Regardless of a recent spat of volatility in emerging markets, the Fed is reducing its stimulus programme by a further $10bn, bringing the value of asset purchases back to $65bn per month.
“Beginning in February, the committee will add to its holdings of agency mortgage-backed securities at a pace of $30bn per month rather than $35bn per month, and will add to its holdings of longer-term Treasury securities at a pace of $35bn per month rather than $40bn per month,” the institution said in a statement.
[I]t can be surmised that the Fed believes the losses in emerging market assets to be of insufficient scale to trouble the US economy
The Fed’s announcement neglected to mention the turmoil in emerging markets, though the taper will no doubt up the pressure on countries such as Turkey and South Africa, whose central banks have already raised interest rates to bolster their enfeebled currencies. From this it can be surmised that the Fed believes the losses in emerging market assets to be of insufficient scale to trouble the US economy.
The reduction is equal to December’s $10bn cut and many analysts expect the reductions to continue at quite the same pace from hereon, in effect bringing the institution’s bond-buying programme to a close by year’s end.
Although the Fed recognised a good few weaknesses, namely a slower recovery in the housing sector, below-par inflation and weaker-than-expected jobs data, the taper is evidence that the institution believes the economy is on track.
“The Committee expects that, with appropriate policy accommodation, economic activity will expand at a moderate pace and the unemployment rate will gradually decline toward levels the Committee judges consistent with its dual mandate.”
The decision will be Bernanke’s last as chairman, as he prepares to hand over his role to Janet Yellen in February. The changeover will mark the end of Bernanke’s eight year term as chair, through which he has negotiated the worst financial crisis since the Great Depression and succeeded in returning the economy to a reasonable standard of health.
The World Economic Forum, a platform for collaborative thinking and searching for solutions. But when Japanese Prime Minister Shinzo Abe alluded to the prospect of conflict in east Asia, collaborative thinking was perhaps far from the minds of some. Joining me now is Joseph Pearlman, Economist at City University London, to talk about what a conflict could mean for the world’s economy.
World Finance: Well Joseph, obviously tensions between China and Japan have been mounting, especially with the sovereignty of the Senkaku and Diaoyu Islands, but if there was a conflict, what would this mean for the world’s economy?
Joseph Pearlman: It’s going to be pretty serious as regards trade between Japan and China, that’s obviously going to be out. Japan is very much dependent on world demands, there’s not been a lot of evidence of demands within Japan for the past 25 or more years. So reduced demand from China is not going to be good for the economy of Japan, maybe it will be good in terms of creating demands within Japan for the construction of extra weaponry.
World Finance: So realistically, how much do China and Japan need each other economically?
Joseph Pearlman: Japan must need China, and I wonder how the speech will have gone down in Japan. It seems to me a very strange approach for Abe to take, because Japan is surely not going to benefit from this unless it increases its production of weapons, and I can only imagine that there’s going to be a lot of dissent within Japan about this.
British Shadow Chancellor Ed Balls has proposed to restore the 50p income tax rate, a move that has already attracted considerable backlash, with critics dismissing it as ‘populist nonsense’
For someone that has harangued Britain’s coalition government for stifling economic growth with its austerity measures, it is ironic that Ed Balls is calling for the return of the 50 percent top rate of income tax to bolster public finances.
Over the weekend Balls, Labour’s Shadow Chancellor, said he would bring back the 50p income tax rate for those earning more than £150,000 a year; a policy that was implemented by former Labour Chancellor Alastair Darling. Such a drastic change would be merely a populist move by a man who has been proven wrong by the strengthening UK economy.
The austerity measures implemented by the government have not been popular, but they have, on the whole, been necessary. The state had become far too bloated during the last 15 years, and cuts needed to be made so that the UK’s debt burden was drastically reduced. It is these cuts, and not the brief raising of the 50p tax rate, that have helped slow down the rate at which the UK’s debt has grown.
What the move would do, in fact, is punish those in industry who have been helping to get the economy back on its feet
A number of independent studies – the most notable of which by the Institute for Fiscal Studies (IFS) – have said that the affect of raising the rate to 50p would be negligible. The IFS said it would only raise a “very small amount of money” towards reducing the government deficit. It believes that such a move would raise only around £100m; a tiny amount in terms of the overall debt burden.
