M&A 2012-13 Activity Update, the Middle Market and Critical Success Factors

M&As have to some extent bounced back from the 2009 lows, however they are pretty much hovering around pre-crisis levels. Activity during the last three years seems to be quite out of sync compared to the precrisis highs or the stockmarket comeback. Then again one could argue that this is just the normal way of things and that the stockmarket hike is due to the QE or the 2006-2007 mergermania to the abundance of leverage. On the other hand M&A cycles move in 5-7 years intervals so we may just be waiting for the next big story that will spark a boom.

Global M&As reached $ 2.2 tr in 2012, barely posting any growth from 2013 with North American deals at $943bn up 5% from the year before. These figures amount to 2/3 of the 2006-7 deal value. We have to go back to 2004 to note an increase of a mere 2.3% CAGR which actually lags even GDP growth, at least when it comes to the US. There’s always talk of growth but for the time being it pretty much sounds like Beckett’s “Waiting for Godot” play: it’s unclear what the next big thing will be and when will come, let alone if it’ll come, but then again that’s always the case.

1. Global M&A 2006-2012

In the first three quarters of 2013 global M&As reached $1,607 bn according to Mergermarket; a 5.5% increase over the same period in 2012. US at roughly $535bn accounted for 40% posting a 22% increase while Europe for 30% at roughly $480bn and a meager 2.4% growth. Taking into consideration that 2012 had a quite strong M&A finish, it’ll be interesting to see how things will evolve at year end as there are fears that the US government shutdown may have cooled the market. Total global PE buyout reached $259bn in 2012 with US representing almost half of that. PE activity has grown at 25% post 2009 lows in Europe and Asia but in the US, where PEs are more prominent, growth was double that at 50%, according to Bain. In the first three quarters of 2013 PE buyout activity reached $ 194bn a 11.6% increase over 2013. For more information about recent PE activity you may refer to our post here.

The M&A increase in the US is attributed to the existence of cash, return of mega deals but also public to private deals. Bigger US deals were those of Verizon Wireless ($124bn), Heinz ($27bn) and Dell ($20bn) the latter two being PE driven. In Europe that has been going through fiscal crisis and recessionary pressures, among the most prominent deals were this for Virgin Media ($25bn).

So, where is the M&A market heading? Let’s try be a bit inquisitive in this blog by looking at the connection between GDP and stockmarket; apologies to academics and analysts who thought of this before. Looking at GDP, DJIA and M&A trends in the last 10-15 years we see that the stockmarket has overreacted to the crisis and didn’t keep pace with GDP growth, only recently catching up. So probably things are just starting to look up. Despite talk of exuberance, the average P/E ratio at the NY Stock Exchange (Dow Industrial) is 17.95 compared to 14.45 a year ago. S&P500 P/E is at 18.85 compared to 16.5 according to WSJ data. Although valuations seem quite hefty they as well depend on what point in the cycle we stand and what’s the ability to generate extra profits. Still valuations are much lower than during the crisis when average stockmarket P/Es reached three digit figures, so exuberance may still be kept in bay. On the other hand when DJIA growth patterns exceed those of GDP such as in 2001 and 2007, it doesn’t turn out that well, with the exception maybe of the post great recession era. On the other hand M&As are usually slow to follow the other two upward trend; often lagging by a couple of years.

2. US and Global M&A DJIA and GDP

Cross Border M&As: Focus on Emerging Markets

True to our focus in this blog let’s see what happened to cross-border deals especially in the transatlantic space. Cross-border M&As are almost half of global activity compared to much lower importance a decade ago, an indication of today’s interwoven globalised world. During the last years there has been some decrease, especially when it comes to outbound activity from Europe, while US interest in Asian and emerging markets remains strong. Main cross border inbound/outbound deals in the Americas last year were Grupo Modelo’s acquisition by Anheuser-Busch ($20bn) and Sprint by Japan’s Softbank ($35b). Among the more significant outbound deals were Liberty Global’s acquisition of Virgin Media ($21.8b) and Alliance Boots by Walgreens ($6.7bn). Cross-border deals are more evident in the energy sector.

In the transatlantic space activity has been pretty much subdued, staying below the precrisis highs. Total transatlantic deals amounted to $180bn in 2012 ending lower than in 2011, with an average size of around half billion US$. By comparison during 2008 transatlantic deals reached $ 270 bn (see our past blogpost about Transatlantic M&As in 2008). NorthAmerican buyers took the reigns over European, reversing an earlier trend that saw European companies being the ones most often making the leap across the Atlantic, trend especially profound in the aftermath of the latest US crisis. UK and Ireland were the most active markets for inbound activity in Europe.

Although international expansion makes sense for large companies we have argued here that it’s also the obvious move for middle market companies that can this way grow to global niche players once a product and operating model is tested in their domestic market. However the challenges are in analyzing and executing the deal and finding qualified advisers with global exposure and experience with middle market peculiarities that are able to be profitable at this level of fees and challenging global regulatory framework. The Big4 along with a handful of boutique investment banks and consultancies may be able to carry out this role, but one has to research their value proposition before committing.

Industry Sector Activity: The Return of Tangibles: TMT, Energy, Industrials

Sectors with particular M&A interest in US are TMT, Energy, Industrials and Pharmaceuticals. Industrials along with Business Services tend to have more activity due smaller deal size and higher frequency. In a change of times Financial Services have been lagging in importance, a far cry from mid 2000’s, but then again the sector has had its fair share of troubles post crisis (Source: The Future of M&As in America, Merrill Datasite and Mergermarket, 2013).

There are different drivers for transactions across industries. Low growth and interest margins as well as technology and compliance burdens drive M&As in financial services, same with insurance. Consolidation is the theme in TMT, especially when it comes to digital and mobile transition. In pharmaceuticals is about getting access to smaller companies with promising drugs. In consumers is about cash rich companies using reserves and expansion, same with energy where buyers are looking for smaller targets with resources. Industrials are looking for expansion to new markets as well as consolidation benefits. The affordable healthcare act changes the competitive landscape in the healthcare sector and is expected to increase consolidation between insurers, hospitals and independent practices (Source: NA Deal drivers 2012-13).

M&A Pricing: kept lower for now

Global multiples have decreased post crisis from the low teens to well into single digits. In 2012 the average EBITDA multiple was at 8.8X down from 9.1X in 2011. Multiples further fell in Q1 2013. US multiples were at 9.3X in 2013. Tax cuts expiring in 2012 pushed down multiples as US shareholders rushed to realize investments before capital gains rates shot up. In Europe multiples were much lower at 8.6X, down from 10X in 2011 but let’s bear in mind that Europe is going through a recessionary phase and fiscal crisis that puts pressure on earnings. Most of activity is intraEuropean continuing a long consolidation trend. Multiples in Asia fell because of economic slowdown.

3. M&A Multiples

When it comes to industry specific valuations higher prices are currently offered for energy companies. Can’t resist however to bring up here Al Gore’s reservations over these valuations arguing that they are based on reserves that will never be probably extracted. Better IRRs are offered in TMT rather than energy or industrials as well as better EBITDA. Valuations are low in financial services, less than 1.25 book value. Latin America with favorable demographics and growth prospects for many even better than those in Asia, offer good M&A prospects, hence a solid base for higher valuations. In this context Modelo brewery was bought in 2012 at a 14.1 multiple. Private equity multiples are low as IPOS are down and many exits are realized thought secondary offerings. PE financing multiples are currently at the 7-8 range with average exit multiples at 11 according to Mergermarket. Refer to our post on PE activity in 2012-13 for more info. American Appraisal expects M&A multiples to increase in 2013 as US economy will continue to fair well, Eurozone sort out its problems while Asia continue to grow (Global M&A Valuation Outlook 2013).

M&A Value Realization: Not always getting what you paid for

In order to realize value from M&As it is important to get valuation right as well as due diligence and post merger integration. We are not getting tired to remind Graham’s saying that Warren Buffet goes by: ‘Price is what you pay; Value is what you get’. Getting price and value to meet is not always easy, in fact most of times it doesn’t happen. An example of that comes from a KPMG analysis of stocks of certain companies’ engaged in M&As during 2007-2008. Average size for those deals was at $2.3b with the median at $620m. What KPMG found is that companies announcing deals in 2007 saw prices fall by 8.4% 24 months later, while those during 2008 increased by only 2.5%. As expected those targets with the highest PEs at acquisition offered the worst returns. According to KPMG deals “during exuberant 2007 may not have received the same level of due diligence as those in 2008 when it was much more difficult to complete transactions” (Source: The Common Determinants of M&A Success, KPMG 2011). This disappointing performance may well have to do to some extend, with the overall stockmarket trend. On the other hand one can’t deny the importance of getting the valuation right.

