Let’s talk about Europe

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.

Davos update: Iran’s feeling friendly, says President

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

Davos update: Abbott shares Australia’s vision for the G20

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.

Davos update: problems remain for Europe

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.

Choy Chung-Foo on Renminbi insurance | BOC Group Life Assurance | Video

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.

World Finance: Mr. Chung-Foo, first of all, congratulations on winning the 2013 World Finance Award for Best Life-Insurer, Hong Kong. Tell me about your main insurance products.

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.

Davos update: Shinzo Abe discusses Japan-China future

Japanese Prime Minister Shinzo Abe has discussed his country’s fraught relationship with China during a moderated discussion with journalists at the World Economic Forum meeting in Davos.

“Unfortunately with China we don’t have a clearly explicit roadmap,” said the Prime Minister. “There may be some conflict or dispute arising out of the blue or on an ad hoc level or inadvertently.”

Unfortunately with China we don’t have a clearly explicit roadmap

Abe also referred to a “new dawn” rising over Japan, speaking about his “Abenomics”. He alluded to the upcoming complete liberalisation of the Japanese electricity sector and of labour market reforms that are in the pipeline. He also suggested that corporate tax cuts are eminent as well. When FT correspondent Gideon Rachman pressed Abe on the risks associated with his economic policy, the prime minister answered with a golfing metaphor. “He said that like a golfer, stuck in a bunker for 15 years, but reluctant to reach for the sand wedge, in case they over-hit the ball and shot out of bounds,” wrote Rachman. “Now Japan had finally had the courage to use the sand-wedge.”

Abe was also keen to emphasise that much of his plans involve attracting significantly more women into the workplace than ever before.

However, the greater focus of the talk was on Japan’s relationship with China and Abe refused to rule out any conflict arising in the near future.

Davos update: WEF discusses Africa’s spiralling population

A panel of five experts gathered today at the World Economic Forum in Davos to discuss Africa’s growing population, which is forecast to reach two billion by 2050, and the ways in which the continent can ensure sustainable and inclusive growth for all.

The panelists opened by discussing the ways in which Africa differs to that depicted by the media, making specific reference to the conflict in South Sudan. “I want to agree that very much is positive on the continent,” said Winnie Byanyima, Executive Director of Oxfam International. “It’s so good to hear it from both the private sector and government,” she said, after Nigeria’s President, Goodluck Ebele Jonathan and CEO of Dangote Group, Aliko Dangote spoke about the region’s recent progress and bright prospects for the future, on both social and economic fronts.

“My vision is that if you look at the Africa of 2050, we should have a united Africa, an African economic community where we have only one common market, where there will be free movement of goods, services and people,” said Dangote. The company CEO then went to on to outline a vision for the future, in which Africa would supply not just raw materials, but the workers and factories required to facilitate these operations, in effect reaping far more sustainable rewards for the continent.

I feel ashamed that trade between our countries is only at 11 percent

“I feel ashamed that trade between our countries is only at 11 percent,” said the Nigerian President, “it’s unacceptable.” The inability to move freely from country-to-country without incurring extortionate border fees was an issue that dominated the hour-long discussion, as each member of panel conceded that it was an incredible opportunity for the continent going forwards.

“Our target by 2050 should be 80 percent of the inter country trade flows,” said Julian Roberts, Group Chief Executive of Old Mutual, who acknowledged that the barriers between African nations are holding the continent back. “The opportunities are there, and the trade will flow.”

The potential for growth was best summed up by Dangote: “Imagine if we had sufficient infrastructure or sufficient power, and not only that, but going forward, if we’re going to even grow at 4.5 percent until 2050, it means that Africa will have a total GDP of about $9trn; that’s twice China today.”

Panelists

Julian Roberts
Group Chief Executive, Old Mutual, United Kingdom; Co-Chair of the Governors for Financial Services Industry for 2014 

Goodluck Ebele Jonathan
President of Nigeria

Aliko Dangote
President and Chief Executive Officer, Dangote Group, Nigeria

Doreen E. Noni
Creative Director, Eskado Bird, Tanzania

Winnie Byanyima
Executive Director, Oxfam International, United Kingdom

Luis Gerardo Del Valle and Alejandro Aceves Perez on tax reforms in Mexico | Jauregui and Del Valle | Video

Mexico’s economy has undergone drastic change in recent years. The government is now looking to pass several tax reforms. Luis Gerardo Del Valle Torres and Alejandro Aceves Perez, Managing Partner and Tax Partner of Jauregui and Del Valle, talk about the proposed reforms and how they are expected to impact investors.

World Finance: Luis, tell us more.

Luis Gerardo Del Valle Torres: Economically speaking, it’s always stated that it’s better to have the resources in the hands of the businesses rather than in the hands of the government. The government is coming up with a 10 percent dividend tax, and that did not exist before, and it’s also increasing considerably the individual’s tax rate from 30 to 35 percent. So any tax reform that just intends to collect more revenue will always and has always been controversial.

World Finance: Alejandro, how will this impact on Mexico’s investment climate?

Alejandro Aceves Pérez: One of the objectives is to increase the collection of revenues for the government, so there is no doubt that it will affect the investment climate. However, we do not consider that this will have a significant negative effect, because the opportunities are there, the markets are there, and we still believe and consider Mexico to be a very attractive place for foreign investors.

Our advice to multinational companies is mainly to be careful to take care of the new regulations in order to avoid the negative consequence

World Finance: What advice would you offer multinational companies who could potentially be impacted?

Alejandro Aceves Pérez: As the tax climate becomes more complex, multinational companies are required to carefully analyse the way they have been performing operations in Mexico. Our advice to multinational companies is mainly to be careful to take care of the new regulations in order to avoid the negative consequence. From an operational perspective, everything becomes more complex, so they need to be closer to their tax advisors, to their legal advisors, so basically they do not have any future negative consequences with respect to the creation of liabilities. So everything basically gets to a more complete environment from a legal and tax perspective, that’s our view.

World Finance: And what opportunities are there for foreign investors? If you think about the various sectors, are there any that are specifically open to them and are there any that are off limits?

Alejandro Aceves Pérez: The real estate sector has been very attractive to both existing investors and new investors, either from Mexican sources or from foreign sources. That has been under a very dynamic environment very recently, so in the future for certain that is one of the major opportunities that our country’s offering. One of the off limits sectors, what we call the energy reform may provide the opportunity to open that sector to foreign investors. That has been under discussion and depending on how they perform the analysis, what the outcome is, we may be seeing more foreign investors coming to our country with respect to the energy sector, which now probably is closed to certain company profiles. That could be off limits at the moment but that might be opened in the very near future.

World Finance: The OECD commenced an action plan with respect to base erosion and profit shifting. Tell me more.

