Xerox logo

A strategic resource is property one owns that is long-standing and one’s competitors cannot duplicate it without incurring serious economic loss.

Xerox had such a strategic resource: its 1950’s patents on plain paper copying were rock solid. Buyers were prepared to pay upwards of USD4 000 for a copier that cost only $600 to manufacture.   Its only competition came from the old wet-process copier companies.

Every five years, the company produced ‘Strategic Plans’ but these were only financial projections. Xerox’s position could be likened to a hydro-electric dam. It takes a great deal of labour to build the dam, but once completed it has a serviceable life for many decades without further significant inputs.

Xerox then created another strategic resource: a world class rapid response repair and maintenance service to keep its breakdown-prone machines in working order. From the patent strategic resource, it created another strategic resource. The value of this is to keep the machines running. From this, the firm created another strategic resource: specially branded Xerox paper that went through the machines without jamming. Essentially it had, therefore, three strategic resources.

Management started to tap themselves on their back ascribing current profits to recent decisions they had taken not giving credit to the planting of seeds many decades back which were now yielding a bountiful harvest.

Books were written about Xerox’s management style, the innovative culture at Xerox which included suggestion boxes, the dress code and their office layouts as all contributing to their success.

Over time, management expended untold resources in trying to get into the computer business while their core skills lay in photocopiers and their maintenance. What they failed to do was to leverage the in-house skilled engineers and technicians on trying to make paper handling better and the machines smaller so that they could sit on a desk top. Canon, Kodak and IBM saw this gap and leapt in to start the enormously profitable line of personal copiers, printers and fax machines.

Management started to loosen their grip on tight integration and started adding many products and projects so as to project youthful vigour through bolt-on acquisitions. They became plump and ready prey for a new generation of upstarts.

Being in possession of a strategic resource makes a company lax and lethargic. In this way Microsoft sidles IBM, Dell outsmarts HP, Nvidia takes business away from Intel. In time, these upstarts also become inertia-bound and there are always nimbler, younger outfits waiting to spring into action.

This is the cycle of life.

So, next time one hears, ‘You’d better tweet that’, one should remember that there was a time when Xerox was also a household name and reconcile oneself to the fact that someone in the future will ask, ‘Remember when you would Google something?’

Peterbilt Trucks through the years.

Hold the High Ground Trumps all Other Pricing Rules

Daimler’s Freightliner and Western Star brands held 40% of the US heavy truck business in 2014, followed by Paccar at 26% with its Peterbilt and Kenworth marques and Navistar and Volvo each come in at 12.5%. This is a low growth, mature and highly competitive industry. Paccar, the subject of this study, has not lost money since 1939 and, not withstanding the economic turmoil of 2008-2009, its return on equity has averaged 16% over the past thirty years.

Fleet Operator’s Viewpoint

Synonymous with quality, Paccar has two brands in its stable: Kenworth and Peterbilt which are widely regarded as the highest quality trucks made in North America and the company does not fail to receive JD Power awards for its trucks as well as for its service. Paccar maintains its high standing despite charging premium prices.

What is Paccar’s secret to being able to sell at a premium? There is none. It is able to show that its trucks run better, run longer and its cost to operate is lower than its competition. This is vitally important to the fleet operator who looks at a fraction of a cent per mile in making procurement decisions.

As an example, a 2015 Kenworth W900L Sleeper lists at around USD165 000 and if it is driven 125 000 miles a year, the operator has to budget around $125 000 every year in operating expenses for fuel, repairs and insurance and all of these expenses are in addition to wages and benefits. It was for this very reason that Kenworth designed low drag, streamlined trucks 4 decades ago, well before its competition.

Quality leadership is a tenuous place

Quality leadership of Paccar’s kind is difficult to hold and there are three reasons for this: one cannot say one has a long-lasting product unless one has a product that has lasted a long time. This reputation take a while to establish but can evaporate in an instant. The second is the complexity in building a very involved, large, high-quality machine. The store-house of knowledge is passed on from engineer to engineer only when the company provides a stable, collegial workplace and thirdly, owing to purchasers’ myopic vision, they tend to be steered by the selling price rather than by future savings.

