The Lameness of Western Banks' PRC Joint Ventures

♠ Posted by Emmanuel in China,MNCs at 11/10/2015 10:28:00 AM

Mainland PRC, where even the mighty barely roam.

It's 2015. Do you know how well international banks' joint ventures in China have done? The perhaps surprising answer is: not well at all. These banks have had to take joint ventures since wholly-owned foreign subsidiaries remain disallowed. With the notion that one cannot be left behind by not having a China presence, most Western majors have piled in at one point or another. Now, HSBC is taking another stab at it, with the advantage of potentially being allowed a majority stake for the first time as a Hong Kong-based entity. That said, the history of these JVs isn't all that promising:

So far, two decades of joint ventures in various forms have produced very limited tangible benefits for the overseas banks involved. Not only have they been limited to minority ownership, but the joint ventures enjoy only so-so profitability and their rankings in banking league tables are unimpressive for top-flight global institutions. 

The most damning evidence of international banks' futility in China is that, despite recent rule changes allowing them to up their stakes in their PRC operations from 33 to 49%, no one has taken up the option. Actually, observers believe that most are instead interested in finding an opportunity to exit their mainland JV operations altogether:

Firms set up variously by Credit Suisse, Royal Bank of Scotland, Deutsche Bank, Citigroup, JPMorgan Chase and Morgan Stanley (again, after it sold its CICC stake) have been allowed to underwrite primary equity and debt issuance but so far have been excluded from the far more lucrative secondary trading markets. All claim publicly to work well but rumours swirl constantly that one or other bank is looking for an exit. Gossip aside, it is worth noting that none of the western banks has as yet taken up the opportunity, since a rule change in 2012, to raise its stake from 33 per cent to 49 per cent.

In all fairness, the Communist Party restricts the profitability of these Western JVs. By limiting their activities to underwriting debt and equity issues--an already-crowded area for financial services instead of the more lucrative secondary market--money-making prospects are hurt:

 To be fair, judging success is not straightforward. JVs that are restricted to primary markets are competitive in the equity and debt issuance league tables but far down the rankings by profit. Most mainland securities houses make their money in trading, not underwriting, where intense competition has squashed fees to levels unimaginable on Wall Street. Many of the ventures have faced culture clashes that have made it hard to implement international practices, according to bankers involved. Some of the overseas banks also privately admit they picked partners who turned out to be weaker than they realised.

The logic of "having to be in China" despite limitations to what you can do has long since lost its luster. HSBC aims to buck the trend, though, and you wish them well even if things haven't gone swimmingly for its peers in the past.

Read More

Sunk-Cost Fallacy: MNCs in Venezuelan Socialist Hell

♠ Posted by Emmanuel in Latin America,MNCs at 2/03/2015 01:30:00 AM

Exciting foreign [currency] escapades await MNCs in Venezuela.

When it comes to all things dealing with "Venezuela" and "business," the correct advice since Hugo Chavez gained power was to hit the road. Get on the A320 and never look back. Apparently, some folks did not heed this commonsense advice for a country in the process of Zimbabwe-fication. While energy companies at least had the excuse of having potentially bountiful sources for energy reserves in sticking around, there were not any country-specific resources many others had.

These include all sorts of US-based consumer goods manufacturers who have persisted in staying in Venezuela. Having substantial plant, property and equipment, they could not readily see beyond the "sunk-cost fallacy" or "Concorde effect" which goes like this: Even if Venezuela turns into an even worse socialist hellhole day after day, we have invested so much money over the years here that we must persist in operating in this `@#$>;!? socialist hellhole." The end result is that the value of the assets of MNCs in Venezuela have to be significantly written down in value to account for the massive depreciation of the local currency.

Earlier on I discussed the incomprehensible Venezuelan foreign exchange system which had four tiers at the time. The trouble is that most American firms have not fully accounted for their foreign exchange losses yet:

At least 40 major U.S. companies have substantial exposure to Venezuela’s deepening economic crisis, and could collectively be forced to take billions of dollars of write downs, a Reuters analysis shows. The companies, all members of the S and P 500 and including some of the biggest names in Corporate America such as autos giant General Motors and drug maker Merck & Co Inc, together carry at least $11 billion of monetary assets in the Venezuelan currency, the bolivar, on their books.

The official rate is at 6.3 bolivars to the dollar and there are two other rates in the government system – known as SICAD 1 and SICAD 2 – at about 12 and 50. The black market rate, though, was at about 190 bolivars to the dollar on Sunday, according to the website dolartoday.com. The problem is that the dollar value of the assets as disclosed in many of the companies' accounts is based on either the rates at 6.3 or 12 and only a limited number of transactions are allowed at those rates. The assets would be worth a lot fewer dollars at the 50 rate in the government system and the dollar value would almost be wiped out at the black market rate.

Needless to say, the Venezuelan socialist government would rather die before giving Yanqui capitalists a dollar per 6.3 bolivars if they decide to flee Venezuela at this late a date. How do you practice mark-to-market accounting for Venezuelan operations? This is at least as intriguing as the notion of stabilizing the country formerly known as Ukraine using emergency IMF lending while it is being torn apart by civil war. The one most accurate is the black market rate of (gulp) 190 to the dollar, but that probably won't satisfy any accounting conventions. The end result is that MNCs cannot accurately reflect their foreign exchange losses just yet. That said, their losses even at 12 or 50 bolivars to the dollar are already substantial:

Diaper and tissue maker Kimberly-Clark Corp recently announced a charge of $462 million for its Venezuelan business, leading to a fourth-quarter loss for the company, after it concluded that the appropriate exchange rate was the SICAD 2 exchange rate at 50 rather than the 6.3 it had previously used.