Luis Gerardo Del Valle Torres: What the report suggests is that governments come up with general anti-avoidance provisions, that they tighten the CFC. By CFC I mean controlled foreign corporations regimes, meaning that whenever the trans-nationals try to organise their business in a way that actually shifts profits from a higher tax jurisdiction to a lower tax jurisdiction, that that’s just included in the basis of wherever the company’s a tax resident.

Mexico is still a very powerful economy, there are a lot of opportunities

World Finance: How will this impact Mexico, and what is the country’s take on it?

Luis Gerardo Del Valle Torres: All of this tax reform will clearly impact the decision of trans-nationals, of where, when and how much to invest. Mexico is still a very powerful economy, there are a lot of opportunities and the Mexican government is relying on the fact that just increasing taxation with this 10 percent dividend tax shouldn’t affect the decisions of trans-nationals in a way that should affect the economy, or the investment that we’re expecting will come into country in future years.

World Finance: And finally, why should investors look to Mexico?

Luis Gerardo Del Valle Torres: The productions costs are still low, probably not as low as in China or as in certain other countries, but then the development of the Mexican economy, the services that are available, the privileged geographical location of Mexico, should be taken into consideration, so I think we’re clearly going to be competing strongly against great countries for foreign investment.

World Finance: Luis, Alejandro, thank you very much for your time

Alejandro Aceves Pérez: Thank you.

Luis Gerardo Del Valle Torres: Thank you for inviting us.

Inflation targeting backed by India’s central bank

A Reserve Bank of India (RBI) panel has recommended an overhaul of the country’s monetary policy. The committee said that the consumer price index (CPI) inflation should be used to establish a formal inflation target of four percent. The report detailed that the long-term retail CPI target should be within a two percentage point range of the established target in just over two years.

Retail inflation currently stands at 9.9 percent, and as the panel suggested, this should be reduced to eight percent in 12 months and six percent the following year. Failure to meet targets would result in a public statement, as in the British model.

Failure to meet targets would result in a public statement, as in the British model

Currently, the Indian Central Bank doesn’t have a formal inflation target and the recommendation laid out by the committee is a big ask given the country’s near double digit price increases. Such changes would shift the emphasis from wholesale price inflation – India’s current main price movement indicator – towards global norms. This would result in greater transparency and predictability; a stark contrast to the central bank’s history of setting ad-hoc interests rates, often to the surprise of international markets.

Historically, the RBI has based policy on its own perception of inflation, currency stability and growth. “It will be a very, very important step for monetary policy in India,” chief economist in Asia for JPMorgan, Jahangir Aziz, told the Financial Times. “Until now, we’ve had no idea what the RBI is doing. If this proposal goes through, we will have a quantitative objective by which we can judge the RBI’s performance.”

The 130 page report also recommended the formation of a monetary policy group, whose primary objective would be inflation management. At present, interest rate decisions are made solely by the RBI governor. This committee would be led by the government and meet every two months to discuss monetary policy.

The current RBI panel was established shortly after former IMF chief economist Raghuram Rajan became governor last year. Its aim is to get New Delhi to cut its budget deficit to three percent of the GDP within three years, while loosening its control over prices. These suggested reforms coincide with general elections, which will be heavily based on being able to offer stable prices.

Despite normalising the country’s monetary policy, Indian business groups stand to be disadvantaged by such modern reforms. For years, these groups have blamed high interest rates for deterring new investment. Only once India successfully regulates its fiscal policy structures will the accuracy of these allegations come to light.

TEPCO to rebuild nuclear plant in Japan despite opposition

Three years after the devastating tsunami that led to the Fukushima power plant disaster, Tokyo Electric Power (TEPCO) has finally been given the go-ahead by the Japanese government to start rebuilding its business. The company, which is now state-controlled, has kept its nuclear reactors offline since the disaster. The agreement will involve over one trillion yen in cost cuts for TEPCO, and there are plans to restart its two main reactors as early as July.

There is fierce opposition in Japan to resorting back to nuclear energy after the Fukushima meltdown

“As an electricity utility we’d like to have nuclear power as an option to sustain a stable power supply,” Naomi Hirose, president of TEPCO, told reporters in a press conference. “If the Kashiwazaki-Kariwa plant restarts, the company will be able to generate electricity from sources that will allow us to cut rates.”

The Kashiwazaki-Kariwa plant is the world’s largest nuclear reactor, and TEPCO has announced its plans to restart it by July. There is fierce opposition in Japan to resorting back to nuclear energy after the Fukushima meltdown. Before the disaster, up to a quarter of Japan’s power was generated from nuclear plants, but it has since been relying on oil, coal and gas plants for power, at huge cost to the economy.

TEPCO has announced it is considering making investments of up to 2.67 trillion yen in order to rehabilitate its nuclear business by boosting upstream projects and overseas electricity businesses. When outlining the plans, TEPCO suggested it would borrow two trillion yen from fresh lenders as soon as possible.

Experts divided over reported STEM human capital crunch

The Social Market Foundation, a leading cross-party think tank, released a paper called In the Balance: The STEM Human Capital Crunch in March 2013. The key findings of the study were that a labour shortage was preventing growth in the Science, Technology, Engineering and Mathematics (STEM) sectors. The paper referenced a study published in 2011, in which it was reported that 26 percent of STEM vacancies could not be filled, and that 21 percent of these vacancies were “skill shortage vacancies”. The findings echo those of several other studies from around the world, and some high profile business leaders have weighed in on the debate.

One of the most prominent is Sir James Dyson. Writing in the Huffington Post, he claimed the UK lacks the engineers required to build the recently announced Hinckley Point nuclear power plant. He said: “The government… signed an agreement which means our looming energy crisis will be solved by nuclear power stations built by the French and owned, in part, by the Chinese. This demonstrates the impact of Britain’s skills shortage and our lack of ambition.”

As part of a plan to improve British infrastructure by encouraging innovation in technology and design, the government announced £400m will be invested in higher education science and engineering by 2016

In the same article, Dyson wrote that Britain only produces 12,000 engineering graduates a year. Speaking to The Telegraph before that piece was published, he quoted the same figure and said there are currently 54,000 STEM vacancies in the UK. He said: “The Chancellor wants to increase exports to £1trn by 2020. But how, when we are importing expertise and it is predicted that we will have a deficit of 200,000 engineers by 2015.” Dyson said his own company was struggling to fill 650 vacancies.

Dyson has been a long-term advocate for increasing the number of British engineers. In 2010, he was invited by the Conservative Party to compile a report outlining what needs to be done to boost the engineering and technology sector. In 2012, he told The Guardian tuition fees should be waived for engineering undergraduates and post graduates should be paid £40,000 a year. Dyson also suggests an overhaul of the visa system would allow international graduates to stay and work in the UK to improve the labour force.

As part of a plan to improve British infrastructure by encouraging innovation in technology and design, the government announced £400m will be invested in higher education science and engineering by 2016. According to David Willets, UK Science and Universities Minister, this investment will include £200m from the Higher Education Funding Council for England with the other half being matched by the universities receiving the funding.

