Apr 222012
how to read the corporate tea leaves

Where is the world economy heading? An interesting exercise by the website Business Insider looks at the earnings reports and announcements by some of the world’s biggest corporations to get an idea of the the direction of the global business world.

The results of Business Insider’s article are interesting and worthwhile of a closer look as we can see some real trends along with some risky bets by management who seem reluctant to acknowledge we’ve moved out of the 1980s.

China’s western water shortage

This is an interesting curve ball; one of the central planks of the China Cargo Cult that believes unfettered Chines growth will drive the world economy indefinitely is that the country’s inland provinces will grow in a similar pattern to that of the coastal provinces.

Anyone who has travelled in those provinces, particularly in the poorer Northern regions like Gansu, has seen first hand the serious erosion, desertification and water problems these areas face.

It shows the China story is not as simple as many of the cargo cultists believe.

Europe is not dead

Even in the darkest days there are opportunities for innovative organisations and regardless of what we think of McDonald’s products, they aren’t afraid to experiment and take risks.

McDonald’s move to “value meals” in Europe replicates what worked in the United States in both the 2001 and 2008 economic downturns. This appears to be working in Europe just as it did in North America.

We should also keep in mind that Europe is a diverse collection of cultures and economies so despair in Athens doesn’t necessarily mean pessimism in Arnhem.

The bottom of the US housing market

In his investor briefing, JP Morgan Chase CEO Jamie Dimon indicated the bank thought the US housing market is at the bottom subject to the American economy not going back into recession.

While it’s possible that the US housing market has bottomed, it’s highly unlikely we’re going to see the US housing market roar back to 2005 levels even if there is a US recovery so we shouldn’t be expecting hockey stick style growth in the US domestic sector driving the world economy as it did through the early 2000s.

Louis Vuitton confirms that the global market for ultra luxury goods is healthy

The entire luxury goods boom is a side effect of the massive amount of money pumped into to the world economy to deal with the 2008 economic crisis.

Like Macao casinos and Silicon Valley venture capital bubbles, this is transitory and at best a marginal influence on overall growth and employment.

It’s interesting how many presentations I’ve seen recently citing the luxury goods markets as evidence all is good in the world economy. This shows the desperation of those whose businesses rely on mindless consumerism.

China’s middle class will save us all

If you were searching for a corporate example of the economic cargo cult surrounding China, then Yum Foods would be one of the best.

The idea that China’s “consuming classes” will number half the nation’s population is some sort of economic Lake Wobegon, where everybody is above average.

Even if Yum’s prediction proves to be true, the nature of China’s economy and the nation’s stage of growth means consumption patterns of the country’s middle – or “consuming” – classes are going to more like those of Americans in 1912 rather than 2002 which undermines any business model based upon the late 20th Century’s profligate spending.

Businesses are once again investing in IT

Microsoft suprised us all last week with their profit results. Earnings from Windows, servers and office suites were all up on improved personal computer sales.

That businesses are investing in IT makes sense as one of the things that is cut early by organisations looking for savings is IT. That happened in 2009 in response to the economic crisis.

Even before the 2009 financial shock, businesses had been under-investing in IT partly because of Microsoft’s failure with the Vista operating system.

Now many businesses have decade old desktop computing systems and the pressures to upgrade are becoming intense.

The worry for Microsoft is Apple’s domination of mobile devices and the rise of cloud computing means that its not necessarily Microsoft will benefit from most of the IT investment.

Electricity prices will rise and low natural gas prices are unsustainable

Energy prices are a riddle within an enigma, however there’s certainly some distorting effects in these markets. CSX’s views on natural gas markets illustrate this.

We can expect more convulsions in energy prices as demand hinges on China, the US and European economic growth coupled with the threat of more conflict in Iran and Iraq.

Should China deliver the growth that the cargo cultists believe then energy prices will continue to climb, which may happen anyway.

The end of the telephone

Again Business Insider’s headline is a little misleading, as Verizon see the decline of the POTS – Plain Old Telephone System – networks that were designed around voice data and a switch to data based networks that don’t treat all traffic as information packets.

Data matters more than voice and we don’t want to be tied to a phone line.

That the telcos see mobile data as their main revenue drivers shouldn’t be a surprise as this has been the trend for two decades.

Consumers are borrowing again

This claim is a worry as it indicates some consumers – along with many lenders – are falling into the habits that nearly bought them unstuck in 2008.

A superficial view of the Amex announcement actually raises more questions than it answers and there’s a suspicion that the credit card provider is driving growth through special offers or reforming their excessive merchant charges.

Like JP Morgan, much of Amex’s optimism is based upon the US economy moving out of recession and American consumers resuming their credit binge. The latter may prove to be a bridge too far.

Winning in diverse European markets

Like McDonald’s, IBM sees plenty of opportunity in Europe and makes the point that, like Asia, the European markets are diverse.

IBM may turn out to be a more of a beneficiary of the increased IT spending that Microsoft is relying upon as Big Blue’s consulting services and cloud technologies are more attuned with where the enterprise computing market is going.

Also in an era of government austerity, IBM may be able to offer process savings to cash strapped agencies and authorities.

Asian consumers save the cigarette industry

There’s no doubt East Asian societies like a smoke so the idea that international tobacco brands see great opportunities in markets like South Korea, the Philippines and Indonesia shouldn’t be a surprise.

Interestingly China doesn’t feature in these projections as their market is largely closed to foreign manufacturers.

While the short term looks good for tobacco companies in East Asia, it’s difficult not to see that rising affluence starts to see public health and anti smoking campaigns similar to those in the West developing over the longer term.

Yahoo parties like it’s 1999

Web surfers want relevant content according to Yahoo’s management. Next month we’ll see these business giants claim social networks and cloud computing are the next big thing.

You can’t help but thing Yahoo’s management are very well qualified to tell us when horses have bolted and vanished over the horizon.

The problem for Yahoo is that customised content is expensive unless you’re going to “crowdsource” it with a social layer as Facebook does and Google is trying to do.

If Yahoo can pull something like this off – and there is no indication they can – then the business has a chance of surviving. Right now the smart money would be betting on the being broken up in the near future.

So where is the world economy going?

One unsurprising thing from these corporate projection is that some businesses are better prepared than others for the changes that are happening.

IBM and McDonald’s stand out as those prepared to innovate and change their business models to suit the prevailing situations.

Companies that believe the 1980s are just around the corner again seem to be the ones most vulnerable – its not surprising that its finance organisations like JP Morgan and Amex are betting the farm on continued massive growth in consumer debt.

The China Cargo Cultist are also vulnerable. If it turns out that Chinese growth – like US consumer spending in the 1980s – can’t go on forever then companies like Yum Foods are going to struggle with growth rates far lower than they expect.

One thing is clear, that there are a lot more nuances in the world’s economy that what you’d pick up from media headlines. The key for big and small entrepreneurs is figure out where these nuances present a business opportunity.

Black tea image courtesy of Zsuzsanna Kilian and SXC storck photos.

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