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The Economist: Business
- Technology start-ups face the downturn: Fright night in the valley
Having learnt from the dotcom bust, technology entrepreneurs hope to stay afloat this time around
HALLOWEEN is still a week away, but homes throughout Silicon Valley are already adorned with images of witches, skeletons and assorted ghouls and gargoyles. Horror stories have also been plentiful in the Valley, courtesy of the region’s high-tech companies. On October 21st Yahoo! said it would cut its staff of around 15,000 by at least a tenth. Given the internet firm’s woes—its third-quarter profit fell by 64%, to $54m, as online advertising withered—the cuts were perhaps inevitable. Equally striking has been a wave of lay-offs at much smaller start-up companies, which are bracing themselves for a coming recession.
Unlike firms in most other industries, which have not seen a severe downturn since the early 1990s, tech companies still bear the scars of the dotcom bust of 2001. The folk that ran them then learnt painful lessons that many of today’s entrepreneurs appear to have taken on board—and that managers in other companies would do well to reflect on. Chief among them are the importance of swift and deep cost-cutting; of focusing scarce resources on core activities; and of convincing investors that your business strategy is a winner. ...
- Face value: Climate of fear
Can Stavros Dimas successfully defend the environment against economic gloom?
STAVROS DIMAS concedes that his appointment in 2004 as the European Union’s environment commissioner was taken by some as a sign that Europe was going soft on tackling climate change. “All hope is lost,” wailed the Guardian, a left-of-centre British newspaper. Margot Wallstrom, a gutsy Swedish social democrat who held the job before him, fitted the part in a way the 63-year-old Mr Dimas did not. He recalls: “People were sceptical about me because of my background. They saw me as an ageing conservative politician and former Wall Street lawyer from a country [Greece] with a poor environmental record.” As greens despaired, business lobbyists breathed a sigh of relief.
But Mr Dimas has confounded the expectations of both sides. He has won praise from the likes of Greenpeace, Friends of the Earth and T&E (a sustainable-transport think tank) for fighting to preserve Europe’s credentials as an environmental standard bearer. Now Mr Dimas faces his hardest task yet: defending Europe’s hard-won commitments on the environment against politicians and companies fearful of looming recession. ...
- Fast food in China: Here comes a whopper
The world’s second-largest burger chain is gearing up in China
CHINA may boast a 5,000-year-old culinary tradition, but when it comes to fast food, Western-style outlets rule. For this you can thank—or blame—changing consumer tastes, and the breathless expansion plans of chain restaurants, which are eager to grab a bigger slice of the country’s estimated annual 200 billion yuan ($29 billion) fast-food market.
For two decades the battle for the modern Chinese stomach was fought between two American giants: McDonald’s, the world’s largest fast-food chain; and Yum! Brands, which operates the KFC and Pizza Hut brands in China. Yum!, which first arrived in China in 1987 (three years before McDonald’s), has always stayed ahead of its rival—going by both the number of restaurants and consumers’ awareness of the brand. In 2005 the two titans were joined by another American stalwart, Burger King, the world’s second-largest burger chain. ...
- American retailing: Left on the shelf
America’s retailers need to respond to plummeting consumer demand
THE unthinkable has happened. American consumers are losing their urge to shop. Maybe it is because they have been scared into prudence, maybe it is because they can no longer get the credit to which they have long been addicted, but they are spending less. Every single retailer is hurting from the drop in demand, but the weakest are in grave trouble. Some, already struggling in an intensely competitive retailing market, are in free-fall, possibly even heading for bankruptcy. For their stronger competitors, that makes the present such an unmissable opportunity.
Which is why shares in Wal-Mart are worth more than at any time in 2006-07, even though they are down by almost a fifth from their high in September. Target, a struggling rival, by contrast, has seen its share price drop by nearly half since September to its lowest in four years. The stockmarket value of Sears, another famous name, is little more than one-quarter of what it was in April last year. Shares in Whole Foods Market, an upmarket organic food retailer nicknamed “whole paycheck market”, are down by nearly 80% from their highest level, and at their lowest since 2001. Similarly, shares in Best Buy have tumbled, but the electronics retailer is in a bullish mood. It expects to expand its market share if a competitor, Circuit City, eventually goes bust. ...
- Kirk Kerkorian: No country for old men
Kirk Kerkorian is unexpectedly selling out of Ford
THIS is proving a ghastly year for Kirk Kerkorian, a 91-year-old billionaire who began 2008 as the world’s 41st richest person. He reportedly told friends recently that he had “lived one year too long”, after the value of his stake in MGM Mirage, which owns casinos and about half the rooms on the Las Vegas Strip, plunged from $14 billion to $2 billion. This week he took another hit as he started to sell his 6.4% stake in Ford at a price which looks likely to create a loss of at least $700m.
Mr Kerkorian bought the shares through his investment firm, Tracinda, early this summer for about $1 billion. He had been encouraged by unexpectedly good first-quarter figures from the carmaker and had taken a liking to Alan Mulally, Ford’s newish boss. Taking the stake was in keeping with his long-term interest in shaking up Detroit’s Big Three carmakers. Mr Kerkorian once held nearly 10% of General Motors’ shares and was a perpetual thorn in its management’s side. In 2006 he unsuccessfully tried to shove the firm into the arms of Carlos Ghosn’s Renault-Nissan alliance. ...
- Pharmaceuticals: A chill wind
Iceland’s promising drugs firms are in trouble
IT MAY seem surprising, but tiny Iceland has produced two of the world’s most innovative small drugs companies. By combining advanced gene-sequencing technologies with privileged access to the genetic data of Icelanders, DeCode Genetics pioneered the field of personal genomics. And Actavis, its compatriot, has grown from obscurity a few years ago through clever acquisitions and global investments into the world’s fifth-largest generic drugs maker.
In normal times, these firms would be the toast of the town in Reykjavik. Iceland is an ideal place to study the link between genetic variations and diseases, as its population is ethnically homogenous and immigration has been limited. Alas, these are hardly normal times for the country, which is in the grip of a spectacular financial meltdown. DeCode, once a darling of technology investors, now faces the embarrassing prospect of getting kicked out of the NASDAQ stock exchange in America. It could be ousted next week if its market value does not climb back above $50m. Rumours are swirling that Actavis, which is controlled by an Icelandic investment group called Novator, may soon be put up for sale. ...
- GM and Chrysler: Follow the money
Merging the two sickly car firms makes little sense—except for one thing
OBJECTIONABLE, but necessary. The description by Hank Paulson, America’s treasury secretary, of the federal rescue package for America’s banks, is a mantra that may soon be repeated in boardrooms across the land as recession-hit firms survey their dwindling options for survival. Few areas of the economy have been battered harder or for longer than the car industry, especially Detroit’s Big Three. So the news which surfaced at the end of last week that General Motors (GM) and Cerberus Capital Management, the private-equity outfit that was paid $700m by Daimler to take Chrysler off its hands just 17 months ago, had been talking about a possible merger between the biggest and the smallest of the Big Three was a surprise, but hardly shocking.
GM and Chrysler have been on the critical list for months, as has Ford, which also recently had some short-lived preliminary discussions about a tie-up initiated by GM, its bigger (but sicklier) rival. All three firms were in the midst of far-reaching cost-cutting and restructuring plans when they were hit by surging oil prices and tightening credit. This