Zhou Xiaobu runs from one end of a table to another, grasping a piece of a puzzle she and her team are assembling as part of a leadership training exercise for McDonald’s Corp. managers.
“Go, go, go,” yells their Taiwanese teacher, exhorting them to work for the prize, a box of Danish butter cookies, for being the first to build the company’s trademark Golden Arches. Above their heads is a sign that reads: “Learning today, leading tomorrow.” The thick green binders stuffed with paperwork on each of the 31 students’ desks indicate the next activity may not be as rousing.
This is McDonald’s Hamburger University in China, and it can be harder to get into than Harvard.
Zhou’s classroom, with its gray walls and carpet, is one of seven in the management training center occupying the 20th floor of the 28-story building on the outskirts of Shanghai that houses McDonald’s China headquarters. The art consists of pictures of McDonald’s products and equipment, such as a milk- shake maker from the 1950s.
The 1,565 square meter (16,846 square foot) facility doesn’t have a pool or a gym and its one-room library holds books with titles such as “Just Listen,” “Personal Accountability” and “None Of Us Is As Good As All Of Us: How McDonald’s Prospers By Embracing Inclusion and Diversity.”
Selection Rate
There’s a coffee machine in the corridor. There’s no cafeteria, although students and staff can order food delivered to the office pantry one floor down.
“I’m thrilled and proud to attend Hamburger University,” said Zhou, who in 2007 started as a management trainee in the central Chinese city of Changsha, a job for which she and seven others were among 1,000 applicants. That’s a selection rate of less than 1 percent, lower than Harvard University’s record low acceptance rate last year of about 7 percent, according to the school’s official newspaper.
To get to the training center, Zhou competed with 43 other workers at her store to be made first assistant manager. She didn’t pay any tuition; it cost McDonald’s about 10,000 yuan ($1,518) to put her through the five-day course.
The world’s biggest restaurant operator moved the training center from Hong Kong last year as it expands in mainland China, where its market share is less than half of KFC owner Yum! Brands Inc. McDonald’s opened a record 165 restaurants in 2010 and will accelerate that growth this year to meet its goal of 1,000 new outlets in the four years through 2013.
Expansion May Accelerate
“They are preparing a base that will allow them to accelerate that rate of expansion,” said Peter Jankovskis, co- chief investment officer of Oakbrook Investments LLC, which holds about 300,000 McDonald’s shares. “They may well have announced a conservative store opening target and their true plan is much greater.”
The school last year trained 1,000 of the almost 70,000 employees McDonald’s has in mainland China, a region that doesn’t include Hong Kong, Macau or Taiwan.
Another 4,000 people will attend classes at the training center through 2014, said Susanna Li, the head of the training center. The classrooms are equipped for simultaneous translation into English, Mandarin and Cantonese to accommodate students from Hong Kong and teachers from overseas.
“We’ll make sure the people pipeline is ready,” Li said. “Having the school here in China helps us provide training faster than sending students to Hong Kong.”
Trailing Yum
Total sales for fast-food chains in China rose 12 percent last year to 60 billion yuan, according to London-based researcher Euromonitor International. Yum’s restaurants, which include Pizza Huts as well as KFCs serving fried chicken alongside Chinese dishes, accounted for 40 percent while McDonald’s had 16 percent, the researcher said.
Oak Brook, Illinois-based McDonald’s has 1,300 stores in China and aims to have 2,000 by 2013. Yum has 3,700 restaurants in China, where it earned 44 percent of its $1.33 billion operating income in the first three quarters of last year.
Yum’s market value surged 40 percent last year, compared with McDonald’s 23 percent gain.
McDonald’s plans to increase its investment in China by 40 percent this year after boosting spending in the world’s most- populous nation by 25 percent in 2010, it said last month, without providing dollar figures. Sales at McDonald’s stores in China open more than a year grew 12.7 percent in the three months ended September, more than double the global average. In the quarter ended December, sales growth was 5.2 percent compared with a global average of 5 percent.
Nurturing Talent
The training center in Shanghai differs from those in six other locations around the world in that it also offers senior management courses, Li said. Running the school, which has seven teachers, will cost McDonald’s 150 million yuan in the five years through 2014, she said.
McDonald’s set up its first Hamburger University in Elk Grove Village, Illinois, in 1961 to train managers as well as franchise owners.
“It’s certainly possible to move up through the hierarchy,” said Jankovskis of Lisle, Illinois-based Oakbrook, which manages more than $2.6 billion. “Many people do consider fast food in general is kind of a dead end, but in the case of McDonald’s, they have a very strong professional organization.”
McDonald’s Chief Executive Officer Jim Skinner, who was paid $17.6 million in 2009, started as a management trainee in 1971 after serving in the Navy, according to the company’s website.
