BUSINESS ASIA

ASIAIn Reform

ISSUE NO.7, Fall 2012

Business Asia2

THE BAJ TEAM

EXECUTIVE BOARDEditor-in-ChiefDirector of DesignCo-Presidents

Director of MarketingDirector of Finance

Zhi-Yen LowYanbin Feng

Jill SeongStella Zhang

Mingxia ZhuMadeline Culkin

DESIGN ASSOCIATESAn-Chi Dai

Arthur Teng

EDITORIALErica Boorstein

Jonathan DawsonKevin Hua

Denis HurleyAjay Kailas

Mingming KohKen-Ji Low

University of Indonesia Maria MarciaAdvai Pathak

Jiting Wang

CONTACT US:BusinessAsia.Journal@gmail.com www.cubusinessasia.com

Cover Photo Source:

http://www.catholicbridge.com/http://msnbcmedia.msn.com/

Fall 2012 3

EDITOR’S LETTER

2012 has been a year brimming with uncertainty- with European leaders struggling with mounting national debt, the recent U.S. Presidential Elections, and China’s leadership transition. Our

previous issue welcomed the Year of the Dragon, bearing bright hopes and expectations for the future of Asian economies. Today, the seventh issue of the Business Asia Journal welcomes the new leaders that aspire to guide us there. These are challenging times to be a leader. The growth of powerhouse economies China and India is beginning to falter, exposing deep structural fault lines within their governments. For all their newfound wealth, these economic giants are now experiencing acute growing pains. Our writers touch on current reform efforts in India, and the effects of technological development in Indian cities. China grew at breakneck speed for a decade, but growing dissent and an urgent need for financial reforms threatens future stability. China partly owes its economic decline to its One Child Policy-inflicted demographic imbalances and rapidly aging populace. The burgeoning Chinese fast-food industry is set to perpetrate widespread socio-cultural changes and increased obesity rates throughout the country, whereas the recent Sino-Japan territorial dispute has also cast dark clouds over an already fragile global economy. The future is not all gloomy, however. Our writers point to South East Asia as an alternative investment destination, with Indonesia leading the region’s growth with its high domestic demand. Also of huge growth potential is the field of microinsurance in Asia, of which large regions still remain untapped. Both of these articles highlight the potential to translate economic growth into the alleviation of poverty. Additionally, Tata Motors’ acquisition of Jaguar continues the trend of strategic direct investment in the developed west by emerging third world markets. Western fashion capitals are looking eastward, with influential Asian designers taking center stage at major global fashion weeks. Developed countries now face a changing landscape in their smartphone markets due to the recent onslaught of intellectual property battles. Business Asia has matured as a publication since its inception four years ago. I would like to express my deep gratitude to the Editorial, Design and Marketing teams for investing so much time and effort in the production of this publication. Also, a very special thank you goes to our former Editor-in-Chief, Yun Qi Mok, for all of her dedication, mentorship, and for believing in me. Finally, thank you to you, dear readers, for your continued support. We value your opinion greatly, and would like to hear your thoughts. If you have any comments, suggestions, or would like to contribute to future issues of our magazine, please contact us at BusinessAsia.Journal@gmail.com.

Sincerely,Zhi-Yen LowEditor-in-Chief

We would like to thank the following sponsors for their generous support:

BusinessAsia.Journal@gmail.com www.cubusinessasia.com

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TABLE OF CONTENTS

India: Going Forwardin Reform 12

Hu’s out, Xi’s In: Tough Times Ahead for Xi Jinping 18

POLITICAL ECONOMY

The BAJ Team

Editor’s Letter

The Microinsurance Revolutionby Maria Marcia Tj.A brief history and education on the field of micro finance and its significant role in reducing poverty

A Case for Structural Reformby Advai PathakChina’s demographic imbalances and rapidly aging population has serious repercussions for its economic growth

India: Going Forward in Reformby Mingming KohAn overview of the Indian Congress Party’s proposed economic reforms

Sino-Japan Islands Dispute: A Potential Threat to Economiesby Jiting WangTerritorial conflict over the Senkaku/Diaoyu Islands creates protests and friction between China & Japan

23

6

9

12

16A Case for Structural Reform

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TABLE OF CONTENTS

POLITICAL ECONOMY

LIFESTYLE

TECHNOLOGY

INTERVIEW

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21

24

26

30

33

35

38

Hu’s out, Xi’s In: Tough Times Ahead for Xi Jinpingby Zhi-Yen LowAs newly anointed chief of China’s Communist Party, Xi Jinping has tough reform challenges ahead

Looking Beyond Chinese Borders: A G.E.M. Within Southeast Asiaby Ken-Ji LowExploring South East Asia as an alternative strategic investment destination

Cyberabadby Ajay KailasAn inside look into the growth and flourishing of India’s Silicon Valley

Revival of the Big Catby Advai PathakExploring cross-border M&A’s through Tata Motor’s acquisition of Jaguar

Super-Sized China: Burgeoning Chinese Fast Food Industryby Kevin HuaSocio-cultural changes and the growing fast-food industry are major contributors to Chinese obesity rates

GENERAL BUSINESS

Asian Designers are the Future of Fashionby Erica BoorsteinWestern fashion capitals looking eastward for up and coming Asian designers

iLitigateby Denis HurleySamsung, Apple, and the Wave of IP Suits Changing the Smartphone Market Landscape

Interview with Sean Huby Stella ZhangSitting down with Sean Hu, Managing Partner of Bionest Partners to hear his insights on U.S. healthcare consulting

Business Asia6

Imagine this. You’re a farmer in Rajasthan, a northern Indian

state near the Thar desert. You have been taught a new technique of irrigation that can conserve wa-ter and boost crop yield. Would you implement the new technique? As an undergraduate busi-ness school student, I thought the answer to be simple and log-ical: Yes –since increased yield would also mean increased in-come. On the other hand, that may not be the logical answer for low income individuals. Why? Farmers are risk averse – crop failures for them would mean a disaster that could push their families into abject poverty.

What is microinsurance? We all have heard the term microfinance – especially after Muhammad Yunus and Grameen Bank received Nobel Peace Prize in 2006 for their efforts to cre-ate economic and social develop-ment by pioneering microfinance in India. Lasting peace can be achieved through the eradication of poverty and microfinance is one of the many ways to do that. For the Rajasthan farm-ers, microfinance is a helping hand for them to buy new seeds or equipment. But what about the crop failures? This is where microinsurance comes in. For the Rajasthan farmers, microinsur-

ance serves as a safety net. With microinsurance, they don’t have to worry about falling into abject poverty when they try new tech-niques to increase their income. The International Asso-ciation of Insurance Supervisors (IAIS) defines microinsurance as “protection of low income people against specific perils in exchange for regular premium payments proportionate to the likelihood and the cost of the risk involved.” The main challenge here is low income individuals. How do we sell insurance to someone who has never heard of the con-cept? How do we convince them to pay for something they cannot

The Microinsurance

Revolutionby Maria Marcia Tj. | University of Indonesia

POLITICAL ECONOMY

Fall 2012 7

see, touch, or feel? More impor-tantly, how do we make money out of policies with the premi-um at just a few dollars a year? Low income individuals do manage their risk. They save, re-duce expenses (sometimes even by withdrawing their children from school), borrow emergency cred-it from relative or money-lenders, and sell whatever assets they have. These existing risk management practices work, but they make low income people very risk averse and thus, may halter development. Insurance is not high on their list of risk management artil-lery, but that may be because of the underdeveloped state of insurance culture. Nevertheless, supplying something that is new and perhaps not trusted requires investments in market education about wheth-er such a product is necessary. To make money out of mi-croinsurance, simplicity is a must. The small premiums and claims require low transaction costs for both the insured and the insur-ers. Low transaction costs means efficient products, policies, and

The World Economic Pyramid (2006)

Source: Thematic Research Highlights by Generation Investment Management, 2007

Approximately 83% of people living in Asia are classified as low income, making Asia the center of microinsurance development.

claims handling processes that can prevent misunderstandings.