Aside from valuation, critical factors for successful M&As are carrying out an efficient due diligence that will unearth issues and proceed according to a well designed post-merger integration plan that focuses on effective communications, quickly establishing goals (usually under a 100 day timeframe), having a post acquisition plan in place, well before closing and selecting key people. That’s at least according to a survey of M&A practitioners, carried out by Deloitte and Mergermarket in 2012.

4. Critical Factors in Deals-Triplex

Middle Market: the next big thing? Not that straightforward

Although expectations about middle market activity arising from the sector’s massive size and pockets of underperformance, it hasn’t picked up the slack left by the eclipse of mega deals. The market simply seems to lack direction. Activity across segments is moving in tandem. Middle market activity in 2013 (ie deals between $500m-$2b) was at over $800 bn according to Mergermarket or around one third of total global M&A value, posting a small increase over 2011. During 2013 Q1-Q3 middle market deals in the US were valued at $400bn, down 7.7% compared to the same period in 2012. That was mainly due to decrease in Europe and US; Asia shows much more resilience in this segment. Looking at the European-US combined space in the lower middle market ($250-500m) we see that deal value is not that much different from the pre-crisis levels of $150b in 2004 and only at 2/3 of the 2006-2007 highs. What’s important at least is that middle market has recovered compared to after the crisis when it fell to almost 20% of global M&As.

5. M&A Deal Size in Europe and US Doublex

According to Citizens Bank’s 2013 Middle Market Survey, around 80% of middle market companies (defined as those with $5mn-2bn revenue) are currently open in making an acquisition with 20% actively engaged. Acquisitions in this space are of smaller size and more frequent. Buyers tend to buy smaller firms that can absorb more easily. Most of the deals are below $10m in value. Their main M&A motive is to increase revenues. Geographic expansion, adding products or putting cash to work come up frequently too.

Other reasons are buying-out underperforming customers or taking out competitors; objectives may differ in middle market compared to big business. Small firms and tech companies especially are looking at acquisitions as means to add talent and know-how while manufacturing companies as an opportunity to add distribution. Although post crisis there’s better availability of debt financing only about 20% of companies are currently looking at raising capital.
A quarter of the market is also looking at selling to upload outperforming segments, raise capital or create liquidity for their owners. As a common theme, many baby boomers will be looking at monetizing their holdings and retire in the near future.

There is a good case for M&As in this space, as it has depth and room for improvement but also some factors inhibiting it. We have covered middle market and PE activity as well as success factors on earlier posts: Private Equity 2012-13 Update and Success Factors for Value Realization, Middle market cross-border M&As set to grow, Large Private Equity Deals-that 800 pound gorilla.

Critical Success Factors in Middle Market M&As

According to Citizens’ Bank, the main concern when undertaking a middle market M&A is undetected liabilities. Information is more difficult to gather and audit in this segment. Conducting adequate due diligence, losing key employees or clients and off course valuation of the company are other frequent concerns. It seems that most of the middle market executives are aware of the process and don’t shy away from getting involved in them. Almost 70% deals are managed internally with advisors coming in for valuation or due diligence; however the devil is in the details.

6. Middle Market M&A Issues

The “detail” in this context is that traditional valuation techniques might not hold as reliability of earnings, cash flows and attainability of synergies may come into question. This is more often the case than in larger deals. Reliability of information as well as operational rigidities that limit the businesses’ scalability have a direct effect on value. Critical factors potential acquirers should consider before committing to a middle market deal, according to Deloitte, include:
• Strategic fit when it comes to products, markets and culture
• Root cause of depressed or bloated earnings
• Probability of improved financial performance
• Identification and attainability of potential synergies
(Factors for Mid-market Companies to Consider When Evaluating M&A Targets, 2012 Deloitte, Making the Deal Work, 2007 Deloitte)

Another “detail” is that traditional finance theories such as the CAPM may not completely hold in this segment. Cost and access to capital and investor profiles may differ than for large public companies (see Robert T Slee, Private Capital Markets: Valuation, Capitalization and Transfer of Private Business Interests, 2004). There are certain adjustments to be made. Market participants can go by gut feeling or rule of thumbs but often that may not suffice or hold in the eyes of auditors and regulators that come to review them. And the list of details can go on.

Even if however the buyer’s management has dealmaking experience we would argue that the challenge comes in the form of bandwidth availability. Buyers should mind to preserve the value of the business while analyzing the deal or later merging the two organizations. So it’s all about whether management can handle the workload at the same time that doesn’t take their eye from the ball ie, day-to-day operations and customer service. It’s also usually not always possible to leverage the acquired companies’ management as prior leaders may create political or loyalty conflicts that cause more harm than good, let alone not able to perform under the new playbook. Actually as discussed in previous posts, in most cases prior management is replaced.

Best practices approach calls for delegation of the M&A process to external experts or devoted teams, albeit with clear senior management endorsement and commitment. Other specific challenges with middle market M&As arise in the context of cross-border transactions. Knowledge of foreign economic circumstances, business practices, cultures, regulatory and tax regimes is not easily attainable without local expertise. In these cases it is better not to try reinvent the wheel but simply look for competent local or global advisers; problem is that there are not that many middle market advisers with true global reach.

Future Trends: Dare a comeback prediction for 2015?

M&A activity is expected to increase as the economies and stock market recover. In a survey of more than 150 investors and corporate executives performed by Mergermarket in 2013 (The Future of M&As in America, Merrill Datasite and Mergermarket, 2013). Almost 2/3 of respondents expected activity to increase, at least when it comes to the Americas. US companies turn to M&As as means for expansion (access to new markets) vertical integration and synergies. Asian Pacific economies keep on exhibiting strength and local companies see opportunity to acquire targets in US or Europe to gain access to markets and technology. It is expected, in this poll at least, that most of transaction activity will happen in the lower middle market i.e., $250-500m and below. Then again that may primarily indicate frequency and not overall value.

So where will it be the next big thing for M&As if there will be one, and when? Will it be middle market, emerging markets, technology, energy, cross-border, public to private, PE or stock-market driven? We’ll have to wait and see. It seems that after all what the market is missing is leadership, as the popular saying goes, that mainly comes from mega deals and the availability of leverage. That’s what moves the needle.

Looking at the latest two economic cycles, the fact that we’re four years in the current one, the economy keeps on growing and the stockmarket breaking highs could one bet, just even by looking at the graphs, that M&As will come back with a bang in 2014 or most probably 2015? After all, as optimism keeps settling in among at least the investment community, this is an environment that buyers will feel comfortable or even compelled to make a move or otherwise feel pressure for stock buybacks and dividend payoffs by activist investors as lately often happens.

7. M&A DJIA and GDP from 95 synthesis 1

So shall we wait for Godot for a couple more years?

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By Pete Chatziplis, CFA, ACCA, MBA. The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.

Private Equity 2012-13 Update and Success Factors for Value Realization

M&A activity has recovered since the 2009-10 lows albeit not mirrored the Stock Market rebound with the Dow hitting and surpassing all-time highs. M&As as well as PE activity on the other side seem to be hovering around pre-crisis levels. During full year 2012 global M&As reached $2.2tr, barely posting any growth from 2013. North American deals reached $943 bn, a 5% increase over previous year. These figures stand at 2/3 of the 2006-7 total deal value. We have to go back to 2004 to note an increase of a mere 2.3% CAGR, which should be in line with GDP growth patterns.

PE Overview: A new Paradigm or Trough?

These lower levels of activity may be just the normal state of things, a new paradigm away from the mega-deals facilitated by excessive leverage in 2006-7. On the other hand PE and M&A cycles move in 5-7 years intervals with PE buyouts representing a sliver of total M&A activity, at around 10%, slightly increasing as a percentage during the last decade. Taking this into consideration we may just be waiting for the next big story that will spark a boom. Furthermore as textbook financial planning has it, a proportion of private assets should be allocated to alternative investments for diversification and excess return purposes. This may as well spark, at some point, PE growth. We will cover M&A trends, segmentation and valuations on another topic. In this we will focus on PE activity as well as ways to increase value and returns by operational means, more so since financial engineering and exits are not that easy.