The goal of the fund is to improve facilities and increase the number of science, technology and engineering students to compensate for a shortfall of workers in these sectors. Another focus of the investment is to double the proportion of women in the science and engineering sector from the current 16 percent, to 30 percent by 2030.

The STEM myth
There has been talk of a similar crisis in the US for decades – recently investigated by Dr Robert Charette, Contributing Editor at IEEE Spectrum Magazine. In his article “The STEM Crisis Is a Myth”, Charette strongly opposes the argument that there is such a shortage. The piece has received a lot of positive feedback from STEM graduates who claim they are unable to find work despite the supposed labour shortage: it has also received negative feedback from industry insiders who claim they are unable to find a sufficient quantity of candidates to fill vacancies.

Charrete analysed data published in articles, white papers and government studies about global STEM labour shortages from six decades and what he found was compelling. Charrete points out the same argument has been reiterated for decades, with a lot of inconsistency in the presented data. He suggests “powerful forces must be at work to perpetuate the cycle”.

Charrete’s work has received mixed reactions and has been asked to prove his findings. However, he says it is not up to him to prove anything as he was merely analysing the data provided: “It’s really not up to me to be proving you wrong, if you’re screaming that there’s a shortage, it’s really up to you prove that there is a shortage, given that you’ve been crying wolf for 50 years.”

One theory as to what is “perpetuating the cycle” is that an excess of science, tech and engineering professionals are necessary to create a bigger pool of skilled labour for employers to choose the best from. Charrete writes: “companies would rather not pay STEM professionals high salaries with lavish benefits, offer them training on the job, or guarantee them decades of stable employment.” The more skilled STEM workers there are, the greater the chance of the ‘best and the brightest’ contributing to innovation in areas such as national defence, manufacturing and computer technology.

Running the numbers
Comparing various reports of UK engineering and tech graduate shortages with the actual numbers reported by the Higher Education Statistics Agency (HESA), it is difficult to overlook the fact the data doesn’t match up. The point of comparing the two is not to prove anybody wrong. The increased investment in science, technology and engineering education is undeniably a good thing.

16%

Proportion of women in UK science and engineering

£400m

UK investment in higher education science and engineering by 2016

The improved measures to increase female representation in these sectors is also a good thing, as is relaxation of the current ELQ funding rule in order to allow people to retrain in these fields. However, the figure of 12,000 British engineering graduates is quite vague, especially seeing as, in 2012, the BBC reported there was a shortage of engineers due to there being 23,000 graduates a year. It was not specified if these were post-graduates, undergraduates or PhD graduates – although, according to the HESA, there were a total of 50,680 “broad based engineering and technology” graduates in the 2011/12 academic year across all levels.

Of those graduates, 23,595 were undergraduates, 1,785 were described as “other postgraduate” and 18,395 were described as “doctorate or higher degree”. In the broad sense of the definition, which seems to be what is being reported, there are a lot more than 12,000 graduates.

It appears several factors are contributing to the reported shortage of engineering and technology labour. It may be the shortage of STEM workers being referred to could be better described as a shortage of ideal candidates. This would explain why business leaders such as Dyson call for looser immigration policy in order to create a larger pool of professionals. This also explains the £400m investment in science and technology training to improve graduate skills.

Furthermore, employers require graduates to be ‘work-ready’, which is often difficult in any field, as graduates often need a period of real-world experience in order to apply what they have studied to reality. It could also be the case that STEM graduates without the grades or experience to be employed at companies such as Dyson are taking jobs in other sectors. It really doesn’t help that there are a lot of inconsistencies in the data quoted by various commentators as it is adding to the confusion about the matter. However, overall, it seems the reported shortage of STEM labour might be a matter of quality, not quantity.

Japan leans in: Shinzo Abe’s push for womenomics

Women in North America and Europe have been vital participants in since the 1960s. From then, women have gone from housewives, to clerical workers and finally to top executives. It would be foolish to say that the glass ceiling has been shattered, but a window up there has certainly been cracked open.

Figures vary from country to country, with Scandinavia topping the list for gender equality, according to the Global Gender Gap Report by the World Economic Forum, with other European countries following suit. Though wealthier nations tend to be more equal when it comes to gender, there is one notable exception: Japan (see Fig. 1).

Coining the term ‘Womenomics’
In 1999, analysts at Goldman Sachs led by Kathy Matsui concluded that Japan could increase its GDP by as much as 15 percent by bringing more women into the work force and closing the gender abyss that has formed in the Japanese labour market. Now, more than 14 years since Matsui’s legendary exposé of gender politics in Japan, things are finally beginning to change. The term ‘womenomics’, lifted from Matsui’s paper, is finally part of the Japanese political lexicon. And, ironically, it was a man who put it there.

Womenomics are a vital component of Prime Minister Shinzo Abe’s much lauded reform plans, affectionately known as Abenomics. Abe is committed to modernising the Japanese economy, long plagued with deflation and slow growth, and he insists that his goal of bringing Japan back to the foreground as an economic powerhouse will not be achieved without “tapping into its most underutilised resource: Japanese women.” Abe insists that his policies are all about empowering women. “Japan is a country with a shrinking population caused by a seemingly intractable decline in its birth-rate. But womenomics offers a solution with its core tenet that a country that hires and promotes more women grows economically, and no less important, demographically as well,” Abe wrote in his very well received op-ed column in the Wall Street Journal.

“My government’s growth plan forecasts that a two percent increase in productivity over the mid to long term will produce, in 10 years, an average of two percent in real GDP growth and three percent in nominal GDP growth,” he wrote. “To achieve this, we must capitalise on the power of women. We have set the goal of boosting women’s workforce participation from the current 68 percent to 73 percent by the year 2020. Japanese women earn, on average, 30.2 percent less than men (compared with 20.1 percent in the US and just 0.2 percent in the Philippines). We must bridge this equality gap.”

So far, Abe’s concrete plans for bringing more women into the workforce are still a little vague. When women joined the labour pool in Europe and North America in the 1960s and 70s, it was largely because of the contraceptive pill becoming available, allowing women to plan when and how to structure their families and careers. Birth control is already widely accessible in Japan, and yet women still don’t always choose to work. The prime minister has suggested that he will expand day-care provision to allow mothers to return to work after giving birth. In a speech to the UN General Assembly, Abe has vouched to implement an official development assistance programme in excess of $3bn over the next three years, with the aim of addressing women’s participation in society through health, medical care, and prevention and resolution of conflict related to women.

Birth control is already widely accessible in Japan, and yet women still don’t always choose to work

Japanese women seem to have responded positively to Abe’s plans, but they have been demanding better infrastructure and provisions for working mothers for a long time before Abe came along. In February, Ryo Tanaka, Mayor of Tokyo’s Suginami Ward, revealed that 2,968 families had applied for state authorised day care facilities, 400 more than the year before and 1,800 more than the state can cope with. In June, a group of women rallied in Tokyo demanding more public day care. Tanaka announced emergency measures to cope with the shortage of child-care spaces shortly after the protests. “I think the mothers were placed in a situation where they felt they had no choice but to raise their voices to be heard,” a Suginami official said. “We must earnestly listen to the urgent concern raised by these mothers, who need to go back to work and also raise children.”