Custom interior of long-haul truck

Owner-Driver’s Viewpoint

Paccar addresses the obstacles by its strategy of being the quality leader. It looks at quality not through the eyes of the fleet operator but through the viewpoint of the owner-driver. Owner-drivers increase their pay by driving themselves and their rigs for longer, harder, sometimes driving 16 Hrs a day. They look at efficiency but also have a broader view since their truck is their office, home, lounge and TV room on the road. Also, with the Paccar brand comes a kind of Harley-Davidson aura. The dealers are highly trained and experienced and their configurator tools allow the purchaser to custom design their rigs. Since Paccar builds each truck to order, inventories are low, both of production items and finished goods.

Paccar’s strategy is to do something well and consistently over the long haul.

Paccar’s make to order model means its variable costs are higher. The higher margins endears it to its dealership base which is more dedicated and loyal. Paccar does not make small trucks, only large ones and in the large truck sector it does not make cheap products.

In the design studio, on the shop floor, in the executive suites all the talk and focus is about truckers and the truck industry. They have no need for consultants to come in and tell them where their core competency lies or who their main customer is.

This is Paccar’s strategy. Good strategy is about design and design is about fitting various pieces together so they work harmoniously together.

A senior judge in the Imperial Court

Part II – The Judiciary

In the first part of this set of papers, corruption in China was addressed. A case to counter this blight was made and, in the current paper, the ground is laid on a small, but not insignificant, step that can be taken to at least start the journey to clean up corruption.

Why is it necessary to address corruption? As consultants to industry, our clients, who, in the main, are successful business people, tell us two things that are high on their wish list:

• I wish to invest in a country where I don’t have to bribe everybody, and
• I want to invest in a country where the judges are not corrupt, where, if I have a legal case, I can expect justice in the courts.

The connection between corruption and the judiciary is undeniable.

One of the most central facts about China’s judicial system is it is intimately and inexorably intertwined with the party bureaucracy. In another way that is emblematic of the problem discussed is the courts are financed from local government sources rather than from provincial or central funds. It goes without saying, therefore, courts lean towards local pressures.

Judges lack life-long tenure and are hired only with the approval of the courts’ communist party’s political department and are subject to the discipline of the party organization.

Except for the most trivial of cases, judges normally operate in panels of three and there is a two-tier adjudication system. Once received by the filing court, the case is heard before a professional judge sitting with two people’s assessors. The assessors are chosen from a roster of approved laymen so as to give the proceedings a patina of democracy. As to be expected, the assessors take their cues from the judge in charge. A collegiate panel of three professional judges deals with decision-making on appeals to the second instance tribunal.

A case that can be received by the receiving clerk of the court can only be inscribed upon the authority of the local party. Hence, many cases can be refused to be received with no reasons offered. For a business seeking judicial remedies for their economic or social redress this is most frustrating.

A point that was raised above related to local interests. The protection of local interests may be crucial to the business dispute between a local company or individual and those from elsewhere.

In all of this, guanxi, the network of personal relations that judges find more compelling to satisfy than legal norms has to be acknowledged even if not eradicated. Hence, judges are ever heedful of maintaining social stability, i.e., take into account public opinion even if that requires the misapplication of substantive or procedural law.

GuanXi

In cases involving the author’s clients, during proceedings, blandishments of an influential or aggressive litigant, who threatens to take the matter to ‘people in Beijing’, have scuppered their plans. The presiding judge does not take kindly to having the case heard elsewhere, especially if it is a local individual who chooses to go to Beijing.

The pressures on judges come from many sides:

• Local government or party officials;
• Members of the local people’s congress;
• Members of the local people’s consultative conference {a.k.a. prominent residents};
• Judges from a higher court and
• Individual provincial or central party or government leaders.

Hence, the legal framework does not support the independence of the individual judge.

Quoting Sen. Marco Rubio, Chairman of the Congressional Executive Commission on China, ‘Local governments are the most significant source of external interference in judicial decision making’,

A possible two-pronged remedy for this would be to give judges life-long tenure, after a period of probation, and for the judge to have more real-life experience rather than academic achievements prior to being appointed to the bar. In this manner, the judge is more mature and less malleable.

