- December 2, 2011
- What Makes the U.S. Special
Technology from innovative companies in Silicon Valley—think Apple, Google, Amazon.com and Facebook—has permeated our workplace and home. As one tiny example, what startup company provided the smartphone, computer or even printed version allowing you to read this blog right now?
Experts analyzing Silicon Valley’s economic power use Apple as an example: Two poor, hard-working guys had the freedom to set up shop in a garage, and by pure ingenuity and skill and creativity, grew their company to become one of the most highly respected businesses in the world. Apple employs more than 64,000 people today and, in its most recent fiscal year, generated $180 billion in revenues, with more than $80 billion in cash on its books.
Richard Florida of The Atlantic recently praised Silicon Valley’s entrepreneurial spirit, declaring that “the very essence of America’s economic and cultural DNA is its ability to generate ever-new generations of startups…startups that forever shift the nation’s whole economic structure.”
This economic and cultural DNA is difficult to reproduce elsewhere, says essayist and author Paul Graham. There are many advantages to starting a business in the U.S., including an open immigration policy, excellent universities, a large domestic market, and venture funding. He says what stops other countries from having their own version of Silicon Valley are obstacles such as rigid labor laws, bureaucratic hassles, regulations and access to debt instruments.
Similar hindrances seem to have sprouted in the U.S. in recent years in the form of regulations. Per the Small Business Administration (SBA), the cost of federal regulations stands at $1.75 trillion, or more than $8,000 per employee. Small businesses bear a disproportionate share of the federal regulatory burden as companies with fewer than 20 employees have a cost per employee that is a third more than larger companies, according to data from the SBA.
Many argue these new regulations have not only constrained companies and made them less profitable—or in some cases, prevented businesses from starting—but they also have shifted wealth from Main Street and Wall Street to K Street. Business is booming for consulting and lobbying firms in the Washington D.C. area, where Bloomberg News reported that an associate attorney with one to eight years of experience can bring home a median salary of $186,250 a year. This is about a third more cash than the median peer earns outside of D.C.
These elevated salaries have helped the D.C. area become the wealthiest metropolitan area in the U.S. this year, overtaking the aforementioned Silicon Valley, according to the U.S. Census Bureau.
The number of lobbying firms on Capitol Hill has increased 30 percent since 1998, says the Center for Responsive Politics. Below shows how lobbying spending has also steadily increased over the past several years with a record $3.5 billion spent in 2010.
Another booming business is contracting firms. In “Government dollars fuel wealth: D.C. enclaves reap rewards of contracting boom,” The Washington Post stated that the government “remains an engine of job creation, outsourcing its tech support and other services.” In 2011, “more than $80 billion in federal contracting dollars will flow to the region,” says the newspaper. Money to contracting firms has steadily risen over the past three decades, but has shot up significantly in the last 10 years. Adjusting for inflation, this record-high 2011 figure is seven times higher than it was in 1980.
Lately, there have been some rather deflating opinions about the U.S. At the CLSA AsiaUSA conference I attended in November, U.S. pollster and author Frank Luntz shared his proprietary method of defining American sentiment. When he asked, “Which word or words describe how you feel about living in America today?” he found that Americans are more worried and frustrated and are feeling less confident and successful.
Luntz’s findings are supported by a recent Pew Research Center survey which showed Americans aren’t as confident in the country as they have been in the past. Pew polled people around the world, asking if they agreed with the statement, “Our people are not perfect, but our culture is superior.” In 2002, 60 percent of Americans polled agreed with this statement. Today, only 49 percent of people believe in this superiority.
What’s most alarming about Pew’s findings is that only 37 percent of U.S. citizens aged 18 to 29 believe in this statement. This is the age bracket Steve Jobs and Steve Wozniak fell in when they started Apple.
The reasons for increasing pessimism vary depending if you ask a republican or a democrat, or a supporter of the Occupy Wall Street or the Tea Party, but I believe it’s not about political parties, but political policies. In Florida’s article, he questions if readers would rather have a “dynamic, innovative, self-revolutionizing” economy, or a “staid and static one, built around older and potentially more vulnerable industries?”
My guess is that many people would opt for the first choice. The entrepreneurial spirit is what makes the U.S. special and provides a template emerging countries look to follow. For America to remain an incubator for the world’s best business, technology and inventive ideas, we believe that policies that promote prosperity must be put in place.
By clicking the links above, you will be directed to a third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor.
The following securities mentioned were held by one or more of U.S. Global Investors Fund as of 9/30/11: Apple, Google, Starbucks, Hewlett-Packard Co., Lockheed Martin Corp.