What the move would do, in fact, is punish those in industry who have been helping to get the economy back on its feet. The private-led recovery – which is today expected to reveal better than predicted growth last year of almost two percent – is still in its very early stages. While there is of course a huge disparity in incomes throughout the UK, those earning higher incomes should be supported so that they can put more back into the economy, thus helping create jobs for those currently struggling.
Over the course of the next few years, politicians should be doing their utmost to support business and entrepreneurs, so that they can help spur on the modest growth seen over the last 12 months. Instead, politicians are far too eager to demonise the easy targets that are high earners in order to curry favour with a disgruntled and struggling general public.
While this is predictable in the lead up to the general election next year, it would be nice to think that the days of bashing high earners will be confined to the years immediately after the 2008 financial crisis. Encouraging aspiration is the only way that the inequality throughout society will be addressed.
The 2014 World Economic Forum has now come to a close, and it was the first Davos in five years where the financial crisis hasn’t been at the forefront. Joseph Pearlman, economist at City University London, discusses Davos’ theme of inequality, the irony of low representation of women, and the ongoing problem of youth unemployment.
World Finance: So Joseph, let’s start with the purpose of the event. Would you say it was a January jolly, or as the founder maybe intended, a platform for collaborative thinking and searching for solutions?
Joseph Pearlman: It is more like a January jolly; however, one does see that there are lots of important business leaders who are meeting up with the top world economists, and that is likely to lead to, probably, better thinking about the role of business in the future, and the direction that the economy is going to take.
World Finance: So would you say there was anything that came out of this year’s Davos that would impact lives or economies?
Joseph Pearlman: The only thing it might influence is the concern that economists and have the concern that politicians of both left and right are beginning to have, and certain other business leaders as well: that the world, and particularly the developed world, is becoming more unequal.
World Finance: Well let’s talk more about that, as inequality was one of the key themes of Davos. Oxfam came out with startling statistics: 85 people hold half of the world’s wealth. Now, this is a really strong statistic, is it as bad as it sounds?
The greater our income disparities, the more likely that one is going to see increased political unrest within countries
Joseph Pearlman: What one would hope for the world is social cohesion, and the greater our income disparities, the more likely that one is going to see increased political unrest within countries. Occupy Wall Street is the kind of thing which potentially could increase as people become more and more dissatisfied, and in certain countries such as Greece, one is seeing violence in the streets, and maybe that could extend to other southern European countries.
Also from an economic perspective, if you think about ever pound that is earned, the poor will by and large consume virtually everything out of that one pound, whereas for every one pound that the rich earn, they’ll probably only spend 60p or 70p of it. And in order to help the economy to grow, one wants to see increased demand.
World Finance: One thing that does strike me about the inequality debate is that maybe it should focus more on how people make their money, because if they do it in a competitive way, it can really benefit economies. So maybe the debate should be more about people who gain wealth through corruption, this kind of thing. Surely there is always going to be inequality?
Joseph Pearlman: Oh yes, and I think corruption is probably less of a problem in the developed world. One has always seen it as more of a problem in the developing world, notably in African economies. But on the other hand, the irony is that in the economies where there is greater corruption, one is seeing less inequality. There’s a tendency towards economies and countries becoming less unequal. Whereas if you examine what’s happening in the developed economies, where there’s less inequality, over the past 30 years one has seen increased inequality, where there’s a level of inequality that hasn’t been seen since about 100 years ago.
World Finance: Moving on now to another big talking point of Davos, and that was the female delegates who attended the event. This year that was only 15 percent, which is down from last year – 17 percent. So, do you think this is a reflection of the world of business?
Joseph Pearlman: I don’t understand why the proportion of women at Davos is actually down, given that one is seeing a greater proportion of world leaders – prime ministers, presidents, being women. So I’m quite puzzled by that.
World Finance: What else came out of Davos then? I know there was a lot of talk about challenges facing Europe, especially with youth unemployment. How do you think this can be resolved by businesses getting involved? Is there anything that they can do?
Joseph Pearlman: Governments’ fiscal policies have got to come in. There seems to be a general view among the top economists who attended Davos that governments have been rather reluctant to engage in government investment.
World Finance: British Prime Minister David Cameron suggested at Davos that the UK should take back factory jobs from Asia to boost western economies. Do you think this could be a solution? And is it realistic?
I think firms will go to where costs are cheapest
Joseph Pearlman: I don’t think it’s terribly realistic, I think firms will go to where costs are cheapest. And who can blame them for that? Trade is a cyclical process that eventually, as people in developed countries become more skilled, and costs of employment for unskilled jobs start to rise, and eventually unskilled jobs will have to move elsewhere.