Unemployed Graduates
Getting into the school is competitive because more than 26 percent of China’s 6.3 million college graduates were unemployed as of July 1, according to the Ministry of Education. That compares with a 4.2 percent unemployment rate for China’s urban workforce, according to data compiled by Bloomberg.
Companies face rising labor costs in China, where annual economic growth has averaged 10 percent over the past three decades. Urban Chinese average yearly wages surged to 32,244 yuan in 2009 from 8,319 yuan in 1999.
Sun Ying, 25, started working part-time for McDonald’s in 2005 during her freshman year as a tourism management major at East China Normal University. When she graduated in 2008, she opted to work full-time for the hamburger chain instead of applying for a job at a bank as her father advised.
The restaurant chain “offers many career opportunities,” said Sun, who in April was made store manager at McDonald’s Xinhualian store in Shanghai’s central Huaihai Road. “I’m even happier to continue to grow with my team,” said Sun, who’s seen the number of people she supervises grow to 55 from 45 since her promotion.
Not Banking
McDonald’s Hamburger University in Shanghai and its training programs are meant to address its “No. 1 challenge,” which is to recruit and retain skilled workers, said Joel Silverstein, president of Hong Kong-based restaurant consultants East West Hospitality Group Ltd.
“It’s getting harder and harder to hire employees in the food-service business,” he said. “The main reason that McDonald’s put up the Hamburger University is to professionalize the sector, making it easier to recruit better people.”
Sun, the store manager in Shanghai, said she’s due for more training next month: a one-week course on “business leadership practices.” Her next goal is to be made operations consultant, which involves supervising a group of stores.
“Now my father has stopped trying to persuade me to work in banking,” she said.
- Michael Wei and Margaret Conley in Shanghai. Editors: Frank Longid, Bret Okeson
Sunday, February 6, 2011
Saturday, February 5, 2011
While the Rich Splurge, the Rest Hold Back - Shobhana Chandra and Anthony Feld
Wealthy shoppers are bolstering the recovery—and masking the reluctance of many less affluent Americans to join in. Sales are up at Tiffany (TIF) and Coach (COH), thanks to demand for $6,000 diamond pendants and $1,200 leather handbags as a stock market surge pads the wallets of the rich.
At the other end of the economic spectrum, Wal-Mart Stores (WMT), the world's largest discount retailer, reports that many of its customers are still living paycheck to paycheck as they await an improvement in job prospects. That means they stick with the essentials. "Financial uncertainty still weighs heavily on everyday Americans," said Mike Duke, the Bentonville (Ark.) company's chief executive officer, in a Nov. 16 conference call with investors.
Those ordinary Americans who have jobs worry about holding onto them, and they expect few if any increases in pay as the recovery inches forward. For upper-income households, it's a different story, says Michael Feroli, a former Federal Reserve economist who is now chief U.S. economist at JPMorgan Chase (JPM) in New York: "They're the ones benefiting the most from the stock market rally, and they're spending."
Consumer spending accounts for about 70 percent of the economy, and the uneven pattern in household expenditures helps explain why Fed policymakers will likely keep interest rates near zero while carrying on with a second round of Treasury purchases aimed at getting credit flowing again. Unemployment averaged 9.6 percent last year, the highest rate since 1983, even as the expansion gathered speed. Feroli estimates the top 20 percent of income earners account for about 40 percent of spending. Dean Maki, chief U.S. economist at Barclays Capital (BCS) in New York, puts the figure at closer to 50 percent.
High-end retailers led the increase in December sales at stores open at least a year, company data showed on Jan. 6. The Bloomberg Retail Sales Luxury Index of U.S. sales revenue jumped 8.1 percent from the same month a year earlier, while the Bloomberg Retail Sales Discount Index eked out a 0.9 percent rise. Purchases made in the third quarter with American Express (AXP) credit cards, carried by relatively wealthy and corporate customers, were back to the most recent peak for a third quarter, which was reached in 2008.The combined total for Visa (V) and MasterCard (MA) didn't experience a similar rebound, according to company data.
The U.S. lost about 8 million jobs during the recession, and Fed Chairman Ben Bernanke said in Senate testimony on Jan. 7 that employers remain reluctant to hire. Payrolls expanded by 103,000 workers in December, less than the median forecast of economists surveyed by Bloomberg News. A healthier labor market would put more money in the hands of shoppers across the board, further lifting consumption. In the meantime, rising stock prices signal that rich shoppers will retain an edge in driving spending. The top 20 percent of income earners account for about 80 percent of equity wealth and half of housing wealth, Maki estimates.
The Standard & Poor's 500-stock index has almost doubled from its March 2009 low. On top of that, President Barack Obama on Dec. 17 signed into law a bill extending Bush-era tax cuts for all income groups, instead of letting them expire for families earnings more $250,000 a year, the cutoff the Administration uses for the middle class. "It's striking," says Dean Baker, co-director of the Washington-based Center for Economic and Policy Research. "Most of the rest of the country is still suffering while the wealthy seem to be largely insulated. You would think they wouldn't have all that much to complain about. Instead, they've had unending criticism for the Obama Administration."