The reach of microinsurance in areas of Asia Approximately 83% of

people living in Asia are classified as low income1, making Asia the center of microinsurance devel-opment. In 2011, there were 350 to 400 million insurance holders covered in Asia.2 China and India, the two most populous countries

1 World Research Institute – The Next Billion (2007)

2 Microinsurance Compendium, Protecting the Poor Volume 2. Published by ILO and Munich Re Foundation (2012)

in the world, cover 80% of the global microinsurance market, sixty percent of which is in In-dia. However, the growth of cov-ered risk in Asia is not limited to these two countries. In The Phil-

ippines, 14.2 million low income individuals have microinsurance. Bangladesh and Pakistan are also showing significant growth, while Cambodia, Indonesia, and Sri Lan-ka are beginning their journey. According to Microin-surance Compendium Report, there are several reasons why Asia is ahead on the microin-surance trend: large and dense populations, interest from pub-lic and private insurers, proper distribution channels and active government support, for example through subsidies. The countries in Asia that offer the greatest im-mediate potential for microinsur-ance are India, Indonesia, China, The Philippines, and Vietnam. India has well-developed microfinance institutions, so mi-crofinance and microinsurance are often sold as a one package deal. In Indonesia, there are state restric-tions that impede market develop-ment for microinsurance, but pilot schemes are already underway. There is also potential for Takaful (Islamic) insurance in the country. Microtakaful, also called Sharia microinsurance, can increase the reach of insurance to low income groups, who may hesitate to buy conventional insurance out of re-

Business Asia8

ligious considerations. China, like Indonesia, has state restrictions that may hinder the market devel-opment of microinsurance – but in the short term. In The Philip-pines, there are concessions in place for microinsurance. Compa-nies are also lobbying government to exempt microinsurance from taxes. In Vietnam, income distri-bution is weighted to the urban poor rather than the rural poor. For microinsurance to grow, it needs to be tailored to the countries’ specific needs, situations, and opportunities.

Potential Growth of Microinsurance In 2007, four billion peo-ple in the world are classified as low income. They have combined annual purchasing power of USD 5 trillion. They are eligible for mi-croinsurance and severely under-served. According to Lloyds Mi-croinsurance Report in 2009, 1.5 billion of low income individuals want and are able to pay; but are without access to microinsurance. In 2007, there were 78 million people covered by microinsur-

ance. In 2009, the number grew to 135 million people. As of this year, nearly 500 million people are covered by microinsurance. Technology develop-ment is one of the factors that support the growth of microin-surance. Cell-phone providers and local minimarket chains, despite being non-traditional, can be intermediaries for mi-croinsurance, making it easy to reach by low income individuals. Climate change, popula-tion growth, and rapid urbaniza-tions have the greatest impact on the lives of low income peo-ple, who have the least ability to adapt. These increased un-certainties have positive im-pact on insurance culture in developing countries, helping microinsurance market to grow. According to the Micro-insurance Compendium Report, there have been many innovations in the field of microinsurance over the past years. New prod-ucts covering a variety of risks have been piloted and distribut-ed to poor households through an increasing diversity of chan-

nels. These new products are helping microinsurance to reach more people than ever before. Microinsurance coverage is growing substantially over the years and the demand is too. To-tal demand is growing more than 10% every year, with premium increases outstripping those in developed markets. Commercial insurers have also seen the mas-sive opportunity of microinsur-ance and entered the low-income market, creating economies of scale. At least 33 of the 50 largest commercial insurance companies in the world now offer microin-surance, up from only seven in 2005. The MicroInsurance Centre estimates there will be one bil-lion policyholders in the world by 2019. With the number currently at 500 million policyholders, that number looks quite achievable. The goal of microinsur-ance is to end the poverty cycle, but it cannot possibly lift poverty by itself. However, it is a valuable tool to break the cycle and the po-tential growth of microinsurance business is massive. This may just be that one area of promising busi-ness to get into without having to choose between charity and profit.

Estimated Outreach of Microinsurance in the World

Source: Microinsurance Compendium, Protecting the poor Volume 2. Published by ILO and Munich Re

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POLITICAL ECONOMY

A CASE FOR STRUCTURAL REFORMAdvai Pathak, Cornell University ‘15, School of Industrial and Labor Relations

CHINA’S

UNSTOPPABLE

ECONOMIC GROWTH

American hysteria regard-ing her seemingly irre-versible decline seems to

inevitably reach fever-pitch when China is introduced into conver-sation. China’s unstoppable eco-nomic growth over the past two decades has led to almost univer-sal acceptance of its assured path towards hegemonic status. Yet, un-derlying China’s sparkling growth figures are significant structural issues that threaten its future suc-cess. Aside from its shocking level of state debt and the sheer number of political demonstrations na-tionwide, the most serious prob-

lem China must confront is its rapidly changing demography. Introduced in 1979 under Deng Xioaping after years of offi-cial policy waffling by the Chinese government, the One Child Poli-cy has had significant and drastic effects. It was instituted to steady China’s ballooning population in an age of concern over its ability to effectively feed itself and has been estimated to have reduced China’s population by 300 million people over its first two decades. Though in general it has been considered successful (bearing in mind the enormous population challenges

facing neighbouring BRIC India), China’s demographic changes are now having widespread secondary effects. The population structure has drastically become extremely top heavy as a result of the unnat-ural and sudden changes in birth rates imposed by the One Child Policy. Whereas the American fertility rate remains around 2.1 (considered an acceptable replace-ment rate to maintain a stable population), China’s has dropped to a national average of 1.56. At this level, China’s babies are failing to replace their parents, leading to

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POLITICAL ECONOMY

a steady decline in population. By 2060, China’s population is pro-jected to drop below 1 billion. The most obvious issue raised by these statistics is that China’s population is ageing and it is doing so at an unprecedented rate. Its current median age is 34.5, close to America’s 37 and that of other wealthy countries in general. However, because of their contrast-ing fertility rates, China is ageing much more rapidly than America. By 2050, China’s median age will be 49 compared to America’s 40, a level of demographic change that is entirely unprecedented. An age-ing population isn’t dangerous in and of itself. Many countries that are currently in the post-industri-al stage of demographic transition also face the same issues. However, China’s issues arise from the fact that it hasn’t the resources to sup-port its ageing population in the same way that Germany and Japan do. The biggest fear demographers have regarding China is that it will age before it has the wealth to sup-port its old. China currently lacks

a comprehensive pension plan and the incomplete program currently in place has an unfunded liability worth about 150% of its GDP al-ready. In keeping with traditional Confucian values of filial piety, China’s younger generations will be expected to save and provide for their elders but this will place them under enormous pressure. China’s youth is facing what has become known as the “4-2-1 Phe-nomenon” - 4 grandparents and 2 parents being provided for by just a single worker. The level of support afforded by the state in support of pensioners will rapid-ly become a very serious issue for young Chinese in years to come. China’s second major con-cern is that its workforce is pro-jected to shrink drastically over the next half century. Having re-lied on mass urbanization to pro-vide for its enormous labor force over past decades, China will now have to deal with a decreasing re-serve of able bodies to call upon. One consequence of this decreas-ing labor supply is increasing wag-

es, currently appreciating between 10-20%. Employers are finding the labor market an increasingly competitive arena and are being forced to respond to higher wage demands. In addition, the gov-ernment has increased minimum wage restrictions but workers re-main restless and discontented. Labor strikes and violence have increased over the past decade as workers have sought higher-pay-

China’s growth over the past half century is certainly remarkable. How it manages that growth and whether it is able to sustain its growth will be the story of the next 50 years.

Fall 2012 11

ing and less monotonous work. The Chinese youth have far high-er aspirations than their parents did; jobs in the service industry are seen as far more desirable than those in manufacturing. These calls for progression to better, more advanced jobs will only in-crease as social pressures to pro-vide for ageing families continue to increase. With a future consisting of fewer, better-paid workers, China will need to provide an infrastruc-ture for greater productivity per worker. This will come into con-flict with its current growth model driven by low-wage manufacture, investment, and exports. Due to rising labor costs, outsourcing manufacturing has already begun shifting to lower cost countries like Vietnam and Cambodia. Al-though China has acknowledged that it seeks to shift towards an economy based on greater domes-tic consumption, it is still far from attaining that goal. Average in-come per head remains far lower than in developed countries and, short of drastic wage increases, this seems set to remain the case for some time. As a result of these fac-tors, Chinese manufacturers are beginning to seriously consider automated manufacturing plants. Employers are struggling to re-cruit workers and exports remain slow in the current state of glob-al economy. In the midst of rising

costs of labor, fierce competition amongst employers, and the threat of a discontented workforce, ro-botic production is an increas-ingly attractive option. Although the upfront costs of robots are daunting to many Chinese man-ufacturers, their performance has been proven in Europe and the Americas over the past decades and their initial capital outlaw is usually repaid within 3-5 years. Managers who have already ad-opted automated production are now reaping the rewards. Auto-mated plants need far fewer work-ers whose work is mostly to su-pervise the machines. By driving down labor costs so dramatically, these factories have boosted prof-it margins spectacularly. By tak-ing on some of the more tedious and unappealing tasks Chinese workers have been complaining about, robots also certainly alle-viate some work-related pressure. Greater productivity afforded by robotic manufacturing will also allow greater numbers of Chinese to seek jobs in other pressing sec-tors like nursing and healthcare. The main area of concern that leads most analysts to favor the irreplaceability of the Chinese worker is in the electronics indus-try, a key area of Chinese manu-facturing. Unlike industrial robots used in say, Detroit for automobile manufacture, those building and assembling precise components of cell phones, computers, and semi-

conductors, will require an ex-tremely high level of precision and intelligence. They will also need to be flexible - the electronics in-dustry is constantly evolving and changing. Unlike in car manufac-ture, robots used in the electronics industry will need to be as highly advanced as their creations. Chi-na faces significant challenges if it is to continue on its path towards economic hegemonic power. Im-plementation of automated man-ufacturing across industries is one strategy that might prove fruitful. However, to effectively address its demographic concerns the gov-ernment will need to implement strong national measures. One would be the loosening of the One Child Policy’s strict enforcement. Creating exemptions like allowing rural families a second child would increase the national fertility rate by a reasonable margin. The gov-ernment also needs to formulate a plan to care for pensioners within its budgetary means. To succeed, this plan will also have to take into consideration the future strain on a smaller workforce facing the dual pressure of having to pro-vide for ageing parents while also being encouraged by the national government to increase domestic consumption. China’s growth over the past half century is certainly remarkable. How it manages that growth and whether it is able to sustain its growth will be the story of the next 50 years.