PE buyouts reached $259bn in 2012 with US representing almost half of that at $118bn, up from $112bn in 2011. Outside US, around 35% of PE buyouts took part in Europe, 11% in Asia excluding Japan, with the balance spread around the world. Although fiscal problems, Europe has been a source of dealflow due to integration, cross-border deals, bottom fishing and privatizations. Average deal size is around $100mn in Europe but 50% higher in the US. PE activity has grown at 25% post 2009 lows for Europe and Asia but in US, where PEs are more prominent, growth was double that at 50%, according to Bain. In the first half of 2013 global PE buyouts reached $144bn (according to Mergermarket) up by 17% from the respective period in 2012.

Global PE Market 2012 - TBF

Sectors of interest for PE investment at least in the US are consumer (B2C businesses), computers/IT, followed by pharmaceuticals and health. Energy is also attractive both in resources and equipment. Biggest PE deals in 2012-13 were: Heinz ($27b by Berkshire Hathaway and 3G Capital Partners), Dell ($20b by Silver Lake partners and Michael Dell), BMC Software ($6b). The Dell deal also underlines the increasing interest for public to private transactions.

Exits: Can I cash my chips please?

Investments don’t worth much more than what you get paid for. Much of the PE activity currently is not in buyouts but working through exiting the backlog of prior investments. As a result holding periods have increased to 6 in 2013 compared to around 3 in 2007 according to Pitchbook. Secondary investments have been gaining attention over IPOs due to difficult conditions there. According to Bain, sponsor-to-sponsor deals tend to historically fair better than other deal types. Almost half of exits in 2012 were realized through secondary buyouts vs. 25-30% five years ago. Other more unique methods such as dividend recaps are gaining traction, especially in uploading large investment. KKR and Bain for example geared up HCA prior to refloating, to take some money out of the table.

Exits by type

Middle Market: Ample opportunity but where’s the value?

PE activity has been affected by the absence of leverage and the eclipse of the 2006-2007 mega-deals (such as Energy Future Holdings (TXU) for $44b, HCA for $32.7b, Equity Office Properties for $39b, first Data $29b, Harrah’s $27b, Alltel $27b, Hilton $26b to name the biggest). In this environment middle market deals (between $250-$1bn ) are fairing much better. It’s easier to maneuver such investments, turnaround and even exit as we have discussed in this blog before (see Middle market cross-border M&As set to grow, Large Private Equity Deals-that 800 pound gorilla). For example the largest ever LBO of TXU has not turned out very well with the company heading to bankruptcy and the PEs that led it, even prominent, such as Goldman Sachs Capital Partners, KKR and TPG Capital, standing to almost write-off their investment (Business Week, Buyout firms clash over energy biggest ever LBO).

Middle market investments also offer benefits when planning exits through aggregating/consolidating companies into larger units and ripping benefits of scale and better valuations. It’s what we’d call “riding up the multiples curve”, ie pretty much scaling up a business by adding activity around a tested operating model and get higher valuations with size. A small company might have good products but what makes or brakes a company is the structure, that’s the reason so many wonderful ideas fail. Access to distribution channels, capital and talent is easier for larger companies.

TEV-EBITDA multiples

There are an estimated 300,000 middle size companies in the US of which PEs own around 35,000 (The New Math of Middle Market M&A, Robert Slee The Value Examiner, July/August 2009). According to Robert Slee, who is probably one of the very few if not the only finance theorist in the context of small/private businesses, 75% of middle size companies destroy value as they usually produce returns below their cost of capital. Cost of capital for small/private businesses according to his calculations is in the high 20s. That is after taking into consideration risk, cost of financing and bypassing CAPM theory that arguably is more suitable for capital markets. These low return patterns can be more accentuated by the fact that much of the owner’s investment is not recorded, such as unpaid/underpaid management time as well as other resources. Although the ample availability of opportunities, it’s not easy to score a home run in the sector. Companies are often the extension of their owners’ lifestyles and not purely an investment. Owners are not willing or not equipped to realize value for their businesses. In these cases it’s simply better to pass. As Graham put it ‘Price is what you pay; Value is what you get’ and in these cases the two diverge significantly. Slee estimates top performers in middle market an additional 9,000 over the ones already owned by PEs. So numbers are not that good, hence PEs prefer to go international where there’s higher demand for capital.

Valuation Multiples: Buying low and selling high, at some point..

Current M&A multiples are below those of the last crisis, although edging higher. PE buyout multiples are usually lower than those for strategic acquisitions but during the crisis spiked over them; another sign of those times. Currently, MA multiples are at the 8 range, having reached low teens, around 12, in 2007 according to American Appraisal. Financing multiples are currently at the 7-8 range with average exit multiples at 11 according to Mergermarket. This is rather low if compared to multiples of low 20s during 2006-2007. Median exit multiples are even lower, close to 8 times, according to Pitchbook. Considering the backlog of rich investments from previous years and challenging exit multiples this is not the best situation. All these indicate a much narrower space for realizing returns which stress the importance of operational gains.

GLobal Exit multiples

PE Turnaround Strategies; It’s more than theory

PE investing is not a straightforward success. Currently one year PE IRR is at 5%, much fueled by mark to market valuations, the change brought about with IFRS and SFAS fair value accounting rules. The five year IRR is at 10% having fallen from almost 30% in 2006-7 and much higher in the 40s, at end of 90s, according to Bain. Hence the academic discussion now centers around the PEs’ elusive alpha.

5 year PE IRRs

So how do PEs create value? We can’t go over the secret sauce in detail here but in general PEs work with performance indicators that are tied to financial performance, which is how they measure their own performance after all. For example ROE based models focus on increasing factors such as Asset Utilization, Profitability and Leverage which pretty much center around sales strategy, cost of capital, cash flow management, cost cutting and getting rid of underperforming assets and units. Asset stripping is a well documented strategy that frees up capital and unrealized value. Pricing is another important value creator. Bain estimates that 1% rise in price results in 15% boost in pretax profits while an increase in sales volume only has half the effect (due to variable costs incurred). This can be achieved with specially targeted sales and marketing strategies.

An example of a recent turnaround story is Kodak. The once blue-chip giant has filed bankruptcy two years ago as its core business gradually failed. The company had been criticized for denying industry changes and remaining attached to its once dominant film business, passing over the digital revolution. After emerging from a private equity backed restructuring plan it just recently returned to the stock market. Under the restructuring plan Kodak sold its film business to its UK pension fund, as well as various patents and inevitably downsized. It now focuses on high-end market segments of packaging, graphic communications and digital imprinting.

Turnarounds though are not easy. Many investments fail, same as for TXU, even if some of the best PEs are involved. According to a survey of M&A practitioners, carried out by Deloitte and Mergermarket in 2012, factors critical for successful M&As, were communicating effectively, quickly establishing goals (usually this is under a 100 day plan), having a post acquisition plan in place before closing and selecting key people.

Deloitte Survey Resuts X3-2b

Value creation starts however with information. This is the foundation and more; without it doing business is like sailing without a compass. Information is important both at the pre-acquisition phase during due diligence, as well as after that through value buildup. An accurate due diligence that will reveal the target’s true operational and financial position as well as a well-planned post integration plan are of paramount importance. Especially with smaller companies due diligence may be more challenging as information may not be there. According to the Deloitte survey, almost half of buyers would spend more time on due diligence. That’s where PE consultants are particularly useful as they bring to the table specialized knowledge and readily deployable bandwidth. Pursuing an M&A is nothing to be taken lightheartedly; it’s a specialized, stressful task that requires detailed planning and execution. Don’t take us wrong, it’s possible that buyers can carry this on their own, but trying to reinvent the wheel while keeping eyes on running own business might turn out particularly costly (ie, don’t text and drive). So when in this situation do yourself a favor and turn to external M&A experts.