Sentiment data reflect the stock market gains. The Conference Board's Consumer Confidence Index for households making more than $50,000 a year hit a 33-month high in January, while the gauges for households earning under $50,000 a year are still below their levels of last May. Rising foreclosures and declining real estate values indicate middle- and lower-income households will remain cash-strapped. The asset value of property held by Americans fell by $649 billion in the third quarter, to $16.6 trillion, the Fed said on Dec. 9. Home prices may drop as much as 11 percent through the first quarter of 2012, which would leave them 36 percent below their 2006 peak, according to a Dec. 8 Morgan Stanley (MS) report.
For companies that cater both to the well-off and those of modest means, the divergence is striking. There's been "a greater bounceback in the more affluent customer," says Clarence Otis, chief executive officer of Darden Restaurants (DRI). The Orlando company owns casual-dining chains such as Red Lobster and Olive Garden as well as the upscale Capital Grille steakhouses. On a Dec. 21 conference call with investors, Darden's chief operating officer, Andrew Madsen, noted that "less affluent guests who tend to have a lower check are reducing their restaurant visits."
Maki, for one, expects consumption patterns to normalize as the year moves forward. "The labor market recovery will become more widespread as we go through 2011, which should take away some of the imbalance" in purchases, says the economist, who specialized in researching household finances at the Fed from 1995 to 2000. "We definitely expect to see some catch-up in spending by middle- and lower-income households. It's one of the ways the recovery will become more entrenched."
The bottom line: Strong Christmas sales numbers obscure the discrepancy between increased shopping by the affluent and cautious spending by the rest.
At the other end of the economic spectrum, Wal-Mart Stores (WMT), the world's largest discount retailer, reports that many of its customers are still living paycheck to paycheck as they await an improvement in job prospects. That means they stick with the essentials. "Financial uncertainty still weighs heavily on everyday Americans," said Mike Duke, the Bentonville (Ark.) company's chief executive officer, in a Nov. 16 conference call with investors.
Those ordinary Americans who have jobs worry about holding onto them, and they expect few if any increases in pay as the recovery inches forward. For upper-income households, it's a different story, says Michael Feroli, a former Federal Reserve economist who is now chief U.S. economist at JPMorgan Chase (JPM) in New York: "They're the ones benefiting the most from the stock market rally, and they're spending."
Consumer spending accounts for about 70 percent of the economy, and the uneven pattern in household expenditures helps explain why Fed policymakers will likely keep interest rates near zero while carrying on with a second round of Treasury purchases aimed at getting credit flowing again. Unemployment averaged 9.6 percent last year, the highest rate since 1983, even as the expansion gathered speed. Feroli estimates the top 20 percent of income earners account for about 40 percent of spending. Dean Maki, chief U.S. economist at Barclays Capital (BCS) in New York, puts the figure at closer to 50 percent.
High-end retailers led the increase in December sales at stores open at least a year, company data showed on Jan. 6. The Bloomberg Retail Sales Luxury Index of U.S. sales revenue jumped 8.1 percent from the same month a year earlier, while the Bloomberg Retail Sales Discount Index eked out a 0.9 percent rise. Purchases made in the third quarter with American Express (AXP) credit cards, carried by relatively wealthy and corporate customers, were back to the most recent peak for a third quarter, which was reached in 2008.The combined total for Visa (V) and MasterCard (MA) didn't experience a similar rebound, according to company data.
The U.S. lost about 8 million jobs during the recession, and Fed Chairman Ben Bernanke said in Senate testimony on Jan. 7 that employers remain reluctant to hire. Payrolls expanded by 103,000 workers in December, less than the median forecast of economists surveyed by Bloomberg News. A healthier labor market would put more money in the hands of shoppers across the board, further lifting consumption. In the meantime, rising stock prices signal that rich shoppers will retain an edge in driving spending. The top 20 percent of income earners account for about 80 percent of equity wealth and half of housing wealth, Maki estimates.
The Standard & Poor's 500-stock index has almost doubled from its March 2009 low. On top of that, President Barack Obama on Dec. 17 signed into law a bill extending Bush-era tax cuts for all income groups, instead of letting them expire for families earnings more $250,000 a year, the cutoff the Administration uses for the middle class. "It's striking," says Dean Baker, co-director of the Washington-based Center for Economic and Policy Research. "Most of the rest of the country is still suffering while the wealthy seem to be largely insulated. You would think they wouldn't have all that much to complain about. Instead, they've had unending criticism for the Obama Administration."
