GM Harnesses the opportunity of Emerging Chinese Market

In a next step to recovering some of the value of GM, CEO Rick Wagoner has announced a massive investment in a joint venture research center in China. The $250 million investment will be focused on research into alternative fuel technologies, and will take place in Shanghai. The joint venture with China's state-run Shanghai Automotive Industry Corp and Liuzhou Wuling Motors Ltd will undoubtedly attract some degree of criticism from protectionists here and in Europe. But the strategic intelligence of this move must not be underplayed.

Since the developed world's competitive landscape is becoming ever more commodetized by the overall flattening of the world's labor and knowledge markets, there is a corresponding growth of opportunity to do business in emerging markets. As the world's fastest growing marketplace and most populace nation, China is the next great frontier. Failing to try to seize some piece of that huge pie would be worse than neglectful--it would be idiotic.

In the US, GM will never regain is pre-eminance. It's current "big" plans for alternative fuel cars are limited to a relatively efficient hybrid, the Volt, which can go 64 kilometers on electricity alone. But it won't be available until 2010. By 2010, it may not even be efficient under current standards.

The declaration of focus on China and India as growth opportunities for GM is a step in the best possible direction. In those markets, there is still a huge opportunity not only to grab market-share (a wondrous possibility in itself, if accomplished), but also to alter the environmental disaster that is imminent as 20,000 new cars are introduced to the road in China, each and every day!

This move is a tremendously progressive track for Wagoner to take, and is consistent with his successful agreement with UAW--an agreement that virtually "eliminates the cost advantages of Japanese automakers". This trend, of exploiting the opportunity to make a difference to the global community through capitalism is a key trend identified in the Powered by Principle approach. Today, it is wise for entrepreneurs to look around for the greatest global problems--and solve them--solving them with the ingenuity that capitalism inspires, and reaping the profits while making an impact that benefits all of us.

This isn't to say that Wagoner is free of principle violations--but to be in such a Principle-Powered "state of grace" is a highly aspirational goal, and one that is progressively more seemingly unattainable the more complex the enterprise. I could argue (and so could you) that lobbying Congress against tightening emissions standards is a contradiction of the very mission embodied by the Chinese venture--and it is. But that doesn't make the choice to be opportunistic about China's needs any less superb. Kudos to Wagoner and GM.

Gaviotas II-- Unique Ideas

Paolo Lugari is the founder of Gaviotas II, an eco-village in the middle of the most inhospitable part of Columbia. Along with the eco component of the project, Gaviotas II has yielded some important bio-technological breakthroughs and inventions. The way they have accomplished that in these unique circumstances has ramifications for SR-inspired capitalism.

Lugari has some fascinating rules for how to conduct business. I don't think they are all perfectly applicable in ordinary life, but seem to serve him in this very unique circumstance. Of course, in Gaviotas II, the people are working there exclusively out of their commitment to the mission -- and in other workplaces, at least some of the people are there just to earn a living. However, as in most paradigms, there is something to gain from his rules. Many of these are very consistent with the Powered by Principle model, which is part of what I find useful about them--others are not, and therefore are even more interesting as prospective inclusions to the approach.

I am only including their basic iterations, but the full text can be found by clicking here.

1. Ban brainstorming meetings
2. Practice Da Vinci's code (this means deal with problems without any assumptions--similar to the Disciple Discipline in the Powered by Principle approach)
3. Play nice with others
4. Burn the corporate policy manual
5. Rule out "degree-itis" (this means forget about hierarchies--identical in practice to Oobeyah)
6. Master the art of indiscipline (work across disciplines)
7. Trash your Outlook calendar

Even the ones I can't quite embrace have a certain maverick-like appeal. But then, working in a eco-village in the middle of the jungle with only other scientists and committed participants would allow for working together with a high degree of freedom and entropy.

How Long Should Countrywide Back Mozilo?

At the end of last week, William Patterson, executive director of CtW Investment Group, the investment arm of labor federation Change to Win, called for Mozilo, Countrywide's CEO to resign or be fired. CtW's unions' pension funds own something close to 3.5 million Countrywide shares. To this point, the Countrywide Board has been silent on the issue, as has Mozilo himself.

There are lots of reasons for Boards to "stand by their men", even when investors become belligerent. Oftentimes, downturns in financial results can't be directly linked to the CEO's leadership or decisions; they come about because of unexpected market changes, unforeseen events or even in the midst of strategic turnaround. After all, altering the course of a huge organization away from proverbial icebergs is very much like turning a huge, slow-moving ship. Sometimes the results suffer along the way. GM's CEO, Wagoner, is in the midst of such a change. And while it hasn't yet been reflected in stock price or other lag indicators, the recent union agreement will likely create a real potential for positive change at GM. Changing leadership at that point would be foolhardy.

There are also cases where the Board needs to jump on the problem. "Chainsaw" Al Dunlop should have been axed prior to his complete evisceration of Sunbeam. The Board waited too long and paid the price.

