Immigration has no “significant” effect on the number of jobs available to U.S.-born workers and helps boost incomes and productivity over time, according to a paper by an economist at the Federal Reserve Bank of San Francisco.
“There is no evidence that immigrants crowd out U.S.-born workers in either the short or long run,” Giovanni Peri, an associate professor at the University of California-Davis and a visiting scholar at the San Francisco Fed, said in the paper released today. “Data show that, on net, immigrants expand the U.S. economy’s productive capacity, stimulate investment, and promote specialization that in the long run boosts productivity.”
Immigrants, who tend to be less educated and lack English- language skills, allow U.S.-born workers with similar levels of education to shift toward more communications-intensive jobs, which generally pay better, Peri said. Also, a growing workforce prompts companies to expand and upgrade equipment, making the economy more productive, he said.
An inflow of immigrants equal to 1 percent of the increase in employment helps boost overall incomes by 0.6 percent to 0.9 percent, according to Peri’s research. That means that immigration pushed wages up by $5,100 on average from 1990 to 2007 after adjusting for inflation, accounting for 20 percent to 25 percent of the gain during those years, he said.
The paper comes as U.S. hiring shows signs of cooling. A Labor Department report on Sept. 3 may show that private payroll rose by 47,000 this month after a 71,000 gain in July, and the unemployment rate rose to 9.6 percent, according to the median forecast of economists surveyed by Bloomberg News.
“The painfully slow recovery in the labor market has restrained growth in labor income, raised uncertainty about job security and prospects, and damped confidence,” Fed Chairman Ben S. Bernanke said at the Kansas City Fed’s annual monetary symposium in Jackson Hole, Wyoming, on Aug. 27.
Monday, August 30, 2010
Sunday, August 29, 2010
Rising China Wages Cut Advantage Over Mexico, Flextronics Says - By Tim Culpan and Frederik Balfour
China’s rising wages are cutting the country’s cost advantage over other manufacturing centers such as Mexico, according to Flextronics International Ltd., the world’s second-largest custom electronics maker.
“As China moves up, up and up and up, for five straight years, it’s been moving up heading towards Mexican pricing,” Mike McNamara, Chief Executive Officer of Singapore-based Flextronics, said in an interview. “Mexico’s been the same labor cost for the past five years, it hasn’t moved up at all.”
Flextronics, which supplies to Hewlett-Packard Co. and Cisco Systems Inc., has been forced to increase wages in China in line with government regulations and growing affluence in the fastest-growing major economy. Larger rival Foxconn Technology Group said this month it will move production away from China’s coastal regions after announcing a doubling of wages at its largest production bases in the south east.
The failure of Flextronics to make its components business profitable means the company will “probably not” achieve its operating-margin target of 3.5 percent this fiscal year which ends in March, McNamara said, without giving a goal timeline. Components account for about 10 percent of sales, he said. Operating income as a percentage of revenue is a key measure of profitability.
Mexico’s Appeal
Mexico, where Flextronics makes televisions for LG Electronics Inc., contributed 15 percent of the manufacturer’s sales in the fiscal year to March, compared with 11 percent a year earlier, its annual report showed. China provided 33 percent of the company’s revenue.
“Mexico’s proximity to the U.S. is phenomenal,” McNamara said. “You start thinking about freight and you think about all the green energy initiatives that are going on. It’s going to put a little bit more emphasis toward doing more products in Mexico.”
Former Mexican Economy Minister Gerardo Ruiz Mateos said in a June 29 interview that the nation will create 750,000 formal jobs this year as the economy rebounds from a recession and foreign direct investment rises. Demand for Mexican exports will help draw about $20 billion in foreign direct investment this year and a greater amount in coming years, Mateos said.
“Mexico is close to the U.S. and is part of the North American Free Trade Agreement, which is why more and more companies are building facilities for exports to the U.S.,” said Vincent Chen, an electronics analyst at Yuanta Securities Co. in Taipei. “China labor costs have been rising 10 percent to 20 percent per year for the last decade, but the cluster of suppliers is still there.”
Flextronics employs 200,000 people globally with operations in 30 countries. Around 30 percent of its workforce is the Americas and 90,000 in China, spokeswoman Valerie Kurniawan said in an e-mailed statement.
No Inland Move
Rising wages in China won’t spur an exodus or prompt Flextronics to move all of its production bases in the country, since labor remains a small cost of manufacturing for many of its products, McNamara said. Labor is about 0.5 percent of sales for computers, rising to 10 percent for power supplies, which require more manual work, he said.
“As far as a wholesale, large-scale effort to move inland, I don’t see any economics at all to it,” McNamara said. Ninety- percent of Flextronics’ production is exported, making a move away from China’s ports less economically viable, he said.
Flextronics plans to continue hiring for the next five years at a power-supply factory in Ganzhou, in China’s inland Jiangxi Province where wages are lower, offsetting the higher labor component for those products, he said. The company will hire up to 6,000 in Ganzhou this year.
Foxconn Shifts Production
Foxconn, which makes Apple Inc.’s iPad and also supplies most of the components used in the cell phones it assembles, in June announced the company would double base-wages for employees in Shenzhen, where it has around half its 900,000 workers, and cut the headcount there by about 170,000 over five years. A 40 percent expansion in its workforce over the next year will occur in inland China, where wages are lower and factories will be closer to the hometowns of its migrant workers, it said.
Foxconn controls 50 percent of the electronics manufacturing services market, double the share of Flextronics, according to researcher iSuppli Corp.
Flextronics shares have lost 30 percent this year on the Nasdaq stock market to close at $5.11 on Aug. 27. Hon Hai Precision Industry Co., the Taipei-based flagship of the Foxconn Group, has declined 11.3 percent on the Taiwan Stock Exchange over the same period.
“As China moves up, up and up and up, for five straight years, it’s been moving up heading towards Mexican pricing,” Mike McNamara, Chief Executive Officer of Singapore-based Flextronics, said in an interview. “Mexico’s been the same labor cost for the past five years, it hasn’t moved up at all.”
Flextronics, which supplies to Hewlett-Packard Co. and Cisco Systems Inc., has been forced to increase wages in China in line with government regulations and growing affluence in the fastest-growing major economy. Larger rival Foxconn Technology Group said this month it will move production away from China’s coastal regions after announcing a doubling of wages at its largest production bases in the south east.
The failure of Flextronics to make its components business profitable means the company will “probably not” achieve its operating-margin target of 3.5 percent this fiscal year which ends in March, McNamara said, without giving a goal timeline. Components account for about 10 percent of sales, he said. Operating income as a percentage of revenue is a key measure of profitability.
Mexico’s Appeal
Mexico, where Flextronics makes televisions for LG Electronics Inc., contributed 15 percent of the manufacturer’s sales in the fiscal year to March, compared with 11 percent a year earlier, its annual report showed. China provided 33 percent of the company’s revenue.
“Mexico’s proximity to the U.S. is phenomenal,” McNamara said. “You start thinking about freight and you think about all the green energy initiatives that are going on. It’s going to put a little bit more emphasis toward doing more products in Mexico.”
Former Mexican Economy Minister Gerardo Ruiz Mateos said in a June 29 interview that the nation will create 750,000 formal jobs this year as the economy rebounds from a recession and foreign direct investment rises. Demand for Mexican exports will help draw about $20 billion in foreign direct investment this year and a greater amount in coming years, Mateos said.
“Mexico is close to the U.S. and is part of the North American Free Trade Agreement, which is why more and more companies are building facilities for exports to the U.S.,” said Vincent Chen, an electronics analyst at Yuanta Securities Co. in Taipei. “China labor costs have been rising 10 percent to 20 percent per year for the last decade, but the cluster of suppliers is still there.”
Flextronics employs 200,000 people globally with operations in 30 countries. Around 30 percent of its workforce is the Americas and 90,000 in China, spokeswoman Valerie Kurniawan said in an e-mailed statement.
No Inland Move
Rising wages in China won’t spur an exodus or prompt Flextronics to move all of its production bases in the country, since labor remains a small cost of manufacturing for many of its products, McNamara said. Labor is about 0.5 percent of sales for computers, rising to 10 percent for power supplies, which require more manual work, he said.
“As far as a wholesale, large-scale effort to move inland, I don’t see any economics at all to it,” McNamara said. Ninety- percent of Flextronics’ production is exported, making a move away from China’s ports less economically viable, he said.
Flextronics plans to continue hiring for the next five years at a power-supply factory in Ganzhou, in China’s inland Jiangxi Province where wages are lower, offsetting the higher labor component for those products, he said. The company will hire up to 6,000 in Ganzhou this year.
Foxconn Shifts Production
Foxconn, which makes Apple Inc.’s iPad and also supplies most of the components used in the cell phones it assembles, in June announced the company would double base-wages for employees in Shenzhen, where it has around half its 900,000 workers, and cut the headcount there by about 170,000 over five years. A 40 percent expansion in its workforce over the next year will occur in inland China, where wages are lower and factories will be closer to the hometowns of its migrant workers, it said.
Foxconn controls 50 percent of the electronics manufacturing services market, double the share of Flextronics, according to researcher iSuppli Corp.
Flextronics shares have lost 30 percent this year on the Nasdaq stock market to close at $5.11 on Aug. 27. Hon Hai Precision Industry Co., the Taipei-based flagship of the Foxconn Group, has declined 11.3 percent on the Taiwan Stock Exchange over the same period.