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- November 28, 2011
- With Rising Wages, Will China Remain a Manufacturing Hub?
Earlier this month, I spent a few days at the CLSA AsiaUSA Forum in San Francisco, which offered a geopolitical and economic intellectual feast for global investors. The research firm gathered a well-rounded cast of engaging speakers that included Republican Presidential candidate Herman Cain, Hall of Fame quarterback Steve Young, Pollster extraordinaire Frank Luntz and renowned physicist Dr. Michio Kaku. Here’s a photo I snapped during a Q&A session with former U.S. Vice President Dick Cheney.
Year-after-year I make it a point to attend this conference because of the comprehensive examination CLSA puts together on the factors affecting global markets. To gather its exclusive knowledge of Asia, the research firm posts its analysts in the U.S. and many Asian countries, including China, Indonesia and the Philippines.
CLSA often discusses the numerous opportunities for U.S. businesses in China because of the rise of the Asian middle class, an increasing urbanization rate, and additional disposable income. The latter has been partially spurred by recent increases in wages. In fact, many people in China saw their wages rise 20 to 30 percent last year.
However, while these wage increases have been positive to the Chinese consumer and the companies which sell the goods, they have prompted many people to ask me how rising wages affect China’s status as a low-cost manufacturing hub for the world. Does this reduce the profitability of companies that expect to continue to benefit from the country?
This is where CLSA’s more balanced view of China’s business landscape is not only helpful, but essential. It is not enough to look at rising wages to appreciate how attractive China is for businesses. To get a better understanding, let’s compare three factors—the World Bank’s Ease of Doing Business score, minimum wage and workforce size—across several Asian markets. The World Bank annually analyzes regulations that either enhance or constrain business activity among 183 economies. For a business that wants to expand into different markets, this report is helpful in determining the ease or difficulty in obtaining construction permits, electricity and credit, as well as hiring workers and trading across borders.
On the World Bank’s scale, the business environment is easier in Thailand and Malaysia than in China and Vietnam, and companies would find it even more difficult to expand their businesses into Indonesia, India and Cambodia. However, Indonesia, India and Cambodia have cheaper labor markets than China or Thailand. But of all of these countries, China offers the largest labor market. CLSA says China makes for an “appealing hub for manufacturing” when you evaluate its unique combination of strengths together.
In addition, China’s workforce is better educated and more highly skilled compared to other Southeast Asian countries, says CLSA. China was also named the “world’s most connected economy” by the United Nations Conference on Trade and Development’s Liner Shipping Connectivity Index, when it comes to how integrated global shipping networks are to enable worldwide trade. The country also has superior infrastructure and trade connectivity compared to many emerging markets, “even occasionally besting developed economies,” says CLSA.
In 2010, countries such as Hong Kong, Japan, South Korea and Germany depended on China for data processing, apparel, and iron and steel exports. China also happens to be America’s third-largest destination for exports behind Canada and Mexico. China’s largest import partners in 2010 were Japan, South Korea, the U.S., Germany and Australia, according to the CIA World Factbook.
For those companies not already doing business in China, there’s one dominant factor that shows they should start: the vast domestic market. Companies may be able to find a cheaper workforce in Bangladesh, India or Sri Lanka, but being located in China allows convenient access to what is rapidly becoming the world’s largest consumer market.
I’ve discussed how many U.S.-based consumer discretionary businesses have been riding the wave of China’s growth all the way to the bank. Starbucks, Coca-Cola and Kraft have expanded their operations in recent years, as they have been converting the traditional tea drinkers to consuming other beverages including coffee, juice and carbonated drinks. (Read it now: China’s Rising Imports of American Goods.)
In American Classic Finds New Life in China, I talked about how American car company General Motors (GM), is also experiencing growth in Asia as Chinese consumers look to purchase their first automobile. According to the China Passenger Car Association, Shanghai-GM topped October’s list of the top ten largest automakers in China. In 2010, GM sold nearly 550,000 cars in China, and expects its global sales to expand by as much as 10 percent in 2012, says Bloomberg.
These are only a few examples of American companies benefiting from the rise of China. Have you positioned your portfolio to do the same?
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following securities mentioned in the article were held by one or more of U.S. Global Investors Fund as of September 30, 2011: Starbucks, Coca-Cola
The United Nations Conference on Trade and Development (UNCTAD) liner shipping connectivity index is generated from five components: (a) number of ships; (b) total container-carrying capacity of those ships; (c) maximum vessel size; (d) number of services; and (e) number of companies that deploy container ships on services from and to a country’s ports.
