China takes a short-cut to power - This is an informative article (may require subscription registration) by John Gapper of the Financial Times. Here is a sample:
…a pattern is developing. One company cedes its intellectual property to a Chinese SOE [state owned enterprise] and then all of them are then squeezed to the margins of China's domestic market, and face a new competitor.
The business world: Observations on business, finance, media and technology
None of this is accidental, or a case of over-eager SOEs crossing the line. China wants to transform from being the factory of the world to an advanced economy and is using its market power to take a short-cut by "digesting" others' intellectual property. One State Council report called for the "absorption, assimilation and re-innovation of imported technologies".
The rail case has shocked foreign companies - Christian Murck, president of the American Chamber of Commerce in China, says it has "changed considerably" their commercial calculations - but they have shown little backbone in resisting it. "They squawk a bit but there has been no mass exodus," says Denis Simon, a professor at Pennsylvania State University.
The lesson the Chinese government will probably take from the affair is that it can get away with its "re-innovation" with impunity. Jeff Immelt, GE's chief executive, complained at a private dinner in June about China not wanting western companies "to win" but GE is now partnering with CSR in the US while Siemens bids with CSR for a Saudi Arabian contract.
The Chinese knack of copying products - the shanzai or "knock-off" culture that spawns imitations of iPhones and Adidas shoes - is an old challenge for western brands. It is hard to get too angry at China for going through a phase in which enforcement of intellectual property law is lax when countries including the US did the same.
But there is a difference between informal pirating, which the Chinese government accepts is a problem and has tried to curb, and the state-approved co-option of technologies. The former is private enterprise running wild whereas the latter is an official effort to leapfrog a phase of industrial development.
It is also an admission of weakness. Chief executives of private Chinese companies, particularly in technology and software industries, worry about their country lacking an innovative culture. In spite of high educational standards in Shanghai, they are concerned that people do not think creatively enough to produce the next Google.
My view - This policy of technology transfer as a precondition for access to China's markets is not new and has been discussed previously by Fullermoney.
Western and Japanese corporate management have succumbed to the short-term lure of immediate sales in China's booming market, at the cost of creating a formidable competitor for the future. This looks to me like a short-sighted policy, although they may feel that if they do not agree to China's demands, someone else will.
I do agree with John Gapper's comment that it is an admission of technological weakness by China although this is unlikely to trouble the country's rulers. Yes, China's authoritarian culture is unlikely to produce the next Google, but it will not feel that it needs to if it can gain technology as the price for access to its home market.
Browning Newsletter on Climate - An incomplete version of this fascinating letter from Fraser Asset Management was posted yesterday. The full edition has now been added to yesterday's Comment of the Day and is also posted in the Subscriber's Area today.l
Bernard Tan: Sayonara Nippon - My thanks to the author for this report. It is posted in the Subscriber's Area but here is a sample:
It is well documented that the Japanese population is shrinking. The following chart shows that the population has shrunk by an average of 115,000 per year since peaking in 2005.
What is not so well documented is the fact that the Japanese are also leaving the country in very significant numbers!
The Japanese Statistics Bureau tracks the number of Japanese passport holders entering and leaving the country every month. The next chart shows the annual NET DEPARTURES from Japan since 2003.
One can see that not only is the number of Japanese people falling by 115,000 per year, the number of Japanese actually living in Japan is also falling by a further 50-100,00 per year, thus bringing the annual erosion to approximately 200,000 per year.
Since Japan has an annual GDP per capita of around JPY 3.8 million. That's a theoretical loss of annual GDP amounting to JPY 760 billion! Although it's a mere 0.16% of 2009's nominal GDP, it is a big deal in a country where nominal GDP growth has averaged -0.4% over the past 10 years!
In fact, the actual damage is probably a lot worse that 0.16% because most of the people who leave are adults of economically productive age.
My view - To state the obvious, these are not encouraging signs and foreigners are also leaving Japan. However, Japan's stock market has experienced a revival of interest in the last six weeks, as you can see from this weekly chart of the Topix Index.