Saturday, August 28, 2010
Solar Power: Brighter Long-Term Investment Outlook - David Bogoslaw
With utilities adopting standards to increase the amount of solar-generated electricity in coming years, the U.S. could bolster its presence in the global solar-power market. The quickening growth pace could present attractive opportunities for investors, according to some professionals.
At the end of 2009, the U.S. ranked fourth in total solar capacity, with 2.09 gigawatts installed, behind Germany with 9.79Gw, Spain with 4.01Gw, and Japan with 2.68Gw, according to Bloomberg New Energy Finance. With U.S. installed capacity growing at a faster pace than that of the international market, the country may be on track to become a more dominant market by 2014, according to Larry Sherwood, an analyst at the Interstate Renewable Energy Council (IREC).
Some 23Gw of solar capacity are under development in the U.S., enough to provide electricity for 4.4 million households, according to the Solar Energy Industries Assn. (SEIA). Solar demand in the U.S. is expected to grow 75 percent in 2011, compared with 2010. About 1.5Gw to 2.0Gw of capacity—1.36Gw in California alone—is scheduled to be installed next year.
One factor could snarl that time line: the expiration of federal incentives, specifically the Treasury Dept.'s cash grant program, which currently covers 30 percent of a project's costs, as long as construction has begun by the end of 2010. SEIA and other groups are pushing to have the qualifying construction start date extended by two years, to the end of 2012. Members of the U.S. Senate Finance Committee didn't return calls asking when they would vote on extending the program. Kaufman Brothers said in an Aug. 17 research note that the firm didn't expect a major decision on solar incentives until after the fall U.S. elections.
U.S. FOCUS ON UTILITY-SCALE SOLAR
The diversion of $3.5 billion from the Energy Dept.'s Loan Guarantee Program to other stimulus projects—and uncertainty as to whether any of the money will be restored—is also delaying some projects. Indeed, the main reason the U.S. solar market lags Europe's is that the federal government has consistently failed to commit to a long-term policy offering financial incentives to power providers, without which solar can't yet compete with such cheaper sources of electric generation as coal and natural gas.
While Europe is moving toward smaller rooftop installation, utility-scale projects are fast becoming the focus in the U.S. and are the most likely way for the U.S. to catch up with the leading solar markets. Photovoltaic panel makers FirstSolar
Solar's brighter future has some investment pros seeking opportunities beyond manufacturers of photovoltaic solar panels. Page at Guinness Atkinson recommends investing in stocks likely to benefit, no matter where solar demand is strongest. Page likes SMA Solar (S92:GR), a German producer of inverters, which convert the direct current produced by solar and wind into alternating current that can be used on the grid.
SATCON'S UTILITY-SCALE INVERTERS
The bigger the installation, the more important the inverter that enables a connection to the grid, says Osborne at Stifel Nicolaus.
While SMA Solar dominates the inverter market, Satcon Technology (SATC) is the largest manufacturer of utility-scale inverters, whose importance is sure to grow as the U.S. market moves toward utility-scale systems. While Satcon continues to report net losses, its revenue tripled from a year earlier, to $27.6 million in the second quarter. Some 45 percent of that volume derived from Europe, vs. nearly all its demand coming from North America a year earlier. The company's "geographic diversification is also reflected in its record backlog of $111 million," 20 percent of which comes from Europe, with another 33 percent coming from Asia, according to an Aug. 6 research note by Raymond James & Co. (RJF). The total backlog has grown 35 percent since June 30. Satcon has announced plans to build annual production capacity from 1Gw now, to 1.25Gw by the end of 2010, and to 1.75Gw in 2011.
Much of Satcon's revenue growth and gross margin expansion, bolstered by a recent shift to lower-cost manufacturing in China, is being offset by higher fixed costs necessitated by international expansion and a bigger workforce, said Raymond James, which still expects the company to post net losses through 2011. The red ink didn't stop Osborne at Stifel from upgrading the stock on July 27 to buy, from hold, citing improving margins and prospects for market share expansion.
The transformation of the U.S. market from rooftop to utility-scale systems is also expected to benefit Power-One (PWER) and Advanced Energy Industries (AEIS), which also make inverters. Dougherty & Co. estimated in a July 30 research note that Power-One's total renewable energy backlog increased by more than $500 million, compared with the first quarter, and is now over $900 million, the equivalent of 3.2Gw to 3.5Gw in shipments. The fast-growing inverter business introduces "a compelling growth aspect to an otherwise cyclical semiconductor capital equipment stock," giving the company more potential than other semiconductor makers to branch into adjacent segments such as solar over the long term, Pacific Crest Securities said in an Aug. 12 note.
KEY ROLE FOR CAPITAL EQUIPMENT MAKERS
Another company that is expected to do well regardless of where demand is strongest is STR Holdings (STRI), which makes adhesive encapsulants, the ethylene vinyl acetate sheets used to weatherproof solar panels and prevent yellowing. Demand for STR's products is strong, with half the world's solar panel makers signed up to use them, says Page at Guinness Atkinson. The company's net sales for the second quarter rose 126 percent from a year earlier, to $67 million, and were up more than 22 percent from the first quarter.(FSLR) and SunPower (SPWRA) have large pipelines of utility-scale projects and will be dominant players in the U.S., starting in 2011, says Matthew Page, one of the managers of the Guinness Atkinson Alternative Energy Fund (GAAEX).
With so much uncertainty surrounding incentives at home and overseas, the fact that more countries are adopting renewable energy standards and planning to build solar plants has analysts and some fund managers feeling more confident about the industry. "I'm bullish on solar because the market is no longer dominated by two or three countries," says Jeff Osborne, an analyst who covers clean energy stocks at Stifel Nicolaus (SF). "Morocco said in 2009 that it wanted to build 2Gw of solar." Utilities in Eastern Europe, he adds, are eager to diversify their energy sources to reduce their exposure to periodic supply disruptions from Russia's Gazprom (OGZPY:US), which provides roughly 25 percent of Europe's natural gas needs.
Capital equipment makers are also a fairly safe bet, with attractive returns on invested capital, says Osborne. Applied Materials (AMAT) and GT Solar (SOLR) both make the semiconductor equipment that deposits chemicals on large polysilicon cell surfaces. Applied Materials also makes equipment that cuts silicon wafers, while GT Solar makes polysilicon and wafers. Osborne sees them as "the arms merchants to the sector," which is attracting new customers in such countries as Korea and India.
If utility-scale installations grow as analysts expect, photovoltaic technologies will in time be outshone by concentrated solar thermal power, or CSP, which uses rotating mirrors to reflect the sun toward parabolic troughs carrying a liquid heat conductor or to so-called "power towers" with hot water boilers on top. The concentrated sunlight superheats the liquid heat conductor or the water, producing steam that drives turbines and generates electricity.
The companies that make materials for solar thermal installations such as mirrors and receiver tubes are now privately held. Turbines are made by public companies, however, and Siemens (SI) is one manufacturer whose turbine orders may increase as solar thermal power gets commercialized. BrightSource Energy, the privately held developer of Ivanpah, a 392-megawatt complex consisting of three CSP plants in California, is using Siemens turbines; the first of those plants is scheduled to begin operation in 2012.
BY 2020, 6GW OF SOLAR CAPACITY
Still, photovoltaic systems are the backbone of the U.S. market, now and for the foreseeable future. In the U.S., 29 states and Washington now have mandatory Renewable Portfolio Standards, while a further six states have set voluntary goals. Most of the solar development is occurring in the 16 states that have "carve-outs," which establish a minimum percentage of electricity that retailers must provide from solar or distributed generation by a certain date, says Justin Barnes, a policy analyst for the Database of State Incentives for Renewables & Efficiency (DSIRE).
Total capacity for grid-connected PV installations was 1.26Gw at the end of 2009. Total solar capacity must reach 6Gw by 2020, and 9.5Gw by 2025, in order for the 16 states with solar carve-outs to meet their targets, according to projections by the Lawrence Berkeley National Laboratory, which is part of the U.S. Energy Dept. That's expected to be a key driver of revenue growth for manufacturers of PV panels and related materials.
Apart from companies that serve the PV panel market, there isn't yet much of a solar industry for retail investors to buy into. That will change in the next couple of years, says Nancy Pfund, a managing partner at DBL Investors, a San Francisco venture capital firm that was spun out of a JPMorgan equity fund in 2008 and which has invested in the Ivanpah complex. "There's going to be a lot more choice very soon," she says, citing the coming of gigawatt-sized solar projects by 2016.
Eventually, manufacturers of solar mirrors used in CSP plants will either go public or be acquired by public companies, she says. She foresees the same trajectory for makers of concentrated photovoltaics, which boost the efficiency of energy conversion from silicon on the panels by focusing on how the silicon is arranged alongside glass.
SOLAR FINANCING OPTIONS
Solar installation financing is another potentially big area for investment, Pfund believes. She sits on the board of SolarCity, the only full-service solar installation company in the U.S. In January, SolarCity signed a deal with Pacific Gas & Electric (PCG) under which the California utility will provide $60 million in tax equity financing for solar installations in U.S. homes and businesses in exchange for lease revenue from SolarCity customers, as well as federal investment tax credits and local rebates. SolarCity's financing options let homeowners and businesses switch to solar power with no up-front investment, so they can start saving on energy costs right away. The company's goal is to be a national brand and become publicly traded, although that's a few years away, says Pfund.