But one place where it is not all that ambiguous is in the case of Mozilo. The decisions that have led Countrywide to its current state of decline were predictable. It didn't require a crystal ball to know that the ARM's that made up most of the company's product line, once they were adjusted, would be painful for a great many of the less-than-credit-perfect lenders. Even if the housing market had remained strong, those homeowners would have faced untenable increases in payments with no commensurate increase in their own earnings. After all, the stagnation in salaries and hourly wages is not a new phenomenon. Wages have risen at a rate far below consumer prices, and certainly way below the rates of increase in property prices(until recently).

This turn of events at Countrywide could have been averted in any number of ways had the leadership been thinking clearly about the future while strategizing: A different mix of products, more disclosure to lenders about the likely ramifications of their rate adjustments, a willingness to grow somewhat less quickly by having marginally higher standards for lenders so that the overall credit-worthiness of customers was higher on average. Any of these decisions could have made a significant difference in todays results.

To have done that though, there needed to be firm principles in place that would have dictated red flags as the strategy was created. If the organization or its leaders had been operating with even the most skeletal of core values, both strategic values (those necessary to deliver the company's value proposition) and ethical principles, the strategy would have been different. But those core values were missing at Countrywide, and so the only principle determining action was a commitment to short-term profiteering. The consequences are far worse for the nearly 12,000 employees who are being laid off than they will EVER be for Mozilo. Too bad. It would be nice if just once those who caused the pain had to suffer it too.

Carbon Footprint Reduction Hogwash

Something that is most dismaying to analyze through the filter of principle power is government policy--in particular, energy policy. One could say that when we (by "we" I mean our public representatives as policy-makers) voice a concern over something, we are declaring a core value. For example, there are multiple directives from government, at both National and State levels, to reduce carbon emissions and so forth. One significant source of carbon emissions is gasoline powered cars and trucks. Yet, despite these clarion cries to reduce emissions, and hearing in congress now regarding electrical utility price-setting, there is no real power behind the words.

If the government was really intent on reducing the amount of carbon emissions created by Americans driving cars they would take severe action in several key areas; Of course, they would be major upsets to the world of car ownership and maintenance and would breathe fear into the oil companies. Amongst those steps would be:

- Increase federal gasoline taxes to at least the level imposed in Europe.
- Increase federal mandates for mass transit usage (this would include penalties for lack of investment or usage within States and municipalities).
- Increase the tax on automobile purchases
- Create enormous tax breaks for auto and other manufacturers who create non-carbon emitting vehicles (hybrids are not non-carbon emitting--they simply transfer the emission from the exhaust pipe back to the power plant).

Of course, this would require courage beyond that possessed by any current leaders. Ultimately, the stranglehold that foreign oil has on us will lead to the same place--but it will take longer and make us victims rather than causal agents. CIBC economists are predicting oil barrels in excess of $100 by the end of 2008. That translates into about $4 a gallon says Richard T. Stuebi, BP Fellow for Energy and Environmental Advancement at The Cleveland Foundation. The comparative rate charged for a gallon of gasoline in Europe vs here demonstrates the marked difference in the actions of a government paying lip service to reducing greenhouse gases to those that mean what they say. Currently, with average gas prices in the US at $3.01, the comparable price per gallon today is $7.37 in Belgium, $6.88 in Germany and $7.45 in the United Kingdom.

What we really learn from the lack of consistent public policy is that the claim of concern for reducing carbon emissions is, like so much in politics today, hot air.

Inspired by (the) Acumen (Fund)

It goes beyond being Powered by Principle--and straight into the next dimension. Instead of engaging in micro-lending or charity, also valuable contributions to emerging markets, Acumen is a "patient" venture fund.

Here's how they describe themselves:
We seek to prove that small amounts of philanthropic capital, combined with large doses of business acumen, can build thriving enterprises that serve vast numbers of the poor. Our investments focus on delivering affordable, critical goods and services – like health, water, housing and energy – through innovative, market-oriented approaches.

Founded by Jacqueline Novogratz, the idea is to invest relatively small amounts of capital in businesses in merging markets, and then working directly with the business to guide it to the point where it is serving or selling to one million or more customers among the poor--and is self-sustaining.

Following on from the last entry in this blog, ultimately, small, thriving businesses in emerging markets are the surest way to lift the world's poor into sustainability.

For more on Jacqueline Novogratz and the Acumen Fund, visit:
Stanford Business Journal
Social Edge Blog
Business Week
TED Talks
Reuters

Doing Business Where It Counts (and Adds Up)

If you can do business anywhere in the world, but have a core value related to globalism or humanitarianism--where do you think of expanding? There are myriad opportunities to do business in emerging markets. As some of the world's formerly corrupt and unstable nations begin to clean up their acts, they become far more attractive as destinations for first world capital. For example, Nigeria had been busy at work trying to reduce corruption, improve consistency in operations and build financial stability. Economically, businesses in Nigeria are doing 4 times the expected level of growth based on their previous trend. For example, five years ago Nigeria had 8 or 9 banks;now it has more than 20. To catalyze this growth the government began to increase the bank's capitalization requirement -- forcing the disaggregation of the few. That expansion led to more foreign banks entering the market, and brought with it investment capital from the developed world.