Collecting the information is one thing and acting upon it in a timely manner is another. In many cases companies are not ready to operate under PE professionals’ standards that often have blue chip corporate or consulting background; hence high expectations in terms of strategic planning. Urgency and efficiency in implementation is important, otherwise problems tend to linger and front loaded value/cash flows wasted. According to a SolomonEdwards survey, part of the grievance and inefficiencies result from poor communication between target CFOs and PEs. We could add here that communication can’t work if the two speak difference languages. What we mean by that: traditional CFO roles in small-middle companies fall more within the controller/bookkeeper domain. Their primary focus is keeping eye on expenses and cash levels. Planning is not a known quantity. Little is done in collecting information for strategic decision making. CEOs/owners pretty much flow with past norms or gut feeling. Getting to perform at strategic level and communicate with the finance/MBA types of PEs is just about similar to learning another language; a change one may not be prepared for, let alone able to make. Increasing financial literacy or management training is useful. Just clocking in and out may not be enough anymore; consciousness of value factors throughout the organization and even equity in them might help (ie management by objectives models). However that is not always easy if people have not been used to. That’s where PE consultants are again useful. They are called to support these CFOs both at the pre-acquisition/due diligence phase as well as after that in streamlining operations and coordinating communications. Companies like Accordion or Solomon Edwards are building successful business models around that by providing specific resources, bandwidth and knowledge. Accordion has also established a specific service for facilitating information collection and dissemination. Operational partners are also used in improving performance. PEs also usually work with tested interim managers who have industry specific experience and are posted to targets to perform specific functions.

We want to point out here to Peer-to-Peer networks that can also support executives. These are however more useful for independent companies that want to up their game as there can be a duplication with the PEs. Midas Managers or Michael Milken-backed Vistage are such networks. Midas Mentors take a cut of returns they create while in Vistage there’s a cost for participating in meetings. Other formal or informal groups, associations and NGOs exist for the same reason. After all there’s good supply of resources as the recession changes has created a slew of experienced middle managers and executives to tap into. However without being able to control implementation, results can be dubious. Moreover is also difficult to find listening ears that are appreciative of intellectual contributions and able to afford them before it’s too late or for owners to connect with experience that is right in the money.

Finally turnarounds come down to people. On the outside management theories make sense to all but the real challenge is implementation. Many can spot shortcomings in an underperforming company; what’s differentiates the makers is the effectiveness in pursuing and implementing changes. Humans mostly resend change, let alone if those changes challenge a favorable status quo. New PE owners may be in a better position to change things due to the power they are versed with, but this is not always adequate. In fact it can as well backfire. Most of the times however the main problem is, as one of practitioners bluntly put it, “what’s behind the manager’s desk”. According to the Deloitte research, around 2/3 of acquirers state that key personnel is one of the main success factors in M&As. It’s one thing not to be able to do, or don’t want to do something and another ignore its existence (and contrary to Socrates, still believing that you know everything). In these cases it’s fair to make a decision and move on with a management change. A high percentage of executives, especially CFOs are eventually replaced when PEs step in. The CFO role has become indeed quite challenging and tenures have shrunk significantly over the last decades.

PE Outlook

In closing, let’s discuss PE trends going forward. As already mentioned this is not a great environment, at least as practitioners would like, however the picture is not that bleak. One good thing is that there’s a lot of capital available for investing. Bain estimates that the PEs’ dry powder can last for up to 3 more years. Main focus of activity will be North America along with middle market and emerging markets. Fundraising is pretty satisfactory as fund managers are seeking diversification, rebalance their appreciated portfolios as well as the elusive alpha. However capital doesn’t come easy. What’s important in selecting GP teams is consistency of performance as well as having “skin in the game”. After all everybody makes mistakes, it’s how many vs. successes that differentiate the leaders. Stock markets are also getting stronger to facilitate exits. On the reverse route public to private deals, such as Dell’s, are gaining attention and may contribute to the sector’s comeback as did in 2007 (ie the HCA deal). After all however buyouts are justified when the underlying business is healthy, valuation is correct and there’re promising exit prospects. As Warrant Buffet put it: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price”.

By Pete Chatziplis, CFA, ACCA, MBA. The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.

Effectiveness in the Implementation of European Bailout Plans and the Cultural Perspective; Individualism vs Collectivism in the Greek Case

Much has been said about European periphery’s economic problems and how they led to economic crises and the IMF intervention. Much of the discussion centers on overleverage, lost competitiveness and other macroeconomic figures. This is what one could call technical analysis. On the other side much of the “softer” or at times irresponsibly “casual” analysis gravitates towards cultural traits some of them being well-indented and some not so.

Let’s look at the Greek crisis in particular: The Troika(lenders) are complaining about inefficient public administration, corruption, opportunistic political system and the absence of civic society as manifested through tax evasion and other. On the other side Greeks are complaining about the recovery plan being unrealistic, recessionary, insensitive, flawed. The bailout plan supporters may jump into what’s called in psychology attribution bias error confirming their prejudices while the subjects find painful gratification in self fulfilling prophecies: since we are not up to par why bother trying improve after all? But then again and allow this parenthesis why Greeks or other nationalities perform much better in well structured economic systems such as that the immigrant communities in the US, Australia or Germany prosper? Is it because of the existence of institutional framework in these countries as argued by the work of Daron Acemoglou (Why Nations Fail: The Origins of Power, Prosperity, and Poverty)?

Whatever the cause of the economic malice, the slow implementation or failure of the bailout plans may be attributed to mistakes in analyzing the problem in the first place both from technical but equally importantly from cultural and sociological perspective ie the doctor has to prescribe the right treatment before complaining that the patient didn’t respond, as well as not well managed expectations and communications if that was the case. In this article we will focus on the sociological/cultural perspective. Before proceeding however we have to caution that culture can become an uneasy topic as such discussions may raise concerns over stereotyping. However, cultures do exist and do interfere with life and business decisions same as corporate cultures, a much celebrated principle in management, that has been coined for many company successes or failures. It’s not that new of invention, after all the saying goes: “when in Rome do as the Romans do”.

Culture, when it refers to ethnographic aspects is a rather new addition to management topics mainly gaining attention with the rise of multinational companies. In such environments people from different ethnic backgrounds, often painfully, realize that what’s considered the norm in one culture is not so in another. Stories about egalitarian Americans using first name or hierarchy conscious Asians hesitating to ask questions or challenge a position have been abundant. The result is miscommunication and inefficiencies. Other instances in the context of cross-border M&As, are equally amusing but painfully costly. Once somebody mentioned a story about an investment in Eastern Asia; after closing a deal the Westerner went with signed contract in hand to plan implementation; the local executive laughed took out a bottle of wine and invited to start the real discussion about what’s to be done now that the legal part was out of the way…. In another instance in Eastern Europe Westerners and local investors were planning an investment. The tender called for cash and follow-up investment as part of the consideration. The local partner laughed: “that’s good. We can surely outbid anybody by promising a high follow-up investment”. But this is not possible” replied the buyers, “we can’t afford that”. “Don’t worry, we’ll just promise and never do it….” he replied. Off course the judicial system plays a role in enforcing such documents but sometimes it also seem to be accommodating or follow the traits of the surrounding cultures.

So how could culture play a role in the European economic crisis and the success or failure of the restructuring plans? Let’s analyze the theoretical background to that. To do so we will refer to the work of Max Weber, Geert Hofstede and even Samuel Huntington to name a few. To some extent they have used religion as a paradigm for peoples’ social psyche. In this respect European societies could be distinguished between:

a. Northern Europe that follow Protestantism/Calvinism/Lutheranism that lean towards individualism and embrace free market or regulated capitalism. North American and certain Commonwealth cultures follow these patterns too.
b. South and Eastern Europe that follow Roman Catholicism and Orthodoxy, which are characterized as collectivist in nature and lean towards corporatism.

According to Weber for example the Calvinist teaching calls for hard work as the road to business success while profits should be reinvested rather than spent in frivolous pleasures. The Protestant endorsement of usury, contrary to Roman Catholicism at the early ages might have affected economic development in some extent. Same effects mat be attributed to Orthodoxy’s mysticism and its apprehension towards materialism as also manifested in Greek philosophy’s Stoicism and Epicureanism.