Sentiment data reflect the stock market gains. The Conference Board's Consumer Confidence Index for households making more than $50,000 a year hit a 33-month high in January, while the gauges for households earning under $50,000 a year are still below their levels of last May. Rising foreclosures and declining real estate values indicate middle- and lower-income households will remain cash-strapped. The asset value of property held by Americans fell by $649 billion in the third quarter, to $16.6 trillion, the Fed said on Dec. 9. Home prices may drop as much as 11 percent through the first quarter of 2012, which would leave them 36 percent below their 2006 peak, according to a Dec. 8 Morgan Stanley (MS) report.
For companies that cater both to the well-off and those of modest means, the divergence is striking. There's been "a greater bounceback in the more affluent customer," says Clarence Otis, chief executive officer of Darden Restaurants (DRI). The Orlando company owns casual-dining chains such as Red Lobster and Olive Garden as well as the upscale Capital Grille steakhouses. On a Dec. 21 conference call with investors, Darden's chief operating officer, Andrew Madsen, noted that "less affluent guests who tend to have a lower check are reducing their restaurant visits."
Maki, for one, expects consumption patterns to normalize as the year moves forward. "The labor market recovery will become more widespread as we go through 2011, which should take away some of the imbalance" in purchases, says the economist, who specialized in researching household finances at the Fed from 1995 to 2000. "We definitely expect to see some catch-up in spending by middle- and lower-income households. It's one of the ways the recovery will become more entrenched."
The bottom line: Strong Christmas sales numbers obscure the discrepancy between increased shopping by the affluent and cautious spending by the rest.
Charlie Rose Talks to John Mack
Were U.S. business leaders satisfied with their conversation with Hu and the U.S.-China summit? Do they see change coming?
Anytime there can be a direct dialogue, CEOs find that helpful. What the Chinese want, I think, is a better understanding, having the U.S. really understand what they're trying to do. I was there in December, and I had a discussion with one of the vice-premiers. He talked about our congressmen, our senators, coming to visit him and saying, You should be doing this, you should be doing that. … He said: "I've read over 100 books about your country. I know something about your culture, but I'm not an expert. To come and preach to me what our country should do when you really don't have an understanding, I find very resentful."
One of the things I've found as a businessperson: Our elected politicians don't travel enough. To understand the Chinese and to get along … we need more meetings like what took place with the CEOs and Hu Jintao. And then kind of cajole and push and say why certain things should work and certain things wouldn't work. That's the dialogue I think they're looking for. They really want to work together, and work with us.
What's the goal of this dialogue?
To build relationships. The Chinese … want to trust the people they're doing business with. You can't just fly in and fly out. The first—I'm going to guess—25 times I went to China, I didn't do any business. The first piece of business that we got was a power project. We raised debt money. I finally said to the minister, "Why did you give me this business?" And I laughed at his answer. He said: "You're the only bank that has come without a lawyer. You trust us."
Do they recognize that there's a belief among some businesspeople that they want to learn what you can teach them and then say goodbye?
We can't forget, this is still an emerging market. Really, it wasn't until the late '80s, early '90s, that they started making this huge change in their economy. So you can understand why they don't want to see outside companies come in and take control of their major businesses. They have to be cautious. But at the same time, I think if you build the sense of trust and communications over time, some of the complaints that we have will go away. Look at General Motors (GM). General Motors sells a lot of cars [there].
The Chinese like their Buicks, right?
It's been one of their best businesses. Do they own 100 percent of it? No. But I would argue, in China you want to have a local partner, and you want to make sure it's fair. It takes time, and I think our time frame is very short. Their time frame is very long, and they have issues they have to address. One of the big ones is unemployment. I think they have to create over 25 million jobs a year. You have this whole movement from the agricultural sector into these urban centers, and you need to create jobs to do that. So you could understand why they have to be somewhat cautious. But at the same time, I've never dealt with any group around the world who are [more] open to ideas … and who make sure that you get the right return on your investment. Are there places where someone has copied things? The answer is yes, but that's not just in China. Do they do some things that upset people? Absolutely, they do.
There are a lot more Chinese students studying in the U.S. than Americans studying in China.
That's right. And I think that's changing. But these students are going to go back to China. They're going to have a different view of things. I think things will change in China.
One of the questions that keeps coming up—in the U.S. and everywhere else—concerns whether America is in decline.
Well, one thing that you have to change—we owe so much money. We have such a large deficit. Clearly, that, I think, saps a lot of our power to be as creative as we should be. But I do not hold the view that America is in decline. I believe we have, you know, ups and downs.
Are the Chinese worried that their economy is expanding too fast, that inflation will get out of control?
They're very concerned about inflation and what it could do to their economy. But again, after having said that, I think they're very focused on it. Their central bank is very focused on it. And they get a lot of advice from people from the outside.
You urge people to go to China. And then you ask them how many books they've read.
I don't ask them about the books. I just want them to go.