In telecom, the government changed the structure of the utility system and caused explosive growth in access (by a factor of over 1 million)-- and therefore, all of the services that accompany available connectivity. Connectivity acts as a bedrock for many other industries. With all of this change, Nigeria is just one example of an extraordinary business opportunity in many different sectors, including financial services, tourism and education.

Africa is an open frontier over much of its breadth. More than 2/3 of African countries have had democratic multi-party elections and the average economic growth is 5% per annum (from 2.5% ten years ago). According to Nigeria's Finance Minister, Ngozi Okonjo-Iweala, to really make a lasting difference in the emerging world, we in the developed world should bring businesses and create jobs. This impact is more profound than feeding the hungry or giving out AIDs medications (although, my own sense is that also makes a vital difference in critical circumstances) --jobs solidify families, improve education and cause generations of change.

This approach would be a great example of Principle-Powered capitalism--expansion due to opportunity that happens also to inject vitality into emerging markets.

Business Schools as Principle-Power Incubators

An interesting article entitled: Shaping Tomorrow’s Business Leaders: Principles and Practices for a Model Business Ethics Program is now available. Visit The Business Roundtable Institute for Corporate Ethics and read the report by clicking here.

Intriguing Opinion Piece

For a very direct critique of Countrywide's PR response to the sub-prime mortgage crisis, see Countrywide Rearranges the Deckchairs in the Wall Street Journal.

Countrywide Unfairly Accused?

In response to the implications by various media that Countrywide somehow preyed upon innocent borrowers, they have begun a campaign of corporate patriotism. "Protect our House" is the tag-line of this internal cheer-leading and includes pledges of allegiance and the assistance of the crisis management team at PR superpower Burson-Marsteller.

If Countrywide were Powered by Principle rather than powered by an overriding concern for revenue, they might take an entirely different approach--one based on a commitment to continuously uncovering violations of their core values (whether extrinsic or intrinsic). To do so would be equally as effective as a PR tool, but would have the added benefit of improving the overall compliance of the organization with core values that would ensure strategic and ethical consistency.

At this very moment, instead of fortifying their denial of their distraction from the long-term consequences of their lending practices, they could be articulating appropriate principles that would avert another similar crisis. Unfortunately, as it has been from the start, Countrywide's attention is on their quarterly results and not on their long-term stability and performance. As so often happens in business, the longevity of the company is sacrificed at the alter of fast money.

Principle vs. Principal

We must use time creatively... and forever realize that the time is always ripe to do right.
--Martin Luther King Jr.

One of the most valuable edicts that any long-term enterprise must embrace is best articulated by Warren Buffett (or at least, attributed to him).
It takes a lifetime to make a reputation--but only five minutes to lose it.

How many longstanding reputations are lost when one employee or policy or supplier errs--and fails to take responsibility and correct it? Organizations can afford to make mistakes--they can't afford to pretend they haven't.

Sub-Prime at a Local Level

It must have been so easy as a mortgage broker to simply "follow the money". Quick and painless mortgages available to the endless number of borrowers flooding in as leads --and no downside for anyone until so much later that everyone can overlook the impending storm. The borrower gets the low payment mortgage for the house he can't really afford, the broker gets his origination fee and commission (often by "fudging" the customer's credit worthiness), and no one pays heed to the obvious risk for everyone. The brokers are raking in fees, and feeling like this boom can never end as long as property prices stay high. But all the while, the very basis for their business is sinking under them.

The securitization of the paper means even the lending bank has no long-term concern with the real viability of the loan or the ultimate predicament that the borrower will surely have when, as must happen, the index to which their interest rate is linked, moves upward. And from the perspective of direct repercussions, only the investors in the mortgage-backed instruments get hurt. But the law of unintended consequences catches up. When your business perspective is short-term and solely self-interested, you are liable to have a business model that can only work so long as conditions do not change. So the mortgage broker model only works if the conditions are static: If property keeps rising in price, if mortgages keep being awarded to fairly weak applicants, if borrowers don't understand the real risk of the adjustable clause in their mortgages, and if banks keep lending 105% of the market value of homes. As soon as one condition changes the model collapses.

On the one hand, operating in the manner described above is naive and a sign of bad planning. On the other hand, to have such short-sighted vision points to a lack of principles, both ethical and strategic. And the outcomes prove it. Those businesses that counseled questionable borrowers away from risky mortgages, that suggested that fixed-income workers not purchase homes values at 20 times their annual salaries, and who carefully outlined for customers both the downside and the upside of their mortgages--they can still function; More likely than not, they would have had structures in place to hold their employees (both mortgage bankers and originators) accountable for the long-term status of the mortgage. In a Principle-Powered universe, the banks would also have had a way of incentivizing long-term stability and low default rates by linking their commission payments to those results. Instead, the institutionalized business model has been "when the ink is dry, the deal is done". But those who were themselves, Powered by Principle, will be far less damaged in these new economic conditions. Because even in the new conditions, their closing rate will be similar, and so, their revenue more stable.