Banks such as Rabobank have also begun to establish tax equity funds. As solar energy becomes more prevalent, Pfund believes more utilities will be attracted to the financing model in order to avoid losing some of their biggest customers, who will move to solar because of how much power they consume.
Investors need to maintain a lengthy time horizon in betting on the growth of the solar industry, says Mark Burger, a principal at Kestrel Development, a consulting firm for renewable energy policy, markets, and technologies.
Solar is "the new 30-year Treasury bond," Burger says. "It's a nice, conservative investment. And you'll get a better return than owning a Treasury bond."
At the end of 2009, the U.S. ranked fourth in total solar capacity, with 2.09 gigawatts installed, behind Germany with 9.79Gw, Spain with 4.01Gw, and Japan with 2.68Gw, according to Bloomberg New Energy Finance. With U.S. installed capacity growing at a faster pace than that of the international market, the country may be on track to become a more dominant market by 2014, according to Larry Sherwood, an analyst at the Interstate Renewable Energy Council (IREC).
Some 23Gw of solar capacity are under development in the U.S., enough to provide electricity for 4.4 million households, according to the Solar Energy Industries Assn. (SEIA). Solar demand in the U.S. is expected to grow 75 percent in 2011, compared with 2010. About 1.5Gw to 2.0Gw of capacity—1.36Gw in California alone—is scheduled to be installed next year.
One factor could snarl that time line: the expiration of federal incentives, specifically the Treasury Dept.'s cash grant program, which currently covers 30 percent of a project's costs, as long as construction has begun by the end of 2010. SEIA and other groups are pushing to have the qualifying construction start date extended by two years, to the end of 2012. Members of the U.S. Senate Finance Committee didn't return calls asking when they would vote on extending the program. Kaufman Brothers said in an Aug. 17 research note that the firm didn't expect a major decision on solar incentives until after the fall U.S. elections.
U.S. FOCUS ON UTILITY-SCALE SOLAR
The diversion of $3.5 billion from the Energy Dept.'s Loan Guarantee Program to other stimulus projects—and uncertainty as to whether any of the money will be restored—is also delaying some projects. Indeed, the main reason the U.S. solar market lags Europe's is that the federal government has consistently failed to commit to a long-term policy offering financial incentives to power providers, without which solar can't yet compete with such cheaper sources of electric generation as coal and natural gas.
While Europe is moving toward smaller rooftop installation, utility-scale projects are fast becoming the focus in the U.S. and are the most likely way for the U.S. to catch up with the leading solar markets. Photovoltaic panel makers FirstSolar
Solar's brighter future has some investment pros seeking opportunities beyond manufacturers of photovoltaic solar panels. Page at Guinness Atkinson recommends investing in stocks likely to benefit, no matter where solar demand is strongest. Page likes SMA Solar (S92:GR), a German producer of inverters, which convert the direct current produced by solar and wind into alternating current that can be used on the grid.
SATCON'S UTILITY-SCALE INVERTERS
The bigger the installation, the more important the inverter that enables a connection to the grid, says Osborne at Stifel Nicolaus.
While SMA Solar dominates the inverter market, Satcon Technology (SATC) is the largest manufacturer of utility-scale inverters, whose importance is sure to grow as the U.S. market moves toward utility-scale systems. While Satcon continues to report net losses, its revenue tripled from a year earlier, to $27.6 million in the second quarter. Some 45 percent of that volume derived from Europe, vs. nearly all its demand coming from North America a year earlier. The company's "geographic diversification is also reflected in its record backlog of $111 million," 20 percent of which comes from Europe, with another 33 percent coming from Asia, according to an Aug. 6 research note by Raymond James & Co. (RJF). The total backlog has grown 35 percent since June 30. Satcon has announced plans to build annual production capacity from 1Gw now, to 1.25Gw by the end of 2010, and to 1.75Gw in 2011.
Much of Satcon's revenue growth and gross margin expansion, bolstered by a recent shift to lower-cost manufacturing in China, is being offset by higher fixed costs necessitated by international expansion and a bigger workforce, said Raymond James, which still expects the company to post net losses through 2011. The red ink didn't stop Osborne at Stifel from upgrading the stock on July 27 to buy, from hold, citing improving margins and prospects for market share expansion.
The transformation of the U.S. market from rooftop to utility-scale systems is also expected to benefit Power-One (PWER) and Advanced Energy Industries (AEIS), which also make inverters. Dougherty & Co. estimated in a July 30 research note that Power-One's total renewable energy backlog increased by more than $500 million, compared with the first quarter, and is now over $900 million, the equivalent of 3.2Gw to 3.5Gw in shipments. The fast-growing inverter business introduces "a compelling growth aspect to an otherwise cyclical semiconductor capital equipment stock," giving the company more potential than other semiconductor makers to branch into adjacent segments such as solar over the long term, Pacific Crest Securities said in an Aug. 12 note.
KEY ROLE FOR CAPITAL EQUIPMENT MAKERS
Another company that is expected to do well regardless of where demand is strongest is STR Holdings (STRI), which makes adhesive encapsulants, the ethylene vinyl acetate sheets used to weatherproof solar panels and prevent yellowing. Demand for STR's products is strong, with half the world's solar panel makers signed up to use them, says Page at Guinness Atkinson. The company's net sales for the second quarter rose 126 percent from a year earlier, to $67 million, and were up more than 22 percent from the first quarter.(FSLR) and SunPower (SPWRA) have large pipelines of utility-scale projects and will be dominant players in the U.S., starting in 2011, says Matthew Page, one of the managers of the Guinness Atkinson Alternative Energy Fund (GAAEX).
With so much uncertainty surrounding incentives at home and overseas, the fact that more countries are adopting renewable energy standards and planning to build solar plants has analysts and some fund managers feeling more confident about the industry. "I'm bullish on solar because the market is no longer dominated by two or three countries," says Jeff Osborne, an analyst who covers clean energy stocks at Stifel Nicolaus (SF). "Morocco said in 2009 that it wanted to build 2Gw of solar." Utilities in Eastern Europe, he adds, are eager to diversify their energy sources to reduce their exposure to periodic supply disruptions from Russia's Gazprom (OGZPY:US), which provides roughly 25 percent of Europe's natural gas needs.
Capital equipment makers are also a fairly safe bet, with attractive returns on invested capital, says Osborne. Applied Materials (AMAT) and GT Solar (SOLR) both make the semiconductor equipment that deposits chemicals on large polysilicon cell surfaces. Applied Materials also makes equipment that cuts silicon wafers, while GT Solar makes polysilicon and wafers. Osborne sees them as "the arms merchants to the sector," which is attracting new customers in such countries as Korea and India.
If utility-scale installations grow as analysts expect, photovoltaic technologies will in time be outshone by concentrated solar thermal power, or CSP, which uses rotating mirrors to reflect the sun toward parabolic troughs carrying a liquid heat conductor or to so-called "power towers" with hot water boilers on top. The concentrated sunlight superheats the liquid heat conductor or the water, producing steam that drives turbines and generates electricity.
The companies that make materials for solar thermal installations such as mirrors and receiver tubes are now privately held. Turbines are made by public companies, however, and Siemens (SI) is one manufacturer whose turbine orders may increase as solar thermal power gets commercialized. BrightSource Energy, the privately held developer of Ivanpah, a 392-megawatt complex consisting of three CSP plants in California, is using Siemens turbines; the first of those plants is scheduled to begin operation in 2012.
BY 2020, 6GW OF SOLAR CAPACITY
Still, photovoltaic systems are the backbone of the U.S. market, now and for the foreseeable future. In the U.S., 29 states and Washington now have mandatory Renewable Portfolio Standards, while a further six states have set voluntary goals. Most of the solar development is occurring in the 16 states that have "carve-outs," which establish a minimum percentage of electricity that retailers must provide from solar or distributed generation by a certain date, says Justin Barnes, a policy analyst for the Database of State Incentives for Renewables & Efficiency (DSIRE).
Total capacity for grid-connected PV installations was 1.26Gw at the end of 2009. Total solar capacity must reach 6Gw by 2020, and 9.5Gw by 2025, in order for the 16 states with solar carve-outs to meet their targets, according to projections by the Lawrence Berkeley National Laboratory, which is part of the U.S. Energy Dept. That's expected to be a key driver of revenue growth for manufacturers of PV panels and related materials.
Apart from companies that serve the PV panel market, there isn't yet much of a solar industry for retail investors to buy into. That will change in the next couple of years, says Nancy Pfund, a managing partner at DBL Investors, a San Francisco venture capital firm that was spun out of a JPMorgan equity fund in 2008 and which has invested in the Ivanpah complex. "There's going to be a lot more choice very soon," she says, citing the coming of gigawatt-sized solar projects by 2016.
Eventually, manufacturers of solar mirrors used in CSP plants will either go public or be acquired by public companies, she says. She foresees the same trajectory for makers of concentrated photovoltaics, which boost the efficiency of energy conversion from silicon on the panels by focusing on how the silicon is arranged alongside glass.
SOLAR FINANCING OPTIONS
Solar installation financing is another potentially big area for investment, Pfund believes. She sits on the board of SolarCity, the only full-service solar installation company in the U.S. In January, SolarCity signed a deal with Pacific Gas & Electric (PCG) under which the California utility will provide $60 million in tax equity financing for solar installations in U.S. homes and businesses in exchange for lease revenue from SolarCity customers, as well as federal investment tax credits and local rebates. SolarCity's financing options let homeowners and businesses switch to solar power with no up-front investment, so they can start saving on energy costs right away. The company's goal is to be a national brand and become publicly traded, although that's a few years away, says Pfund.