Anytime there can be a direct dialogue, CEOs find that helpful. What the Chinese want, I think, is a better understanding, having the U.S. really understand what they're trying to do. I was there in December, and I had a discussion with one of the vice-premiers. He talked about our congressmen, our senators, coming to visit him and saying, You should be doing this, you should be doing that. … He said: "I've read over 100 books about your country. I know something about your culture, but I'm not an expert. To come and preach to me what our country should do when you really don't have an understanding, I find very resentful."
One of the things I've found as a businessperson: Our elected politicians don't travel enough. To understand the Chinese and to get along … we need more meetings like what took place with the CEOs and Hu Jintao. And then kind of cajole and push and say why certain things should work and certain things wouldn't work. That's the dialogue I think they're looking for. They really want to work together, and work with us.
What's the goal of this dialogue?
To build relationships. The Chinese … want to trust the people they're doing business with. You can't just fly in and fly out. The first—I'm going to guess—25 times I went to China, I didn't do any business. The first piece of business that we got was a power project. We raised debt money. I finally said to the minister, "Why did you give me this business?" And I laughed at his answer. He said: "You're the only bank that has come without a lawyer. You trust us."
Do they recognize that there's a belief among some businesspeople that they want to learn what you can teach them and then say goodbye?
We can't forget, this is still an emerging market. Really, it wasn't until the late '80s, early '90s, that they started making this huge change in their economy. So you can understand why they don't want to see outside companies come in and take control of their major businesses. They have to be cautious. But at the same time, I think if you build the sense of trust and communications over time, some of the complaints that we have will go away. Look at General Motors (GM). General Motors sells a lot of cars [there].
The Chinese like their Buicks, right?
It's been one of their best businesses. Do they own 100 percent of it? No. But I would argue, in China you want to have a local partner, and you want to make sure it's fair. It takes time, and I think our time frame is very short. Their time frame is very long, and they have issues they have to address. One of the big ones is unemployment. I think they have to create over 25 million jobs a year. You have this whole movement from the agricultural sector into these urban centers, and you need to create jobs to do that. So you could understand why they have to be somewhat cautious. But at the same time, I've never dealt with any group around the world who are [more] open to ideas … and who make sure that you get the right return on your investment. Are there places where someone has copied things? The answer is yes, but that's not just in China. Do they do some things that upset people? Absolutely, they do.
There are a lot more Chinese students studying in the U.S. than Americans studying in China.
That's right. And I think that's changing. But these students are going to go back to China. They're going to have a different view of things. I think things will change in China.
One of the questions that keeps coming up—in the U.S. and everywhere else—concerns whether America is in decline.
Well, one thing that you have to change—we owe so much money. We have such a large deficit. Clearly, that, I think, saps a lot of our power to be as creative as we should be. But I do not hold the view that America is in decline. I believe we have, you know, ups and downs.
Are the Chinese worried that their economy is expanding too fast, that inflation will get out of control?
They're very concerned about inflation and what it could do to their economy. But again, after having said that, I think they're very focused on it. Their central bank is very focused on it. And they get a lot of advice from people from the outside.
You urge people to go to China. And then you ask them how many books they've read.
I don't ask them about the books. I just want them to go.
An Iron Ore Rush Above the Arctic Circle - Natalie Doss
Baffin Island in Canada's frigid Nunavut territory is about as far off the grid as most people can imagine. Subzero temperatures, ice-blocked sea lanes, and a lack of conventional infrastructure make this spot more than 300 miles above the Arctic Circle among the planet's most inhospitable places to do business. That hasn't stopped international mining companies from fighting over the remote turf. The attraction: huge iron ore deposits underneath a barren landscape—a reminder of just how far global mining companies will go to secure new reserves.
After oil, almost nothing is as central to the operation of a modern economy as steel. Everything from appliances to automobiles to skyscrapers depend on the stuff. That has made iron ore, steel's main component, a hot commodity amid the current global resources boom, especially for fast-growing emerging economies.
The price of iron ore has more than doubled in the past two years amid surging Chinese steel production. Most ore exports come from Brazil and Australia, where the world's three biggest mining companies, Brazil's Vale (VALE) and Australia's Rio Tinto Group (RTP) and BHP Billiton (BHP), dominate. That's left other mining companies, steel producers, and big users such as China to fight over the few remaining big iron fields, including desolate Baffin Island.
Luxembourg-based ArcelorMittal (MT), the world's largest steelmaker, and Nunavut Iron Ore Acquisition, a company backed by Houston-based private equity firm Energy & Minerals Group, on Jan. 14 struck a C$590 million ($593 million) deal to jointly acquire Baffinland Iron Mines, whose Mary River project on the island may become the first iron-ore mine inside the Arctic Circle. The estimated cost of building the project, including an 87-mile railroad and a port that can be reached only by custom-built cargo ships able to navigate frozen seas, is more than $4 billion.