According to Geert Hofstede’s famous Cultural Dimensions Theory (not accidental that was developed within multinational IBM) there are 5 traits upon which cultures can be characterized:

- Power distance (we’d call that in other words “respect towards hierarchies”)
- Individualism (or the “degree of interdependence” within the society)
- Masculinity/Femininity (we’d prefer to call that “materialism vs. spiritualism” )
- Uncertainty avoidance (we’d prefer to call this “adaptability” or “resistance towards change”)
- Long term orientation (pretty much self-explanatory: long term versus short term society focus)

In our case now: Greece is a collectivist culture where although business is conducted in a rather relaxed way, power distance is high and respect is important. In collectivist cultures more important than anything are relationships and accountability towards the person’s immediate social grouping be it immediate family, extended family, locality, ethnic group, company, union etc. Next to relationships, written communications might fade (especially when mandated by an outsider to the group). A Greek minister once even admitted that have not even read the bailout plan. There was no time for that or no purpose considering its supposed inevitability or stakes in hand. Obviously the details could be envisioned negotiable later, even after signing. Actually objections started soon after signing. It’s also well documented that statistics were falsified to achieve EU admission. Pretty much the same as ticking the box on Important Terms and Conditions before downloading a software. Who bothers? On the other hand Northern European cultures are in large individualistic where power distance is also high but relationships are not that important and communication can often be blunt. Written communications are respected and highly valued. There’s also a strong avoidance over uncertainty, which may be exacerbated with current financial problems and extremely high unemployment. These differences as illustrated by different scoring in Hofstede’s parameters are shown in the diagram below for Greece and a group of Northern European individualistic cultures.

Blog Graph Greece and Individualists

But let’s set aside the major manifestations of individualism and collectivism and focus, for the interest of brevity, to the issue of how decisions are taken and communicated in these cultures. For example in our case, what went wrong, at least in the beginning, with the restructuring plan? The EU officials have been frustrated with the low pace and erratic implementation. When shortcomings occur they note with disdain their discontent: the plan has been agreed and signed departures from its wording are not expected. In AngloSaxons societies it’s normal for written agreements to be kept; that’s why negotiations are long. On the other hand in societies such as Greece’s, written agreements are of limited value. These are places where one can hear more often the phrase “that’s how we do things here” or these things are not possible here” versus the expression “that’s the law” that explains actions in individualistic countries.

Blog Graph Greece and Collectivists

In individualistic countries is quite straightforward, even to the not educated, of how they should operate within the society. In collectivist cultures however it’s not always possible to understand how things work if not through upbringing and subconscious. Locals mostly can adjust to that it’s just an outsider that might feel lost. It takes empathy and inquisitiveness to prosper. As one said don’t get distracted with what the law says but what the people really do.

So what’s the conclusion, the moral meaning from this analysis regarding enforcement of the restructuring plan? For Troika: should place more attention to what people think than what say or sign. Monitor implementation. Identify power brokers, decision-makers and involve them. Respect sensitivities, be introspective, try figure out motives and hidden messages and agendas. For Greeks: don’t hope for leniency, for lenders giving up or being intimidated. Not that they don’t have feelings; it’s just that they keep them away from work and don’t let them affect the goal. Be upfront and clear on intentions and concerns. Discuss and argue constructively.

This article has been in the making for quite a while. In the meantime it’s good to see that Troika is pretty much adjusting their approach now monitoring evaluation setting gradual landmarks and acting based on progress. Communications from North has been toned down a bit too, it’s so much of an unnecessary distraction anyway. Greeks have also given up on talking, bluffing and protesting and doing more. But then again most people know what’s right or wrong, large parts of what’s happening in the past was illustration of Mental Exit (something that Hirschman refers to in his famous book Exit, Voice, and Loyalty). Mental or Physical Exit by playing along, evading, immigrating and much of the frustration is also put up for other purposes. Once a football(soccer) player was asked why complaining so vividly to the referee for a decision since there was little chance to change opinion. Well, he said, this decision is lost but I may make him think twice about the next one and even if that doesn’t happen and we loose then I’ll put up a good excuse to the fans in bad refereeing…”.

For sure the story unfolds on this crisis and it’s quite early to jump into conclusions. The purpose of the article is just to contribute towards decision making and action taking from a cultural perspective both in this or other instances.

By Pete Chatziplis, CFA, ACCA, MBA. The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.

Pete Chatziplis, a finance and management consultant, is the creator of the Transatlantic Business Forum. Drawing on global work-experience he has been part of the Cultural Detective Organization (Intercultural Effectiveness, Increase Productivity-Strengthen Relationships) contributing to the development of a training manual about intercultural understanding.

A European Tale: the debt crisis in other words; Select your ending…

Once upon a time there was a European family… Their life was all happy and mellow and everybody looked up to them. However times changed and they were struck by a terrible crisis. The following story might be true and might be an allegory for something else happening right now in real life… It’s also an unfinished story; you can vote for the outcome right at the end of it. But let’s take it from the start…

Family Background

The mother came from an aristocratic family of intellectuals. You could notice that in her elaborate and polite manners, style and often flamboyant ways. She had rich education in humanities and sciences something evident in her discussions. She was working in fashion, everything that had to do with quality of life but was also very active with civic organizations, charity and arts. She would give grace to whatever she set her eyes on. Then there was the father, a busy, laborious, industrialist; diligent and hard working. It’s not that he didn’t have many intellectuals in his family but he took more pride in discipline, practicality, moderation and self-restraint. He had few words to waste; he often expressed himself without much tact which often got him misunderstood.

It was a rather odd couple some would say but for others it seemed that they complemented each other very well. But it was not always like that. Their families didn’t get along very well in the past. They had many disputes which caused great distraught and pain to them and others. These were tough times, with violence and poverty. However, through much pain they realized it was much better to put all that behind and instead of hating, care about things they shared, cherished and valued. So they concentrated on making their lives better which brought them much happiness and wealth.

As time went by and the wedding grew stronger they also decided to grow their family; so they had kids. It was a happy family they had, full of respect and ideals but little time did they have for each other. The parents were busy and even when they had some time, they wouldn’t seriously care about their kids; they would even find their kids’ mischiefs amusing. The kids were independent-minded though and felt perfectly fine to stay away from their parents’ attention. They were pretty much growing up on their own as the product of circumstances, handouts and serendipity. You see they were receiving a monthly stipend and had nannies and all the care in the world. You could say that they were spoilt.

When they grew up and became adults their parents gave them credit cards. It was supposed to mark their coming of age. Kids could now plan their future; take a loan to study and grow professionally or start a business. Instead kids however rolled down to the easy life. After all they didn’t care much about growing up and making a life for themselves; actually they were not even prepared for doing so.

When parents were asking how they were doing in school or their businesses the kids would say that everything was going well. That was a blatant lie and they were surprised to pull it through; they guessed their parents were probably turning the blind eye. Nonetheless they were afraid that this couldn’t go on for ever and at some point they would get in trouble; but then again it was too difficult to stop. There were so many distractions. There were cars, trips and nice clothes, all easy within their reach; why bother change after all? Dazed from their easy life at times they felt gifted, they felt that they deserved having things coming easy to their way. At other times, when targets seemed tough to accomplish they would feel incompetent and helpless as ambitious targets where out of their reach; after all, their family’s haven was enough.

Crisis breaks out

But nice stories at sometime come to an end. Times changed and the family business was not doing that well anymore. The parents were starting to age and worry about the future and their finances. The world was also changing; it was becoming a more competitive, a less forgiving place. So they started to pay more attention to their family and business. Their kids’ mischiefs were not that amusing anymore. They started to worry more about them and ask questions. It was not long before they realized that things were not going well, but they would postpone taking action. In the end it was a call from the bank telling that credit cards were maxed out and asking for money transfers to cover overdrafts…. It was the last drop in the bucket, they were infuriated…

As a matter of fact the parents assumed that something was not going well, but they were too busy and too distant. . In a way they might even be buying their “silence” for being absent, so that they could go on with their lives undistracted. They didn’t want to face their responsibilities and would blame it to each other or on the kids’ character. On the other hand they knew they just had to bring them to the point of no return to get them on the right track. As somebody said; a crisis is too good of a thing to go wasted. And now it was exactly that time. This situation couldn’t go on for anymore. It was time for everybody to sober up and carry their share of family responsibilities. Yes, the party had to stop one way or the other; but it was not easy.

The kids at the begging denied everything; they tried mislead their parents that everything was still going well. But the parents looked around the home and found expensive clothes and motorbikes and other things that they were hiding that couldn’t be explained. That was not the life they have earned or they could sustain on their own. That was not a life of responsibility that the father was brought up with or wanted for his family.

Parents also asked around and stories started to come out about the ways kids spent their money; they felt embarrassed from what they heard. Everybody thought something seemed wrong with the kids’ way of living, however nobody tried do anything about it; they just looked the other way. The kids would also always have excuses for everything. For example when asked about their expensive cars they would say that they were test drives, or gifts or other funny excuses. In the end the kids started to confess everything.