One can see that with the experience particularly of Hong Kong and South Korea. Hong Kong, 50 years ago, was producing all the rubbishy plastic goods. Then subsequently South Korea did. Look at South Korea now: it’s the second most important shipbuilder in the world, in Samsung it’s got probably the most important electronics company in the world, and they’re not producing the rubbishy plastic items that they used to produce.
That’s now going to be produced among the lesser southeast Asian economies. And eventually that’s going to move towards African countries which are in their own right starting to grow. Eventually, when all of those countries achieve a decent skills level, then we’re going to see more and more manufacturing start to return to the countries where the firms that are responsible for these manufactured goods are based.
World Finance: I think what was interesting was the Google chairman Eric Schmidt said that new technologies could take over some jobs of people. So there’s a race between computers and people: what’s your take on this?
Joseph Pearlman: It strikes me that one will as a result see an increase in service industries. You know, leisure industries. There’s always going to be a desire for more goods, and it’s not as though there’s a set number of jobs in the country. The moment the demand for jobs in one industry disappears, there’s likely to be a demand for jobs in other industries. And if people are losing their jobs in skilled industries, then there’s likely to be a decline in wages, which will make the demand for jobs in other industries start to increase.
Pension and insurance funds have long been considered integral to Latin America’s economic growth. Mauricio Toro, President of Protección, talks about his organisation’s work in the region, and its disciplined approach to corporate governance.
World Finance: Mauricio, how is Protección promoting a culture of sustainable saving in Latin America?
Mauricio Toro: Colombia decided more than 20 years ago to move from a defined benefit pension system to a defined contribution system, where AFPs started offering services to customers in order to create their savings for retirement and even for severance. During these 20 years, Protección has been working very hard promoting the culture of savings, giving advice to our clients, employers, employees, and creating products and services that could help them create their wealth and their savings for the future. That has been a very interesting, very challenging process. And on the other side, we have been working strongly promoting the capital markets, the professional investment processes, so I think it’s the task we have been doing here in these last 20 years or more.
World Finance:Latin America’s pension and insurance funds are particularly important to the area’s economic growth, so tell me what has Protección’s impact been in this area?
Protección is now a very important player in the capital markets
Mauricio Toro: Well Protección is now a very important player in the capital markets, and through our investment processes we have been supporting companies to invest throughout the country and even the region, and some companies are starting to invest in different continents which has been a very important support for Colombian growth, because Colombia’s economy is very well diversified, the quality of our management is very good, and companies have the opportunity to access capital markets and grow through the country, and this has been very important. We have even been working with the government, supporting the government’s financial needs, and it’s part of a virtuous circle, where savings are invested in a productive way and the companies, the government, private sector, and public sector could reach their goals, financially speaking.
World Finance: Good transparency is a vital facet of doing business in the pensions sector so what procedures do Protección have in place to ensure you maintain trust with your stakeholders?
Mauricio Toro: Managing pension funds and severance funds is basically a fiduciary process, a fiduciary activity where you have to put the interest of your clients first, and you have to work in an environment of good transparency, where the interests of different stakeholders could be taken into consideration and respected. Protección is the only listed company of the AFPs in Colombia, the only administradora a pensiones listed on the stock exchange. We have been working with our corporate governance code, considering the interests of different minority shareholders, customers, employers, employees, providers, all the stakeholders we have nowadays, so the transparency in the information, the treatment they receive from the company, from the board, the management and all the areas of the organisation is a very important process. We are very strict in complying with it, and I think it has been very useful in order to have the consciousness throughout the company to respect everybody’s interest in our different processes.
Additionally we plan to support the needs of the government of the country in terms of the infrastructure development
World Finance:Finally, what are Protección’s plans for the rest of the year?
Mauricio Toro: Our most important goal for 2013 is to consolidate the merger with ING Colombia, our largest shareholder, Grupo de Inversiones Suramericana, both the ING assets in pensions and savings in Latin America, and after that we decided to merge Protección with ING Colombia. Now we are merged, and Protección is the brand we adopted for the integrated company. Although the process was a success in terms of the opportunity, the quality of the services we continued offering to our customers, the operations continuity we could achieve which is very important challenge in this process, we need to consolidate the culture, we need to adapt our services to the best standards of the industry, and to continue growing in the Colombian market. So that’s our most important challenge for this year. Additionally we plan to support the needs of the government of the country in terms of the infrastructure development, and in the areas of investment, the support of Colombian companies in the process of consolidation throughout the continent.