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- November 25, 2011
- American Classic Finds New Life in China
With a middle class that could to balloon to 1.4 billion people by 2030, China has become a lifeline for automakers looking to keep their profits afloat in a weak global economy. Through October 2011, more than 15 million new vehicles have been purchased in China, according to ChinaAutoWeb*. That’s about 3 percent higher than a year ago. Toyota, Audi, Volkswagen, BMW and Nissan are all searching for ways to tap into this fast-growing market.
One of the country’s biggest success stories is General Motors (GM), which has positioned itself as one of the most recognizable and highly sought after cars in China. Shanghai-GM topped October’s list of the top-ten largest automakers in China with more than 100,000 cars sold, according to data from the China Passenger Car Association. With the help of a joint venture with China’s SGM Wuling, GM is expanding its operations into emerging markets like China and India. The additional revenue streams from these growing middle classes are helping GM retake the title as the “world’s leading auto manufacturer,” a title it had given away to Toyota in 2008.
GM sold nearly 550,000 cars in China in 2010, more than triple its sales in the United States. The car company expects its global sales to expand by as much as 10 percent in 2012, according to Bloomberg*. The company has also announced plans to introduce its new Chevrolet Volt plug-in hybrid car in eight cities throughout China.
A recent article in The New York Times* says, “The American carmaker General Motors has found the Chinese market to be a life-saving opportunity for the reinvention of the Buick brand.” Buick, once called “damaged brand” by a GM executive, leads China in luxury and subcompact car sales and the Buick Excelle is the country’s top-selling sedan.
While U.S. drivers often stereotype Buick motorists as “drivers who have a soft spot for the early-bird special,” Buick is “one of the hottest luxury cars in China.”
GM’s rise to stardom didn’t happen overnight. The luxury brand was a proud favorite of the last Chinese Emperor, Pu Yi, who was a fond owner of not one, but two Buicks. Experts suggest GM’s longstanding legacy has helped America’s oldest surviving automobile to prosper in China.
GM isn’t the only company speeding up deliveries to China. GM, Volkswagen and Nissan are on schedule to collectively deliver more than 4 million vehicles to China in 2011, according to Bloomberg. In the past year Ford, Nissan and Chrysler have announced business plans to increase their annual auto output to China.
China’s car culture is still developing and has plenty of room to grow. The country still has a low rate of vehicle ownership and the total number of cars sold per capita is 13 times smaller than the U.S., according to research from McKinsey. In addition, nearly 80 percent of Chinese car purchases will be made by first-time buyers.
As millions of Chinese consumers open up their wallets for their first vehicle purchase; foreign automakers continue to position themselves to take advantage in this accelerating marketplace.
*By clicking the links above, you will be directed to third-party websites. U.S. Global Investors does not endorse all information supplied by these websites and is not responsible for their content.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The following securities mentioned in the article were held by one or more of U.S. Global Investors Fund as of September 30, 2011: Dongfeng Motor Co., Ford Motor Co.
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- November 11, 2011
- China's Rising Imports of American Goods
As Americans in the 1970s sang that they’d like to “teach the world to sing,” Coca-Cola was entering the Chinese market. More than 30 years later, China is the beverage company’s third largest market, and Coca-Cola is still seeing modest growth in China.
Many other U.S. companies have been growing in China over the past several years. In fact, USA Today recently reported that China is America’s third-largest export market, with the total U.S. exports of electronic, agricultural and other products to China rising an astounding 468 percent from 2000 to 2010.
In recent months, however, China’s imports have slowed following the strong rebound in 2009. On a year-over-year basis in October 2011, China’s total exports increased only 15.9 percent compared to total imports, which grew 28.7 percent. This difference compares favorably to October 2008, when imports decreased significantly more than exports. This discrepancy is not surprising, given the fact that Europe is China’s largest export market, according to Stratfor Global Intelligence.
In light of China’s domestic demand continuing, we took a look at a few U.S. companies in the consumer goods area that stand to benefit.
As traditional tea drinkers, Chinese have been slowly broadening their beverage options over the past 10 years and U.S. multinational companies have been reaping the rewards. Companies such as Nestle, Kraft, Starbucks, Coca-Cola and PepsiCo have enjoyed success in converting the tea lovers to consumers of other beverages, including coffee, juice and carbonated drinks.