Stories came out about people giving them loans as they’d assume that their parents would pay for them in the end. A local banker even occasionally reversed some credit card charges or moved them to other ones to erase some debt so that it didn’t hit the credit limit. When they asked him what he was doing he mentioned three letters, showed some lengthy documents and off course asked for a good commission. Kids didn’t understand much but didn’t even bother about it as long as it kept things going.

Not all the kids were the same however. While the younger ones maxed out their credit cards by spending in good life the older ones were a little more responsible but made some bad investments. People started to question everybody anyway. In the end, none of the kids could survive without their parents’ help and now this help was questioned. Even one of their uncles, a bon viveur, with great education and property but extravagant ways fell into disbelief and had to cut down his expenses too. In a way it was him that everybody was worrying about if he’d come to the point of asking for help too. Therefore parents had to sober up everybody, starting from kids. They had to put up a tough face; it was time for action…

Crisis Deliberations

At the beginning kids accepted their fault but said it was impossible to change at once; they asked for more money to give them time. Off course they promised they have learned their lesson and they’d now use their money for good. But they said that before… The parents didn’t buy it.

Then the kids pointed out to some of their friends that when they racked up too much debt they didn’t pay. They argued they were fooled by shop owners and banks; transactions were erroneous, debts were phony; they were simply tricked in. With all this these kids saved face in some way, they said. Even if they managed to walk out of their obligations however little talk was made about these kids been grounded, changed school and losing their club memberships and amenities. These losses would have been unbearable to the European family’s kids. They knew that.

Some of their friends told them that their parents are suppressive and insensitive. They told them they would be better off if they left home, break up with the past life and live ascetically in a communal. All this sounded t romantic, even though they haven’t tried something like that before. Impulsively, a part of them wanted to go this way, but that was merely an impulse.

Then kids thread their parents they’d leave home and family if not having it their way. They didn’t really mean it nor did their parents want them too; however after some initial surprise and frustration parents shrugged their shoulders and told them they were free to go if they’d wish and if they left behind all their goodies. Parents wanted to keep the family together albeit not at any cost, not if the family had no meaning. Kids thought parents were bluffing about sending them away but they couldn’t say for sure; in the end maybe they both were bluffing.

Outside the family, everybody the kids knew, the banker, the nightclub promoter, the shop owners, argued that the parents were unfair for treating their kids this way, for cutting down their stipend and credit cards. They said that this was not a way for kids to grow. Deep inside they were worrying about losing the kids’ business. Some others were saying that kids are incompetent; unable to stand on their own feet. They should be either sent away (and not worry about them) or sustained for ever. It was the parents that have failed in their roles; they were the ones that destroyed the kids and now enjoy torturing them; it was a mockery of a family. Some even remembered the father’s bullying past something left behind but still hurt him to remember.

The father’s family thought kids were useless and that the wedding was a mistake all from the start; a crazy idea, too much of a trouble. The mother, the kids were different people from the father; they were hopeless due to their upbringing. It is probably what you would call in psychology group attribution error. Off course they ignored their positive sides too and the many benefits this wedding brought everybody such as stability and complementary aspects but it was not a good time to bring this up.

An odd aunt that they were not seeing that often and never liked the idea about the marriage, started to throw her poison too. She had good ideas always but never really showed any sincere interest to family issues. You know it’s this kind of aunt that always has an idea about everything but doesn’t do anything about it. She would just love to draw attention on her as in her glory days so that she didn’t feel overshadowed and an odd loner.

The Rehabilitation Plan

After much talking, true to the family’s traditions, the parents came up with a detailed action plan. They said that kids should either leave home and make their living the hard way or stay and embark on a long “rehabilitation process”. They would have to study and at the same time work and contribute to the family’s expenses to the extent they can. They should also pay back their debt. The father was relentless; he said credit was over, they would have to start living within their means. He was strict and absolute while the mother was trying to show some tenderness and flexibility to keep some balance. Parents also hired a strict personal trainer with experience in such “rehabilitations”. They said he had to be tougher with the younger kids so that they motivate the older ones and set a good example for the community around them too.

The kids accepted and to formalize that signed an agreement but without even looking at it. Reality is kids dreaded the rehabilitation idea and they could find a lot of theories to argue on that. But in the end they just wanted to keep on with their ways or if they had to work they would rather work in some office in the family business; but they had no such experience or skills. The parents never worried about equipping them with such skills; or give them jobs in their companies, but that’s another story… In the end kids thought it made sense just to take it easy as parents made enough money for everybody. So they proposed to work in their local club. They ended up however spending most of the time socializing if they would even ever go to work. Kids also said they were taking evening classes but they often skipped and went on partying. In the end they just cared about getting through another day; a vane, meaningless pursuit to others.

So in the end their rehabilitation was failing. They claimed it was due to the plan which was not realistic. They said they were unable to contribute to the family; a self-fulfilling prophecy or what you would probably call in psychology a self-serving bias. The kids thought that parents would be forgiving, fed-up and ignore them so that they could go back to their own busy lives. The single aunt off course said it’s wasted time; the kids were a lost case; will never get in the right truck. But parent were not the sort of giving up. They asked around and found out about their kids’ ways. They were furious about their cheating. They assumed that kids would do what they were asked and signed to do.

The Rehabilitation Plan gets serious…

So the parents said that we’ll have to follow up with what kids were doing every day. At least parents were becoming more involved this time. Issues were to be discussed together and decisions were also taken jointly. They also emphasized to the personal tutor to be extra vigilant. They’d also have to work at a really tough job not like the easy ones they were having up to now. They should start working at a factory. They braced for a long “rehabilitation process”. It was not going to be easy

Story Ending?

Let’s say this story is a metaphor; depicting the European debt crisis. You can try guess parallels between figures here and in the crisis. On the other hand it might just be a simple story on a common family and any resemblance to facts, real persons is purely coincidental:). Let’s also say that this story is stil developing. Taking this in mind feel free to guess potential outcomes (left open as there are so many views on such matters these days..).

So here are some possible endings we could think for this European tale (or add yours):

1st Tale Ending:

Kids kept on failing. The family didn’t pull it together. It broke apart. Kids were sent away from home and:
i. became criminals.
ii. sobered up but never got where they could had they stayed in their family.
iii. they excelled surpassing even their parents’ successes. They probably struck a lottery or came up with a great invention (ok crazy things happen in fairy tales…)

2nd Tale Ending:

Kids and the family stayed together. Kids sobered up and became responsible citizens and successful professionals.

3rd Tale Ending:

Kids and the family stayed together. The kids never really sobered up; they grew up always dependent on their parents but at least they didn’t get into trouble and wrack up debt. They were always dependent on handovers; after all their parents were too possessive to turn over some of their businesses to them. They all just muddled through.

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The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.

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Virginity: a dubious virtue when it comes to olive oil and the overlooked costs for consumers and the economy

Conventional wisdom has it that virginity is a binary issue. It either exists or not. Not so it seems when it comes to olive oil. There’s extra virgin olive oil, simply virgin olive oil and even if that is not confusing enough some suggest that for most commercially available olive oils, virginity is a questionable virtue altogether. But let’s first start with the definitions: what does virginity stands for when it come to olive oils?

Olive Oil Classifications

The EU, the largest producer and consumer of olive oil globally and US, the second largest consumer have come up with elaborate regulations on classifying olive oils that include both chemical and taste characteristics (EU directive 796 and US Standards for Grades of Olive Oil and Olive-Pomace Oil). These are similar to regulations introduced by the International Olive Council (IOC), the large global organization representing olive oil and table olive producers and consumers. The German and Australian Oil Associations have come up with additional tests (known as DAGs and PPPs). Unfortunately apart from tasting, it’s almost impossible for the average consumer to verify an olive oil’s quality; instead has to rely on representations by manufacturers, public authorities and retailers. But what can the everyday consumer make out of the olive oil’s classification alphabet soup and why does it matter?

Broadly speaking virgin olive oils are those that are extracted directly from olives through only mechanical means i.e. excludes oils that go through any chemical treatment. Extra virgin is the olive oil with lower than 1% acidity, while a grade lower, simple virgin olive oil’s acidity cannot exceed 2%. Oils with higher acidity are not edible. These oils are called lampante as they would only be used as lamp fuel in the past. High acidity olive oils have to go through refining processes and blending with virgin oils to go through the food chain. These chemical processes are perfectly acceptable just as long as product labels indicate so and consumers are aware of what they are buying. Olive oils resulting from these processes are called refined, fine, light or simply olive oil. Pomace olive oil, is a different creature in that is extracted from the first olive pressing pulp refuge, with chemical processes.