The effectiveness of monetary policy in supporting a modern economy was up for debate today at the WEF in Davos, with leading figures discussing whether it would be better to take a fiscal policy approach. UK Chancellor George Osborne debated with US economist – and one time potential replacement for Federal Reserve chief Ben Bernanke – Larry Summers, as well as Governor of the Bank of Japan Haruhiko Kuroda.
Defending the UK’s adherence to strict monetary policy, Osborne said that the improving economic conditions over the last year “demonstrates that monetary policy works.”
We are bequeathing to our children a deficit in massive reform of infrastructure
However, Summers, spoke passionately about how a lack of investment by governments was giving future generations a colossal shopping list. “We are bequeathing to our children a deficit in massive reform of infrastructure. We are spending 25 percent less on research in life sciences than we were five years ago. That is a deficit with huge human consequences. We have to move on from viewing deficits in terms of financial debt and focus on the deficits we are bequeathing to our children.”
The debate over which strategy is more effective for economies will likely rage on, particularly as some countries emerge from economic crisis. While pumping money back into the economy and strictly controlling interest rates has helped Britain get back on track, there is still a massive need to invest in infrastructure. Only then will the region be able to sustain positive economic growth in the coming decades.
Sharia compliant banking is establishing itself as a robust part of the banking sector, with the United Kingdom intending to borrow through the Sudak in the first quarter of 2014. Adnan Ahmed Yousif, President and CEO of Al Baraka Banking Group, talks about why this emerging industry is in such demand.
World Finance: Mr Yousif, perhaps you can tell us why you feel Islamic banking has prospered so much over the last few years.
Islamic banking has proved to be the right instrument
Adnan Ahmed Yousif: Concerning the Islamic banking, it is growing very fast and this has been already proved for the past five years now. Although we were facing a crisis in different markets, Islamic banking has proved to be the right instrument, or the right products, whereby it goes straight to the right economy. Therefore I believe that for the coming years, Islamic banking also will grow very fast and there is now a sign whereby many countries are looking to these instruments which have been submitted or proposed by the Islamic banking favourably, including the United Kingdom, where the Prime Minster has already announced the intention of Britain to borrow through the Sukuk in the first quarter of 2014.
World Finance: So what is the current size of the Islamic banking sector, and what has made it so successful internationally?
Adnan Ahmed Yousif: Two days ago, we had what we call an Islamic conference in Dubai and there was a big debate about the size of the banking. According to Ernst & Young research, it’s about $1.6trn, and maybe if you take it to the European or American market, that’s not that big. But when you take it to the Arab world it is sizeable, and if you talk about the Union of Arab Banks, all of the Arab banks’ balance sheets consolidated, they are close to about $2.8bn.
World Finance: So tell me, what do you see as the future of Islamic banking, and what opportunities does it offer to the international community?
Adnan Ahmed Yousif: Well I think that Islamic banking has opened the door now to Islamic institutions and non-Islamic institutions to use their products. We have several products which have been used, one of them, which is the major one, is the Sukuk, which I highlighted in the beginning of the interview. Also, there are certain products which, as I say, go straight to the economy. If you take for example, in America, the bulk of the amount of investment will go in the economy or would go in the stock markets, maybe just five percent out of that investment goes to the right economy, the rest is just going through certain products which does not add anything to the economy.
World Finance: Let’s talk about you, over the course of your career you’ve acquired vast experience in the financial sector, most notably spending 20 years at ABC. So how has your past experience prepared you for your current role as President and CEO of Al Baraka Banking Group?
I came with a lot of experience, and I tried to share this with my colleagues at Al Baraka
Adnan Ahmed Yousif: Well, I started with American Express for five years and then I moved with ABC for 20 years, and I think that we called ABC the city bank in the Arab world. When it was started, it was with a big size of capital, it was close to about $1bn in 1980, at that time it was huge, and if you compare it to Chaseman at that time it was about $2bn. And we have been operating in 34 countries at that time, and by spending almost 20 years in the bank, it has given me a lot of experience when I joined Al Baraka. As a matter of fact also, when I joined Al Baraka I was not new to most of the senior staff in Al Baraka, because they know me very well, since I used to travel and visit them and do business with them. Therefore what I got from Al Baraka from ABC in the 20 years, and also from American Express, has given me a good experience in running subsidiaries. Therefore I came with a lot of experience, and I tried to share this with my colleagues at Al Baraka.