Activists protest over a government decision to open up India’s retail market to foreign companies. Source: latimes.com

India: Going Forward in Reform

Fall 2012 13

Activists protest over a government decision to open up India’s retail market to foreign companies. Source: latimes.com

India: Going Forward in Reform

The myth of India’s seemingly inexhaustible economic potential has begun to wane. As the Indian economy faces its most severe slowdown, fear and uncertainty has abounded amongst foreign

investors in India as well as within Indian corporations. Accustomed to an annual growth rate of 10%, today’s rate of 5% seems meager in comparison – even though 5% already represents an extremely impressive achievement, especially in present circumstances – and those with vested interests in the Indian economy are beginning to fear for their future prospects.

Such sentiments have reverberated all the way to the upper echelons of the Indian political machine, as the Indian Congress Party revealed its latest – and most drastic – series of economic reforms aimed at hauling the Indian economy back on track. This set of reforms touch on previously taboo regions such as opening up the multi-brand retail sector to foreign investment, slashing diesel subsidies by a huge margin, and finally permitting foreigners to hold a stake in key Indian corporations and industries. Experts widely agree that such reform measures are long overdue, but anyone familiar with the economic history of the Indian growth machine should be familiar with the process of achieving reform in the world’s largest democratic system: reform is never considered – let alone carried out – until a crisis arises and the situation begs it. The boom of the Indian economy has allowed its policy makers to remain in a voluntary state of oblivion with regards to the loopholes within the economy. However, the current slowdown has forced India’s leaders out of their denial as the economy struggles to meet the huge expectations that have been thrust upon it.

Unfortunately, not everyone agrees with the extent of the reform measures – some even question the fundamental need for reform. A key ally of the Indian Congress party, the Trinamool Congress headed by Sonia Gandhi, withdrew its support from the government in protest against the proposed reforms. Although this move does not threaten the power or stability of the Indian government, it highlights

By Mingming Koh, Cornell University ‘15, College of Arts and Sciences

Business Asia14

the existence of key forces within the Indian politics and society that oppose the much-needed reform. Such opposition forces are far from novel in the Indian political arena. Previous attempts at economic reforms have often been compromised, and in some cases even completely derailed by forces deeply interested in preserving the status quo. Manmohan Singh, India’s Prime Minister and key advocate of economic reform, has often been criticized as weak-willed and overly compromising. As a result, his earlier attempts at reform, though well-meaning, have had little success as he gave way to said forces. This time, however, it seems unlikely the opposition forces are going to get their way. Sonia Gandhi has thrown the weight of the ruling party behind these economic reforms as incontestable signs of serious economic slowdown have

abruptly captured the full and panicked attention of the now disillusioned government.

These reforms are certainly promising and steer the Indian economy toward in a lauded direction. However, some are doubtful of their effectiveness in guaranteeing the continued growth of the Indian economy. Apart from structural problems

that plague the economy from within, India has been and still is embroiled in deep societal conflicts that continuously threaten to disrupt her economy. Racial and religious conflicts are still an extremely potent fault line within the Indian society, as evidenced by an exodus of tens of thousands of northeastern immigrants working in major cities. This exodus was sparked by an ongoing conflict between Muslims and the indigenous Bobo tribe in the northeastern state of Assam. This incident of mass hysteria only begins to underline the complicated and sensitive issue of ethnic tensions in Indian society. Up to this point, the Indian government has managed to suppress and quell – often only temporarily and superficially – such conflicts, but it has become increasingly difficult to forcefully separate Indian society and economy to avoid the negative spillover effects of an ethnically divided society. While the economic reforms that have been proposed are certainly welcome, more needs to be done in order to truly guarantee the continued upsurge of the Indian economy. Fundamental and structural issues need to be resolved in order to clear the path for the economy to reach its full potential. Fortunately, most of these larger problems are concentrated within the Indian society. Indian politics have actually achieved a remarkable level of modernity given its status as a developing country. As the world’s largest democracy, the Indian political system is believed by many to be

Manmohan Singh, India’s Prime Minister and key advocate of reform

Apart from structural problems that plague the economy from within, India has been and still is embroiled in deep societal conflicts that continuously threaten to disrupt her economy.

POLITICAL ECONOMY

Fall 2012 15

capable of supporting a much more advanced and sophisticated economy. The giant head start of Indian politics on her economy is an important factor in the analysis of India’s economic potential, but India’s social problems constantly impede this gap from being bridged. Solving India’s social problems is a Herculean task and nobody expects a simple set of reform measures to become a panacea. Manmohan Singh and Sonia Gandhi are definitely

moving in the correct direction, with the correct understanding of the necessary chronological chain of policy events for improving India’s situation in general: reforming the economy first, then tackling wider social issues later with the enhanced resources from stable economic growth. The validity and effectiveness of this path has similarly been recognized by the Chinese leadership, who are funneling the majority of the nation’s resources into economic growth for the ultimate goal of improving the Chinese society. This step-by-step approach to national advancement requires, above all, time and patience.

At this point in time, we applaud Manmohan Singh for taking on a tougher attitude in pushing through economic reforms. It is certainly not easy, especially with a population of 1.2 billion and the very real worry of severe stagflation. But going forward, adopting genuine

economic reforms is the correct thing to do. Whilst we undertake that task, it is important not to conveniently forget that successful economic reform is by no means the ultimate goal – there is much more to be done to push India into the class of developed nations.

Solving India’s social problems is a Herculean task and nobody expects a simple set of reform measures to become a panacea.

A Walmart Retail store in India

Business Asia16

The recent territorial dispute between China and Japan

over the Senkaku/Diaoyu Is-lands in the East China Sea has drawn the world’s attention to East Asia. Since the 1970s, both countries have made bold sov-ereignty claims over the islands, located equidistant from Taiwan and Ryukyus. With Japan’s most recent attempt to “buy over the islands”, it was no surprise that a huge uproar was triggered across China. While most agree that an imminent war is unlikely to break out between the two Asian giants, there have been concerns that the Sino-Japan tension, if aggravated, could cause irrevocable damage to the already fragile global econ-omy. Meanwhile, top Japanese automakers including Toyota, Honda and Mazda have already seen a 2% drop in their car sales in China because of the recent boycott against Japanese prod-ucts by the Chinese. As China’s Vice Minister of Commerce Jiang puts it, “the battle over the own-ership of the island chain will inevitably have a negative im-pact on the Sino-Japan economic ties,” it seems that the possibility of a potential damage on the two countries’ economies is real. In the mean time, signs are showing that the conflict be-

tween China and Japan is hurt-ing the Japanese economy. Last month, large scaled anti-Japanese protests broke out in several ma-jor Chinese cities, causing prop-erty damage and closure of many Japanese-owned businesses. Ac-cording to Bloomberg, Fast Re-tailing has closed 42 of its Uniqlo stores in China, and Aeon shut 30 of its 35 outlets in Guangdong and Shandong. Electronic man-ufacturers Panasonic and Sony shut down several of their pro-duction plants in China as the recent strikes have damaged their facilities. The auto manufacturing industry is another sector of the Japanese economy that is hugely

affected by the recent anti-Jap-anese sentiment. Japanese auto brands have long taken a consid-erable share of the Chinese auto market because of their low prices in comparison to their European and American competitors. How-ever, Toyota, Honda and Nissan have recently reported decreasing numbers of dealerships in some provinces and have consequent-ly closed their plants in these re-gions. Scholars and experts around the world are now voic-ing concerns regarding the pos-sible economic consequences of the dispute between China and Japan. One widely debated ques-

Sino-Japan Islands Dispute: A Potential Threat to Economies

Jiting Wang, Cornell University ‘16, College of Engineering

Two Japanese activists landed on an island at the centre of a bitter dispute with China on September 18.

POLITICAL ECONOMY

Fall 2012 17

tion is that whether the impact on two of the world’s largest econo-mies will be destructive and long lasting. Assessing the current sit-uation, I think the answer is no.

