illustration: Chart: MARKET DEVELOPMENT CHART BY ERIC HOFFMANN/BW photograph, Photograph: PORT OF MADRAS Made-in-India Hyundais awaiting export PHOTOGRAPH BY JAY/EPA PUBLICATION-TYPE: Magazine JOURNAL-CODE: BW
Copyright 2005 The McGraw-Hill Companies, Inc. http://www.mcgrawhill.com All Rights Reserved
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Business Week June 13, 2005
Delivering The Goods At FedEx; Founder-CEO Frederick Smith reflects on the company's high-flying growth BYLINE: Staff SECTION: The Corporation: Q&A; Pg. 60 Vol. 3937 LENGTH: 734 words
The past three years have been absolutely, positively great ones for FedEx Corp.: The Memphis delivery giant saw its stock rise 70% over that period, and profits more than doubled in the past year alone -- a performance that earned FedEx Corp. the No. 39 spot in the BusinessWeek 50 rankings this past April. Atlanta bureau chief Dean Foust sat down with founder and Chief Executive Frederick W. Smith recently to discuss trends in the business. Edited excerpts follow: FedEx has had quite a nice run over the past three years. What were the keys? First, we worked hard to build a unique international network. The second is that back in the mid-'90s we recognized that our customers wanted us to broaden the things that we did for them. They particularly wanted us to be in the ground package business, they wanted us to be in the freight business -- so we made some good acquisitions, and I think we engineered their absorption into the FedEx system well. Your China traffic has been growing 50% annually. Is there a point at which your international becomes bigger than your domestic business? It would not surprise me if, fast-forward 10 years, the international portion of FedEx Express is a bigger revenue generator than the domestic [express] part of the business. The Internet has created something that has just never been true in human history before. You have a low-cost, standardized system on virtually every desktop in the industrialized world, which allows you to see the wares of anybody who wants to sell something without regard to time and place. And we can facilitate trade between these completely unprecedented supplier-buyer relationships. I go in a FedEx hub [and] I'm just always shocked -- you see something from Georgia of the former Soviet Union going to Hattiesburg, Miss., or something like that. You just say, ``My, that's the most incongruous thing that I ever saw.'' What are some of the new services you see adding in coming years?
Page 52 Delivering The Goods At FedEx; Founder-CEO Frederick Smith reflects on the company's high-flying growth Business Week June 13, 2005 I think that probably 10 years from now you'll actually be able to watch a shipment in transit. You'll be able to see things as they're actually moving, not just as they go through a gate, if you will, and are scanned by a human being. There will be some intelligence in the shipment so that you have real-time visibility. What are going to be the growth markets over the next 20 years? I think Brazil is becoming a major economic force. In all likelihood, if you fly the airline system for [more than] a couple of days, you'll be on a Brazilian-built airplane, Embraer, which is a heck of a plane. Their agricultural economy has really taken off. India, same thing. I mean India has deregulated, eliminated a lot of bureaucracy, signed an open-skies agreement with the United States -- which is a reason I think that China will do so, too -- and their economy is booming. I think Eastern Europe's going to grow. It's inexorable. The demographics of Western Europe are such that they can't really sustain themselves unless they have growth markets and people to come in and work in those societies, and the natural affinity is Eastern Europe. FedEx has clearly been a beneficiary of globalization and free trade. But in the past year some economists, such as Paul A. Samuelson, have questioned the long-held tenet that free trade benefits all countries. Have you seen anything that has made you waver? I have the greatest respect for Professor Samuelson. [But] I have to say I'm a lot more optimistic. People [in the U.S.] are very creative; they'll figure out how to make things and sell things. This time last year, Boeing was a dead duck. ``Airbus is going to rule the skies, Boeing's got all these problems.'' Well, guess what? Up in Seattle [at Boeing], they had all these guys cooped up, figuring out some pretty nifty things, and now they're selling 787s like hotcakes. They're back in the game. Plus the advantages of scale: How can you not be interested in a potential market in excess of a billion people in India or China? I think that trumps the fact that our textile industry is going to China. You're 60 now. Do you see staying past 65? I don't know. A lot of it depends on how I feel. I had a heart bypass, but in retrospect that might have been the best thing that ever happened to me. I can't figure out anything else I'd rather do. My wife sure as heck wouldn't let me stay at home all the time, so I'd have to do something else.
LOAD-DATE: June 9, 2005 LANGUAGE: ENGLISH GRAPHIC: photograph, Photograph: SMITH: "Customers wanted us to broaden" services PHOTOGRAPH BY EVAN KAFKA PUBLICATION-TYPE: Magazine JOURNAL-CODE: BW
Copyright 2005 The McGraw-Hill Companies, Inc. http://www.mcgrawhill.com All Rights Reserved