Banks such as Rabobank have also begun to establish tax equity funds. As solar energy becomes more prevalent, Pfund believes more utilities will be attracted to the financing model in order to avoid losing some of their biggest customers, who will move to solar because of how much power they consume.
Investors need to maintain a lengthy time horizon in betting on the growth of the solar industry, says Mark Burger, a principal at Kestrel Development, a consulting firm for renewable energy policy, markets, and technologies.
Solar is "the new 30-year Treasury bond," Burger says. "It's a nice, conservative investment. And you'll get a better return than owning a Treasury bond."
Wednesday, August 25, 2010
China's Billionaire Builder - William Mellor
Zhang Xin is betting hundreds of millions of dollars that the warnings of a housing crash are wrong. The former sweatshop worker has a track record of being right.
From her leafy, 11th-floor rooftop terrace at the headquarters of Soho China Ltd., billionaire Zhang Xin scans the relentlessly expanding Beijing skyline she helped create. Zhang’s avant-garde buildings -- some sleek as chopsticks, others stepped like rice terraces -- became part of the hottest real estate market on Earth in 2010.
Zhang says she’s well aware of the chorus of investors and economists who predict that China’s property boom is about to go bust, taking the global economy down with it. The doomsday scenarios don’t intimidate Zhang, a onetime penniless sweatshop worker who ascended to Wall Street by defying the odds. She hopes to prove skeptics wrong again this year by betting hundreds of millions of dollars on new buildings in Beijing and Shanghai, Bloomberg Markets magazine reports in its September issue.
“I don’t see any bubbles,” says Zhang, dressed in a white V-neck zippered top, black slacks and red heels. “The next few months will be a fantastic time to buy.”
Zhang, 44, personifies the explosive rise of China, from the poverty of Mao Zedong’s communist rule to the riches of state-controlled capitalism in the world’s third-biggest economy. At age 30, armed with a master’s degree from the University of Cambridge in England and connections from working at Goldman Sachs Group Inc. in New York and Hong Kong, Zhang founded Soho China with her husband, Pan Shiyi. The company became central Beijing’s biggest developer about a decade later in 2005 -- and a favorite among investors.
Soho China’s Shares
Soho China’s shares jumped about 17 percent on the Hong Kong stock exchange this year through Aug. 3 compared with a 6.1 percent fall in the Bloomberg Asia Pacific Real Estate Index, which includes 191 property stocks. Zhang’s ownership stake is worth about $2.2 billion, ranking her alongside Oprah Winfrey as one of the world’s wealthiest self-made women, says Rupert Hoogewerf, whose Shanghai-based Hurun Report tracks China’s rich.
Zhang, who rode the wave of China’s three-decade expansion, now faces a real estate market that’s due for a crash, says Andy Xie, formerly Morgan Stanley’s Asia-Pacific chief economist, who now works independently in Shanghai. Economists began predicting a real estate bubble in China last year after its government pumped $585 billion of stimulus funds into the economy. State- controlled banks went on a record $1.4 trillion lending spree in 2009.
See-Through Buildings
That sent residential real estate prices soaring 68 percent in the first quarter of this year compared with the same period in 2009, pushing mainland China past Hong Kong as the world’s fastest-appreciating housing market, says London-based property adviser Knight Frank LLP. Beijing’s skyline has shot up along with prices, leaving it with many unoccupied see-through buildings. In the central business district, 37.5 percent of office space was vacant in the second quarter, according to Chicago-based property advisory firm Jones Lang LaSalle Inc.
“This is a serious bubble,” Xie says. “The alarm bells are ringing.”
Kenneth Rogoff, a Harvard University professor and co- author of “This Time Is Different,” (Princeton University Press, 2009), a book that examines financial crises during the past 800 years, already sees signs of turmoil in China’s housing market.
“Property prices are starting to collapse,” he says.
Barclays Capital and Standard Chartered Plc analysts forecast a falloff of as much as 30 percent in China’s big cities in the second half of 2010 compared with those of mid- April.
Double-Dip Recession
If China’s real estate takes a dive, so will its economy, analysts say. Property investment and related industries make up about 20 percent of the country’s gross domestic product, Citigroup Inc. research shows. The economy, which expanded 10.3 percent in the second quarter, may slow to 5 percent in the third period if housing plummets, says Jim Walker, chief economist at Hong Kong-based Asianomics Ltd.
The slowdown would reverberate throughout Asia and beyond, especially to countries that supply iron ore and other commodities that have fueled China’s boom.
“Commodity suppliers such as Australia and Brazil will be hard hit,” Walker says. “They are incredibly China dependent. It could result in the double-dip recession people are talking about.”
China’s economic rulers moved earlier this year to engineer a soft landing. In April, China’s cabinet, led by Premier Wen Jiabao, began imposing stringent restrictions on lending to curb speculation, particularly on luxury dwellings.
Housing Soars
Officials raised down-payment requirements and interest rates on housing purchases, boosted the proportion of deposits that banks must hold in reserve and, in Beijing, banned families from buying more than one new home.
The measures cooled the economy after it grew at a sizzling 11.9 percent pace in the first quarter. Housing prices, which jumped a record 12.8 percent in April, eased to 11 percent in June.
While Zhang says government managers will prevent a crash, she would prefer they let the market dictate demand. Unlike most of her rich Chinese peers, who keep a low profile to stay on good terms with officials, Zhang has been very public in her criticism of government policies.
“The market should be making the decision to buy or not to buy, not be told by the government,” says Zhang, who lives with her husband and two sons, ages 10 and 12, in a 32nd-floor penthouse in her Jianwai Soho development in Beijing. “The government is very sensitive to public opinion and that’s why people like us have the responsibility to talk honestly about what is happening. That would hopefully help to get the truth to the decision makers.”
Rupert Murdoch
The English-speaking Zhang, who regularly appears in Beijing’s society magazines, brings a Western style to the way she does business. During the 2008 Summer Games in Beijing, Zhang and Pan entertained fellow billionaire Rupert Murdoch and his wife, China native Wendi Deng, at a celebrity party -- attended by bankers, movie stars and the media -- at a resort they built with the help of 12 architects next to the Great Wall of China. An inveterate blogger and user of a Twitter-like service, Zhang, who calls herself a soccer mom, praised Spain’s “perfect” defense in a post following its World Cup victory in July.
Fiberglass Pigs
Zhang’s company headquarters in the Chaowai Soho building looks like a Silicon Valley tech firm. Casually dressed engineers, architects and salespeople bounce around ideas in a communal coffee bar decorated with a sculptured herd of life- size fiberglass pigs.
“Many Chinese companies are run like military camps with military discipline,” Zhang says. “We do not run a company that way. It does not help the creative process.”
Pan, 46, the slim, balding and bespectacled chairman of Soho China, says his wife’s relaxed management style only goes so far. Zhang, the chief executive officer of Soho China, enforces its corporate culture with the determination of a Communist Party cadre, Pan said through a spokesman in an e- mail.
“Zhang Xin’s personality, value system and educational background are just like our own personal Central Commission for Discipline Inspection,” Pan jokes. He wasn’t available to be interviewed in person.
Natural Experimentalist
In hiring noted architects from around the world, Zhang has pushed the boundaries of design in Beijing. Kengo Kuma of Japan, who designed the Osaka headquarters of LVMH Moet Hennessy Louis Vuitton SA, created Sanlitun Soho, a development of nine office and apartment buildings shaped like ocean waves. It opened in June.
“She is a natural experimentalist, simultaneously setting and defying trends,” Pan says.
Zhang and Pan develop buildings for Chinese much like themselves: entrepreneurs. Many of their rivals put up conventional offices, to be leased mainly to multinational tenants, or grandiose villas and luxury apartments with swimming pools for China’s superrich. The duo conveyed their more practical side with the name Soho, which stands for small office, home office.
The company says it has developed 2.3 million square meters (24.8 million square feet) of real estate -- including about a fifth of Beijing’s central business district. Soho China’s early projects were multiuse, designed for living, working or both. Buyers of Zhang’s high-end units, which can cost more than 60,000 yuan ($8,860) a square meter, include coal mine owners and exporters. In the second quarter, 92 percent of Soho China’s buildings were occupied, Zhang says. Profit surged last year more than eightfold to 3.3 billion yuan.
Zhang Expands
“They focus on sectors which hold long-term promise,” says Mark Mobius, Singapore-based executive chairman of Templeton Asset Management Ltd., which is Soho China’s largest institutional investor, with a 4 percent stake, according to data compiled by Bloomberg. “They have high sensitivity and a great sense of style.”
Zhang is now expanding her empire again, dismissing the China bears. In June, she paid 2.25 billion yuan for a 22,500- square-meter plot of vacant land on the Bund, Shanghai’s stately colonial-era waterfront strip, where buildings resemble those of 19th-century Europe. Two weeks later in Beijing, she started marketing a futuristic 485,000-square-meter commercial, retail and entertainment complex that’s shaped like interlinked cocoons. It will be designed by London-based Pritzker Prize- winning architect Zaha Hadid.
