August 26, 2017

Asia's Intraregional Integration Is Creating Business Opportunities

On Aug. 9, 2017, The Economist Intelligence Unit (The EIU) held a webinar titled, "Asia: Back on track or on the brink?" Presented by John Marrett, East Asia analyst for The EIU, the webinar began by explaining how the global economy is growing in 2017. The United States is experiencing full employment along with gross domestic product (GDP) growth at 2%. The euro area, the monetary union of 19 of the 28 European Union (EU) member states which have adopted the euro as their common currency and sole legal tender, is experiencing low, but stable growth.

China, the world's second largest economy, is seeing stable economic growth with 6.8% GDP growth. Even emerging markets such as Brazil and Russia have seen their recessions end this year. Mr. Marrett also said that global inflation is projected to reach 4.4% in 2017, the highest rate in six years, which "is an indicator of a strengthen economic picture."

On the topic of Asian regional integration, Mr. Marrett said the loss of a U.S.-led Trans-Pacific Partnership (TPP) along with an increased uncertainty between Asia and the West, intraregional integration is still professing. Multilateral free trade agreements (FTAs) such as the Free Trade Area of the Asia Pacific (FTAAP) and Regional Comprehensive Economic Partnership (RCEP) are expected to strengthen Asian intraregional trade. The implementation of FTAAP or RCEP, however, may not come for years ahead.

In addition, many intraregional bilateral FTAs are currently under negotiation including the India-Australia FTA, India-Thailand FTA, China-ASEAN FTA, and South Korea and Indonesia FTA. ASEAN or the Association of South-East Asian Nations is a regional intergovernmental organization comprising ten Southeast Asian states (Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, the Philippines, Singapore, Thailand, and Vietnam).

Mr. Marrett further said import duties on goods traded between Indonesia, Malaysia, Philippines, Singapore, Thailand and Vietnam (ASEAN-6) have been eliminated. And by 2018, Cambodia, Laos, Myanmar, and Vietnam are scheduled to eliminate all remaining import tariffs. Moreover, a large number of international infrastructure projects are underway throughout Asia, many of which are the result of China's Belt and Road Initiative.

"China is the backbone of [Asia's] regional growth" as the Middle Kingdom produces 44% of Asia's nominal GDP with the rest of Asia and Australasia contributing 56%. This is a concern given China's expected economic deceleration to an average of 4.8-4.9% GDP growth from 2018-2019.

Chinese growth is still investment-led, which is a concern as credit is fueling high levels of investment. China's private non-financial sector credit as a percentage of GDP is at an alarming level of 200%. "This is storing problems for later," Mr. Marrett notes. The Chinese government, which is aware of these issues, has taken some steps to mitigate the credit problem. Xi Jinping, China's president will take strong steps after the 19th CCP National Congress in the autumn of this year in Beijing where he is expected to consolidate his power.

China's economic slowdown impact intraregional trade on a varying range of sectors and countries. The greatest impact will be felt in places such as Mongolia and Taiwan. The former is disproportionately dependent on demand from China for majority of its exports. The latter has a broad trade relationship with China, but Taiwanese capital goods will be hardest hit. "Australia will take a hit as well" as China reduces it demand for commodities produced by Australia's mining sector.

Japan and India will be less impacted by China's economic deceleration. The Japanese economy is more diverse in terms of export destinations than many other East Asian countries; whereas India's is more dependent on Middle Eastern and European markets.

Mr. Marrett concluded his presentation by explaining: "China's hard landing will not define the regional economic story in 2018" for the Asian region. He presented the slide that showed Asia GDP growth rates for 2017 and 2018 for several countries and special administrative regions:


Mr. Marrett importantly noted that "the economic distress cause by China's slowdown will not be enough to be politically destabilizing to China or other Asian countries."

While China may experience an economic slowdown in the next few years, I remain optimistic of the opportunities that exist in middle and higher income countries in ASEAN where private consumption is growing at a rapid pace. The implementation of bilateral and multilateral FTAs will further facilitate intraregional trade, which will be a boon for small businesses and multinational corporations alike.

How are you positioning your business to capitalize on the opportunities presented in Asia's growing economies?

Aaron Rose is an advisor to talented entrepreneurs and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.