Severing Trade Hurts Both Na-tions First of all, as China and Japan are both obtaining mutu-al benefits from their economic relationship, it is unlikely that either party will choose to hurt its opponent at its own expense. With the global economy still in gloom, China and Japan now rely on each other for their economic growths more than ever before.Currently, China is Japan’s largest export market while Japan is Chi-na’s largest importer. The value of the bilateral trade between the two countries amounts to $350 billion, accounting for almost 5% of each country’s annual GDP. Jeopardizing their economic ties, especially given the current eco-nomic situation, is unsound for both countries. As demand in Europe drops due to the present debt crisis, China and Japan need each other to sustain their devel-opment. Furthermore, by sever-ing trades China and Japan will

put themselves at a disadvantage on the global stage as their close rivals in Europe will take the chance to catch up very soon. As the Japanese car sales decreased in the past few months, Europe-an automakers have quickly tak-en up larger shares of the Chinese auto market. Based on market research conducted by the China Association of Automobile Man-ufacturers, sales of car brands from other foreign countries such as Germany, US, South Korea and France are up 25%, 19%, 12%, 4% respectively in the same period. It is logical to deduce that the same

situation is likely to happen in other sectors of exports if China and Japan decide to restrict trade with each other.

Limited Effect on the Economy As China and Japan are not likely to really play out “the economic card” on each other,

the implication on their econo-mies will be short-lived. Despite drawing wide international atten-tion, the recent boycott that hap-pened in China is more a reflec-tion of public anger rather than an attitude adopted by the state. The impact of such movement driven by public sentiment is sel-dom long lasting. Similar boy-cotts have previously taken place in China in 2005, when disputes over the content in a Japanese his-tory textbook led to a nationwide demonstration in China. Never-theless, China’s imports from Ja-pan surged over 15%, almost tri-

pling the previous growth rates. Public sentiment will eventually calm down and commercial ac-tivities between countries will ul-timately return to normal in the end. Although the current territorial dispute between Chi-na and Japan may not cause any serious threat on the countries’ economies, the world is still wait-ing for leaders from both sides to come up with an agreement as soon as possible. With the Euro-pean debt crisis and the downfall of the global economy as a whole, the world needs the Asian pow-ers to help us out of the econom-ic quagmire the world is stuck in right now.

One widely debated question is that whether the impact on two of the world’s largest economies will be destructive and long lasting.

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Hu’s out, Xi’s In: Tough Times Ahead for Xi JinpingBy Zhi-Yen Low, Cornell University ‘14, College of Agriculture and Life Sciences

POLITICAL ECONOMY

Fall 2012 19

To echoing applause and ac-clamation in the Great Hall of the People, the world’s

second-largest economy was handed over to seven dark-suit-ed men upon a red carpet before a 2200-strong crowd of delegates. Now at the helm of China’s ruling Communist Party and economic reforms is Mr Xi Jinping, who will head the new Politburo Standing Committee, the nation’s peak deci-sion-making body, for the next five years. The moment inked a mile-stone in the party’s history, being only the second peaceful transi-tion to take place since it came to power more than fifty years ago. The November 15th de-cision announced that on top of stepping down as the Communist Party’s general secretary, Mr Hu Jintao would also be relinquish-ing his role as the head of China’s army in favor of Mr Xi. Despite holding China’s two most signifi-cant positions of power, ironically, it seems likely that Mr Xi may not wield much in the way of control at all. His two predecessors, Mr Hu and Mr Jiang, still maintain a significant clout over the remain-ing six members of the Politburo committee. The selection process of China’s incoming leaders still remains shrouded in mystery, but ultimately, it is Mr Xi that faces the uprising of angry voices calling for change from below.

Calls for Reform Deng Xiaoping first led China on the path to prosperi-ty when he ascended to power in 1978 with his vision for economic reform. Today, Mr Xi’s term begins in tumultuous times- advocates of

reform are pressing him to reduce the privileges of state-owned en-terprises, which include meager interest rates on loans from state banks and government-directed investments. With the capital fire-power of government safes behind them, state-owned enterprises dominate China’s economic land-scape by taking over private com-panies that can no longer put up a fight. As a result, the hard-earned savings of citizens are being fun-nelled into a massively inefficient public sector. Extensive financial reforms will be needed to cor-rect these social inefficiencies for a more competitive playing field among public and private sector firms. Land grabs by local offi-cials are also fuelling discontent among throngs of farmers and an expanding middle class, who feel that too little of the country’s new-found wealth has been trickling

down to them, despite a decade long spurt of economic growth. China has prospered greatly under Hu Jintao and Wen Jiabao’s pursuit of prosperity, but the disparity be-tween the rich and the poor has dramatically widened under what some see as a paternalistic leader-ship approach. Ordinary Chinese watch frustrated as the authori-tarian governance fill the pockets of the country’s party members, 2.7 million millionaires, and 251 billionaires, while 13 percent of China’s 1.3 billion population still lives on below $1.25 USD a day. Land should be given out to farm-ers in order to empower to boost productivity. The issues surrounding wealth are especially sensitive now, due to the scandal and po-litical purge of former Chongqing party head and Politburo member, Bo Xilai, who has been accused of corruption, abuse of power,

Business Asia20

and abetment in the cover-up of a murder. More recently, media re-ports put together by foreign and Chinese journalists from public sources suggest that the families of Xi and Wen have amassed vast amounts of wealth, sparking a na-tional uproar. In his speech after being appointed, Mr Xi only al-luded very briefly to corruption as one of challenges that the country faces, apart from becoming “di-vorced from the people”. The latter challenge is certainly true, as mi-croblogs, such as Sina Weibo, have been mushrooming across the na-tion, spouting cynicism about the government’s concerted propa-ganda surrounding the leadership transition.

“The Emperor Wears No Clothes” In the past, Chinese gov-ernment officials used censorship

of microblogs, blocking search terms, and monitoring users’ ac-counts to bottle up public dissent. Today, dissatisfaction and com-plaints proliferate across the coun-try via China’s relatively new social media pipelines. Reports and im-ages are shared instantly. To cope with these public protests, party leaders have taken to respond-ing to public discourse without the connotations that come with traditional propaganda, in or-der to steer online conversations and opinions to safer waters. Zhu Huaxin, the managing editor of Online Public Sentiment journal, asserts that each member of the Communist Party understands the magnitude of consequences that result from social change, yet on official occasions, media only reports good news. “Ordinary people like us all know the emper-or is not wearing any clothes”. Given the current unsus-

tainable growth, Mr Xi needs to cope with these challenges he in-herited from his predecessors. China is no longer the same blaz-ing economic powerhouse it was in the past- its stellar growth is starting to lose steam. Implement-ing any broad changes to the po-litical system will require a very bold leadership and strong back-ing from his Politburo Commit-tee members. For starters, Mr Xi should start loosening the Com-munist Party’s vise-like grip on the economy. Its state capitalism model, at the heart of the Chinese economy, may have propelled the country to unprecedented growth under Deng Xiaoping’s rule. How-ever, for China to continue thriv-ing, Mr Xi needs to gain the sup-port of his people, and to do that, he has to begin his own reforms from the ground up.

Fall 2012 21

LOOKING BEYOND CHINESE BORDERS

A G.E.M. WITHIN SOUTHEAST ASIAKEN-JI LOW ‘14, COLLEGE OF ARTS & SCIENCES, CORNELL UNIVERSITY

An Overview of the Southeast Asian Economy

Southeast Asia, with a population of 610 mil-lion, makes up one of the fastest growing Global Emerging Markets (G.E.M.) today. The region is

a collection of 10 countries - Malaysia, Singapore, In-donesia, Vietnam, Philippines, Cambodia, Thailand, Laos, Myanmar and Brunei, 4 of which are among the only 13 countries that have sustained economic growth of over 7% over the last 25 years (including China and Brazil). This sustained economic growth has raised countries like Malaysia from an agricul-tural and commodity-based low-income economy to a successful middle-income economy. Like many emerging economies, strong eco-nomic performances have helped support advances in education, healthcare, infrastructure etc. Some countries have been very successful in translating rapid economic growth into meaningful reductions in poverty. For example, in countries like Malay-sia, economic growth has been accompanied by a near-eradication of hardcore poverty, which fell from 6.9% in 1984 to 0.9% in 2010. In human development terms, there are no countries in Southeast Asia where the development picture is as poor as that found in Sub-Saharan Africa. All these collectively are strong indicators of growing political and economic stability within the region.