Agricultural Bank
Many investors don’t share Zhang’s optimism about the housing market. On July 16, the Agricultural Bank of China debuted on the Hong Kong stock exchange, rising 2.2 percent to 3.20 Hong Kong dollars. Analysts and fund managers surveyed by Bloomberg had predicted a first-day gain of 5 percent, according to the average of seven estimates. On Aug.3, the stock closed at 3.51 Hong Kong dollars, a rise of 9.7 percent.
Agricultural Bank made 1 trillion yuan of mortgage and other loans last year, and its rate of nonperforming credits at the end of 2009 was 2.91 percent -- almost double that of China’s three other largest state-run banks.
As housing prices fall, bad loans will surge and hurt the state-owned banks, says Michael Pettis, a professor of finance at Peking University. “I would stay clear of property developers and banks,” says Marc Faber, who oversees $300 million at his own firm and has managed money in Hong Kong for the past 37 years.
Cultural Revolution
Zhang, who was born in 1965 as China was about to plunge into the chaos of the Cultural Revolution, is an unlikely billionaire. Her parents, who were both translators at Beijing’s Bureau of Foreign Languages, separated during Mao’s crackdown. As part of the Communist Party’s forced exodus of intellectuals to work in the countryside, Zhang and her mother ended up in a rural part of Henan province.
In 1979, they found their way to Hong Kong and lived in a single room just big enough for two bunk beds. They shared a bathroom with other families.
For five years, from age 14, Zhang toiled in small factories making sleeves, collars, zippers and electrical parts. She says conditions there were similar to those in mainland China today. At Taiwanese-owned Foxconn Technology Group, which makes Apple Inc. iPhones in Guangdong province, at least 10 of its workers committed suicide in recent months, according to China’s official media. Foxconn employees work a massive amount of overtime to make a living wage and grow extremely exhausted, Li Qiang, executive director of New York-based China Labor Watch, said in a statement in May.
Cambridge University
“My life then was exactly the same as those factory workers,” Zhang says. “It was mindless work. You basically moved from one factory to another for whoever paid you slightly more.”
By age 19, she had saved the equivalent of a few thousand British pounds -- enough to buy an airplane ticket to London and support herself while she studied English at secretarial school.
“Quickly, after I landed in England, I found out ways to get scholarships,” she says. “England turned out to be a very encouraging place for me.”
She won a spot at the University of Sussex, where she earned her undergraduate degree in economics in 1991. Then she enrolled at Cambridge and graduated in 1992 with a master’s in development economics.
Goldman Sachs
Barings Plc, a London-based investment bank, hired Zhang right out of Cambridge to work in Hong Kong analyzing privatization in China. Soon after starting the job, she switched to Goldman Sachs, serving as an analyst at the investment bank. It was a short stay. In 1994, she joined Travelers Group Inc. Homesick, she returned to China a year later.
Zhang told the New Yorker magazine in 2005 that she had detested investment banking.
“On Wall Street, all values seemed upside down,” she said. “People spoke crassly, treated each other badly, looked down on the poor and adored the rich.” She said investment banking reminded her of her days working in the Hong Kong garment factories. “The difference is, in Hong Kong the competition turned people into shortsighted mice, whereas on Wall Street it turns them into wolves and tigers,” she said.
Zhang stepped back into China in 1995 as the economy was moving away from orthodox Marxism. As early as 1978, China’s leader, Deng Xiaoping, had begun to open markets, declaring: “To get rich is glorious.” Beijing, famous for its exquisite 600-year-old Forbidden City flanked by stolid Soviet-style architecture, was beginning to sprout modern buildings. Workers were flocking to the capital as China’s economy surged at the rate of 10 percent a year. A friend of Zhang’s recommended that she contact Beijing Vantone Real Estate Co., where Pan served as a partner.
Hawaii of China
Like Zhang, Pan was self-made. His grandfather, a supporter of Mao’s rival, Nationalist leader Chiang Kai-shek, had fought on the losing side in the civil war that ended in 1949, Zhang says. The family had been persecuted for it and forced to eke out a living as peasants in impoverished northwestern Gansu province.
“If I grew up with nothing, they grew up with even less,” Zhang says.
After getting a college diploma and working in the petroleum ministry, Pan in 1989 headed south to the tropical island of Hainan, then a freewheeling frontier about to be reshaped as the Hawaii of China. There, Pan learned the real estate business before returning with his partners to seek opportunities in Beijing, Zhang says.
Tiananmen Square
Within four days of meeting Zhang, Pan proposed. Soon after their marriage, he left Vantone and the newlyweds teamed up to form a company called Hongshi (red stone), later renamed Soho China. Zhang would use her experience in investment banking to attract foreign investors and architects; Pan had local knowledge and connections to negotiate with the government to acquire the land.
“It was the initial attraction in us being partners in business as well as partners in life,” Zhang says.
Zhang and Pan were setting up their company in 1995 as the local government in Beijing was developing a 4-square-kilometer central business district beyond the eastern end of the Avenue of Eternal Peace. The development was about 5 kilometers (3 miles) from Tiananmen Square, where the army had killed pro- democracy demonstrators six years earlier. The couple correctly gambled that the government would soon allow citizens to get home loans, and that a class of entrepreneurs would emerge to buy their live-work units.
Asian Crisis
For their first project, Pan and Zhang planned to turn a malodorous old Chinese liquor factory into Soho New Town: 10 brightly colored buildings from 12 to 40 stories high and accommodating 8,000 residents and hundreds of small businesses.
“Neither of us was financially established,” Zhang says. “But the good thing about having no experience is that you have no fear.”
As construction was about to begin in 1997, the Asian financial crisis struck. Beginning in then-debt-ridden Thailand when the government was forced to abandon its currency peg to the U.S. dollar, the contagion spread across the region, sending currencies other than the nonconvertible yuan plunging.
Investors outside of China who had promised to back the project suddenly couldn’t or wouldn’t come up with the funds. Pan turned to local investors to save Soho New Town, and the development sold out even before completion in 2001. Rather than trying to sell or lease entire buildings, Zhang and Pan peddled units to individual purchasers, a practice they still use today to reduce the risk of whole buildings sitting vacant.
Management Disputes
As China’s global aspirations grew, so did Zhang’s. By the early 2000s, China’s economy was rapidly overtaking those of the U.K. and Germany. Beijing had been chosen to host the 2008 Olympics, accelerating the government’s plans to develop the equivalent of three Manhattans in the central business district.
On the site of an old machine-tool factory, Zhang and Pan began in 2002 to put up Jianwai Soho, a 683,000-square-meter complex of 24 white, cubic buildings of varying heights designed by a Japanese architect, Riken Yamamoto. The project was so large that it took five years to complete and exposed a weakness in Soho China’s business model, says Jack Rodman, president of Shanghai-based Global Distressed Solutions LLC.
After selling the apartments, offices and shops in their developments, Pan and Zhang turned over control to independent management companies. At Jianwai Soho, disputes over management fees and quality of service broke out between owners and property managers -- tensions that continue to flare today. Some of the buildings are now in need of repair.
2007 IPO
Zhang says the management breakdowns hurt the reputation of Soho China, which is taking back control of all but one of its developments.
“Earlier, we said, ‘This is not our problem; why should we manage them?’” she says. “Then we realized they have our names on the buildings.”
Zhang in 2007 persuaded Pan to take the company public in Hong Kong and cash in. The timing of the initial public offering on October 8, 2007, was exquisite. Less than a month later, global markets began to tumble in the early days of the credit crisis. They raised $1.9 billion -- the biggest IPO by a property company in Hong Kong that year.
Soho China shares traded at HK$4.92 on Aug. 3, 40 percent below the offering price. After plummeting along with the rest of the stock markets during the financial meltdown, Soho China’s stock outperformed the Hong Kong and Asia Pacific property indexes almost twofold since it hit bottom in October 2008 through Aug. 3.
Wall Street Wolves
The IPO, which was underwritten by Goldman Sachs, HSBC Holdings Plc and UBS AG, marked a change in Zhang’s relationship with Wall Street. Only two years earlier, she had publicly lambasted investment bankers as wolves. Today, Zhang is more circumspect when asked about her Wall Street experiences.
“I had better be careful these days,” she says. “I am their client. I work with them very closely.”
Today, the Soho name appears on 14 developments in Beijing, a city of 22 million people. In August 2009, Zhang and Pan made their first move into Shanghai with their purchase from Morgan Stanley of the Exchange, a 50-story office building on Nanjing Road, Shanghai’s main shopping street.
Now called the Exchange-Soho, the development is a prime example of the real estate bubble in China, economist Xie says. Soho China paid Morgan Stanley 2.45 billion yuan for the building -- the equivalent of 34,000 yuan per square meter. In the first quarter of 2010, Zhang says, she was selling office space in the building for an average 61,500 yuan per square meter, almost doubling her money. That works out to $843 per square foot -- more than twice the $381 per square foot that HSBC made when it sold its New York headquarters on Fifth Ave. in October.
Feared a Bubble
“Chinese property prices are 100 percent higher than can be justified,” Xie says.
Zhang, who early this year feared a bubble, now says her own research reveals that the property market is regaining its sanity. She says real estate prices have been cooling since April, following the government’s lending restrictions, but aren’t headed for a collapse.
“We know from our own experience the prices are staying flat,” she says.
Stephen Roach, Asia chairman of Morgan Stanley, agrees with Zhang. China’s property bubble is confined to luxury properties, he says. Roach says the lending curbs are successfully deflating high-end speculators in the top 10 cities, which collectively account for just six percent of the total market.