A conflict of interest
Though the higher echelons of Abe’s government might be gearing up to meet these demands, Japan remains a deeply conservative society, and even innocuous calls for more free child-minding have been met with aggressive opposition. After the June 2013 protests, a number of political commentators took to the internet to express their displeasure at the thought of women leaving the home to work.

“What I am saying is don’t force your child rearing on society from the start,” read a particularly vitriolic blog entry by Liberal Democratic Party (Abe’s own) member, Yutaro Tanaka. He added that while he agreed that “women power” was necessary to boost the economy, the women who took to the streets to demand better support “had no touch of reserve nor shame.”

Japan remains a deeply conservative society…even innocuous calls for more free child-minding have been met with aggressive opposition

Though Yutaro Tanaka has been particularly vocal about his opinions, he is by no means alone. The trouble for Abe is that a number of high-ranking politicians and prominent businessmen still share these traditionalist and conservative beliefs. “Their view of women is basically as tools to boost the birth rate, reduce social security spending and increase growth. Women have a role because they are key to solving these three problems,” Mari Miura, a political science professor at Sophia University in Tokyo, told Reuters. “But they have a strong idea of the traditional family as a core ideology of conservatives. That ideology and reasonable solutions do not match, so the policy is always schizophrenic at best.”

But it is undeniable that when it comes to employment rations, Japan still lags behind in all key World Bank Gender Gap indexes. It ranks 104th in the world for female participation and opportunity, despite women and men scoring equally in literacy, primary and secondary education, and woman surpassing men by far in life expectancy.

Cracks start to appear at university level, where significantly less women choose to attend, and the gap gets persistently wider at boardroom level; so few women are on the boards of listed companies in the country that the World Bank could not compile a figure, and the same is true for firms with female participation in ownership.

Realising the only option
But Abe is well aware that in order to achieve greater female participation in the workforce, it is not sufficient to simply tackle the issue at the top. He will not be enforcing positive discrimination for women in boardrooms, for instance, but will instead follow the work the Jiro Aikawa, a Japanese development specialist working with young female African farmers. “Through his involvement in African agriculture, he has succeeded in doubling the incomes of 2,500 farmers in Kenya. Africa’s agriculture will not grow strong unless Africa’s women are first empowered, and unless Africa’s agriculture is made robust, Africa itself will not thrive. This is his conviction,” Abe wrote in his Wall Street Journal column.

“One of Aikawa’s strategies is to promote women farmers’ understanding of the consumer market. The goal is to move beyond agriculture that merely enables the farmer to eat, to agriculture that enables the farmer to earn money.” Though Abe’s bottom-up reforms might help women onto the first step in the career ladder, corporate culture in Japan remains entrenched in its regressive attitude towards women climbing the rungs after that.

[T]he policy is…schizophrenic at best

Though a number of large corporations have been publicly enforcing diversity policies as a way to boost profits, Keidanren – a big business lobby group – has blocked a proposal to make it compulsory for large companies to disclose gender statistics. While increasing female participation in the labour market will lead to growth in the long-term, Abe is still facing growing public debt and some measure of economic uncertainty. It will be a challenge for Abe’s government to find the funds to cover the reforms he has promised.

However, the economic possibilities of Abe’s womenomics might prove too irresistible for even the staunchest traditionalist to resist. In a recent interview with Reuters, Matsui reinforced that her findings of 14 years ago, and insisted that despite the opposition, Abe is doing the right thing. “It’s the first administration that I can think of that even mentioned women’s participation. So that’s a step forward. Obviously, this is going up against a tidal wave of potential opposition, but at the end of the day, what other choice do they have?”

A new era for the US Fed as Yellen takes the reins

“She calls it like she sees it,” said President Obama in October as he backed Brooklyn-born Janet Yellen to succeed Ben Bernanke as Federal Reserve chair. “She doesn’t have a crystal ball, but what she does have is a keen understanding about how markets and the economy work, not just in theory but also in the real world,” he added, as a humbled Janet Yellen stood smiling by his side.

Yellen’s authority over 300 million Americans and the founding fruit on which they all depend will see her supplant the likes of Christine Lagarde, Angela Merkel, Dilma Rousseff and Hillary Clinton – at least for the time being – as the most powerful female figure in world finance.

Yellen’s authority…will see her supplant the likes of Christine Lagarde, Angela Merkel, Dilma Rousseff and Hillary Clinton…as the most powerful female figure in world finance

As the US returns to the verges of a fiscal cliff, one of Bernanke’s most celebrated protégés must stabilise the economy while somehow putting the breaks on quantitative easing.

Experience and early years
At 67 years of age, Yellen is six years older than the age at which the average American retires. However, with age comes experience, which in Yellen’s case is in no short supply. Having spent three years as the Fed’s vice chair, six heading the San Francisco Fed, two running the CEA and a further three on the Fed Board of Governors, her industry expertise is without compare.

Yellen’s childhood years were spent at Fort Hamilton High School, where she excelled academically and was named valedictorian of her graduating class in 1963. At the tender age of 18, Yellen migrated cross border to study economics at Brown University and in 1970 undertook a PhD at Yale University, which marked the beginnings of what would prove to be an impressive career in economics.

Soon after, Yellen became an assistant professor at Harvard University, served for two years on the Fed’s board of governors, and worked on the faculty of the LSE alongside her husband, George Akerlof. So often seen as second fiddle to the 2001 Nobel Prize-winning economist, Yellen found a perfect companion for bettering her own economic wisdom. “We liked each other immediately and decided to get married,” recalls Akerlof in his Nobel Prize biography. “Not only did our personalities mesh perfectly, but we have also always been in all but perfect agreement about macroeconomics.”

Sticky wages
Nonetheless, as time progressed so too did Yellen’s standing, best evidenced by the New Republic journalist Noam Scheiber calling Yellen for a story, only for her husband to pick up and promptly retort, “Well, I’m a pretty good economist too.”

Together Yellen and Akerlof developed their theory of ‘sticky wages’, which determined that, despite increased earnings, wages are often slow to follow; a principle that Yellen later introduced to the Fed’s fiscal dealings.

The original concept was inspired by an idea to pay their babysitter beyond the going rate, which then saw a string of excellent sitters apply, leading the couple to conclude that this same principle could be applied on a macroeconomic scale to great effect.

The duo’s hypothesis highlighted the market’s inability to reach equilibrium in the event of a downturn and went on to attribute this phenomenon to a number of factors, among them being self-preservation, union activity and regulatory barriers. However, as is the case with many of Yellen’s economic principles, a conclusive reason for the imbalance is yet to be determined.