Olive Oil Chemistry and Health Benefits

Acidity is just one measure of olive oil’s quality but alone doesn’t guarantee virginity and doesn’t capture all of olive oil’s health features. There are at least ten more criteria, namely concentration in certain chemical substances, used for olive oil classification. Let’s see some of these chemical substances and what one is buying in them. First of all fatty acids: olive oil is rich in monounsaturated and polyunsaturated fats versus saturated and trans-fats who are present in animal and processed fats. Monounsaturated and polyunsaturated fats lower cholesterol levels and risks of heart disease. Olive oil also includes polyphenols. These are natural antioxidants that protect against cell damages, have anti-inflammatory properties, reduce blood pressure and the risk of coronary disease. It’s not accidental after all that in the Mediterranean olive oil is often drunk as medicine or aphrodisiac. Olive oil is also used for skin treatment from healing sunburns to cleansing and conditioning. Non irrigated trees, unripe handpicked olives as well as special varietals give higher percentage in polyphenols. The bitter taste in high quality olive oils, indicate a high percentage of polyphenols. Unfortunately, polyphenols same as monounsaturated and polyunsaturated fats, are sensitive substances that can decay over time or destroyed after chemical treatment or exposure to light and air. Hence oil has to be carefully stored and consumed within one to two year time frame. Olive oil, contrary to wine is not getting better with time. Apart from chemical characteristics sensory tests ensure the right color and absence of unpleasant odors and flavors such as muddiness or fustiness. Only accepted flavors by olive oil connoisseurs are bitterness, fruitiness and pepperiness.

These olive oil qualities are hard to find. Extra virgin olive oils are made from the best quality olives and milled at low temperatures (hence the term cold pressed) to preserve their health features, which however decreases output. If something goes wrong during growing, harvest or production they have to go through chemical treatment and refining to correct flaws and then marketed as refined oils; hence they are not virgin anymore. To secure superior characteristics such as high concentration in antioxidants and intense taste, olives have to be at best handpicked from the tree when just start maturing, sorted out and milled within forty-eight hours or less. Other reasons for manual harvesting is that oil plantations in much of the Mediterranean comprise of sensitive, often ancient trees grown on rocky hillsides and in such spacing that are not suited for modern intense mechanical harvest (SHD plantations).

The Good Scenario for Market Efficiency: The price is right

From all of that it seems that virginity is not easy to find and if so it costs, or to put it better: it should cost. The good scenario would be that in the age of healthy eating and slow food, consumers are well aware of and appreciate qualities of extra virgin and various other oils. Consumers are using extra virgin olive oil, preferably raw in salads or dressings, for its antioxidant and other healthy aspects and may turn to other oils either lower grade olive oils or vegetable oils that still offer lower cholesterol levels for cooking, frying or other uses. That doesn’t mean that extra virgin olive oil could not be used for cooking; this is typical in the Mediterranean but maybe it’s not that economical. But whatever the preferences are, the point is that these consumers are prepared to pay the right price for every type of oil and as a consequence demand and supply adjust accordingly.

A Bad Scenario for Market Efficiency: Information Asymmetry

Then there’s the bad scenario: i.e. consumers don’t differentiate between olive oils or just trust the label in their quest for the more highly appreciated extra virgin olive oil, whatever that means. These are the type of consumers that may be taken advantage of. After all it is perfectly natural that between two extra virgin olive oils and in the absence of any other perceived difference, one would opt for the cheaper one. Higher prices would simply be considered a rip-off. But maybe that’s not so.

UC Davis that has developed expertise in olive oil, carried out a research of large number of commercially available olive oils in California in 2010 which found that most of them do not deserve the term “extra virgin”. In other words contrary to their intentions, consumers are not buying extra virgin olive oils in the many bottles with colorful pictures that proliferate supermarket shelves. At the same time more expensive extra virgin olive oils and their producers are unfairly driven out of the market even if certain consumers have the ability to cover their cost.

This pretty much reminds the “Market for Lemons”, professor Akerlof’s famous paper that studied the damaging effect of information asymmetries in the used car market (lemon is a slang term for defective used cars) and lead to his 2001 Nobel prize in economics. Very briefly, Professor Akerlof argues that used car buyers have difficulty in knowing the exact condition of a used car and in the absence of such knowledge they’d assume that the car is of average quality and be prepared to pay nothing more than average price. At this price owners of superbly maintained used cars will not place their cars in the market, which evidently will bring the overall quality of supply down. This is sometimes summarized as “the bad driving out the good”. In another manifestation of such phenomenon; security market regulators are eager to protect against suspicions of “insider trading” as this would drive away investors that have no access to such information. This could collapse capital markets.

Same as with olive oils: in the absence of reliable information, in the absence of product differentiation, buyers will go for the cheaper product or at least an average priced “extra virgin olive oil”. In vain producers will use superlatives, fancy adjectives, exclamation marks, certifications, nice bottles, emblems and picturesque images to persuade they are “more virgin” than others, hence deserve a higher price to cover their cost. Words have lost their meaning. Many will shrug their shoulders to olive oil producers’ problems. But the problem goes beyond that. It’s not farmers that are doing that bad after all. Instead of going the extra mile to produce high quality extra virgin olive oil the average farmer can sell a descent product at wholesale prices and then pocket some EU subsidy (most olive oil is produced in the EU) to make up for the difference. It is visionary producers of high quality extra virgin olive oil that can’t survive. According to Tom Mueller’s book Extra Virginity, manual harvesting, that is the standard for high quality extra virgin olive oils, costs as much as $3 per liter of the end product. Even outside this segment costs are high. Italian extra virgin olive oil wholesale commodity prices range between $3-4/liter; it is a wonder how it can then retail at $6-8 even $10 and cover bottling, customs, transportation, wholesale and retail margins. Many producers of premium extra virgin olive oils will throw the towel, sell below cost or not produce at these levels. But off course consumers are not aware of all these intricacies. Unfortunately it seems that even retailers don’t know sometimes what they are selling, or at least that’s what it seems like based on the UC Davis report (UC Davis’ report as expected hasn’t gone unnoticed; see NAOOA’s reply for example). One could be safe by selecting upscale retailers or specialized online stores for extra virgin olive oil. These businesses have the ability to sell at higher prices and at these price levels can’t afford to disappoint their patrons.

Making sure that products are correctly labeled doesn’t also mean that lower quality olive oils should be expelled from the market. Beyond free consumer choice, fair markets are about demand and supply. Food is largely considered a commodity, at least up to now. Although supply for some foods like caviar or fillet-mignon is limited hence prices are high, a tomato for example is pretty much the same for everybody. That has started to change with the introduction of organic food, the highest growth food segment in the US and elsewhere. In a world of six billion and counting, for good or for bad, there’s no much room for organic food or free range meat. What would happen though if ordinary products sell for organic without being so? This would register significant profits but it would be fraud. Same with olive oil, be it organic or other premium oil.

Another Bad Scenario for Market Efficiency: Adulteration & Counterfeiting

The other bad scenario behind market inefficiencies is the existence of counterfeit or adulterated olive oils. It’s useful here to briefly outline market economics to put into perspective the extend as well as consequences of such practices.

Global olive oil production varies per year but can be estimated at around 3,000 tons based on 2010 figures, of which EU produces 70% and consumes 64%. In the US alone, olive oil is a $700 million market which amounts to around 9% of global consumption of which more than 90% is imported. The overall US edible oil market (includes all sorts of oils such as canola, sunflower, corn, soya, palm, sesame, avocado, coconut, peanut, cottonseed even margarine and animal fats) is estimated in the tens of billions and grows at 10%, an especially high rate. To complicate things more some oils are also used as biofuels which also affects prices in relation to what’s happening in energy markets. If most of products in a $700 million market are counterfeit to some extend, as the UC Davis report indicated, then profits and foregone taxation must be significant. So the stakes are high. But let’s examine on what’s involved in counterfeiting or adulteration.