Looking beyond China and into Its ‘Backyard’Slowing economic growth and inflationary pressures in China have created difficulties for its policymakers. Inflationary pressures in China’s real estate market have resulted in the implementation of government restraints. While there has been some success in re-ducing the rise in housing prices, China’s economy has begun to lose momentum. Its GDP growth had already slowed to 9.2% at the end of last year from its double-digit growth of 10.1% in 2011, as exports continued to slump amid weaker demand from both Europe and the US. Rising local wages have also made it harder for Chinese exporters to compete with cheap labor in other emerging economies. China’s continued fix-ations on control over some of its largest enterprises have received much criticism as strikes among work-ers become increasingly common. It is a well known fact in economic theory that a state capitalist system does little to encourage innovation. While govern-ment directed investments can be vital for research and development, it is very difficult for state officials to value assets and allocate resources efficiently. Con-stant support from the government will inevitably debilitate firms’ innovation. China’s current growth figures fell to 7.4% in the third quarter and are now at its lowest levels since the beginning of 2009. Analysts have forecast-ed slowing growth in China down to 7.7% this year

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(from 8.2% in May). Furthermore, the risks to China from Europe are large. Given China’s exposure to Eu-rope, its growth rate could experience an abrupt drop if the Euro area experiences a sharp recession. The channels of contagion would be felt mainly through trade with knock-on effects to domestic demand. It is estimated that China’s growth would fall by 4%. China’s signs of economic slowdown and in-flationary pressure may work well in Southeast Asia’s favor. Investors have been turning towards the re-gion, once dubbed as ‘China’s backyard’. Growth of the 6 major Southeast Asian economies, Indonesia, Malaysia, Philippines, Singapore, Thailand and Viet Nam is projected to be about 5.6% through 2016, which is a solid growth performance in comparison to other sluggish economies. Traditionally, the region has been heavily reliant on external demand. However, we are likely to see a change as the regional economy moves to-wards more balanced growth. The regional economy will rely more on domestic demand which should in-crease economic resilience to external shocks. Coun-tries like Indonesia and Philippines that are making significant investments in transport and infrastruc-

ture are already taking measures to strengthen do-mestic demand. The overall outlook for the region remains largely positive. Economies like Indonesia are like-ly to lead the region’s growth to maintain its strong momentum owing to Indonesia’s high domestic de-mand. Malaysia is also set to face robust growth pros-pects in the medium term due to its positive start and its government’s persistence of its Economic Trans-formation Program (ETP).

S.E.A. FOCUS: MALAYSIA’S ETP AND INDONESIA’S MP3EI Malaysia has achieved significant econom-ic progress since its independence in 1957. Amid a constantly changing global economy, the Malaysian government has realized the need for a fundamental-ly new economic model in order to achieve its goal to become a high income nation by World Bank stan-dards. It founded the Economic Transformation Pro-gram as an initiative to turn its economy into a high income economy by the year 2020. Consistent with the regions’ need to move towards balanced growth and greater reliance on domestic demand, the ETP is

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designed to focus on key growth engines which cap-italize on some of Malaysia’s competitive advantages. The model will rely heavily on the private sector-led growth. Successful implementation of the ETP will see Malaysia’s economy undergo significant changes to resemble other developed nations. The ETP has been regarded as a bold approach to grow the economy. The model will essentially be led by the private sector with the government pri-marily playing the role of facilitator. Approximately 92% of the funding will come from the private sector with the public sector serving as a catalyst to spark private sector participation. Progress of the ETP is closely monitored by the Performance Management Delivery Unit (PEMANDU), an agency under the Prime Minister Department of Malaysia. The Indonesian government is not far behind with its MP3EI program. The central idea behind the MP3EI is to accelerate economic transformation and expand growth to all regions as well as to ensure that Indonesia is locally integrated and globally connect-ed. Additionally, innovation and technology are set to be developed in an effort to push economic trans-

formation at every stage from the agriculture indus-try to knowledge based and science based sectors. Acceleration of economic growth will be driven by all the nation’s components i.e. State Owned Enter-prises, local, and foreign companies.

EVALUATION While the outlook for the region appears to be very positive, investors should still be mindful of sev-eral factors. The economic disparities between each country within Southeast Asia remain very wide, each with vastly different political structures, making it difficult to integrate as a trading bloc. At this stage, it is still questionable whether the region can truly rival an economic powerhouse like China in terms of size and importance. However, government initia-tives like Malaysia’s ETP and Indonesia’s MP3EI sug-gest that potential growth within the Southeast Asian region is imminent. With China’s stellar growth start-ing to dwindle, perhaps investors should begin to set their sights further southeast of familiar Chinese ter-ritory.

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India has been primarily recog-nized as a third world country

by various development indexes. However, for the past few decades India has been trying to change this label and has been developing at an alarming rate. Greater focus on infrastructure and proper uti-lization of the country’s educated labor force has helped steer the country in the right direction. No-ticing this drive, many large infor-mation technology firms such as have made their way to heart of a few Indian cities. One example of such a city is Hyderabad--the capital of the state of Andhra Pradesh. Hy-derabad is a sprawling area which houses 6.8 million people, making it India’s 4th most populous city. Hyderabad is a major hub for ed-ucation as it is home to thirteen universities and business schools. Furthermore, it is home to the Telugu film industry, colloquially known as Tollywood. Additional-

ly, since it is located at the inter-section of North and South India, it has a host of different cultures and food, with Hyderabadi Biry-ani being one of the most famous dishes in the city. Hyderabad has many places of interest such as Chowmahalla Palace, Charminar, museums, gorgeous malls, and multiples galleries. It was during the 2000s when Hyderabad underwent a drastic change: the Information Technology revolution. Countless companies streamed in to set up their operations in the city. Names such as Microsoft, Oracle, Yahoo!, Dell, and IBM have established call centers, business processing outsourcing firms, and central corporations. By providing stable jobs for the highly educated pop-ulation, the economy received a large amount of revenue which helped turn Hyderabad into a major bustling service sector that packs quite an economic punch.

Even the formerly qui-et Gachibowli district has been transformed entirely-Gachibowli is now a central business district as it is home to ICICI’s headquar-ters (the country’s largest office building), UBS, Bank of Ameri-ca, and Wells Fargo. Rent in the area used to be 25-30 rupees per square foot. Now, current residen-tial prices have reached as high as 3000-4000 rupees per square foot.

Ajay Kailas, Cornell University ‘13, College of Agriculture and Life Sciences

Cyberabad

Below: Hyderabad Information Tech-nology Engineering Consultancy City in Hyderabad, Andhra Pradesh, India.

Above: the Buddha Monolith stands in the center of Hussain Sagar, the city lake.

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Fall 2012 25

“The World Bank Group rated Hyderabad one of the best cities

to work with, proving that Indians have what it takes to meet the

demands of the Western world.”

This change has been one of the quickest the region has ever seen before. Hyderabad has undergone a 48% increase in the price for of-fice space rental. There is a large increase and demand because businesses are booming and try-ing to get as much space as they can. In Gachibowli, prices range around 3500 rupees per square foot per month. This is an incred-ible increase from the 35 rupees it cost a few years ago. “Gachibowli, in turn, Hy-derabad has been put on the global map because of the IT/ ITES com-

panies operating out of this area. The IT/ITES corporates combined with better infrastructure, excel-lent connectivity to the remaining parts of the city, express access to the airport, reputed schools in the vicinity, network of hospitals, en-tertainment zones has made this location a hot spot for investment,” chimes Pochendar Shenigarapu a CEO of a business in the area. It is evident that the IT transformation has shocked all of Hyderabad and revolutionized the city by catapulting it into a strong place in the world economy. The World Bank Group rated Hyder-

abad one of the best cities to work with, proving that Indians have what it takes to meet the demands of the Western world. During the 2008-2009 year, the IT exports surmounted to 4.7 billion dollars. These numbers have been project-ed by statistical experts to increase each and every year by as much as 3-5%. The development of a town-ship called HITEC has helped build new relationships that have brought even more companies to the area, like Facebook. It is no wonder Hyderabad is referred to as the Silicon Valley of India.

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REVIVAL OF THE BIG CAT“Tata’s purchase of Jag-uar is just one example of a growing number of cross-border M&A deals involving com-panies from the devel-oping world acquiring established western brands.