August 21, 2017

Preparing Your Business for Internal and External Risks

In a previous post on this blog, I wrote, "Risks may be classified in various ways such as internal (weaknesses) and external (threats) with variations depending on geopolitical and socioeconomic conditions." This post focuses on how companies and organizations can identify and evaluate internal and external risks.

It is only natural for business owners and their managers to focus on their business' market opportunities with the goal of maximizing profit. Given the high rate of failure, however, businesses should equally consider the internal and external risks their venture may encounter.

Whether it is for a business where I hold an equity stake or corporate clients that I am advising, I evaluate the strength of any business plan or long-term strategy on the following eight risks:
  1. Product Risk;
  2. Technology Risk;
  3. Market Risk;
  4. Management Risk;
  5. Scale Risk;
  6. Climate Risk;
  7. Capital Risk; and
  8. Exit Risk.
Businesses should consider product risk, which, according to this article, is defined as "the potential for losses related to the marketing of a product or service. It is managed using a standard risk management process of identifying, treating, controlling and monitoring risk as part of product development or product management." The article presents a number of common types of product risk:

  • Demand Risk. Failure to generate demand for a product launch and other risks related to demand.
  • Operational Risk. Operational risk such as delayed product launch due to production issues.
  • Price Risk. Price risks such as a new product launch that sparks a price war with a competitor.
  • Customer Experience. Customer experience issues such as a product with poor usability.
  • Quality Risk. Poor quality. This can occur due to requirements, non-functional requirements, design, testing or quality control issues.
  • Brand Risk. A product reflects poorly on your brand. This can occur due to the customer experience and quality issues. Alternatively, it can be a product that simply doesn't appeal to your customers such that it impacts your brand image. For example, a snowboarding brand that alienates customers with a line of ski wear.
  • Inventory Risk. Problems with inventory such as shortages in one channel and excess inventory issues in another.
  • Reputation. Damage to your reputation as a firm due to a failed product and resulting publicity.
  • Compliance & Regulations. A product that is deemed to violate laws, regulations or standards. In some cases, a product can attract new regulations if it is perceived to damage markets, the environment or quality of life.
  • Product Liability. Failures of a product that cause damages such as an unsafe product that results in injuries.

Technology Risk is defined as the potential for implementing new, unproven technology looms large in most content strategy projects. This article provides 36 types of technology risk. What is more, a business must consider the risk of a cyber attack or data breach. How is your company planning for the potential of technology failures to disrupt your business such as information security incidents or service outages?

Market risk includes geographic (different risks exist when doing business in China compared to the United States, for example), as well as sector risk. Launching a new search engine brings significant competitive risks within the sector. Forming a bank involves significant regulatory risks.

Regarding management risk, is the company being led by a competent management team with a proven record of success? If not, who are the managers soliciting advice from?

The Startup Genome Report, published in 2011 and subsequently edited 2012, addresses the risk of premature scaling. A startup can maximize its speed of progress by keeping the five core dimensions of a startup: customer, product, team, business model and financials in balance. The art of high growth entrepreneurship is to master the chaos of getting each of these five dimensions to move in time and concert with one another. Most startup failures can be explained by one or more of these dimensions falling out of tune with the others.

With respect to climate risk, many businesses owners are facing the twin pressures of extreme weather events and failure of climate-change adaptation. A report by McKinsey & Company, a consultancy, classifies climate risk into two categories: Value-chain risks and external-stockholder risks. The former include physical risks ("those related to damage inflicted on infrastructure and other assets, such as factories and supply-chain operations, by the increased frequency and intensity of extreme weather events, such as wildfires, floods, or hurricanes"), price risks ("increased price volatility of raw materials and other commodities"), and product risks ("the core products becoming unpopular or even unsellable").

External-stockholder risks include ratings risk ("the possibility of higher costs of capital because of climate-related exposure such as carbon pricing, supply-chain disruption, or product obsolescence, regulation risk ("government action prompted by climate change"), and reputation risk ("either direct, stemming from a company-specific action or policy, or indirect, in the form of public perception of the overall industry").

The common starting point for creating a mitigation strategy is to undertake a full assessment of where climate-related risk lies within a firm.