“It’s a micro bubble, not a macro bubble,” he says.
Slower Growth
Roach says the drop in the high-end market will slow economic growth, which he estimates will fall to between 8 percent and 9 percent by the end of the year.
“This would be a much more sustainable growth rate for China -- especially in light of the recent uptick in inflation,” he says. Inflation reached 3.1 percent in May, the fastest growth in 19 months, before falling back to 2.9 percent in June.
To stabilize the housing market, China needs to build more affordable dwellings to be sold to the 500 million Chinese whose income has been rising for a decade, says Donald Straszheim, Los Angeles-based senior managing director and head of China research at ISI Group, a firm that advises institutional investors. He says the government should put together a long- term program to increase construction of low- and middle-income housing.
Zhang’s Forecast
“If they don’t, the massive number of people getting richer each year will continue to bid up house prices and frustrate Beijing,” Straszheim says. “When the government takes the lid off lending, house prices are going to go back up again. That’s a persistent boom-bust cycle.”
Zhang says success in real estate has come down to guessing what the government will do next. In June, she gave her prediction at a JPMorgan Chase & Co. conference attended by almost 2,000 foreign investors in Beijing.
“Everyone was so pessimistic, and I was saying that in the next six months or a year, prices will go up again,” she says. “My guess is that it is austerity now, but at some point it will become stimulus again.”
If the former sweatshop worker is right, her latest property investments will likely prosper -- as will China, perhaps sparing the global economy the threat of a double-dip recession.
William Mellor is a senior writer for Bloomberg Markets in Sydney at wmellor@bloomberg.net.
From her leafy, 11th-floor rooftop terrace at the headquarters of Soho China Ltd., billionaire Zhang Xin scans the relentlessly expanding Beijing skyline she helped create. Zhang’s avant-garde buildings -- some sleek as chopsticks, others stepped like rice terraces -- became part of the hottest real estate market on Earth in 2010.
Zhang says she’s well aware of the chorus of investors and economists who predict that China’s property boom is about to go bust, taking the global economy down with it. The doomsday scenarios don’t intimidate Zhang, a onetime penniless sweatshop worker who ascended to Wall Street by defying the odds. She hopes to prove skeptics wrong again this year by betting hundreds of millions of dollars on new buildings in Beijing and Shanghai, Bloomberg Markets magazine reports in its September issue.
“I don’t see any bubbles,” says Zhang, dressed in a white V-neck zippered top, black slacks and red heels. “The next few months will be a fantastic time to buy.”
Zhang, 44, personifies the explosive rise of China, from the poverty of Mao Zedong’s communist rule to the riches of state-controlled capitalism in the world’s third-biggest economy. At age 30, armed with a master’s degree from the University of Cambridge in England and connections from working at Goldman Sachs Group Inc. in New York and Hong Kong, Zhang founded Soho China with her husband, Pan Shiyi. The company became central Beijing’s biggest developer about a decade later in 2005 -- and a favorite among investors.
Soho China’s Shares
Soho China’s shares jumped about 17 percent on the Hong Kong stock exchange this year through Aug. 3 compared with a 6.1 percent fall in the Bloomberg Asia Pacific Real Estate Index, which includes 191 property stocks. Zhang’s ownership stake is worth about $2.2 billion, ranking her alongside Oprah Winfrey as one of the world’s wealthiest self-made women, says Rupert Hoogewerf, whose Shanghai-based Hurun Report tracks China’s rich.
Zhang, who rode the wave of China’s three-decade expansion, now faces a real estate market that’s due for a crash, says Andy Xie, formerly Morgan Stanley’s Asia-Pacific chief economist, who now works independently in Shanghai. Economists began predicting a real estate bubble in China last year after its government pumped $585 billion of stimulus funds into the economy. State- controlled banks went on a record $1.4 trillion lending spree in 2009.
See-Through Buildings
That sent residential real estate prices soaring 68 percent in the first quarter of this year compared with the same period in 2009, pushing mainland China past Hong Kong as the world’s fastest-appreciating housing market, says London-based property adviser Knight Frank LLP. Beijing’s skyline has shot up along with prices, leaving it with many unoccupied see-through buildings. In the central business district, 37.5 percent of office space was vacant in the second quarter, according to Chicago-based property advisory firm Jones Lang LaSalle Inc.
“This is a serious bubble,” Xie says. “The alarm bells are ringing.”
Kenneth Rogoff, a Harvard University professor and co- author of “This Time Is Different,” (Princeton University Press, 2009), a book that examines financial crises during the past 800 years, already sees signs of turmoil in China’s housing market.
“Property prices are starting to collapse,” he says.
Barclays Capital and Standard Chartered Plc analysts forecast a falloff of as much as 30 percent in China’s big cities in the second half of 2010 compared with those of mid- April.
Double-Dip Recession
If China’s real estate takes a dive, so will its economy, analysts say. Property investment and related industries make up about 20 percent of the country’s gross domestic product, Citigroup Inc. research shows. The economy, which expanded 10.3 percent in the second quarter, may slow to 5 percent in the third period if housing plummets, says Jim Walker, chief economist at Hong Kong-based Asianomics Ltd.
The slowdown would reverberate throughout Asia and beyond, especially to countries that supply iron ore and other commodities that have fueled China’s boom.
“Commodity suppliers such as Australia and Brazil will be hard hit,” Walker says. “They are incredibly China dependent. It could result in the double-dip recession people are talking about.”
China’s economic rulers moved earlier this year to engineer a soft landing. In April, China’s cabinet, led by Premier Wen Jiabao, began imposing stringent restrictions on lending to curb speculation, particularly on luxury dwellings.
Housing Soars
Officials raised down-payment requirements and interest rates on housing purchases, boosted the proportion of deposits that banks must hold in reserve and, in Beijing, banned families from buying more than one new home.
The measures cooled the economy after it grew at a sizzling 11.9 percent pace in the first quarter. Housing prices, which jumped a record 12.8 percent in April, eased to 11 percent in June.
While Zhang says government managers will prevent a crash, she would prefer they let the market dictate demand. Unlike most of her rich Chinese peers, who keep a low profile to stay on good terms with officials, Zhang has been very public in her criticism of government policies.
“The market should be making the decision to buy or not to buy, not be told by the government,” says Zhang, who lives with her husband and two sons, ages 10 and 12, in a 32nd-floor penthouse in her Jianwai Soho development in Beijing. “The government is very sensitive to public opinion and that’s why people like us have the responsibility to talk honestly about what is happening. That would hopefully help to get the truth to the decision makers.”
Rupert Murdoch
The English-speaking Zhang, who regularly appears in Beijing’s society magazines, brings a Western style to the way she does business. During the 2008 Summer Games in Beijing, Zhang and Pan entertained fellow billionaire Rupert Murdoch and his wife, China native Wendi Deng, at a celebrity party -- attended by bankers, movie stars and the media -- at a resort they built with the help of 12 architects next to the Great Wall of China. An inveterate blogger and user of a Twitter-like service, Zhang, who calls herself a soccer mom, praised Spain’s “perfect” defense in a post following its World Cup victory in July.
Fiberglass Pigs
Zhang’s company headquarters in the Chaowai Soho building looks like a Silicon Valley tech firm. Casually dressed engineers, architects and salespeople bounce around ideas in a communal coffee bar decorated with a sculptured herd of life- size fiberglass pigs.
“Many Chinese companies are run like military camps with military discipline,” Zhang says. “We do not run a company that way. It does not help the creative process.”
Pan, 46, the slim, balding and bespectacled chairman of Soho China, says his wife’s relaxed management style only goes so far. Zhang, the chief executive officer of Soho China, enforces its corporate culture with the determination of a Communist Party cadre, Pan said through a spokesman in an e- mail.
“Zhang Xin’s personality, value system and educational background are just like our own personal Central Commission for Discipline Inspection,” Pan jokes. He wasn’t available to be interviewed in person.
Natural Experimentalist
In hiring noted architects from around the world, Zhang has pushed the boundaries of design in Beijing. Kengo Kuma of Japan, who designed the Osaka headquarters of LVMH Moet Hennessy Louis Vuitton SA, created Sanlitun Soho, a development of nine office and apartment buildings shaped like ocean waves. It opened in June.
“She is a natural experimentalist, simultaneously setting and defying trends,” Pan says.
Zhang and Pan develop buildings for Chinese much like themselves: entrepreneurs. Many of their rivals put up conventional offices, to be leased mainly to multinational tenants, or grandiose villas and luxury apartments with swimming pools for China’s superrich. The duo conveyed their more practical side with the name Soho, which stands for small office, home office.
The company says it has developed 2.3 million square meters (24.8 million square feet) of real estate -- including about a fifth of Beijing’s central business district. Soho China’s early projects were multiuse, designed for living, working or both. Buyers of Zhang’s high-end units, which can cost more than 60,000 yuan ($8,860) a square meter, include coal mine owners and exporters. In the second quarter, 92 percent of Soho China’s buildings were occupied, Zhang says. Profit surged last year more than eightfold to 3.3 billion yuan.
Zhang Expands
“They focus on sectors which hold long-term promise,” says Mark Mobius, Singapore-based executive chairman of Templeton Asset Management Ltd., which is Soho China’s largest institutional investor, with a 4 percent stake, according to data compiled by Bloomberg. “They have high sensitivity and a great sense of style.”