Other companies don't want to be left behind. Cleveland-based Cliffs Natural Resources (CLF) in mid-January agreed to pay C$4.9 billion, including net debt, for Montreal-based Consolidated Thompson Iron Mines to lock up iron ore assets in northern Quebec. And Liu Yikang, chief of the Expert Group for Overseas Resources Projects at China's Ministry of Land and Resources told Bloomberg News in mid-January that a Chinese company was involved in the bidding for Baffinland, though he declined to name it.
"There's nowhere else to go," explains Benjamin J. Cox, the founder of Portland (Ore.)-based research company Oren and chief executive officer of Canadian iron-ore mine developer Roche Bay. "There's no rock left unturned in Australia, and anything that's nice in Africa already is controlled."
Baffinland has so far spent almost $500 million evaluating Mary River. To get ore to the coast, Baffinland CEO Richard D. McCloskey says four rivers must be crossed. The company has resorted to using temporary bridges made from shipping containers welded together so rock samples can be moved by truck. Workers also must contend with temperatures that sometimes dip below -50C (-58F). At such temperatures, "steel starts breaking, fuel starts freezing," McCloskey says.
To guarantee deliveries, Mary River will need ice-breaking, bulk-commodity-carrying ships with three times the normal engine power, says Tim Keane, Arctic operations manager for Montreal-based shipper Fednav. Such vessels have never been built and, according to Keane, may cost up to twice the price of conventional vessels. "Ordinary ships don't have the horsepower required to muscle their way through those conditions," he explains.
Mary River has an estimated 365 million tons of reserves in its first deposit (eight others have been discovered so far), based on ore being transported by rail. Production could surpass 18 million tons a year on that basis. That would cause Canadian ore output, which the U.S. Geological Survey pegged at 27 million tons in 2009, to soar. Even so, it would be dwarfed by Brazil's 380 million tons and Australia's 370 million tons of annual production.
Asian steelmakers are already involved in Canadian iron ore. Tata Steel, India's biggest producer, has a joint venture with Canada's New Millennium Capital to mine in the provinces of Quebec, Newfoundland, and Labrador. China's Wuhan Iron and Steel, the world's fifth-biggest steelmaker, owns 19 percent of Consolidated Thompson and has agreed with Adriana Resources of Vancouver to develop the Lac Otelnuk iron-ore project in Quebec.
"There's a feeling in China that the Big Three have taken advantage of China in the past and that's something they want to avoid in the future," says Adriana CEO Allen J. Palmiere, referring to the dominance of Vale, Rio, and BHP.
ArcelorMittal, meanwhile, is reducing its reliance on third-party suppliers by raising its mining capacity. The company said in September it planned to spend $4 billion to increase output to 100 million tons by 2015.
Even before ArcelorMittal's initial bid in November, Baffinland had already attracted other steelmakers' attention. Germany's ThyssenKrupp and Voestalpine reached accords to buy some future output from the Baffin Island field, and Mitsubishi agreed to buy up to 1 million tons a year to sell in Japan and Taiwan. Notes Gordon A. McCreary, chairman of Toronto-based explorer Asia Now Resources and a former CEO of Baffinland: "Huge things are going on in the North."
The bottom line: The world's appetite for iron ore, used in steelmaking, has sparked interest in mining reserves in Canada's desolate Arctic Circle region.
After oil, almost nothing is as central to the operation of a modern economy as steel. Everything from appliances to automobiles to skyscrapers depend on the stuff. That has made iron ore, steel's main component, a hot commodity amid the current global resources boom, especially for fast-growing emerging economies.
The price of iron ore has more than doubled in the past two years amid surging Chinese steel production. Most ore exports come from Brazil and Australia, where the world's three biggest mining companies, Brazil's Vale (VALE) and Australia's Rio Tinto Group (RTP) and BHP Billiton (BHP), dominate. That's left other mining companies, steel producers, and big users such as China to fight over the few remaining big iron fields, including desolate Baffin Island.
Luxembourg-based ArcelorMittal (MT), the world's largest steelmaker, and Nunavut Iron Ore Acquisition, a company backed by Houston-based private equity firm Energy & Minerals Group, on Jan. 14 struck a C$590 million ($593 million) deal to jointly acquire Baffinland Iron Mines, whose Mary River project on the island may become the first iron-ore mine inside the Arctic Circle. The estimated cost of building the project, including an 87-mile railroad and a port that can be reached only by custom-built cargo ships able to navigate frozen seas, is more than $4 billion.
Other companies don't want to be left behind. Cleveland-based Cliffs Natural Resources (CLF) in mid-January agreed to pay C$4.9 billion, including net debt, for Montreal-based Consolidated Thompson Iron Mines to lock up iron ore assets in northern Quebec. And Liu Yikang, chief of the Expert Group for Overseas Resources Projects at China's Ministry of Land and Resources told Bloomberg News in mid-January that a Chinese company was involved in the bidding for Baffinland, though he declined to name it.