Every company, whether a startup or multinational corporation, experiences capital risk. Not having adequate funds to develop the product or service, pay its employees, invest in materials and equipment are just some of the concerns businesses of all sizes may encounter during its lifespan. How you are going to mitigate the risk of running about of money? Is your startup in position to utilize any of the following options to raise capital: small business loan or line of credit, purchase order financing, vendor financing, product pre-sales or crowdfunding?

It is often said that if you are focused on your exit plan, you are not focused on your business. However, a business owner must anticipate how and when investors receive their return on investment. Listing the shares for the public to purchase through an initial public offering or being acquired by another company or private equity firm carries their own unique risks--if the opportunity to exit presents itself.

In addition to evaluating a business plan on the seven risk factors listed above, I recommend using a SWOT analysis to evaluate internal and external risks. The SWOT analysis (alternatively SWOT matrix) is an initialism for strengths, weaknesses, opportunities, and threats—and is a structured planning method that evaluates those four elements of a business venture or specific project. The questions following the SWOT matrix below will assist business owners and managers to evaluate risks by identifying specific strengths, weaknesses, opportunities, and threats.


Strengths (Internal)
1. 
2. 
3. 
Weaknesses (Internal)
1. 
2. 
3. 
Opportunities
(External)
1. 
2. 
3. 
Opportunity-Strength Strategies 
Use strengths to take advantage of opportunities 
1. 
2. 
3. 
Opportunity-Weakness Strategies 
Overcome weaknesses by taking advantage of opportunities 
1. 
2. 
3. 
Threats
(External)
1. 
2. 
3. 
Threat-Strength Strategies 
Use strengths to avoid threats 
1. 
2. 
3. 
Threat-Weakness Strategies 
Minimize weaknesses and avoid threats 
1. 
2. 
3. 

Internal 
Strengths 
  • What are your strengths? 
  • What do you better than others? 
  • What unique capabilities or resources do you possess? 
  • What do others perceive as your strengths? 

Weaknesses 
  • What are your weaknesses? 
  • What do your competitors do better than you? 
  • What can you improve given the current information? 
  • What do others perceive as your weaknesses? 

External 
Opportunities 
  • What trends or conditions may positively impact you? 
  • What opportunities are available to you? 

Threats 
  • What trends or conditions may negatively impact you? 
  • What are your competitors doing that may impact you? 
  • Do you have solid financial support?
  • What impact do your weaknesses have on the threats to you?

How do you identify internal and external risks for your business or organization?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

August 20, 2017

An Approach of Assessing Country-Level Risk

Throughout my career of doing international business, risk is the one item that I have come to understand, appreciate and embrace. Risks may be classified in various ways such as internal (weaknesses) and external (threats) with variations depending on geopolitical and socioeconomic conditions. Whether it is for a business where I hold an equity stake or corporate clients that I am advising, identifying, evaluating, and mitigating risks is an important exercise that I perform.

The Economist Intelligence Unit (The EIU) produced a webinar on Aug. 2, 2017 to promote its risk briefing and scenario planning services. While I am not recommending subscribing to these services, per se, I found particular value in The EIU's approach of assessing country-level risk (listed in alphabetical order):
  1. Financial Risks: How healthy is the local financial system?
  2. Foreign Trade and Payments: How easy is it to get inputs/money in and out?
  3. Government Effectiveness: Does political culture foster strong business environment?
  4. Labor Market: Could labor market factors disrupt operations?
  5. Legal and Regulatory: Will the legal system safeguard investment?
  6. Local Infrastructure: Will infrastructure deficiencies negatively affect operations?
  7. Macroeconomic Risks: Is the economy stable and predictable?
  8. Political Stability: How stable are political institutions?
  9. Security: How safe is the physical environment?
  10. Tax Policy: Are taxes low, predictable and transparent?
I continue to have the privilege of working in some amazing (and challenging) countries. Different risks exist in industrialized versus developing countries. The EIU's approach of accessing country-level risk is helpful in identifying and assessing those risks.

It is important to note that not all risks come from negative sources. Risks may come from positive sources or opportunities. Expansion and growth are opportunities, but they also bring additional risk. The ultimate goal is to minimize the effects of risks on your business.

Will the questions above help you evaluate the country-level risk for your business or organization?

Aaron Rose is a board member, corporate advisor, and co-founder of great companies. He also serves as the editor of GT Perspectives, an online forum focused on turning perspective into opportunity.