World Finance: So what would you say has been your most challenging role so far?
Adnan Ahmed Yousif: Well I think that, running subsidiaries in fifteen countries, it is a challenge for any chief executive. I think that what’s ongoing now is the major one, is the capital adequacy or positive requirements, and the positive requirements, not just for Al Baraka, but all banks worldwide, this is one of the important challenges which is going to be facing banks in the coming two to three years.
World Finance: Finally then, what does the future hold for Al Baraka?
Adnan Ahmed Yousif: Well, the future is very good. We’re seeing our future is to be within five years close to about a $36bn balance sheet, and total branches of about 760, and total staff of about 15,000. Now we are a $20bn balance sheet, and 500 branches, and 10,000 staff. At the beginning of that, where we are, and where we are going to be.
World Finance: Mr Yousif thank you very much for your time.
In his speech today at the WEF in Davos, British Prime Minister David Cameron encouraged the UK and the West to take back jobs and factories from Asia. This movement, which has already begun, will boost Western economies, he said.
In a move to further encourage this existing trend, UK Trade & Investment (UKTI), in conjunction with the Manufacturing Advisory Service (MAS), will launch Reshore UK, a program designed to assist the many UK companies now looking to bring manufacturing, software, textile production, and call centre work back to the UK.
Cost, quality and the reduction of lead times are the primary reasons why companies want to come home
“This new service will offer dedicated support for businesses that want to capitalise on the opportunities of reshoring, creating new jobs and ensuring that hard-working people can reap the benefits of globalisation,” said Cameron in his address at the forum.
“Reshoring is a huge opportunity for UK manufacturers and we are delighted to be working in partnership with UKTI to give both domestic and international firms access to this one-stop service,” said Steven Barr, Head of the MAS, in a government press release.
Combining competitive corporate tax rates, stable economy, strong legal frameworks, good regulation and a dynamic labour market, reshoring businesses looks more attractive than ever. Cost, quality and the reduction of lead times are the primary reasons why companies want to come home. So far, UKTI has identified 1,500 reshored manufacturing jobs since 2011.
Cameron is confident about the UK’s dynamism in the global context. “We are a global nation with global interests and a global reach, and if you think all of this is somehow an unashamed advert for the UK and UK business you’re absolutely right,” he said.
Google Chairman Eric Schmidt addressed leaders at the World Economic Forum in Davos yesterday, where he delivered a speech warning new technologies could threaten increasing numbers of middle class jobs. He also questioned whether workers have the right skills to compete in an increasingly tough market.
Schmidt argued that as technology evolves, the workforce needs to be equipped with the necessary skills. Currently, many workers are lacking the technological expertise to be re-hired, a problem Schmidt believes is likely to endure for the next two to five decades.
“It’s a race between computers and people, and people need to win,” he told the crowd, according to the BBC.
“As more routine tasks are automated this will lead to much more part-time work in caring and creative industries. The classic 9-5 job will be redefined.”
Tech companies have long since bemoaned the lack of a skilled workforce from which to hire from
The idea that rapidly advancing technologies will be a big threat to jobs in the future is by no means a new one – but the fact that a senior tech exec like Schmidt is raising the issue is significant.
Tech companies have long since bemoaned the lack of a skilled workforce from which to hire from, and some have even advocated for a change in the skills young people are taught in basic education.
Conversely, Schmidt insisted that it would be a huge mistake not to take full advantage of the efficient new technologies being developed. Jobs must be created.
For the former Google CEO, increasingly jobs will be created by smaller firms, and therefore these entrepreneurs need more support in order to continue hiring- otherwise the situation would only get worse.
“It’s clear to me that we can get full employment, but wages are still depressed,” said the chairman.
Schmidt’s analysis is somewhat worrisome because in a way it officialises the trend of companies striving to cut wage bills, and replacing staff with automation technologies whenever possible.
As a result wages as percentage of economies are likely to continue decreasing, which will ultimately mean demand in the economy will remain low.
A panel, comprising members of the political spectrum, business community and public servants gathered at the World Economic Forum (WEF) meeting in Davos yesterday to discuss the ways in which European leaders can craft a long-term strategy for competitiveness. As the region moves tentatively on from crisis response mode and onto stability, a plan must now be decided upon if Europe is to return to its former glories.