The original concept [‘sticky wages’] was inspired by an idea to pay their babysitter beyond the going rate, which then saw a string of excellent sitters apply

It did take quite some time for the pair’s theory to be put into practice, however, as the two were forced to wait until 1994 before Yellen was appointed to the Fed’s board of governors. This new role not only saw her fulfil a lifelong ambition to join the institution, but also establish an impressive reputation in the field of economics, and in 1997 she was promoted to the chair of president Clinton’s Council of Economic Advisors. Her career in world finance then passed from strength to strength, as the Bay Ridge resident exercised her dovish tendencies and made a name for herself as an astute economic mind in the process.

Recent analysis by the Wall Street Journal shows that Yellen boasts the best economic prediction record of the 14 Fed employees it examined, ahead of William Dudley, Elizabeth Duke, Richard Fisher and Ben Bernanke, to name a few.

By far the most famous of Yellen’s predictions was in December 2007, when she rightly predicted that a recession could well be on the cards for the US. “The possibilities of a credit crunch developing and of the economy slipping into a recession seem all too real,” she warned, and it is this astute eye for detail and capacity for decision-making that best characterise her long and successful career in finance and economics.

Employment first
Obama’s support is unsurprising given that Yellen’s policies share a certain likeness with the administration’s valuation of employment ahead of inflation. At the Trans-Atlantic Agenda for Shared Prosperity conference in February 2013, Yellen spoke of the three million Americans who had been out of work for over a year and emphasised the importance of combatting this phenomena above all else. “These are not just statistics to me. We know that long-term unemployment is devastating to workers and their families. Longer spells of unemployment raise the risk of homelessness and have been a factor contributing to the foreclosure crisis. When you’re unemployed for six months or a year, it is hard to qualify for a lease, so even the option of relocating to find a job is often off the table. The toll is simply terrible on the mental and physical health of workers, on their marriages, and on their children.

Recent analysis by the Wall Street Journal shows that Yellen boasts the best economic prediction record of the 14 Fed employees it examined

“Long-term unemployment is also a great concern because it has the potential to itself become a headwind restraining the economy. Individuals out of work for an extended period can become less employable as they lose the specific skills acquired in their previous jobs and also lose the habits needed to hold down any job. Those out of work for a long time also tend to lose touch with former co-workers in their previous industry or occupation – contacts that can often help an unemployed worker find a job. Long-term unemployment can make any worker progressively less employable, even after the economy strengthens.”

Jeffrey Frankel, former member of Clinton’s Council of Economic Advisors and professor at Harvard University’s Kennedy School of Government, said, “I very much expect Janet Yellen to continue the policies of Ben Bernanke,” an opinion that echoes the expectations of the many.

For all intents and purposes, the Fed’s policies with regards to inflation look likely to remain essentially unchanged under Yellen, whose background has focused principally on unemployment and whose past remarks have sympathised with Bernanke’s approach. “The mandate of the Federal Reserve is to serve all the American people, and too many Americans still can’t find a job and worry how they’ll pay their bills and provide for their families,” she said in October 2013 at a White House ceremony.

For this reason, it would appear that under Yellen’s regime, an eventual ‘normalisation’ of policy for the Federal Open Market Committee (FOMC) is far from imminent and global markets will continue to depend upon artificial means of support. “Progress on reducing unemployment should take centre stage for the FOMC, even if maintaining that progress might result in inflation slightly and temporarily exceeding two percent,” she said at a meeting sponsored by the Society of American Business Writers and Editors in March.

What will be interesting is to see how Yellen’s focus on unemployment will tie in with recent plans to increase America’s minimum wage. Her belief that decent pay leads to better morale, and consequently higher productivity, suggests that a minimum wage rise may well come into effect when she takes the position. Furthermore, it could be said that the theoretical reasons for raising the minimum wage share a certain likeness with quantitative easing, with each assuming that with more money comes greater productivity.

The problem with bonds
The Fed’s aggressive expansionary policies have seen it pump $85bn of new money into the system every month, consisting of $45bn in treasuries and $40bn in mortgage-backed securities. Although Yellen’s candidacy campaign has seen little opposition, there exist a fair few who remain dissatisfied with the Fed’s seemingly ceaseless bond buying campaign and have proceeded to question Yellen’s stance on the subject in this same vein.

By far the most famous of Yellen’s predictions was in December 2007, when she rightly predicted that a recession could well be on the cards for the US

Critics worry that the Fed’s excessive bond buying will continue for far too long under Yellen’s liberal leadership and that her often overbearing tolerance for inflation could well lead to excesses that bear a certain likeness to the events that preceded the crash.

Among those most disconcerted by the Fed’s policies is Florida’s Senator Marco Rubio, who said in a recent press release that he would vote against Yellen, “because of her role as a lead architect in authoring monetary policies that threaten the short- and long-term prospects of strong economic growth and job creation.” Rubio went on to add, “Altogether, she has championed policies that have diminished people’s purchasing power by weakening the dollar, made long-term savings less attractive by diminishing returns on this important behaviour, and put the US economy at increased risk of higher inflation and another future boom-bust.

“Sound monetary policy established by the Fed is critical for long-term investment and economic growth. Unfortunately, the arbitrary way in which interest rates and our currency have been treated, especially over the last few years, has created asset bubbles and financial uncertainty that limit our economic potential.”

Cause for concern could well be justified given that America’s monetary base is rising rapidly as economic growth trails behind, leading many to fear an eventual bloat of inflationary implications at some point in the near future. Put another way, America’s wealth is but an illusion, and once Wall Street clocks on to this fact, losses could well spiral out of control.

Transparency and tradition
Although opinion is divided on Yellen’s dovish leanings, most are in agreement with her plans to improve upon the Fed’s transparency and better its longstanding and – some say – outdated traditions. The Fed’s history as a hierarchical and male-dominated space appears to be coming to an end, and Yellen’s appointment as the first female chair is the most obvious indication that America’s central banking system is undergoing considerable change.

Yellen’s appointment as the first female chair is the most obvious indication that America’s central banking system is undergoing considerable change

Another of the Fed’s structural changes can be seen in Yellen’s communications strategy, which is among her most impressive achievements to date, and requires a far greater degree of disclosure. “I hope and trust that the days of ‘never explain, never excuse’ are gone for good, and that the Federal Reserve continues to reap the benefits of clearly explaining its actions to the public” she told the Society of American Business Editors and Writers in Spring 2013.

Where once the Fed’s policy was to disclose very little about monetary policy moves, believing that this stance would protect against market overreactions, the existing approach is to trust more in financial markets and accept responsibility for its dealings, however catastrophic. “The Federal Reserve’s ability to influence economic conditions today depends critically on its ability to shape expectations of the future, specifically by helping the public understand how it intends to conduct policy over time, and what the likely implications of those actions will be for economic conditions.”