August 18, 2017

Persistence Personified

On his program, "Tribe of Entrepreneurs," Søren Skovdahl Hansen interviewed Alexander Brooks about his personal story of experiencing homelessness during his childhood to making the leap into entrepreneurship earlier this year. Mr. Brooks, who is an occasional guest writer on this blog, formed AE Brooks, LLC (d/b/a, Entreprov) on May 22, 2017. Entreprov is a boutique firm based in Seattle, Wash. that helps small and medium-sized businesses increase their customer base and retain current customers through machine learning and business strategy.

During his interview, Mr. Brooks covers a variety of interesting topics including the problem Entreprov is solving for its customers, his decision to enter entrepreneurship, the importance of building relationships with mentors and potential customers, the necessity of learning new skills during different career stages, and his journey to Seattle from his native Michigan.

I am proud to consider Alex a friend and colleague, and I recommend listening to the interview in its entirety.


Aaron Rose is an advisor to talented entrepreneurs and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.

August 17, 2017

Global Economic Growth in 2017 is as Good as it Gets

On July 27, 2017, The Economist Intelligence Unit (The EIU) held a webinar, "The world economy in the age of Trump," which focused on the global outlook for 2017-18. Presented under the title of "Good Economics, Bad Politics: The Global Outlook for 2017-18" by The EIU's John Ferguson, Director of Global Forecasting, and Mike Jakeman, Global Economist, the webinar focuses on the United States outlook along with the main regional forecasts that present the most significant risks to the global economy.

Mr. Jakeman begins by noting global growth will accelerate in 2017 and the world's economy is looking at its healthiest in years. In other words, the global economy is seeing its best performance since before the 2007-08 financial crisis. For example, the U.S. is experiencing close to full employment as gross domestic product (GDP) is expected to rise to 2% in 2017.

In addition, the eurozone, the monetary union of 19 of the 28 European Union (EU) member states which have adopted the euro as their common currency and sole legal tender, is growing steadily.

Many emerging markets will be stronger in 2017, Mr. Jakeman said. With 6.8% economic growth in China, 2017 is proving to be a good year for the world's second largest economy. Brazil and Russia are also seeing economic growth this year with both countries no longer experiencing an economic recession.

However, risks, notably political, exist that may stymie the resent global economic upswing. Mr. Jakeman notes that U.S. President Donald Trump's impulsive behavior to weaken domestic institutions, which is threatening American democracy, and his disrespect for old alliances and prioritizing commerce over diplomacy could create headwinds for the global economy.

In addition, the webinar claims "thuggish authoritative leaders" such as Russia's Vladimir Putin (overt anti-Westernism, tight controls ahead of Russia's 2018 elections, and meddling of US election), Turkey's Recep Tayyip Erdoğan (shift to executive presidency that will keep him in power until 2029), and the Philippines' Rodrigo Duterte (7,000 dead in war on drugs, dissenting voices marginalized, and a state of emergency), are invoking policy or implementing actions that may derail positive global economic growth.

Turning his attention specifically to the U.S., Mr. Jakeman said there are certain priorities set before Congress. Tax cuts will take time, but deregulation is happening now. Healthcare has been a mess for decades and will probably remain so, according to the webinar. As for tax reform, personal and tax cuts are coming rather than comprehensive reform of the United State Internal Revenue Code.

Mr. Jakeman then explained that "Trumpism will not transform the economy. Fiscal surge could help temporarily, but growth of 4% will be out of reach." He also noted how productivity growth has halved in the U.S. from 2005-2015 compared to the period of 1995-2005. Moreover, a slower labor force growth will prevent the Trump administration of reaching its 2016 campaign promise of achieving 4% GDP growth. Mr. Jakeman notes tax cuts for the rich leads to saving, not spending (wealthy have lowest marginal propensity to spend) and any rapid growth of the U.S. economy will be inflationary, which the Federal Reserve would lift rates in response to curtail such rapid growth.

Disappointingly, The EIU webinar projects the U.S. economy will experience a recession in 2019. "Only two quarters of contraction, but enough to bring growth down to 1%."

Focusing on Europe, Mr. Ferguson said economic recovery is taking hold in the eurozone. "Tentative signs of recovery are building. Unemployment is falling, euro is rising, and growth revised up to 1.9% in 2017." However, Europe is "never far from a crisis." Brexit negotiations, Grexit, Italian debt, and the election of populist candidates may adversely impact Europe's economic growth in the next few years.