"There's nowhere else to go," explains Benjamin J. Cox, the founder of Portland (Ore.)-based research company Oren and chief executive officer of Canadian iron-ore mine developer Roche Bay. "There's no rock left unturned in Australia, and anything that's nice in Africa already is controlled."
Baffinland has so far spent almost $500 million evaluating Mary River. To get ore to the coast, Baffinland CEO Richard D. McCloskey says four rivers must be crossed. The company has resorted to using temporary bridges made from shipping containers welded together so rock samples can be moved by truck. Workers also must contend with temperatures that sometimes dip below -50C (-58F). At such temperatures, "steel starts breaking, fuel starts freezing," McCloskey says.
To guarantee deliveries, Mary River will need ice-breaking, bulk-commodity-carrying ships with three times the normal engine power, says Tim Keane, Arctic operations manager for Montreal-based shipper Fednav. Such vessels have never been built and, according to Keane, may cost up to twice the price of conventional vessels. "Ordinary ships don't have the horsepower required to muscle their way through those conditions," he explains.
Mary River has an estimated 365 million tons of reserves in its first deposit (eight others have been discovered so far), based on ore being transported by rail. Production could surpass 18 million tons a year on that basis. That would cause Canadian ore output, which the U.S. Geological Survey pegged at 27 million tons in 2009, to soar. Even so, it would be dwarfed by Brazil's 380 million tons and Australia's 370 million tons of annual production.
Asian steelmakers are already involved in Canadian iron ore. Tata Steel, India's biggest producer, has a joint venture with Canada's New Millennium Capital to mine in the provinces of Quebec, Newfoundland, and Labrador. China's Wuhan Iron and Steel, the world's fifth-biggest steelmaker, owns 19 percent of Consolidated Thompson and has agreed with Adriana Resources of Vancouver to develop the Lac Otelnuk iron-ore project in Quebec.
"There's a feeling in China that the Big Three have taken advantage of China in the past and that's something they want to avoid in the future," says Adriana CEO Allen J. Palmiere, referring to the dominance of Vale, Rio, and BHP.
ArcelorMittal, meanwhile, is reducing its reliance on third-party suppliers by raising its mining capacity. The company said in September it planned to spend $4 billion to increase output to 100 million tons by 2015.
Even before ArcelorMittal's initial bid in November, Baffinland had already attracted other steelmakers' attention. Germany's ThyssenKrupp and Voestalpine reached accords to buy some future output from the Baffin Island field, and Mitsubishi agreed to buy up to 1 million tons a year to sell in Japan and Taiwan. Notes Gordon A. McCreary, chairman of Toronto-based explorer Asia Now Resources and a former CEO of Baffinland: "Huge things are going on in the North."
The bottom line: The world's appetite for iron ore, used in steelmaking, has sparked interest in mining reserves in Canada's desolate Arctic Circle region.
Thursday, December 23, 2010
New Business Models in Emerging Markets - by Matthew J. Eyring, Mark W. Johnson, and Hari Nair
Right now more than 20,000 multinationals are operating in emerging economies. According to the Economist, Western multinationals expect to find 70% of their future growth there—40% of it in China and India alone. But if the opportunity is huge, so are the obstacles to seizing it. On its 2010 Ease of Doing Business Index, the World Bank ranked China 89th, Brazil 129th, and India 133rd out of 183 countries. Summarizing the bank’s conclusions, the Economist wrote, “The only way that companies can prosper in these markets is to cut costs relentlessly and accept profit margins close to zero.”
Yes, the challenges are significant. But we couldn’t disagree more with that opinion. We have seen the opportunities of the future on a street corner in Bangalore, in a small city in central India, in a village in Kenya—and they don’t require companies to forgo profits. On the surface, nothing could be more prosaic: a laundry, a compact fridge, a money-transfer service. But look closely at the businesses behind these offerings and you will find the frontiers of business model innovation. These novel ventures reveal a way to help companies escape stagnant demand at home, create new and profitable revenue streams, and find competitive advantage.
That may sound overly optimistic, given the difficulty Western companies have had entering emerging markets to date. But we believe they’ve struggled not because they can’t create viable offerings but because they get their business models wrong. Many multinationals simply import their domestic models into emerging markets. They may tinker at the edges, lowering prices—perhaps by selling smaller sizes or by using lower-cost labor, materials, or other resources. Sometimes they even design and manufacture their products locally and hire local country managers. But their fundamental profit formulas and operating models remain unchanged, consigning these companies to selling largely in the highest income tiers, which in most emerging markets aren’t big enough to generate sufficient returns.