I think Japanese shares have attracted interest for the following reasons:
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Fullermoney Historic Archive: FM17 End September 1985 - Here is the latest in the sequential posting of the early hardcopy letters which have been scanned in PDF format.
Quote of the week - On lending long:
"Who would be prepared to lend with the fear of being repaid in depreciated currencies always before his eyes?"
Georges Bonnet, French foreign minister of the 1930s
Additional commentary by Eoin Treacy
Vietnam Insights: take a fresh look - I found this bullish report from HSBC and thought it may be of interest to subscribers. Here is a section on earnings:
We have put together a DuPont analysis of the return on equity (ROE) of Vietnamese companies. The DuPont model provides a framework to analyse the ROE by breaking it down into five components, as given below: ROE = Profit margin × Asset turnover × (1-Interest burden) × (1-Tax burden) × Leverage
Our universe includes most of the Ho Chi Minh Stock Index constituents excluding the financials sector and companies with patchy data. We have used 163 companies for 2007, 202 for 2008 and 220 for 2009, which we believe are still quite representative of the general trend.
The most remarkable finding of our analysis is that Vietnamese companies are delivering return on equity (ROE) that are as good as or better than its regional peers. In 2006, Vietnam's ROE was 21.1%, considerably higher than the Asia ex Japan average of 17.3%. In the following year, Vietnamese companies generated an ROE of 17.6%, almost equal to the Asia ex Japan average of 17.8%. In 2008, Vietnam ROE stood at 13.3%, higher than the regional average of 12.5%, while 2009 saw the ROE rising substantially to 18.6% from 13.3% in Vietnam, whereas the average ROE of the region remained at 13.5%. In 2009, the Technology sector had the highest ROE (30.8%) mainly because of higher margins, while Energy and Industrials recorded the lowest ROE of 14%, which still beat the Asia ex Japan average of these sectors.
My view - Vietnam has been off the radar of many Asia focused investors for much of the last two years and the market has lagged its regional and international counterparts. High inflation, a lack of faith in the political structure and the depreciating Dong have all contributed to the stock market's underperformance and remain challenges today. Vietnam has become one of the largest importers of gold in part because citizens have such little faith in the domestic currency.
The VN Index bottomed in February 2009 and has been ranging above 400 for the last 19 months and counting. It found support at the lower side three weeks ago and broke upwards to a new three-month high this week. A sustained move below 450 would be required to question scope for some further upside. A sustained move above 515 would break the yearlong progression of lower major rally highs and likely signal a return to medium-term demand dominance.
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Email of the day (1) - on lumber prices:
"I find that the lumber prices quoted by IG index are different from the ones given in our chart - lumber CME first month! Are these different contracts? If so, would it be possible to have a chart that corresponds to what IG is offering? Many thanks"
My comment - Thank you for this question which may also be of interest to other subscribers. We always roll our continuation charts with the most active contract. March currently has more than 4000 contracts so that is what the 1st month continuation chart now reflects. I called IG Index and they will not roll the January contact into the March until December 31st so I have added the expiring contact to the Chart Library for the intervening period.
Natural Gas Net Export Trends - This report by Jonathan Callahan from Mazema Science may be of interest to subscribers.
My view - Natural gas and oil share the common characteristic that some of the largest exporters are now consuming much more of their own product. This means that as previously prolific regions decline, exporting nations are increasingly becoming importers.
Prior to the build out of LNG infrastructure, it was difficult to transport natural gas except by pipeline. This situation was not conducive to a global pricing mechanism as is evident in the oil market. However this may be changing with the increasing potential to trade gas globally via super cooled tankers.
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Eoin's personal portfolio: commodity long increased - This section continues in the Subscriber's Area.
Weekend Reading - Thanks to a subscriber for submitting this list of academic reports, contributed in the spirit of Empowerment Through Knowledge.
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Email of the day (2) - on an addition to the Chart Library:
"May I request you to kindly add MESA URANIUM CORP (MSA.V) to our library? Thanks and regards"
My comment - Thank you for this suggestion which has been added to the Chart Library.