“We need to keep the momentum on reforms,” said José Manuel Barroso, President of the European Commission, who stressed that leaders must keep that sense of urgency if they are to continue to instrument growth and improvement. “There may be a temptation to sit back and relax,” he added, “yet there remains a great deal of work to be done on the structural front.”
You’re talking about a pretty tough situation that we’re coming out of, and we’re only just emerging
“You should not underestimate the capacity of people to learn from their own mistakes,” said Angel Gurría, Secretary-General of the OECD. “Europe is rebuilding itself, redesigning itself, reinventing itself, strengthening itself, and this is happening all the time. You’re talking about a pretty tough situation that we’re coming out of, and we’re only just emerging.” The Secretary-General admitted that there are still a lot of downside risks and institutional issues for Europe, but was confident that Europe was heading in the right direction.
Italy’s Minister of Economy and Finance, Fabrizio Saccomanni, encouraged the region’s leaders to “reopen the chapter of economic and institutional reforms” aside from fiscal and monetary policy, believing that there remains a great deal to be done yet.
The panel also conceded that Europe still has a competitiveness problem on the energy and digital front. President and CEO of Siemens Joe Kaeser said of the supposed European recovery, “are we really there yet?” and referenced the unemployment problem as testament to the region’s many structural shortfalls. “Is it really a recovery or is it about easing the pain?”
Although the panel agreed that Europe’s situation is improved from that of a year previous, they also agreed that there are numerous structural inadequacies that need to be addressed if the region is to up its competitiveness.
Hassan Rouhani, Iran’s new and supposedly Western-friendly President, spoke today at the World Economic Forum in Davos of his hopes that the country would be welcomed back into the international fold. In a much-anticipated speech, President Rouhani also spoke of his desire that Iran would be able to develop certain industries through foreign investment, now that sanctions were being eased.
Highlighting the global financial crisis, he said that it was better for increased cooperation between countries to solve economic issues. “The events of the last six years have shown that nobody can live alone. No power can regard its dominance as permanent. Globalisation amid the financial crisis has shown that we’re all on the same boat.”
[H]e said that it was better for increased cooperation between countries to solve economic issues
He added that the recent deal with global leaders of the country’s nuclear development was a “major development”*. “Iran’s relations with Europe will be normalised. Relations with the United States have entered a new phase. Last month for the first time politicians from both countries have negotiated and exchanged views and have made decisions to resolve differences in relation to the nuclear issue.”
* For more on the deal, read the latest issue of World Finance.
Chocolate is most people’s guilty pleasure; but when it comes to business, the industry is more guilt-free. Entrepreneur Peter Harris shows us around Hotel Chocolat, which has taken a slice of the global $100bn chocolate market and transformed it into one of Britain’s most advocated brands. And Laurent Pipitone from the International Cocoa Organisation explains the global outlook for cocoa, and what’s causing the supply deficit pushing prices up.
Peter Harris: Chocolate is an amazing thing. I mean, how people actually worked out that you would take this cocoa pod, take the beans out of it, and through a number of processes make it into this unusual but beautiful substance is absolutely remarkable.
World Finance: Chocolate. It’s most people’s guilty pleasure; but when it comes to business, the industry is more guilt-free.
Laurent Pipitone: Global sales of chocolate represent around $100bn. Then the cocoa market, which is the main ingredient for chocolate, represents around $10bn, which is the value of the cocoa produce around the world.
World Finance: Entrepreneur Peter Harris has taken advantage of this billion dollar industry, and turned his passion for chocolate into a flourishing business, having founded one of the leading boutique chocolatiers, Hotel Chocolat. But what does it take to succeed in the world of confectionary?
Peter Harris: People often say ‘that was a fantastic idea, how did you come up with it?’ But I actually think there are thousands of good ideas, and the most important thing is how you apply those ideas. And you’ve got to have an almost evangelical passion for your idea, or your business, to make it successful.
Global sales of chocolate represent around $100bn
In the very beginning, Angus [Thirlwell] and I lent money to the business, and the bank matched that with overdraft. That gave us the ability to develop the business to an early stage. But the biggest thing is to actually sell your product successfully. We did that, so we were able to then invest the profits of the business, back into the business, to then develop those ideas.
World Finance: So it really has grown organically, you could say?
Peter Harris: Absolutely, absolutely. You know, we’re one of the rare businesses that’s grown to the size we are now – we employ a thousand people, we’ve got 70 shops in the UK, we have our own factory, our own cocoa plantation – so all these are things that we’ve been able to develop in our business, and afford if you like, by reinvesting those profits.