What’s often missing from even the savviest of these efforts is a systematic process for reconceiving the business model. For more than a decade, through research and our work in both mature and emerging markets, we have been developing our business model innovation and implementation process (see “Reinventing Your Business Model,” HBR December 2008, and “Beating the Odds When You Launch a New Venture,” HBR May 2010). At its most basic level, the process consists of three steps: Identify an important unmet job a target customer needs done; blueprint a model that can accomplish that job profitably for a price the customer is willing to pay; and carefully implement and evolve the model by testing essential assumptions and adjusting as you learn.
Start in the Middle
Established companies entering emerging markets should take a page from the strategy of start-ups, for which all markets are new: Instead of looking for additional outlets for existing offerings, they should identify unmet needs—“the jobs to be done” in our terminology—that can be fulfilled at a profit. Emerging markets teem with such jobs. Even the basic needs of their large populations may not yet have been met. In fact, the challenge lies less in finding jobs than in settling on the ones most appropriate for your company to tackle.
Many companies have already been lured by the promise of profits from selling low-end products and services in high volume to the very poor in emerging markets. And high-end products and services are widely available in these markets for the very few who can afford them: You can buy a Mercedes or a washing machine, or stay at a nice hotel, almost anywhere in the world. Our experience suggests a far more promising place to begin: between these two extremes, in the vast middle market. Consumers there are defined not so much by any particular income band as by a common circumstance: Their needs are being met very poorly by existing low-end solutions, because they cannot afford even the cheapest of the high-end alternatives. Companies that devise new business models and offerings to better meet those consumers’ needs affordably will discover enormous opportunities for growth.
Take, for example, the Indian consumer durables company Godrej & Boyce. Founded in 1897 to sell locks, Godrej is today a diversified manufacturer of everything from safes to hair dye to refrigerators and washing machines. In workshops we conducted with key managers in the appliances division, refrigerators emerged as a high-potential area: Because of the cost both to buy and to operate them, traditional compressor-driven refrigerators had penetrated only 18% of the market.
Yes, the challenges are significant. But we couldn’t disagree more with that opinion. We have seen the opportunities of the future on a street corner in Bangalore, in a small city in central India, in a village in Kenya—and they don’t require companies to forgo profits. On the surface, nothing could be more prosaic: a laundry, a compact fridge, a money-transfer service. But look closely at the businesses behind these offerings and you will find the frontiers of business model innovation. These novel ventures reveal a way to help companies escape stagnant demand at home, create new and profitable revenue streams, and find competitive advantage.
That may sound overly optimistic, given the difficulty Western companies have had entering emerging markets to date. But we believe they’ve struggled not because they can’t create viable offerings but because they get their business models wrong. Many multinationals simply import their domestic models into emerging markets. They may tinker at the edges, lowering prices—perhaps by selling smaller sizes or by using lower-cost labor, materials, or other resources. Sometimes they even design and manufacture their products locally and hire local country managers. But their fundamental profit formulas and operating models remain unchanged, consigning these companies to selling largely in the highest income tiers, which in most emerging markets aren’t big enough to generate sufficient returns.
What’s often missing from even the savviest of these efforts is a systematic process for reconceiving the business model. For more than a decade, through research and our work in both mature and emerging markets, we have been developing our business model innovation and implementation process (see “Reinventing Your Business Model,” HBR December 2008, and “Beating the Odds When You Launch a New Venture,” HBR May 2010). At its most basic level, the process consists of three steps: Identify an important unmet job a target customer needs done; blueprint a model that can accomplish that job profitably for a price the customer is willing to pay; and carefully implement and evolve the model by testing essential assumptions and adjusting as you learn.
Start in the Middle
Established companies entering emerging markets should take a page from the strategy of start-ups, for which all markets are new: Instead of looking for additional outlets for existing offerings, they should identify unmet needs—“the jobs to be done” in our terminology—that can be fulfilled at a profit. Emerging markets teem with such jobs. Even the basic needs of their large populations may not yet have been met. In fact, the challenge lies less in finding jobs than in settling on the ones most appropriate for your company to tackle.
Many companies have already been lured by the promise of profits from selling low-end products and services in high volume to the very poor in emerging markets. And high-end products and services are widely available in these markets for the very few who can afford them: You can buy a Mercedes or a washing machine, or stay at a nice hotel, almost anywhere in the world. Our experience suggests a far more promising place to begin: between these two extremes, in the vast middle market. Consumers there are defined not so much by any particular income band as by a common circumstance: Their needs are being met very poorly by existing low-end solutions, because they cannot afford even the cheapest of the high-end alternatives. Companies that devise new business models and offerings to better meet those consumers’ needs affordably will discover enormous opportunities for growth.
Take, for example, the Indian consumer durables company Godrej & Boyce. Founded in 1897 to sell locks, Godrej is today a diversified manufacturer of everything from safes to hair dye to refrigerators and washing machines. In workshops we conducted with key managers in the appliances division, refrigerators emerged as a high-potential area: Because of the cost both to buy and to operate them, traditional compressor-driven refrigerators had penetrated only 18% of the market.
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