Zhang is now expanding her empire again, dismissing the China bears. In June, she paid 2.25 billion yuan for a 22,500- square-meter plot of vacant land on the Bund, Shanghai’s stately colonial-era waterfront strip, where buildings resemble those of 19th-century Europe. Two weeks later in Beijing, she started marketing a futuristic 485,000-square-meter commercial, retail and entertainment complex that’s shaped like interlinked cocoons. It will be designed by London-based Pritzker Prize- winning architect Zaha Hadid.
Agricultural Bank
Many investors don’t share Zhang’s optimism about the housing market. On July 16, the Agricultural Bank of China debuted on the Hong Kong stock exchange, rising 2.2 percent to 3.20 Hong Kong dollars. Analysts and fund managers surveyed by Bloomberg had predicted a first-day gain of 5 percent, according to the average of seven estimates. On Aug.3, the stock closed at 3.51 Hong Kong dollars, a rise of 9.7 percent.
Agricultural Bank made 1 trillion yuan of mortgage and other loans last year, and its rate of nonperforming credits at the end of 2009 was 2.91 percent -- almost double that of China’s three other largest state-run banks.
As housing prices fall, bad loans will surge and hurt the state-owned banks, says Michael Pettis, a professor of finance at Peking University. “I would stay clear of property developers and banks,” says Marc Faber, who oversees $300 million at his own firm and has managed money in Hong Kong for the past 37 years.
Cultural Revolution
Zhang, who was born in 1965 as China was about to plunge into the chaos of the Cultural Revolution, is an unlikely billionaire. Her parents, who were both translators at Beijing’s Bureau of Foreign Languages, separated during Mao’s crackdown. As part of the Communist Party’s forced exodus of intellectuals to work in the countryside, Zhang and her mother ended up in a rural part of Henan province.
In 1979, they found their way to Hong Kong and lived in a single room just big enough for two bunk beds. They shared a bathroom with other families.
For five years, from age 14, Zhang toiled in small factories making sleeves, collars, zippers and electrical parts. She says conditions there were similar to those in mainland China today. At Taiwanese-owned Foxconn Technology Group, which makes Apple Inc. iPhones in Guangdong province, at least 10 of its workers committed suicide in recent months, according to China’s official media. Foxconn employees work a massive amount of overtime to make a living wage and grow extremely exhausted, Li Qiang, executive director of New York-based China Labor Watch, said in a statement in May.
Cambridge University
“My life then was exactly the same as those factory workers,” Zhang says. “It was mindless work. You basically moved from one factory to another for whoever paid you slightly more.”
By age 19, she had saved the equivalent of a few thousand British pounds -- enough to buy an airplane ticket to London and support herself while she studied English at secretarial school.
“Quickly, after I landed in England, I found out ways to get scholarships,” she says. “England turned out to be a very encouraging place for me.”
She won a spot at the University of Sussex, where she earned her undergraduate degree in economics in 1991. Then she enrolled at Cambridge and graduated in 1992 with a master’s in development economics.
Goldman Sachs
Barings Plc, a London-based investment bank, hired Zhang right out of Cambridge to work in Hong Kong analyzing privatization in China. Soon after starting the job, she switched to Goldman Sachs, serving as an analyst at the investment bank. It was a short stay. In 1994, she joined Travelers Group Inc. Homesick, she returned to China a year later.
Zhang told the New Yorker magazine in 2005 that she had detested investment banking.
“On Wall Street, all values seemed upside down,” she said. “People spoke crassly, treated each other badly, looked down on the poor and adored the rich.” She said investment banking reminded her of her days working in the Hong Kong garment factories. “The difference is, in Hong Kong the competition turned people into shortsighted mice, whereas on Wall Street it turns them into wolves and tigers,” she said.
Zhang stepped back into China in 1995 as the economy was moving away from orthodox Marxism. As early as 1978, China’s leader, Deng Xiaoping, had begun to open markets, declaring: “To get rich is glorious.” Beijing, famous for its exquisite 600-year-old Forbidden City flanked by stolid Soviet-style architecture, was beginning to sprout modern buildings. Workers were flocking to the capital as China’s economy surged at the rate of 10 percent a year. A friend of Zhang’s recommended that she contact Beijing Vantone Real Estate Co., where Pan served as a partner.
Hawaii of China
Like Zhang, Pan was self-made. His grandfather, a supporter of Mao’s rival, Nationalist leader Chiang Kai-shek, had fought on the losing side in the civil war that ended in 1949, Zhang says. The family had been persecuted for it and forced to eke out a living as peasants in impoverished northwestern Gansu province.
“If I grew up with nothing, they grew up with even less,” Zhang says.
After getting a college diploma and working in the petroleum ministry, Pan in 1989 headed south to the tropical island of Hainan, then a freewheeling frontier about to be reshaped as the Hawaii of China. There, Pan learned the real estate business before returning with his partners to seek opportunities in Beijing, Zhang says.
Tiananmen Square
Within four days of meeting Zhang, Pan proposed. Soon after their marriage, he left Vantone and the newlyweds teamed up to form a company called Hongshi (red stone), later renamed Soho China. Zhang would use her experience in investment banking to attract foreign investors and architects; Pan had local knowledge and connections to negotiate with the government to acquire the land.
“It was the initial attraction in us being partners in business as well as partners in life,” Zhang says.
Zhang and Pan were setting up their company in 1995 as the local government in Beijing was developing a 4-square-kilometer central business district beyond the eastern end of the Avenue of Eternal Peace. The development was about 5 kilometers (3 miles) from Tiananmen Square, where the army had killed pro- democracy demonstrators six years earlier. The couple correctly gambled that the government would soon allow citizens to get home loans, and that a class of entrepreneurs would emerge to buy their live-work units.
Asian Crisis
For their first project, Pan and Zhang planned to turn a malodorous old Chinese liquor factory into Soho New Town: 10 brightly colored buildings from 12 to 40 stories high and accommodating 8,000 residents and hundreds of small businesses.
“Neither of us was financially established,” Zhang says. “But the good thing about having no experience is that you have no fear.”
As construction was about to begin in 1997, the Asian financial crisis struck. Beginning in then-debt-ridden Thailand when the government was forced to abandon its currency peg to the U.S. dollar, the contagion spread across the region, sending currencies other than the nonconvertible yuan plunging.
Investors outside of China who had promised to back the project suddenly couldn’t or wouldn’t come up with the funds. Pan turned to local investors to save Soho New Town, and the development sold out even before completion in 2001. Rather than trying to sell or lease entire buildings, Zhang and Pan peddled units to individual purchasers, a practice they still use today to reduce the risk of whole buildings sitting vacant.
Management Disputes
As China’s global aspirations grew, so did Zhang’s. By the early 2000s, China’s economy was rapidly overtaking those of the U.K. and Germany. Beijing had been chosen to host the 2008 Olympics, accelerating the government’s plans to develop the equivalent of three Manhattans in the central business district.
On the site of an old machine-tool factory, Zhang and Pan began in 2002 to put up Jianwai Soho, a 683,000-square-meter complex of 24 white, cubic buildings of varying heights designed by a Japanese architect, Riken Yamamoto. The project was so large that it took five years to complete and exposed a weakness in Soho China’s business model, says Jack Rodman, president of Shanghai-based Global Distressed Solutions LLC.
After selling the apartments, offices and shops in their developments, Pan and Zhang turned over control to independent management companies. At Jianwai Soho, disputes over management fees and quality of service broke out between owners and property managers -- tensions that continue to flare today. Some of the buildings are now in need of repair.
2007 IPO
Zhang says the management breakdowns hurt the reputation of Soho China, which is taking back control of all but one of its developments.
“Earlier, we said, ‘This is not our problem; why should we manage them?’” she says. “Then we realized they have our names on the buildings.”
Zhang in 2007 persuaded Pan to take the company public in Hong Kong and cash in. The timing of the initial public offering on October 8, 2007, was exquisite. Less than a month later, global markets began to tumble in the early days of the credit crisis. They raised $1.9 billion -- the biggest IPO by a property company in Hong Kong that year.
Soho China shares traded at HK$4.92 on Aug. 3, 40 percent below the offering price. After plummeting along with the rest of the stock markets during the financial meltdown, Soho China’s stock outperformed the Hong Kong and Asia Pacific property indexes almost twofold since it hit bottom in October 2008 through Aug. 3.
Wall Street Wolves
The IPO, which was underwritten by Goldman Sachs, HSBC Holdings Plc and UBS AG, marked a change in Zhang’s relationship with Wall Street. Only two years earlier, she had publicly lambasted investment bankers as wolves. Today, Zhang is more circumspect when asked about her Wall Street experiences.
“I had better be careful these days,” she says. “I am their client. I work with them very closely.”
Today, the Soho name appears on 14 developments in Beijing, a city of 22 million people. In August 2009, Zhang and Pan made their first move into Shanghai with their purchase from Morgan Stanley of the Exchange, a 50-story office building on Nanjing Road, Shanghai’s main shopping street.
Now called the Exchange-Soho, the development is a prime example of the real estate bubble in China, economist Xie says. Soho China paid Morgan Stanley 2.45 billion yuan for the building -- the equivalent of 34,000 yuan per square meter. In the first quarter of 2010, Zhang says, she was selling office space in the building for an average 61,500 yuan per square meter, almost doubling her money. That works out to $843 per square foot -- more than twice the $381 per square foot that HSBC made when it sold its New York headquarters on Fifth Ave. in October.