BY: ADVAI PATHAK

Described at its launch by Enzo Ferrari as “the most beautiful car ever made”, the 1961 Jaguar E-type is widely acknowledged to

this day as Jaguar’s greatest creation. 51 years later, the iconic British brand has finally released a successor, the 2013 F-type. The release of this long anticipated follow up epitomizes Jaguar’s current revival and serves as a major coup for Tata Motors who were chastised globally fol-lowing their acquisition of Jaguar Land Rover in 2008. Tata’s purchase of Jaguar is just one example of a growing number of cross-border M&A deals involving companies from the developing world acquir-ing established western brands. Despite the initial fears of knowledge and technology drain (which ultimately proved entirely unfounded), “

CORNELL UNIVERSITY ‘15, INDUSTRIAL AND LABOR RELATIONS

1961 JAGUAR E-TYPE

Ratan Tata’s plan was ludicrously simple and remains so.”

the immense success of Jaguar under Tata’s ownership suggests this trend is mutually beneficial to both foreign and domestic brands and that, certain variables permit-ting, it is one that is set to contin-ue. Lumped with another marquee British brand, Land Rov-er, and packed together for a rel-atively paltry $2.8 billion, Jaguar is estimated today to be worth around $14 billion. Its last annu-al report stated Jaguar Land Rov-er earned £1.51 billion profit on £13.5 billion of revenue, a compa-

ny record. This represents a major turnaround for a company that never once earned an operating profit in its 19 years under Ford ownership. Tata should, and has been, lauded as the main driver of this success. Calamity struck directly after the deal for JLR was concluded in the wake of the 2008 financial crisis. Ratan Tata, chair-man of the Tata Group, was forced to seek financial assistance from the British government to keep the brand afloat and maintain its three British factories. After re-jecting a condition-laden proposal

from British Business Secretary, Lord Mandelson, and in spite of widespread criticism that he had overcommitted to a dying brand, Tata raised half a million pounds of commercial finance to maintain production facilities and poured £1 billion of Tata’s cash into JLR’s R&D. In the wake of a drastic and global drop in demand for luxury vehicles, it seemed a suicidal gam-ble. Yet Ratan Tata’s plan was ludicrously simple and remains so. He is much admired for build-ing and exploiting brands as val-

REVIVAL OF THE BIG CAT

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GENERAL BUSINESS

Nam ut massa turp-is, ac blan-dit justo.

ue. Aware of the brand value of JLR, a factor he described as “ir-resistible”, and of the quality of employees he would gain, from high-value factory workers in its British plants to senior work-ers like famed Head of Design Ian McCallum, Tata has made few changes in JLR’s corporate structure. His only major ap-pointments have been Carl-Peter Forster, the former boss of GM Europe, as Tata Motors’ CEO, and Ralf Speth, formerly of BMW, as JLR’s chief executive. Tata Motors has therefore successfully trod a thin line between publicizing its association with JLR for prestige purposes and avoiding encroach-ing upon Jaguar or Land Rover’s established brand image. Maintaining the quintes-sential “Britishness” of the two brands has been of primary im-portance - all three production centers in England have contin-ued to run and Jaguar has actually managed to increase its workforce, in spite of the current economic malaise, to a total of 23,000. This is a statistic that is likely to please the British government. Projects that were indefinitely postponed under Ford due to cash restric-tions have finally seen the light of day. Both the Jaguar XF and XJ saloons as well as the Land Rov-er Evoque have been met with an enormously positive reception from both critics and consumers alike. Most importantly, Tata has sought to project the JLR brand into growing markets like China and Russia and this more than anything has explained the enor-mous growth in sales. A recently concluded tie-up with Chinese

automaker Chery Intl will open JLR’s first production plant in the Chinese mainland, helping to cope with the excessive domestic Chinese market. That the new Jaguar F-type will be the first model re-leased by Jaguar to be conceived and designed entirely under Tata ownership makes it extremely significant. In 2011, Tata Motors pledged £5 billion over the course of 5 years to Jaguar for R&D in an attempt to bridge the chasm be-tween itself and the German lux-ury trio of BMW, Mercedes-Benz, and Audi. Up till now Tata Motors’ share prices have risen 80%, mak-ing it the top-performing stock of any global automaker. Now, as the excitement of major investment and well-received new mod-els settles, investors are waiting for clear indicators of long-term growth and stable development. Showcased in September 2011 as the prototype CX-16, the F-type represents the first of what Tata hopes will be a number of excit-ing and ground-breaking new products. The augmentation of Jag-uar’s fleet of vehicles will be the most crucial step in attempting to seize market share from their German rivals. As speculators press for a lower-market car to compete with the popular BMW 3-series, Jaguar seems, initially, to have taken a step in the wrong direction. The release of the F-type, an expensive two-seat-er sports coupe, is not going to boost Jaguar’s bottom line fig-ures. The market for sports cars is about 0.1% of global car sales and it is enormously competitive.

Jaguar will position the F-type in competition with currently pop-ular and powerful brands like Porsche, Maserati, and Aston Martin. Given that Jaguar already has a well-performing sports GT in the XK, it does not represent a diversification in its range either. However, Ratan Tata has made no secret of his desire for Jaguar to recreate its sporty image in keep-ing with the era of the E-type. This release is widely acknowledged to be an attempt to embellish Jaguar’s range as a whole with a sportier feel, overturning current beliefs that it is geared towards

Fall 2012 29

an older generation. The Tata Group is renowned as a company for taking a long-term view of its investments. With deep pockets and one of the best management teams in the world, it is prepared to help Jaguar surpass its 1960’s zenith and establish itself as a major global automaker. To this end, a smaller saloon car and a crossover are currently in design to widen Jaguar’s appeal and are expected to be unveiled later this decade. In attaining Jaguar, Tata has continued a recently bur-geoning trend of strategic for-

eign direct investment in the de-veloped west by the third world. The reasons for this are varied. For one, most developed coun-tries are running current account deficits, whereas many develop-ing economies have surpluses. Cross border investment is just one method of utilizing these vast sums of money. The fact that the three nations with the most M&A activity in the developed world are China, United Arab Emirates, and Singapore correlates with this logic. Just like firms from the rich world, foreign MNC’s like Tata are seeking to continue growth through access to new markets and production techniques. Un-like American corporations that seek a more ‘organic’ method of accessing local market share through establishment of lo-cal factories and offices, MNC’s from abroad prefer acquiring well-known western companies. This offers the quickest method of gaining a foothold in a foreign market, exploitation of the ac-quired brand, and other benefits like technology sharing. Western firms also usually benefit from increased investment that they might otherwise have lacked un-der a frugal western boardroom, as Jaguar did. The biggest issue for emerging market companies is that they often pay excessive sums for western firms (a premi-um for market entry) - Tata Steel’s purchase of Anglo-Dutch giant, Corus, is an example in which emerging market FDI has thus far proved unsuccessful. Corus, now known as Tata Steel Europe, has seen profits drop substantially and it has been forced to engage

in workforce cuts at all levels. Public perception of these deals is mixed. Most westerners fear losing their biggest assets to foreigners that might seek to move production away from the home country, draining knowl-edge and technology while allow-ing the purchaser to add jobs in its own domestic economy. There is almost certainly also an un-derlying fear of anti-colonialism that the emerging market media has gleefully exploited. Ratan Tata himself has acknowledged the value of increasing national prestige with these cross-border acquisitions. Despite his enor-mous outlay and the subsequent disappointment of Corus, he pos-its that losing that bid would have left India disappointed as a whole. Despite these undercurrents of distrust, the British Government too has been very grateful and supportive of Tata’s involvement. Jaguar has added over 8,000 jobs to its British workforce and is considering opening a new en-gine factory at a time when most other industries are struggling. The harmony between Indian finance and British engineer-ing that Ratan Tata has been so careful to create and nurture has proved bountiful and could well prove a successful model for fu-ture cross-border M&A’s.

Super-Sized China:Burgeoning Chinese Fast Food Industry

Kevin Hua Cornell University ‘15,College of Engineering

The modern fast food industry in China began to take off in the 1990s, some twenty years after the

country’s reforms and opening up in 1978. The cur-rent lifestyles of white and blue collar workers de-mand not only cost effective and on-the-go foods, but also the luxury of choosing from a wide variety of cuisines. Although China’s food service indus-try is roughly half the size of the U.S. market, it has experienced tremendous growth over the new mil-lennium. The industry is estimated to be about $300 billion in 2009 by economist estimates and is expect-ed to grow 12% a year to over $500 billion by 2014. Although two fast food giants, KFC and Mc-Donald’s, dominate the western fast food market in

China, 70% of the overall fast food market share is still occupied by Chinese fast food

enterprises. KFC and McDonald’s at-tempt to assimilate to the local culture and cater to Chinese taste buds with traditional dishes; KFC includes thou-sand year egg with pork congee in its morning menu and McDonald’s has a dim sum menu. On the other hand, the local fast food chain scene usually has

a repertoire of dim sum, steamed buns, Cantonese barbecued food, and various

meat dishes with rice. According to a KFC Consumer survey, up to 44% of Chi-

nese consumers plan to spend more on fast food rather

than traditional restau-rants due to their added convenience, taste, and cost. C o n s u m e r s ’ steady move towards higher calorie diets and excess consumption of sugar, salt, and fats cor-

Fall 2012 31

relate with increasing risks of obe-sity and other health conditions. A study led by researcher Janet Currie in 2009 found correla-tion between a fast food restau-rant within 0.1 miles of a school and the probability of obesity in-creasing by 5%. Interestingly, the number of restaurants within 0.1 miles of a school does not affect the probability of obesity. The re-sults of the study are significant enough to suggest that fast food establishments such as KFC and McDonald’s as well as new ur-banization where people migrate from the countryside to the city, together contribute to the China’s growing obesity rate. The mass industrialization efforts in Chi-na after 1978 spurred a need for young workers and brought many people from the rural countryside closer to the city. In only two de-cades, the urban population of the total population rose from 25% to 50% in 2011. In Beijing, which has one of the highest fast food chain densities per capita, 27.8% of children are heavier than stan-dard weight guidelines set by the Chinese Health Ministry. Official Chinese government statistics es-timate that more than 100 million people were obese in 2011, a five fold increase from 2005.