World Finance: According to a Bain & Co survey, Hotel Chocolat was placed fourth in the top ten most advocated brands. It was also the only British name to make the list.
The company has a loyal customer base, and has found original ways to capitalise on this. The chocolate tasting club offers members a different selection box each month, and encourages their feedback, making the experience interactive. And in effect, a free and self-funded way to do market research.
Peter Harris: Innovation in itself is really important, and through the life of Hotel Chocolat, we’ve actually incubated many of our own businesses. So these are ideas that we’ve come up with, normally because of prompting from our customers, listening to our customers. And by then giving them a little bit of space within our business – in other words, a little bit of resource – we can then allow those to develop without the sort of spotlight of having to make profits in the early days.
World Finance: Innovation has played a large role in Hotel Chocolat’s success, even down to funding its expansion. In 2010 they launched Chocolate Bonds, where loyal customers could invest in the company’s future, and take their monthly yield in – you guessed it – chocolate, raising an impressive £4m.
We won’t pay you any money or interest, but we will pay you a return in chocolate
Peter Harris: We just thought it would be really nice if we could involve our customers in what we’re doing, so we said to them, would you be interested in lending us £2,000 or £4,000, and in return we won’t pay you any money or interest, but we will pay you a return in chocolate. And so you’d get six boxes for a £2,000 bond, and 13 boxes for a £4,000 bond. And this was something that people were a little bit cynical about initially, but we were very successful. And this is really about the relationship we have with our customers.
World Finance: But now the chocolate industry might be headed for darker days, with global chocolate supplies headed for the longest production shortfall in more than five decades.
Laurent Pipitone: Well, the money’s increasing. The long-term average is about three percent per year. On the other side, supply’s not following. One of the reason is that farmers are turning to other crops, which they feel are more profitable for them. Many cocoa farmers are still in poverty, so this is the main reason why cocoa producers are not choosing cocoa as a new investment.
Farmers are hedging, plantations are also hedging. Many cocoa plantations were planted 20, 30 years ago, so their yields are declining over time. So there has not been enough new investment in recent years to supplement what is existing.
Laurent Pipitone: Cocoa prices are expected to continue to rise over the coming few years, due to the supply deficit that the cocoa market is experiencing. So, we’ve seen the supply deficit over the past few years, we’ve seen price increases over the past few years, and we expect this to continue.
Then this will also have an impact on the chocolate price. Cocoa is the main raw material for chocolate, and the price of cocoa in chocolate products represents about 10 percent. So this will impact on chocolate prices to some extent as well in the coming few years.
Many cocoa farmers are still in poverty. Farmers are turning to other crops which they feel are more profitable for them
World Finance: While cocoa prices are forecast to rise, sales in China more than doubled in the past decade, outpacing gains in western Europe – the biggest consumer. And tighter supplies will translate into higher costs for food makers.
But Hotel Chocolat’s Peter Harris is not concerned.
Peter Harris: It’s important actually to put price rises of commodities into perspective. Invariably price rises are reported, but price falls aren’t. And if you actually look at cocoa, yes it is rising a little bit at the moment, but it actually went through a period of it going down quite a lot – but this was never reported.
So the answer is, obviously we manage that. We buy forward cocoa so that we know how much we’re having to pay, so we can obviously guarantee the prices to our customers. But I believe there’s a lot of speculation goes on in the cocoa market – as in other markets – which actually is designed to try to destabilise the pricing so that people can make money. But it’s not really relevant to the source of the product and the availability of it, because that’s very good.
World Finance: So with new restaurants in the pipeline, their turnover at an all time high, and customer satisfaction their driving force, the British start-up looks like it has found the lasting recipe for success.
The G20 conference will be landing in Brisbane this November, and Prime Minister Tony Abbott used his speech at the WEF to outline what he perceived as a chance for Australia to promote free-market economics across the world.
[Abbott] told the audience at Davos that Australia will be making the case for reduced government spending
He told the audience at Davos that Australia will be making the case for reduced government spending and the development of sustainable private sectors as well.
“Even though the crisis was the gravest economic challenge the world has faced since the 1930s, it’s important to remember that it was not a crisis of markets, but one of governance,” said Abbott. “Then it was the G20 which helped to coordinate the actions which prevented another Great Depression.