When it comes to coffee in China, most of the purchases are made from retail outlets, in the form of processed or instant coffee, and bought from mainly two U.S. companies: Nestle and Kraft. Together they account for more than 80 percent of the market share in China, according to data from CLSA Asia-Pacific Markets Research group. However, coffee consumption remains far lower than consumption in the U.S. and Hong Kong. As you can see below, on a per capita basis from 2005 through 2010, while GDP has grown, consumption of coffee remains near zero.
While CLSA doesn’t anticipate the Chinese to consume much more than 3 kilograms of coffee, the research firm indicates that the Chindonesian markets together “still have at least two decades left of positive volume growth.”
On-trade consumption, which is coffee purchased at chains and fast-food outlets, also remains very low, says CLSA, but this hasn’t stopped Starbucks from forging new frontiers. This fall, the Seattle-based company opened its 500th store on the mainland—the company reports a total of 800 stores in Greater China. The strategy appears to be successful so far: The Financial Times indicated that sales in China grew between 30 and 40 percent during the third quarter.
By 2015, Starbucks plans to open 1,500 stores, although this number is low on a per person basis when you consider that in the U.S., there are more than 10,000 stores serving lattes and cappuccinos today.
The carbonated beverage market is growing as well. In this area of the beverage market, Coca-Cola and PepsiCo together have more than 90 percent market share in China, says CLSA. Over the past 10 years, the firm’s data shows the volume of carbonated drinks in China has increased an average of 8 percent per year, but the growth has been slowing in recent years due to rising health awareness and a maturing market.
However, Coca-Cola had continued growth over this last quarter: the company reported that worldwide volumes grew by 5 percent, primarily driven by operations in India and China.
This growth may be partially due to the company’s rising market share in the fruit and vegetable juice category. In a very fragmented market, over the past 10 years, CLSA shows that Coca-Cola has grown from virtually no market share in China’s fruit and vegetable juice category, to a 10 percent market share.
In China, fruit and vegetable juices by volume from 2005 through 2010 have experienced strong growth: CLSA says that the market for juices has grown 15 percent per year, driven by a rising health trend. Going forward, volume of fruit and vegetable juices should growth 10 percent per year over the next five years, and 8 percent a year during the 2016 through 2020 timeframe, says CLSA.
In China Fears – A Road Warrior’s View, I discussed how American companies are riding the wave of China’s growth all the way to the bank. From what they drink and eat to where they shop and what they buy, as increasing incomes provide more discretionary income, the dynamics of the Chinese consumer forever change. I believe savvy investors can benefit from these emerging trends.
The following securities mentioned were held by one or more of U.S. Global Investors Fund as of 9/30/11: Starbucks, The Coca-Cola Co.
By clicking the link above, you will be directed to a third-party website. U.S. Global Investors does not endorse all information supplied by this website and is not responsible for its content.
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- March 16, 2011
- Thinking Positive: Cash on the Sideline
The Wall Street Journal had a story over the weekend about companies hurting their shareholders by holding too much cash.
The story is based on research from Goldman Sachs estimating that the non-financial companies in the S&P 500 have piled up more than $800 billion in cash and liquid securities on their books.
The writer points out that, over the past year, companies with lots of cash have strongly outperformed the S&P 500 (ex financials).
But the writer also says that “squirreling away cash is almost as bad as frittering it away” and cites a study that “during bear markets over the long run…stocks with the biggest cash hoards have underperformed those with the least amount of extra cash.”
I have a hard time with the idea that squirreling and frittering are pretty much the same, but I agree that companies can hold onto too much cash for too long.
Current market conditions have corporations behaving like individuals in terms of taking a “wait and watch” position. And it’s true for individuals and corporations alike—cash gives you options, and the more of it you have, the more options you have.
If you don’t believe that, just ask the automakers, the banks and all of those once-prosperous companies that ran out of cash and went under as a result.
Companies will eventually regain the courage to spend, and when that happens, those with big cash stashes will have a huge advantage, be it for innovative capital investment, strategic acquisition or other forward-looking uses.
And that stands to be beneficial for those long-term shareholders who have held on through this extremely pessimistic time.
Of course, it also stands to be highly profitable for Goldman Sachs and others providing investment banking services if these cash-loaded companies start making deals again.
All opinions expressed and data provided are subject to change without notice. Some of these opinions may not be appropriate to every investor. The S&P 500 Stock Index is a widely recognized capitalization-weighted index of 500 common stock prices in U.S. companies. The following security mentioned in this article was held by the U.S. Global Investors family of funds as of 12-31-08: The Goldman Sachs Group Inc. 09-199
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