Although America’s aggressive bond-buying regime at first glance appears radical, Yellen is far from it; instead she is merely a product of a time wherein unemployment and the extreme means by which it is combatted are par for the course. While her appointment to the highest chair in central banking marks the pinnacle of a long and successful career, it also represents the beginnings of a new era for the Fed and for the global economy as a whole.

From billions to bust: where did it go wrong for Eike Batista?

“I’m not bragging. It’s just a consequence of all the things that we have done. Just look at the assets. Jesus, by 2015 we will be making $10bn. Between 2015 and 2020 that will double, or triple. And those are discounted numbers I’m giving you.” Eike Batista’s modesty might not have shone through in his now infamous interview with the Sunday Times in March 2012, but his confidence certainly did. He was then Brazil’s richest man, the fourth richest person in the world and on a mission to the top. What a difference two years make.

In the intervening time, Batista lost most of his $30bn and tumbled right off any rich list he once appeared on. Batista’s white-knuckle ride of ostentation and loss culminated with OGX, his once celebrated oil-and-gas company and the cornerstone of his empire, filing for bankruptcy this past November, after missing $45m worth of payments to bondholders.

Though he still heads another four listed companies in energy, ship building, mining and logistics, Batista’s unconventional set-up and management style means that even the profitable parts of his sprawling businesses are likely to face the axe as a direct consequence of OGX’s failure.

Building something from nothing
Batista has been a ‘celebrity millionaire’ in Brazil for the past 30 years. Known for his extravagant taste, exuberant (and public) family life, and unrepentant ambition, Batista became the face of Brazil’s emergence as an economic powerhouse over the last two decades. In many ways Batista’s success was symbolic of what Brazil could be, with just a little bit of hard work.

His father was a prominent businessman who once headed Vale do Rio Doce and served as Minister for Mines and Energy in the 1960s and then the 1980s, but his children were raised by his estranged wife in Germany. As the youngest, Eike abandoned an engineering degree in Aanchen to try his luck in Brazil, and by the age of 25 he had made $6m by buying and selling gold. He married a model, bought a very big boat and started growing his business.

Batista made his real money in mining in the 1990s. Since 2004 he listed five successful companies under the EBX (Eike Batista X) umbrella: MPX in energy generation; MMX in mining; LLX in logistics; OSX in shipbuilding; and of course OGX. Batista once boasted to Brasil Econômico, that “the ‘X’ represents multiplication”, referring, of course, to his assets.

Batista’s troubles can be traced back to the launch of OGX in 2008, though they would only reveal themselves much later

The companies, excluding OGX, and a handful of other international holdings including a mining operation in Colombia, were virtually multiplying in size and value each month for much of the mid to late 2000s. In 2009 alone, EBX shares were up by 195 percent; LLX had gained 500 percent and Batista’s reputation as Brazil’s golden boy was solidified.

Batista’s troubles can be traced back to the launch of OGX in 2008, though they would only reveal themselves much later. The oil and gas company was launched and listed on the basis that it would explore prospects around Brazil, but without any actual fields in operation. It was always a risky proposition, but Batista had assembled a reputable team of experts behind his project, all ex-Petrobras with a wealth of experience in drilling in Brazil.

Batista was riding the slipstream of the discovery of Brazil’s enormous ultra-deep-sea crude oil reserves, known as the Pré-Sal region off the southeast coast of the country. OGX’s IPO raised $3.7bn and was Brazil’s biggest ever IPO at the time.

But in 2012, news broke that OGX was slashing production in what had been touted as its biggest oil asset off the Rio de Janeiro coast. It soon became apparent that for all of Batista’s skilled sales pitch, there was nothing supporting the hype of OGX. When the company announced it would be winding down production by 2015, it was producing 10,000 barrels of crude a day – barely a fifth of what it had promised in the IPO prospectus five years earlier. Shares tumbled by 99 percent and bonds were being traded at eight percent of their face value. However, that was just the beginning of Batista’s problems.

In the five years between OGX going public and then going bust, Batista seemed to be caught up in what can only be described now, with the benefit of hindsight, as unbridled megalomania. He had extended himself from energy production to flashy – and expensive – entertainment and hospitality ventures. At one point an EBX subsidiary was bidding for the Maracanã stadium concession, had won the contract to renovate and run a historic hotel in downtown Rio and was running the Rock in Rio festival, a ten-day party that brings the biggest names in pop music to Brazil.

The good times: Brazilian President Dilma Rousseff and Eike Batista celebrate the first oil extraction by his company OGX on an oil field in Porto Acu, 2012. Batista has been a 'celebrity millionaire' in Brazil for the past 30 years
The good times: Brazilian President Dilma Rousseff and Eike Batista celebrate the first oil extraction by his company OGX on an oil field in Porto Acu, 2012. Batista has been a ‘celebrity millionaire’ in Brazil for the past 30 years

These showy enterprises not only lost Batista a lot of money when it eventually became apparent they were being frightfully mismanaged, but they also lost him a lot of standing with the Brazilian public, who stopped thinking of him as an aspirational figure and started seeing him as something of an ostentatious show-off.

Overestimated assets
As OGX started to unravel, Batista’s almost risible capitalisation strategy became apparent; and the ultimate demise of EBX became a chronicle of a death foretold. Batista had relied heavily on government support, not only in terms when bidding for concessions, but also in investment through the Brazilian Development Bank (BNDES).

As of October 31, the bank stood to lose up to BRL 6bn, around $2.61bn of direct investment and financing of EBX projects. EBX’s main companies were all built upon the same foundations: the opportunity to profit from Brazil’s exuberant mineral reserves by investing in the infrastructure that the government would be unable to build itself.

Batista was building ports, ships, energy infrastructure and mines; all of his companies were interconnected, MMX’s mining products would be shipped from LLX’s multi-use port, which would also be used as an oil hub for OGX’s products, and so on. When OGX and its billions of dollars worth of debt came crashing down, it dragged down the whole lot of them.

He built a $30bn house of cards by persuading investors, banks and the Brazilian government that his superstructure of companies could be the answer to all of Brazil’s infrastructure needs

Batista started his business life peddling insurance door-to-door, and his salesmanship is undeniable. He built a $30bn house of cards by persuading investors, banks and the Brazilian government that his superstructure of companies could be the answer to all of Brazil’s infrastructure needs.

He sold a dream. However, by 2012 it was obvious that the man lacked the management skill to make that dream function past the sales pitch. Batista had not only built his conglomerate in such a way that his main companies relied heavily on each other to succeed, but he also severely leveraged OGX, by far his most ambitious enterprise, on his other, already successful companies. When OGX announced it was suspending operations, Batista was leveraged up to his ears.

In June, Batista, seeing EBX on the verge of collapse, took out a full page editorial in the O Globo and the Valor newspapers. Though described by the local media as a mea culpa of sorts, in which he confronted headfirst the perception that he benefited “from a rampant wave of capital building, that [he surfed] on a wave of an inflated market, that without any apparent reason, offered him a blank cheque with a few billion with which to play at being an entrepreneur.”