Catching Up with the Unit-ed States? Although it is tempting to compare the trend between fast food and obesity in China to that of the U.S, PBS journalist Ray Su-arez asserts that obesity problems and their solutions are unique to both countries. The fast food menus in the United States offer

cuisine that is familiar to Ameri-can taste buds, such as hamburg-ers, fries, fried chicken, and ice cream. Furthermore, the U.S. has had a fairly long history of using automobiles and mass transport systems which both reduce the necessary daily exercise from walking. Not long ago in Chi-na, the streets of big cities were streaming with cyclists and pe-destrians. However, more people now have access to the luxury of taxis, cars, and motorbikes. Only in the past recent decades has work in China has shifted from a manual labor economy to a ser-vice and institution-based one. A majority of people are employed in sedentary work in the office—a

major contribution to the obesity rate in metropolitan cities in Chi-na. How is this different from the lifestyle and diet choices in the U.S? China’s booming econo-my and never-before experienced massive spending power allows consumers to buy fried foods, western hamburgers, snacks, take outs, and many other cal-orie-dense foods. Major metro-politan areas in China have also recently adopted mass transit systems with increased automo-bile sales, completion of subway and train systems, and mass bus transit systems. All of these new changes contribute to a terrify-ing reality: an increasing obesity

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rate at 30 to 50 percent annually. This is very different from the U.S’s slow adaptation to an obesity-con-tributing environment. The large influx of calories and low amounts of physical exercise in the Chinese population are recent and fast, requiring more immediate regu-lations and changes to tackle the problem. Another major factor that makes china’s obesity prob-lem unique is the cultural factor. Over the past century, China has suffered from droughts and polit-ical overturns that led to periodic famines. But with modern living conditions people can afford more food and eat more generously. Children in China have a unique case of a “six-pocket syndrome”- they do not have siblings and were born at the very beginning of the one-child policy. Therefore they have two parents and four grand-parents who have nothing really to spend on besides that single child. Furthermore, it is a common prac-tice in Chinese culture that most meals are shared from dishes in the middle of the table. Over the past decade, more food has be-

come more readily available on the table. Weight Watchers China director Shan Jin suggested that Chinese meals should adopt more of a Western style, with one plate per person portioned out to pre-vent overeating, and with smaller portions for individuals on a diet. With a communal eating habit where everyone shares from dish-es in the middle, it is much easier for individuals to overeat.

Slimming Solutions Given how quickly the obesity epidemic has infected China’s population young and old, controlling obesity for health ben-efits is a major issue at hand. Some of the current remedies for fight-ing obesity are prescribing tra-ditional Chinese medicine, such as “huang quin” (Baical skullcap root) and “shanzha” (hawthorn fruit) to reduce patients’ weight and fat buildup. Other methods include acupuncture and medi-tation. Chinese researchers claim that treatments can result in weight loss of more than 5.8 ki-lograms over the course of four

months. The Chinese government finds these methods promising and is collecting more data such as weight, height, and waistline mea-surements from patients undergo-ing current weight loss treatment. Furthermore, private and public fat camps are available for teen-agers and young adults in China, where they are sent for months at a time to a recreational center to exercise and follow a proper diet. They lift weights and do aerobics for months, as well as train and eat like an athlete to lose weight.

Though China has no sig-nificant regulation that cuts down on calorie-dense fast food con-sumption or manufacturing, the government is launching cam-paigns in high schools aimed at raising awareness about health risks associated with obesity. Though drugs, treatments, and raising awareness may be effec-tive in controlling obesity, it still requires a big part of every indi-vidual’s self discipline in order to achieve their desired goals of los-ing weight.

Fall 2012 33

Asian Designers

by Erica Boorstein Cornell University ‘14, College of Arts & Sciences

Prabal Guruing has received a lot of at-tention recently after Duchess Kate Middleton wore one of his creations from his spring 2012 line during her visit to Singapore.

are the Future of Fashion

While in the past fashionis-tas would look to Western

fashion capitals such as Paris or New York City for inspiration, to-day it seems that looking eastward would be more helpful. Across the board at major fashion weeks in London, Paris, and New York critics noted a strong influence from both Asian fashion trends and a greater presence of Asian fashion designers. With the rise of strong Asian economies like those of China and Japan, Asian markets have been the new consumers of high fashion in the past twen-ty years. Recently though, Asian fashion has changed over from being more consumer-focused to being more production focused. More and more new Asian fashion designers debut their collections at major fashion events and have gotten press in influential fashion magazines. These new design-ers bring a different, Eastern-in-spired look to the global fashion scene and are a breath of fresh air to fashionist as in the West. This is apparent in Paris where re-nowned fashion designer Wallace

Chan presented fifty of his newest pieces at the Biennale de Antiqu-aires in Paris. This is the first time since 1962 that the Biennale de Antiquaires has reached out to an Asian designer and asked him to present. In New York City, South Asian designers had a major pres-ence at fashion week. Design-ers like Bibhu Mohaptra, Shee-na Trivedi, Prabal Gurung, and Naeem Kahn received rave re-views for their collections and are poised to be the some of the fash-ion industry’s new brightest stars. Prabal Guruing in particular has received a lot of attention recent-ly after Duchess Kate Middleton wore one of his creations from his spring 2012 line during her visit to Singapore. Japanese style has been incredibly influential especially in Great Britain. The super pop-ular “Lolita Street Style” which takes inspiration from child-like elements of fashion and includes lace, pale pinks, frilly skirts, and doll-like make up has merged with British punk fashion and seem to constantly play off each

LIFESTYLE

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other on both the runways and on the streets. This Lolita-punk style can be seen on celebrities such as Gwen Stefani who incorporates elements of the look into both her outfits and her fashion line, L.A.M.B. Furthermore, designers like Marc Jacobs, most notably, have based entire collections on Asian influences and have done huge collaborations with Asian fashion designers. Since becom-

ing creative director in 1997, Marc Jacobs have been influential in bringing the Louis Vuitton brand to Asia. Recently, Louis Vuitton has opened stores in Asian fash-ion capitals like Shanghai, Tokyo’s Ginza District, and Island Maison in Singapore. In addition, Marc Jacobs’ collaborations with fa-mous Asian designers have been

not only extremely popular but have even become iconic pieces. In 2003, Marc Jacobs collaborated with Takashi Murakami to create the immensely popular Mono-gram Multicolore, which took the traditional monogram and put it in rainbow hues against black and white backgrounds and the Cher-ry Blossom pattern, which put cartoon flowers with smiling fac-es in the middle on the traditional monogram items.

The look of haute couture and the hottest fashion trends would look completely different if it were not for the new influence from both established and up-and-coming fashion designers. As these designers bring their unique Eastern views to both established fashion houses and Western consumers it is indis-putable that they have become a force in the fashion industry.

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TECHNOLOGY

The smartphone mar-ket will mature in several years in devel-oped countries. A more mature market implies slower sales and greater commod-itization along official or unofficial basic design and function-ality standards.

iLITIGATESAMSUNG, APPLE, AND THE WAVE OF IP SUITS

CHANGING THE SMARPHONE MARKET

by: Denis Hurley, Cornell University ‘14, College of Arts & Sciences

Notes: (1) Numbers include sales to end-users only; (2) Only top five companies are included

Source: IDC Worldwide (July 2012),

On August 24, 2012, in the American intellectual property case Apple vs. Samsung Electronics Co., a jury ruled that Sam-sung had infringed on a number of Apple’s patents and ordered Samsung to pay a little over $1 billion in damages. The decision was the conclusion of one of many ongoing intellectual property battles among smartphone and tablet producers around the world, the outcomes of which could drastically alter the market landscape in the coming years.

The Smart Phone Market According to analyst house Gartner, Q2 2012 overall smart-phone sales jumped 42.7% globally year-on-year and 27% quar-ter-on-quarter, far outstripping overall mobile handset growth. Bloomberg estimates the size of the global smartphone market by revenue to be around $220 billion. Samsung and Apple are the clear goliaths in hardware while Google and Apple dominate the mobile operating system sphere. The most striking trend in the smartphone market over the past year is Android’s large and rapid-ly expanding lead over competing operating systems. Google’s Li-nux-based mobile OS now boasts a 64% market share, up from just over 40% in the same period of 2011. iOS is second most popular, capturing 19% of the market. On the hardware side, Apple and

Worldwide Mobile Device Sales by Vendor (in millions of units)

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TECHNOLOGY

Samsung accounted for half of all smartphone shipments globally. While both companies grew sales at impressive rates year-on-year, Samsung outdid competitors by a wide margin, posting 172% sales growth and more than doubling its market share.