Feared a Bubble
“Chinese property prices are 100 percent higher than can be justified,” Xie says.
Zhang, who early this year feared a bubble, now says her own research reveals that the property market is regaining its sanity. She says real estate prices have been cooling since April, following the government’s lending restrictions, but aren’t headed for a collapse.
“We know from our own experience the prices are staying flat,” she says.
Stephen Roach, Asia chairman of Morgan Stanley, agrees with Zhang. China’s property bubble is confined to luxury properties, he says. Roach says the lending curbs are successfully deflating high-end speculators in the top 10 cities, which collectively account for just six percent of the total market.
“It’s a micro bubble, not a macro bubble,” he says.
Slower Growth
Roach says the drop in the high-end market will slow economic growth, which he estimates will fall to between 8 percent and 9 percent by the end of the year.
“This would be a much more sustainable growth rate for China -- especially in light of the recent uptick in inflation,” he says. Inflation reached 3.1 percent in May, the fastest growth in 19 months, before falling back to 2.9 percent in June.
To stabilize the housing market, China needs to build more affordable dwellings to be sold to the 500 million Chinese whose income has been rising for a decade, says Donald Straszheim, Los Angeles-based senior managing director and head of China research at ISI Group, a firm that advises institutional investors. He says the government should put together a long- term program to increase construction of low- and middle-income housing.
Zhang’s Forecast
“If they don’t, the massive number of people getting richer each year will continue to bid up house prices and frustrate Beijing,” Straszheim says. “When the government takes the lid off lending, house prices are going to go back up again. That’s a persistent boom-bust cycle.”
Zhang says success in real estate has come down to guessing what the government will do next. In June, she gave her prediction at a JPMorgan Chase & Co. conference attended by almost 2,000 foreign investors in Beijing.
“Everyone was so pessimistic, and I was saying that in the next six months or a year, prices will go up again,” she says. “My guess is that it is austerity now, but at some point it will become stimulus again.”
If the former sweatshop worker is right, her latest property investments will likely prosper -- as will China, perhaps sparing the global economy the threat of a double-dip recession.
William Mellor is a senior writer for Bloomberg Markets in Sydney at wmellor@bloomberg.net.
Millionaires’ Kids Hunt M&A for Standard Chartered - Joyce Koh -
Standard Chartered Plc started a trainee program for the children of private-banking clients, joining bigger rivals including Citigroup Inc. and UBS AG in reaching out to Asia’s next generation of millionaires.
Eighteen people aged 18 to 26 enrolled in the six-week program in Singapore, which ended Aug. 13. They were assigned to projects ranging from identifying potential acquisition targets for London-based Standard Chartered to developing ideas for branch design, said Jungkiu Choi, the executive responsible for the course.
UBS and Citigroup, the biggest managers of money for the rich in the Asia-Pacific region, also run programs for children of their private-banking clients as banks target the scions of millionaires. Asia’s wealth may grow at double the global pace over the next four years, according to a Boston Consulting Group report published in June.
For “rich people, the next generation is their number one concern,” Choi said in an Aug. 23 interview in Singapore. “Transferring knowledge, discipline, business acumen, capability -- that’s more important to them than transferring their wealth.”
Private banks ignore the offspring of rich clients at their peril, said Justin Ong, PricewaterhouseCoopers LLP’s private banking leader for Asia-Pacific. A survey by PwC last year showed almost 40 percent of private banks in Asia don’t know how much money they’ll keep when a clients’ wealth gets transferred, he said.
Loss of Customers
“This is really a time of investment by the banks to develop relationships with the next generation of high net worth,” Singapore-based Ong said. “They have only just come to realize the deepening issue around potential customer loss if they don’t react to this and start building relationships now.”
Standard Chartered, the U.K. lender that gets more than three-quarters of its profit from Asia, restarted wealth management operations in 2006 after a decade-long hiatus. It caters to people with more than $1 million of assets. Half of the interns’ families have at least $10 million managed by the bank, said spokeswoman Ally Lim.
Standard Chartered’s private bank increased assets under management by 27 percent in Asia in the first half, more than twice the global pace.
The bank has no plans to extend the program to other parts of Asia, since most senior executives are based in Singapore, said Choi. This year’s participants came from Singapore, China, Dubai, South Korea, India, Indonesia and Malaysia and paid for transport and accommodation themselves.
UBS, Citigroup Courses
In Asia, Zurich-based UBS runs a two-week course once a year in Singapore and Hong Kong on topics including wealth management, leadership and personal development. Citigroup’s program, which alternates between the two cities, ran for five days this year and covered financial planning, investing and “soft skills” such as public speaking, said Aamir Rahim, the New York-based bank’s Asia-Pacific chief executive officer of wealth management.
Both banks said their courses had record numbers of participants in Asia this year. Credit Suisse Group AG this year started its first Chinese-language course for young investors in Taiwan.
“Our programs for the next generation of ultra-high net worth clients are designed to provide practical advice on how to manage the wealth they will eventually acquire,” said Daniel Harel, UBS’s head of private banking in South Asia for clients with at least 50 million Swiss francs ($48 million) of assets.
M&A Shortlist
Standard Chartered’s program is the only one in Asia that takes place in a real-life business setting, Choi said. At the end of the six-week course, participants can opt for a one-week class in financial planning, he said. They get paid an intern stipend of S$1,300 ($957) a month for their work at the bank.
“I tell them: ‘You are Spiderman. You have a special power and a special responsibility, but you need to learn how to deliver pizza first’,” said Choi.
One thing the trainees may deliver for Standard Chartered is an acquisition. As part of their on-the-job training, they were asked to help identify potential takeover targets for one of the bank’s units. The participants whittled down the list of candidates to less than 10 from “a few hundred,” and Standard Chartered may start talks with those companies, Choi said.
He declined to identify the potential targets.
--Editors: Philip Lagerkranser, Lars Klemming
Eighteen people aged 18 to 26 enrolled in the six-week program in Singapore, which ended Aug. 13. They were assigned to projects ranging from identifying potential acquisition targets for London-based Standard Chartered to developing ideas for branch design, said Jungkiu Choi, the executive responsible for the course.
UBS and Citigroup, the biggest managers of money for the rich in the Asia-Pacific region, also run programs for children of their private-banking clients as banks target the scions of millionaires. Asia’s wealth may grow at double the global pace over the next four years, according to a Boston Consulting Group report published in June.
For “rich people, the next generation is their number one concern,” Choi said in an Aug. 23 interview in Singapore. “Transferring knowledge, discipline, business acumen, capability -- that’s more important to them than transferring their wealth.”
Private banks ignore the offspring of rich clients at their peril, said Justin Ong, PricewaterhouseCoopers LLP’s private banking leader for Asia-Pacific. A survey by PwC last year showed almost 40 percent of private banks in Asia don’t know how much money they’ll keep when a clients’ wealth gets transferred, he said.
Loss of Customers
“This is really a time of investment by the banks to develop relationships with the next generation of high net worth,” Singapore-based Ong said. “They have only just come to realize the deepening issue around potential customer loss if they don’t react to this and start building relationships now.”
Standard Chartered, the U.K. lender that gets more than three-quarters of its profit from Asia, restarted wealth management operations in 2006 after a decade-long hiatus. It caters to people with more than $1 million of assets. Half of the interns’ families have at least $10 million managed by the bank, said spokeswoman Ally Lim.
Standard Chartered’s private bank increased assets under management by 27 percent in Asia in the first half, more than twice the global pace.
The bank has no plans to extend the program to other parts of Asia, since most senior executives are based in Singapore, said Choi. This year’s participants came from Singapore, China, Dubai, South Korea, India, Indonesia and Malaysia and paid for transport and accommodation themselves.
UBS, Citigroup Courses
In Asia, Zurich-based UBS runs a two-week course once a year in Singapore and Hong Kong on topics including wealth management, leadership and personal development. Citigroup’s program, which alternates between the two cities, ran for five days this year and covered financial planning, investing and “soft skills” such as public speaking, said Aamir Rahim, the New York-based bank’s Asia-Pacific chief executive officer of wealth management.
Both banks said their courses had record numbers of participants in Asia this year. Credit Suisse Group AG this year started its first Chinese-language course for young investors in Taiwan.
“Our programs for the next generation of ultra-high net worth clients are designed to provide practical advice on how to manage the wealth they will eventually acquire,” said Daniel Harel, UBS’s head of private banking in South Asia for clients with at least 50 million Swiss francs ($48 million) of assets.
M&A Shortlist
Standard Chartered’s program is the only one in Asia that takes place in a real-life business setting, Choi said. At the end of the six-week course, participants can opt for a one-week class in financial planning, he said. They get paid an intern stipend of S$1,300 ($957) a month for their work at the bank.
“I tell them: ‘You are Spiderman. You have a special power and a special responsibility, but you need to learn how to deliver pizza first’,” said Choi.
One thing the trainees may deliver for Standard Chartered is an acquisition. As part of their on-the-job training, they were asked to help identify potential takeover targets for one of the bank’s units. The participants whittled down the list of candidates to less than 10 from “a few hundred,” and Standard Chartered may start talks with those companies, Choi said.
He declined to identify the potential targets.
--Editors: Philip Lagerkranser, Lars Klemming
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