The current system if far too entrenched to make radical changes in a short period of time without substantial resistance. The independence of the individual judge should be paramount and by making that person have tenure should alleviate the dependency of the judge on the local party machinery.

Ask anyone on the sidewalks of New York or Auckland to name globally recognized brands from different countries and the following would form a sub-set of their responses:

Japan has Canon, Sony, Honda …..

Taiwan has Acer, HTC …..

South Korea has Hyundai, Samsung, LG ….

India has …………………………………..long pause……scratching of head….. Jaguar/Land Rover {these were acquired brands and so constitutes cheating here}

What India lacks is a clutch of world-beating products. Herein lies the rub. Its Asian neighbours had 60 years of thoughtful leadership which marshaled agriculture, manufacturing and finance policy-makers towards the one goal of collective prosperity. The progression of Japan, for example, from a broken country and one on its knees in 1945 to a formidable economic powerhouse in 2015 was through small-holding agriculture to small-scale manufacturing to a world-leading manufacturer with Nikon, Komatsu and other internationally recognized brands in its stable. This progression was underpinned in its entirety by a finance and manufacturing policy that encouraged exporters and fostered intense internal competition.

Prime Minister Modi launched his Make In India campaign immediately upon taking up office in mid-2014. He recognizes the importance of manufacturing in driving economic prosperity. However, this manufacturing has to be of a particular type to achieve his lofty goal, viz., one that is export oriented.

Over the past six decades since independence from Britain, the various Indian governments gave scant attention to local manufacturers, except if they were run by favoured industrialists, but were quick to prevent imports, for both production and for consumption. In this manner, local competition was stifled and mediocre products were turned out.

QUANGO’s {Quasi-Autonomous non-Governmental Organisations} flourished under these artificial conditions and some were even able to come out with goods of unquestionable excellence. Hindustan Machine Tools (HMT) is a prime example of such an entity.

Walk into any hardware store in India and ask for a screwdriver. The tool handed to you is mediocre, except if it is an import—usually from China—and comes without a warranty. Against this backdrop, Modi intends to make India into a manufacturing titan fully capable of turning out stealth fighter jets and high-speed bullet trains and, that too, during his tenure as PM, say by 2020. This is a laudable objective but the timeline is hardly realistic.

For him to achieve success here, he has to look first towards education. The British, plantation style of education that India has had thrust upon it by its Colonial masters cannot produce the hordes of technocrats necessary to drive his dream. If he looks towards the much vaunted IITs as producers of the calibre of individuals he desires, he’ll be sorely disappointed. Over the past two decades, India has provided the world with IT professionals of exceptional quality. However, only about 3 million of an estimated 500 million in the Indian workforce are in IT. Had the graduates of the IITs and other colleges gone on to industry rather than IT or finance, which has been their wont, there would have been no need to have a Make In India campaign.

Almost 5 decades of policy neglect have created a situation where only 10 per cent of the work force is employed in manufacturing. Contrast this with South Korea where the focus was industry-based development for the past 3 decades and fully 30 per cent of the labour force is drawn into industry. So, secondary and post-secondary education will have to be re-aligned along the German, Italian and Swiss models with industry providing internships. They will become the incubators of the new crop of technocrats.

The next item on his To Do list is to look to the crumbling infrastructure. The roads and railways connecting the various cities and the road systems within the cities themselves have to have a serious expenditure in analysis and then monumental capital outlays have to be planned for upgrading most of these. Electrical capacity building will have to be an imperative. Private-Public partnerships may work in this context.

Finally, he will have to corral bureaucrats charged with land, labour and capital policy to provide the last supporting pieces. Agriculture land will have to be made available for the factories. Buying farmland and converting it to build factories is tremendously complicated and expensive; by law, companies have to pay four times the market price in rural areas The Special Free Zones, where enterprises are given special treatment, also will not suffice.

India continues to provide heavily subsidized power to agriculture and, at the same time, charge prohibitively high rates to manufacturing. China, and other countries hoping to develop, follow the reverse logic. Price baselining and making available a plentiful and regular supply has to be a given here.