Using the stronger exchange rates is unrealistic because of how hard it is to repatriate profits earned in Venezuela back to the United States at any rate, let alone those rates, securities analysts say. Citigroup Inc (C.N) says it has not been able to buy U.S. dollars from the Venezuelan government since 2008...

Ford Motor Co (F.N) and oil services company Schlumberger NV (SLB.N)  took big-ticket hits to their quarterly profits because of their Venezuelan operations. Ford took a fourth-quarter charge of $800 million and Schlumberger $472 million. A Ford spokeswoman said that it still values its Venezuela assets at about 12 bolivars per US dollar. But for Ford, the currency system and other conditions are so tough in the South American country that it has made an accounting change that will allow it to ring fence its Venezuela business so that it doesn’t have a direct impact on the company’s operating results. 

Schlumberger, which previously used the 6.3 rate, said it is now using the SICAD 2 rate of 50 as it "best represents the economics of Schlumberger’s business activity in Venezuela." Another S&P 500 company to switch to the 50 rate from 6.3 in recent weeks was industrial gases producer Praxair Inc (PX.N), which took a fourth-quarter charge of $131 million as a result. It also said the switch will hurt its revenue and earnings in 2015

These firms should have taken Carole King's advice a long, long time ago. Something has indeed died inside of Venezuela. It's called sanity.

Read More

How Large is the Domestic Footprint of MNCs?

♠ Posted by Emmanuel in MNCs,Outsourcing,Trade at 6/02/2014 02:00:00 AM

The answer is "not much." There's a very interesting thing going on worldwide as Western stock indices hit all-new highs week after week while their local economies suffer from stagnation. The archetypal example, of course, is the American joke/con-omy (its performance is laughable and is buoyed by dubious, unsustainable factors like falling incomes) which shrunk 1% in the first quarter of 2014. America #1, baby! How is it possible that the US economy is going nowhere fast but US-headquartered firms' equity valuations are zooming ever higher? Surely this is a classic case of Greenspan's "irrational exuberance"? Well, not necessarily, and the reasons why are relatively straightforward.

The Economist has an interesting feature on how (mostly) Western multinational corporations derive an ever-smaller share of their revenues at home, while their headcounts and shareholders head in a similar direction. Of course you can use stock valuation methods such as price-earnings ratios, dividend discount models and what else have you to derive how much these stocks are worth, but the important thing to keep in mind is that a lot of MNC earnings will increasingly come abroad. So their home economies may go nowhere fast--think of North America, Western Europe and Japan--but their revenues may be unaffected or likely even grow as most gains come from international operations in developing countries and the like.

It's interesting stuff, and I'll have more on how MNCs hardly act in the national interest as most IPE scholars believe. While these MNCs may successfully lobby their home governments for economic and trade favors, governments do not have the same sway over MNCs.

Read More

Will a US Tax Holiday Boost US Interest Rates?

♠ Posted by Emmanuel in Americana,MNCs at 11/03/2011 10:11:00 AM

There's an interesting video clip over at Reuters Breakingviews on how measly yields on interest-bearing instruments may increase Stateside in the aftermath of the declaration of a tax holiday. Designed to repatriate profits that US multinationals hold abroad by offering concessions on the statutory 35% tax rate to, say, 5.25% (which most corporations dodge anyway--witness those allegedly paying no taxes despite being profitable), the seemingly unrelated and surprising result may be higher yields.

In a nutshell, the argument is that firms which hold a collective $1.4 trillion or so overseas would have to liquidate their existing US Treasury holdings to bring home their foreign income. While I do have doubts about (a) the amount of Treasury holdings firms have and (b) the need to sell such holdings to effectuate repatriation, the video clip presents some thought-provoking ideas.

There's also talk of tax holiday "Dutch disease" insofar as benefits from additional government revenue may be blunted by a stronger dollar from these inflows hurting exports according to the Congressional Report Service.

Either way--the tax holiday's normative implications aside--there are interesting economic implications that may mitigate the revenue-enhancing argument for such an act.

11/4 UPDATE: Here is the text from Reuters Breakingviews if you're unable to access the clip above. Their reasoning involves MNCs having substantial holdings overseas kept not in cash but in nearly as liquid US Treasuries:

Another snag exists: much of the money is invested in Treasuries. The side effects of companies dumping all that paper need to be factored into the equation. Most of the overseas money is on the balance sheets of blue-chip pharmaceutical, technology and consumer goods companies with significant foreign sales and profits.

They include Pfizer, Microsoft, Cisco Systems and Procter & Gamble. Bringing the money home would mean paying taxes, so companies are hoping for a break from the current 35 percent top rate. Microsoft, for example, has $56 billion of cash on its books, $51 billion of which is outside the United States and almost entirely invested in Treasuries.

Securities filings suggest this is typical of multinationals. Investing in United States government bonds mitigates currency fluctuations, carries very little risk and keeps holdings liquid.

Read More