Regarding the Middle Kingdom, China's politics will supersede economic reform in 2017 as a result of the 19th National Congress of the Communist Party of China to be held later this year in Beijing. According to Mr. Ferguson, China's rise of GDP of recent time has been fueled by debt. For example, China's private non-financial sector credit as a percentage of GDP is at an alarming level of 200%, which is proof that the country's debt dynamics are unsustainable. As a result of "a policy-induced managed slowdown" by the Chinese government, The EIU projects a continuing deceleration of China's economy with GDP falling from 6.8% this year to 4.6% in 2018.

"In summary, 2017 is as good as it gets," Mr. Ferguson said. "First China and then the U.S. will exert downward pressure on the global economy." Emerging countries like India, Iran and Russia (despite sanctions imposed on Russia by Australia, Canada, EU, Japan, and the U.S.) will continue to see economic growth, while Qatar will experience economic decline given the political crisis the country is facing from its Middle East neighbors.

Do you agree with the information presented in this webinar? How will your business be affected if the U.S. experiences an economic recession in 2019 or China sees a deceleration of economic growth in the next couple of years?

Similar to investing in public equities of buying on the low, businesses should consider expanding to new markets that are experiencing an economic recession or deceleration. Doing so will provide an ample opportunity for taking advantage of the rewards that will materialize when the economy returns to growth.

Aaron Rose is an advisor to talented entrepreneurs and co-founder of great companies. He also serves as the editor of Solutions for a Sustainable World.

August 11, 2017

Changes in Saudi Arabia Since the Announcement of Its Vision 2030 Initiative

The following is a guest post by Haton AlFreidi.

On April 25, 2016, a long-term national transformation was announced by Saudi Arabia’s crown prince Mohammed bin Salman Al-Saud. Under the name “Vision 2030,” the Saudi Arabia government aims to develop and enhance the society, economy, and country. By 2030, Saudi Arabia’s government thrives to have:
  1. A Vibrant Society: who cares about their heritage and its tourism, spend more on cultural and entertainment activities, increase awareness about sport and exercise along with increasing its facilities, and have Saudi cities ranked the top in worldwide through empowering societies economically and having the highest healthcare standards.
  2. Thriving Economy: by increasing entrepreneurship opportunities, lowering nation’s unemployment, raise the ratio of females in workforce, increase private sector participation, increase non-oil exports, and increase local and foreign investments.
  3. An Ambitious Nation: By increasing families’ income, have more than one million volunteers, and become one of the leading countries in E-Government.
The vision not only aims to change the country, but to change a very conservative society. This will be difficult. Even though Saudi Arabia’s government aims to achieve its vision by 2030, many of what was listed has already been implemented on different aspects. With the help of social media, many people are now more open to accepting change and differences. This helped the government to attain the vision in less time than expected. Some of the changes include: 
  • New governmental ministries formed for sports, tourism, and local activities and events. And the existing ministries are restructured to be more involved in electronic interaction with citizens, monitor and improve their services, and pay more attention to citizens satisfaction.
  • Sports was offered in the country's private school only, but now they are required in all schools whether public or private. Obtaining permits to open gyms became encouraging by the government as a result of decreasing obesity and chronic diseases.
  • Empowering women is one the main aspects the government is heavily focusing on. Many laws and requirements are being issued to support women legally, socially and especially in the workforce.
  • Finally, in a step of improving public services, airports and healthcare entities are being privatized by the government to enhance the quality of the facilities and the services provided to citizens.
To many Saudi's, especially the younger generation, the vision is not only a governmental plan, but a vision that many has implemented and started working toward achieving its goals. The vision to us, young generation, represents change, hope, growth, development, competition against developed countries, and a better place to live in. For years, Saudi Arabia did not have a long-term plan for a better future. Oil was the main resource and the main focus. Therefore, having a vision for the first time motivated Saudis to work with the government in attaining the vision goals, and seek more opportunities for improvement.

Haton AlFreidi is a Research Analyst at ROI3, Inc. in Seattle, Wash. Born in Saudi Arabia, Ms. AlFreidi received a Bachelor of Arts in Business Administration in Finance and International Studies from Seattle University. She may be contacted at hatounfreidi@gmail.com.