The cost of labour in India is lower than in China. With the spectacular growth in China, wages there have moved up considerably. India has a plentiful supply of labour available at attractive rates.

India’s cost of capital is one of the biggest impediments to entrepreneurs. These costs are among the highest in the world and the root cause is the closed financial system in India. So, Modi has much on his plate if he wants this to succeed and all the items are priority number 1.

The realistic estimate to make everything fall into place and to have all the policy parties aligned should, at the very least, take a generation. This is a long time horizon for any politician but Mr Modi has to be credited with at least being able to identify the current malaise in India.

The Make In India initiative is going to have to have a lot of thought expended into it. The results will be immense, if the execution is done right.

First Imperative: Addressing Corruption and Financial Crime

Part I – The genesis of the problem of corruption

Corruption is authority plus monopoly minus transparency.

The scale of bureaucracy in China and the break-neck pace of its economic development from an almost standing start are the two ideal conditions for the growth of corruption and unbelievably massive financial gain by underpaid government officials.

Official corruption: a long-standing pedigree

“The abuse of public power (gonggong quanli) by the occupants of public office (gongzhi renyuan) in the state and party apparatus for private interests,” is how China’s authorities define corruption.

Transparency International scores China at 36 (out of a possible 100) on its corruption index (http://www.transparency.org/country#CHN) where 0 is most corrupt and ranks it 100^th out of the 176 countries surveyed.

Corruption (fubai in Chinese, meaning decay and putrefaction) has been a part of life since many millennia.

In the face of rampant corruption, Confucius helped re-establish the ancient traditions of honour, morality and social hierarchy so as to check the empire’s decline in the later centuries of the Zhou dynasty (1045 – 265 BC).

Two millennia later, peasants in Guizhou province launched protests in 1851 amid famines and local government corruption as the Qing dynasty (1644 – 1911) drew to a close.

At that time, cheating in the imperial examinations was elevated to an art form: Confucian texts were sewn into the cuffs, fans had notes inscribed on their hidden side, miniature books were made available so that they could be concealed between the fingers of an open palm. Some examinees hired experienced scholars to sit exams in their stead. Then, of course, the easiest way to pass was to bribe the examiners.

Mao’s Communist Party of China rose to power in 1949 on the anti-corruption campaign against Chiang Kai-shek’s ruling Kuomitang. The communist party’s dominant position and the economic hardships of the population-at-large meant that poorly paid party officials could easily use their position for personal gain.

Official corruption re-emerged as a principal source of frustration in the late ‘80s fuelling the Tian’anmen Square protests of 1989. Despite the stated policy of President Xi to stamp out corruption, and with the exception of convictions of some high-profile individuals on the grounds of sleaze, little has been achieved.

A cursory glance at the passengers alighting from helicopters at the Hualapai Heliport at Grand Canyon shows that 9 out of 10 fee-paying passengers, who have just parted with USD250 per person for a 1 Hr ride down the Grand Canyon, are junior party officials of the Communist Party and their families. Macao casinos still have high rollers fly in to try their luck at the tables, who, when they are done go back to the mainland to their desk jobs in the local party apparatus.

Going hand-in-hand with market reform, corruption has grown over the past 3 decades relying solely on two factors: opportunity, presented to officials in the form of extensive role of government as a regulator, allocator, producer and employer and motivation, such as, ‘confusion over changing values, weakness of moral sanctions, relative impoverishment and a lack of alternative sources for self-enrichment’. Add to this the privatization of state assets has put numerous opportunities for official graft within tempting reach of poorly paid bureaucrats. Coupled with this, central government has devolved the decision-making apparatus to the local level in critical areas such as investment processing and law enforcement. As an example of this in context, our joint venture counsel teams often highlight the hidden costs of doing business which often appear as ‘fees’. Over the years we have had occasion to see birth control fees, public health fees, public security fee, tree planting fee, traffic control fee, fire department fee and so on.

Having set the stage of the level of corruption, the next important thing one has to come to grips with is the strategy to be implemented to reduce corruption and bring transparency to the dealings of the party and the dealings of the ordinary Chinese. If this is brought about, China will become a beacon for the continent.

Part II in this series will address the initial steps that should be taken to bring light to the dark corridors of power.