However, though he admitted this is how he has come to be seen by the market and the public, the editorial did nothing to disabuse any one of those opinions. Batista boldly placed the blame for OGX’s shortcomings on the ranks of executives he had drafted in from other oil and gas companies to help him develop the company, who he all but accuses of having over-inflated expectations with their optimistic analysis of the market and the company itself. “I was as surprised as any of my investors, collaborators and the market,” he wrote, referring to the losses accrued by OGX.

“More than anything I ask myself where I have erred,” he continued. “What should I have done differently? The first issue is probably linked to the financing model I chose for my companies.” Batista suggests that by relying on the stock market he condemned his companies to failure. He admits to being too eager: “If I could turn back time, I would not have resorted to the stock market. I would have structured private equity that would have allowed me to build the companies from zero and develop them each over 10 years.”

Though Batista is not wrong when he identifies his financing model as a major factor contributing to the undoing of his empire, his inability to take responsibility over the mismanagement of his many investments is worrying. Though he has managed to sell off the least damaged of the ‘X’ companies – LLX was bought by EIG Global Energy Partners, MMX was sold to Trafigura, a Dutch commodity trader and Mubadala, Abu-Dhabi’s sovereign wealth fund, and MPX was bought by E.ON and renamed Eneva. The Colombian coalmines are also being sold. But there are billions of dollars in debts to service, and the rest of his smaller enterprises continue to struggle.

Throughout the collapse of OGX and the subsequent quartering of EBX, it became increasingly apparent that for all of Batista’s confidence, his enthusiastic showmanship, his jolly arrogance and ostentatious lifestyle, deep down he remained the door-to-door peddler of his youth. He was a good salesman, but his shortcomings as manager and executive made his downfall.

He was a good salesman, but his shortcomings as manager and executive made his downfall

Batista is now facing a lengthy legal struggle against his creditors as he tries to limit losses. EBX is on full damage control mode now; they have filed a number of suits with the Brazilian justice system in an attempt to stay off bankruptcy and avoid trouble with the creditors, all of which remain unresolved.

Batista’s personal fortune, once estimated at $34bn, has dwindled to around $200m; three of his private jets and a helicopter have been sold. It is unclear how Batista will manage to extricate himself from the tangle of debts and collapsing contracts he has woven around himself, but it will take years before he can truly move on from this disaster. Perhaps he should have taken note of the old maxim: Jack of all trades, master of none.

The race for video game innovation

Derided for years by older generations as an industry purely aimed at children, the video games industry has grown to such a level that it is now among the most dominant – and most profitable – of all the entertainment industries.

Worth around $80bn, the global video game industry has exploded in popularity over the last two decades, in part due to technological innovations but also because of the ageing population of youthful gamers that are reluctant to put down their control pads once they hit their 30s. Indeed, in the US, the average age of gamers is 34, while roughly two fifths of these gamers are female, defying the stereotype that this is an industry purely for adolescent men.

But despite this perception of the industry as a niche, frivolous market catering predominately to single young men, it is neverthless one that is shaping the future for many other markets.

Wii

100.3 million

Units sold

34.3 million

Copies sold of their best selling game (excl. packed-in games): Mario Kart Wii

Playstation 3

80 million

Units sold

15 million

Copies sold of their best selling game: Grand Theft Auto V

Xbox 360

80 million

Units sold

14 million

Copies sold of their best selling game: Grand Theft Auto V

It is not just about the major console designers and the games developers, however. Mobile devices and online platforms are rapidly expanding the gaming industry’s reach. There is also a vast ecosystem of branch industries that serve the console-makers, which includes a wide array of smaller, specialist firms that are innovating in all manner of areas.

Last year, US industry group the Entertainment Software Association (ESA) published its report into how the gaming industry has grown to the level it is today. Michael D Gallagher, President and CEO of the ESA, spoke about how the sector has experienced a level of growth unmatched by any other. “No other sector has experienced the same explosive growth as the computer and video game industry. Our creative publishers and talented workforce continue to accelerate advancement and pioneer new products that push boundaries and unlock entertainment experiences. These innovations in turn drive enhanced player connectivity, fuel demand for products, and encourage the progression of an expanding and diversified consumer base.”

Key players
The industry’s key players for the last decade have been Japan’s Sony and Nintendo and US tech giant Microsoft. Sony’s PlayStation revolutionised games consoles in the middle of the 1990s, bringing games to a more mature customer base. By the turn of the century, Microsoft decided to get in on the action by releasing its wildly popular Xbox console. Nintendo, previously the dominant player in the industry, retreated to offering consoles to a more family-orientated audience as opposed to hardcore gamers, as well as innovating motion-sensor products like its Wii console.

Last November proved to be the new dawn for the industry, with Microsoft releasing its hugely anticipated – and somewhat controversial – Xbox One console to replace its industry-leading Xbox 360. Sony followed suit, releasing its Playstation 4 console, which it hoped would reverse the company’s decline over the last decade. Nintendo aimed to steal a march on both rivals by releasing its Wii U product a year earlier.

Both the Playstation 4 and Xbox One come with radical new technologies designed to take gaming – and home media – to the next level. However, each company took a very different approach to the launch of their new console. Microsoft received derision from the gaming community when it announced it wouldn’t allow gamers to lend their games to friends and required an internet logon each time they were played – decisions that were quickly reversed. It also raised concern from people with its insistence that the Xbox One would use its Kinect motion tracking camera to monitor the room at all times, enabling it to sense when a user enters the room, and recognise the voice and physical appearance of that user.

Anand Shimpi, founder of AnandTech news and an expert on internal computer components, told the BBC in November he thought there were clear similarities between the two new consoles. “For the first time the guts of both the Xbox and PlayStation are very similar – their processor and memory hardware vary in performance but not capabilities. Gone are the days when Sony’s machine was substantially more difficult to program for than Microsoft’s. In fact, the PlayStation 4 has appreciably more graphics horsepower under its hood than the Xbox One, there’s no way around that fact.

“Both firms have licensed the same GPU (graphics processing unit) architecture, but Sony’s chip has 1152 ‘cores’ compared to Microsoft’s 768. Microsoft runs its cores at a slightly higher speed, but the maths works out to Sony having about a 40 percent peak potential graphics performance advantage.”

Shimpi added, “The real question is whether this translates into a substantially better gaming experience. Typically developers building one game for multiple platforms target the lower performing one, and may offer some additional perks to the faster one – smoother frame rates, slightly improved visuals.”

Controlling the living room
The new wave of consoles to enter the market in recent months have included features designed to amaze and astound players accustomed to relatively straightforward gaming. While online platforms are nothing new, both Microsoft and Sony have created online hubs where players can download exclusive content, play against complete strangers on the other side of the world, and access a range of additional services. No longer just about gaming, the industry has sought to diversify into new areas, with both the Playstation Network and the Xbox Live platforms allowing apps to be downloaded that include television and film streaming service Netflix, as well as email services and video messaging.