“The challenge as we continue to work through the weaknesses that brought on the crisis is to strengthen governance without suppressing the vitality of capitalism. The crisis after all has not changed any of the basic laws of economics.”
Abbott outlined his vision of a G20 in which business activity is key.
“Stronger economic growth is the key to addressing almost every global problem. Stronger growth requires lower, simpler and fairer taxes that don’t stifle business creativity,” he said.
“And stronger growth requires getting government spending under control so that taxes can come down and reducing regulation so that productivity can rise. In the decade prior to the crisis, consisitent surpluses and a preference for business helped my country, Australia, to become one of the world’s best performing economies.”
Abbott took the Davos stage after Iranian President Hassan Rouhani, and called for an end to the on-going violence in Syria.
2013 was widely cited as the year in which Europe’s economic prospects returned, however, regardless of credit spreads having narrowed, break-up speculation receded and stock prices climbed, questions remain about the continent’s recovery or lack thereof.
A panel of experts gathered at the WEF to discuss why there is still a great deal to be done in the current climate.
One issue that dominated proceedings was unemployment, especially with regards to widespread joblessness amongst the region’s youth
“Things feel better in Europe, but policy-makers should not be complacent,” said Axel Weber, Chairman of the Board of Directors at UBS, who added that GDP growth in the region’s largest countries is “lacklustre and too one-sided.”
One issue that dominated proceedings was unemployment, especially with regards to widespread joblessness amongst the region’s youth.
The Harvard Professor of Economics Kenneth Rogoff described the employment situation as “horrific”, and reiterated that only Germany had returned to its pre-crisis levels, whilst numerous other nations could take upwards of five years to regain their former strength.
“We asked 80 of our clients what the critical issues in Europe are in terms of their expansion. The answer was labour market inflexibility,” said Sir Martin Sorrell, Chief Executive Officer of WPP.
Although the panelists expected Europe to make progress this year, they agreed that deep-set structural unemployment problems needed to be solved, stressing that if graduates were unable to find work two or three years after graduation this could in turn lead to a lost generation.
“It is difficult for a company to hire a 30-year-old person without work experience,” said Giuseppe Recchi, Chairman of Eni.
In conclusion, the panel agreed that the continent’s governments must implement far-reaching structural reforms if they are to create a flexible labour market, boost competitiveness and better the cost and ease of doing business.
The internationalisation of the Renminbi has created some exciting opportunities in the Hong Kong Insurance sector. Choy Chung-Foo, CEO of BOC Group Life Assurance, talks about the benefits of close economic ties between China and Hong Kong, and why international investors should be considering Renminbi insurance.
Choy Chung-Foo: First of all, let me thank World Finance and the judging panel for giving BOC Group Life Assurance this award. We offer a full range of life, annuity, and health products that meet the needs of customers at the different life stages.
World Finance: And what is BOC’s position in the local life insurance market?
Choy Chung-Foo: In Hong Kong, insurance market ranking is based on annualised first year premium, generated by insurance. On this basis, BOC Group Life is among the top life insurers in Hong Kong in recent years. For the first quarter of this year, we were number one in the market share. Renminbi offshore insurance was first introduced in Hong Kong by us at the end of 2009. Being the pioneer in this business, we are solidly ahead of our competitors, taking over 50 percent market share in this business.
Like all Hong Kong based companies, we have been benefited by the close economic relationship between Hong Kong and mainland China
World Finance: China has been making huge economic reforms, so how has this impacted the insurance business in Hong Kong?
Choy Chung-Foo: Like all Hong Kong based companies, we have been benefited by the close economic relationship between Hong Kong and mainland China. The mainland of China is now promoting the increasing views of Renminbi globally, and Hong Kong is the major offshore market to achieve this goal. We seized this opportunity and have built our Renminbi insurance portfolio quickly to become the market leader in the Renminbi insurance market.
World Finance: Tell me more about Renminbi insurance. Why should international investors be looking into it and what resources are available?
Choy Chung-Foo: With the increase in economic activities between China and other markets, there is an increasing use of Renminbi globally. More and more people may want to go to China, for education, business, and for retirement. Also, as Renminbi increases its international presence, it becomes one of the world’s major currencies. Investors naturally have incentive to diversify their portfolio to improve Renminbi assets as a result.
The need to acquire Renminbi assets to support these activities increases. Renminbi insurance helps investors in their planning to meet these needs. Insurance business is now of the strategic focuses of the group. With the continuous support from the group we’re working on an international expansion plan, which we shall share in due course.