The Legal Landscape Apple and Samsung alone are embroiled in 50 ongoing cas-es in 19 countries with billions of dollars at stake. Although Apple claimed an initial legal victory in the United States and is seeking to ban the sale of a number of Samsung products in the coun-try, Samsung is sure to appeal the ruling and attempt to block the injunction on sales of its prod-ucts. News of the US ruling sent shares of Samsung plummeting 7%. Shares in ZTE, China’s largest publicly traded maker of smart-phones, also fell 7% while shares in HTC, already down 47% year to date as a result of its own costly patent suits with Apple, fell 2%. In Europe, judgments have been as varied as the EU mem-bers themselves. A German court upheld Apple’s claims of patent infringement and issued a prelim-inary injunction against the sale of some Samsung products in the country. But Apple later lost in a German regional court which found that neither Samsung nor Google’s Motorola Mobility unit had infringed on certain Apple patents. In Holland and Great Britain, neither company has been able to claim a significant victo-ry. A judge in the latter country famously ruled that Samsung did not infringe on Apple design pat-ents because Samsung products

were clearly not as “cool” as their Apple counterparts. Samsung re-cently expanded the conflict in the critical European markets of France and Italy, filing patent in-fringement suits against Apple in both countries. Although Apple has en-joyed considerable success in the American court system and some success in Europe thus far, courts in Japan and Korea handed down

rulings favorable to Samsung. A Japanese court rejected Ap-ple’s claims outright and ordered the company to reimburse Sam-sung’s legal fees. In South Korea, both companies were found to be at fault. Although Taiwanese technology giant HTC has been embroiled in numerous disputes with Apple, neither ZTE nor Hua-wei Device, two major Chinese smartphone producers, have been drawn into the fray. China presents something a challenge for the suit-happy Apple juggernaut. China is Ap-ple’s second largest market, after the United States, and could po-tentially overtake the US market within a few years. The Chinese smartphone market has tripled in

the last years. China’s myriad legal system, heavy favoritism toward domestic companies, and the risk of inciting a nationalist backlash against its products, are likely among the reasons for Apple’s hes-itance. For the time being, neither Apple nor Samsung face serious from Chinese smartphone compa-nies at the high-end of the market spectrum, so neither will neces-sarily target ZTE and Huawei in the near future.

Back to the Drawing Board With each ruling in favor of a patent holder, smartphone producers around the world are forced to adjust their product lines in order to avoid running afoul of freshly interpreted patent laws in whichever relevant markets they operate. As the first company with a smartphone design worthy of becoming the unofficial industry standard (touchscreen, few phys-ical buttons, a simple UI display-ing application icons), Apple likely has the most to gain from rulings in its favor. As the largest player in the market, Samsung also has a massive financial stake in the outcomes of these disputes. Oth-er competitors more or less fall in line behind these two companies in terms of design and function-ality. Thus, the major cost of mo-bile and tablet-related IP litigation is not the legal fees – which are surely handsome – but rather the short-term costs imposed on pro-ducers forced to comply with new IP restriction enforcement and the potentially greater long-term costs of creating enough product differ-entiation to avoid forbidden du-plication without departing from hugely popular and accepted in-

With each ruling in favor of a patent holder, smartphone producers around the world are forced to adjust their product lines in order to avoid running afoul of freshly interpreted patent laws in whichever relevant markets they operate.

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dustry design standards. The smartphone market will mature in several years in de-veloped countries. A more mature market implies slower sales and greater commoditization along of-ficial or unofficial basic design and functionality standards. The fight for sales and legal victories today is essentially a competition for sway over the market landscape of the future. More strict patent rul-ings benefit large companies with deep pockets and put smaller, po-tentially more innovative startups at a disadvantage. Small compa-nies will be forced to play by the rules of larger companies.

Triangular Tablets? Apple seems to have won

important battles in Europe and the United States but there may not be a clear winner in the so-called “smartphone wars.” Emerg-ing markets with lax IP laws (by American standards) allow inno-vative and less well-heeled compa-nies more breathing room which may lead to more innovative prod-uct offerings in these markets rath-er than in developed countries. If many of these suits re-sult in victory for patent holders, the primary result will be greater product differentiation. The larg-est companies – with the deepest pockets and the largest legal teams – will likely crowd out innova-tive smaller companies and will benefit from the greater margins created by more legally enforced

product diversity. User experience may suffer as R&D budgets shrink as a percentage of total corpo-rate expenditures in favor of legal costs and designs are molded ac-cording to IP restrictions rather than quality. Perhaps out of court settlements, patent exchanges, or mutual agreement on basic in-dustry standards would be a more effective means of settling dis-putes without slowing innovation. Following the Apple vs. Samsung ruling, an image of a triangular Samsung tablet began circulating on the Internet as a prediction of future mobile product design – triangular so as not to infringe on Apple’s “patented” rectangular de-sign. Hyperbole. But still.

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INTERVIEW

Sean Hu is the managing part-ner and North America head of Bionest Partners, a premi-

um consulting firm focusing on the healthcare industry. The firm provides creative consulting and financial solutions tailored for healthcare industries and financial institutions. Their core competen-cies lie in human pharmaceuticals, biotechnologies, animal health, diagnostics and medical devices. Clients of Bionest Partners vary from biotech start-ups to big phar-ma companies and financial insti-tutions. Hu holds a Bachelor of Sci-ence in Organic Chemistry from Peking University, a PhD in ge-nomics from New York University and an MBA from the Wharton School of Business, University of Pennsylvania.

Q: What do you think of the prospects of the health-care industry?A: I see a very promising fu-ture for the healthcare industry. Healthcare is an indispensible part of human life and a top priority for many people. Everyone gets sick sometime in his or her life and

Insights on U.S. Healthcare ConsultingInterview with Sean Hu, Managing Partner of Bionest Partners

Stella Zhang, Cornell University ’13, College of Arts & Sciences

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would need healthcare services so this industry will continue to thrive in the future. This industry will increasingly focus on the life sciences in the future.

Q: What do you see as some of the areas within the healthcare industry that will become more popular and important in the near future?A: Research and manufacturing of medical devices and the phar-maceutical industry will continue to gain popularity in the future. As new diseases appear, new treat-ment methods and medicines need to be developed. This will not change and thus continued devel-opment in research and manufac-turing in these industries will be more sustainable.

Q: Does this mean that we will see biotech startups flourishing?A: Biotech startups have a very high failure rate of 80% because of the high risks involved. Because of the nature of the medical research industry, there are many develop-ment cycles in the commercializa-tion of any technology and hun-dreds of millions of dollars need to be invested in something with extreme uncertainty of success. For example, the success rate of developing a cancer drug is less than 10%.

Q: Could you please tell us a little bit more about your personal experiences?A: I started off doing healthcare consulting and joined a startup ge-nomics company in the late 1990s. I was lucky to see the company develop from a new startup to one with considerable size and sub-stantially high revenue. Now, I am working for Bionest, a premium healthcare consulting firm, head-ing its US businesses.

Q: It’s very impressive, as a Chinese, to be selected by a European company to head its US businesses. How did you achieve that?A: I think there are two most im-portant things that help you bring in business for a firm – your net-work and your expertise. As some-one who didn’t grew up in the US, the network part is a little bit more difficult. Of course you need to work hard to build your network, but I think it’s even more import-ant to leverage your own strengths – for me, it’s being an expert in the area of your business. As you work with other people, your excellence will become your credential, and eventually become your new busi-ness opportunities.

Q: Why did you choose to go to business school? Has that experience helped you?A: I had really excellent technical background before my MBA, but

I think like most technical peo-ple, I lacked management skills and I was not familiar with the rules of the game. I felt that it was necessary to re-educate myself so I chose to pursue a MBA at the Wharton School of Business. This turned out to be a great choice and a very good investment.

Q: As the head of Bionest’s US businesses, what do you feel is the direction of the healthcare industry in the future?A: Definitely personalized med-icine. Today, most medicines are only effective on about 30%-50% of the patients. We should only prescribe drugs to applicable pa-tients, but so far it’s hard to tell during diagnosis. If we could bet-ter understand their genetic codes, we could customize medicines so that there is a higher chance that the drug is effective on a particular patient.

Q: How does Bionest stay competitive in the consult-ing industry?A: For a small business like us, it’s very important to differentiate ourselves in order to compete with big consulting firms like McK-insey. We need a brand and identi-ty that people will recognize us for. We specialize in healthcare, and we have the best expertise in this area and that’s how we get business and stay prestigious in the health-care consulting industry.