The Playstation Network has been praised recently for its openness to independent developers and flexibility, but Shimpi believes that Microsoft’s existing user base gives it an advantage here. The company still has a widely used ecosystem of services that will help it retain users. Shimpi says, “Here’s where Microsoft believes its other strengths – Xbox Live, developer relations, the Kinect sensor – will give it the advantage. Microsoft is basically counting on everything else being so good that developers would rather give it their exclusives.”

The tech market many think is likely to be revolutionised next is in the living room. With Apple rumoured to be launching a smart television set capable of doing many of the things personal computers are used for, consoles like the Playstation 4 and Xbox One are attempting to become the entertainment hub of people’s living rooms.

Apple has itself bought a company responsible for the Xbox’s Kinect motion-detecting capabilities. In November it confirmed the $360m acquisition of Israel-based firm PrimeSense, which developed key parts of the Kinect service. It is unclear what Apple plans to do with this, but it’s thought that the technology is likely to be implemented into a future smart television set. It certainly shows that there are innovative independent firms in the gaming industry waiting to be snapped up by some of the world’s leading tech companies.

Value chain
A typical value chain doesn’t necessarily apply to the video game industry, in which constant innovation means developers have to keep an eye on the latest trends. A concurrent engineering approach to developing products is employed, allowing new games to be created quickly. The development of a video game console begins with the investment layer, where funding is sought for the development and production of games. Most developers look to outside investment in order to fund their games, with leading companies like Activision and EA (see table) investing large amounts in potential new game franchises each year.

>60 million

UK population

>31 million

UK active gamers (approx.)

Once funding is received, the creative teams get to work designing the visuals and sounds for games, creating a unique style and story for the game. Leading developers like Ubisoft, maker of the popular Assassin’s Creed series, are renowned for creating distinct worlds in their games. Another, Rockstar Games, has been feted for its incredibly detailed approach to creating whole, living cities in its Grand Theft Auto series of games. The creativity of the games industry has led to many of the best writers that are traditionally found in Hollywood deciding to pen complex stories for video games, while actors are hired to give their likenesses and voices to characters.

Production is then carried out, where the necessary tools and game engines are created. Upon completion of the technical aspects of the games, distributors and publishers are brought into the equation. Some of the leading games companies, such as EA, Take-Two and Activision distribute their own games, but other firms act as the mechanism for spreading the game around the world. Japanese firm SEGA, which used to make consoles, is known for distributing many popular titles, including the Football Manager games.

The penultimate stage in the value chain is the hardware layer, which is the consoles or mobile devices that provide a platform for the games. While traditionally dominated by consoles like the Xbox and Playstation, mobile platforms are becoming increasingly prevalent, promoted mainly by both Google and Apple.

Finally, the game and platform reaches the end user, the consumer of the title and person that all companies hope will go onto promote the game among friends, buy additional content and any subsequent versions of the game. Word of mouth plays a crucial role in the industry, perhaps more so than any other. Users tend to lend their games to each other, spreading the word among the community. While Microsoft’s decision to restrict games to one user may have been justified in terms of preventing piracy and boosting sales, it also would have potentially damaged the ability for the reputation of games to spread.

Loss leaders
Many observers have speculated whether the new consoles from Microsoft and Playstation will be loss leaders, as has been the case in the past. Usually, manufacturers have taken a hit when selling new consoles because they’ve subsidised the cost. Sony is reported to have lost around $260 on each Playstation 3 console it sold, contributing to a loss of $1.2bn during 2008. This time, Sony has priced its new console in the US at a surprisingly low $399. According to reports, the components of the Playstation 4 cost a combined $332, not including packaging or a controller. Sony is attempting to capture market share, tying users into its ecosystem of services, which it hopes will make up for the losses made on the consoles.

Microsoft, on the other hand, has gone for the higher price of $499, hoping that its already considerable user base will enthusiastically buy the new machine. Marketing manager Yusuf Mehdi told GamesIndustry.biz in September that it was the company’s intention to at least break even. “The strategy will continue, which is that we’re looking to be break even, or low margin at worst, on the Xbox One, and then make money selling additional games, the Xbox Live service and other capabilities on top. And as we can cost-reduce our box, as we’ve done with the 360, we’ll do that to continue to reduce and get even more competitive with our offering.

Wooing developers
Getting developers onside to create the best games is crucial for both Microsoft and Sony. While Microsoft has been widely praised in the past for providing an open platform, Sony lost ground by complicating matters for smaller, more independent developers. Daniel Kaplan, business developer at Stockholm-based game-maker Mojang, says it remains to be seen how easy it is to develop for each platform. His company is the maker of the hugely popular Minecraft game, which has sold more than 45 million copies. He told the BBC, “Both Microsoft and Sony talk about the new platforms as indie-friendly and it will be interesting [to see] if that is the case.

“So far, for us it has been quite good but what I’m hearing from other developer friends, who are not in the same fortunate position of having had a bestselling game like Minecraft, is that there still seems to be a lot of forms to fill in to gain access to software development kits and tools.

Time taken to make $1bn

19 days

The Avengers (film)

3 days

Grand Theft Auto V (game)

Highest-grossing game of all time (incl. subscriptions):

$10bn+

World of Warcraft

The difficulty independent developers are finding is the need for two distinct development kits when designing for each platform, says Kaplan. “The idea that you need a separate development kit – a special version of the console that can be very expensive – to create games for the PS4 and Xbox One is quite bad for indies since a lot of them usually have very little cash at hand, so removing as much friction as possible would be ideal.”

He points to Google and Apple’s approach of having a standardised developer kit. “There is really no need of all of this behaviour since both Google Play and Apple’s App Store have shown that you can create open markets for all kinds of developers with the same deal for everyone.

“Giving more or less everyone the same opportunity is important for the indies. It allows their developers to focus their time on creating games and not on filling out forms describing different features or ordering developer kits for a lot of money that may not ultimately bear fruit for them anyway.”

He concludes, however, by saying that both companies are changing the way they operate and it will be interesting to see how open they become. “With that being said, both Microsoft and Sony are changing and I’m really looking forward to what will happen in the future.”

Wooing the developers for exclusive content is key for each company, and Sony’s new openness to independent developers and easy-to-use platform could give it an advantage, says Shimpi. “I suspect that’s what will happen this generation. At worst you’ll see parity between the two consoles, but at best you’ll see developers give PS4 versions of cross-platform games a slight edge. Where things get really interesting is what happens if a developer chooses to develop exclusively for the PS4 and go all out.”

There is unlikely to be a clear winner in the market, however, as both have developed consoles with distinct products. “Sony appears to have built the faster gaming machine, while Microsoft has built a system that might appeal to a broader audience and perhaps consume less power. There are strengths in both platforms – anyone hoping for a clean sweep will likely be disappointed.”