Adulteration: Mixing Substances

Adulteration is as old as olive oil trade. It went on in ancient times and through history in 19th and 20th century Europe and US. In 1997 and 1998, olive oil was the most adulterated agricultural product in the European Union, prompting the EU’s anti-fraud office to establish an olive-oil task force. Tom Mueller in a 2007 article quotes one investigator saying: “Profits were comparable to cocaine trafficking, with none of the risks” (Slippery Business, Tom Mueller, The New Yorker, August 13, 2007).

Adulteration can take many faces: from mixing different types of oils to adding dangerous chemical substances. When mixing different types of oils one could add cheaper oils such as rapeseed, sunflower or olive pomace oil to expensive extra virgin olive oil and sell at the higher price pocketing the difference and avoiding taxes. Although mixing different kinds of oil can be harmless to human health; this is not the case when mixing with chemical substances and colorants to arrive at a product whose chemistry, taste and appearance resembles olive oil. In 1981 in Spain, in what’s know as Toxic Oil Syndrome, rapeseed oil was denatured by adding aniline, a dangerous chemical substance and then sold as olive oil. This resulted in over 600 deaths. In April 2008, the Italian police impounded seven olive oil plants and arrested 40 people for adding chlorophyll to sunflower and soybean oil and selling it as extra virgin olive oil, both in Italy and abroad; 25,000 liters of the fake oil were seized and prevented from being exported.

Counterfeiting: Masking Origins

Another possibility is misrepresenting the olive oil’s origin such as country of origin or region (ie if it is of protected designation of origin (DOP)). In 2008 Italian police, in what was called “Operation Golden Oil“, arrested 23 people and confiscated 85 farms after an investigation revealed a large-scale scheme to relabel oils from other Mediterranean nations as Italian. It’s like putting together fake parts to create a Rolex watch.

Let’s go back to global market figures to illustrate the dynamics behind this practice. Of all global olive oil production, Spain is the largest producer with 40%-45% that along with Italy at 15-20% and Greece at 10-15% form the top three producers and consumers, followed by other Mediterranean countries such as Tunisia, Turkey, Israel, Morocco Syria as well as Portugal and Australia down under. Olive oil wholesale prices from the various varietals and regions have different prices. Italian olive oils are usually the most expensive. Although Italy’s production doesn’t cover domestic production it is a major export country controlling more than 50% of US imports. This paradox is explained by sizeable imports to Italy, with the question being which part of Italian olive oil is consumed locally and which exported. At the same time, Greece the third largest olive oil producer and probably one of the first ones, represents only 2% of US imports.

Blending olive oils from various origins is perfectly legal as long as labels indicate so. For example, large circulation brands often mix various olive oils to reach their production quotas at the same time that maintain relatively consistent taste and stable cost basis. On the other hand small producers’ production, same as for wine production, varies in quantities and taste from year to year depending on weather and other circumstances. Much of olive oils sold in the US are blends of olive oils coming from Greece, Italy, Spain, Tunisia and other Mediterranean countries. True to fair representations, US Customs regulations on “country of origin” state that if a non-origin nation is shown on the label, then the real origin must be shown on the same side of the label and in comparable size letters so as not to mislead the consumer. It is interesting though to come across consumers that don’t go beyond the flashy letters and images on the bottle’s front side to check the label on the back side and see what exactly they are buying. On the flip-side some producers argue that there is nothing wrong with blends as one is really buying the bottler’s know-how and guarantees rather than the country of origin. It’s like buying a car assembled in one country whose all parts are manufactured overseas, in the end it’s up to consumer’s choice again.

If mixing is acceptable, nobody can argue in favor of counterfeit products; not at least among WTO members. Unfortunately record shows that there’s still room for better market monitoring when it comes to extra virgin olive oil as well as not the same level of respect. There are numerous experts, magazines, food shows, specialty distribution chains (liquor and wine stores) promoting wine and its uniqueness. Olive oil, sadly though, still lags behind. Maybe producers are not strong enough to enforce a better environment. For example Luis Vuitton has 30 in-house lawyers and 250 outside private investigators and spends $18m to fight counterfeiting (Deluxe: How Luxury Lost Its Luster, Dana Tomas, 2007).

It is amusing and disappointing to come across disbelief for a $50 per liter extra virgin olive oil. At the same time very few would be surprised for a $50 per bottle wine or a $1,000 suit. Nobody is wondering why cars worth more than $200,000 when one only wants to get from A to B, or why a handbag should worth $5,000 for carrying the essentials. It’s often a vain discussion try justify extra virgin olive oil prices by referring to ancient trees, rare varietals, plant densities, non irrigated hillsides, terroirs and labor costs. One would think twice before arguing against the purpose for high wine prices or differences between Cabernet Sauvignon, Merlot, Shiraz, Rioja, Chianti or Pinot Grigio even if not aware of their qualities. It could be embarrassing. Yet in a world where the objective would be to just “drink wine” there’s a good possibility we would only end up with Two Buck Chuck (the two dollar a bottle Charles Shaw wine often synonymous with mass consumption). At the same time very few people can appreciate olive oil from Alberquina, Picual, Mission, Picholine, Frantoio, Leccino, Koroneiki, Taggiasca, Ladoelia and other varietals let alone distinguish between extra virgin or refined. Large retailers and importers would prefer to launch their own branded products than source from independent producers. This may provide a better profit margin and control over quality but in the end it’s product degeneration at its best. And if some argue that fine wine or haute couture or other luxuries is something more than a answers to biological needs, that very understandably, are a statement of art or passion, then what one can say about harvesting century-old olive trees some as old as the civilizations they fed and inspired?

Epilogue: It’s the economy!..

Beyond romanticism, olive oil’s luck will probably change once economic stakes get higher. Americans only consume 1lt of olive oil per person while in the Mediterranean (Spain, Italy, Greece) more than 10 times as much. Olive oil consumption is growing fast in the US and globally along with growing populations, incomes and health awareness. In the US for example trans-fat oils are being phased out. Just imagine the potential if consumption moves closer to that in the Mediterranean. To cater for increased consumption more areas should be cultivated. Olive tree could flourish in California and elsewhere in the US with mildly warm climate as it also does in Australia, South America and South Africa. Production can further increase in the Mediterranean too where the tradition already exists. Higher production can create new jobs and boost local communities both in the US but also in Mediterranean countries that face economic problems. At the same time higher consumption will benefit public health. So there’s great potential and a strong economic case even allowing for some product cannibalization with other kinds of oil. However all these benefits cannot materialize if the economic return to farmers and manufactures is killed with practices such as those already mentioned.

In the end in a large and efficient market there will be ample room for everybody, both at the low and high end. There will be room for mass and premium producers and after all there will be room for teroirs and the sacred tree that threw its shade over Plato’s Academy, provided the winner wreaths in ancient Olympics and the liquid for religious rituals, throughout times, from ancient altars, to christenings and menorahs. And after all virginity, for all what it is worth, will regain its meaning again.

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By Pete Chatziplis, CFA, ACCA, MBA. The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.
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GREK ETF, NBG and other ways for the risky to play the Greek crisis in the US

As a Greek bailout plan seems to be gravitating towards a yet again successful closure in its on-off year-long saga, the Greek stock market has been experiencing a robust rebound.

It’s no secret that the Greek stock exchange has plummeted over the last three years. Its capitalization from over $220 billion in 2007, has fallen nearly 90% to under $28 billion in November 2011. Following recent optimism for a successful closure to the bailout package it is experiencing a remarkable rebound. As a result the Athens Stock Exchange General Index reached 840 points in February 17 compared to a low of 621 almost a month ago. By comparison at the end of 2009, just after the last elections and before the crisis erupted it was at 2,900 points. At this time banks were trading at five times more than current prices or at over 2-3 times book value. Off course since them much of the book value has been eroded due to the devaluation of state bond holdings and loan losses resulting from the economic crisis.

There are some ways for US investors with risk appetite to gain exposure to the Greek crisis if interested. These are mainly the Greek ETF GREK and some very few stocks, mainly the National Bank of Greece (NBG). They might sound like a good opportunity for bottom fishing but be prepared that speculating here maybe a rollercoaster.

The GREK ETF tracks the FTSE/Athex 20 Index, which is comprised of the top 20 companies listed on the Athens Exchange by market capitalization. That limits, to the extend possible, risks from ASE’s low liquidity. GREK is heavy in banks (almost one third of its value) as well as some blue chip private companies, large utilities and state controlled companies. Greek banks in our opinion serve as a sort of hedge fund for small-size Greek companies and to some extent consumer and real estate market, albeit to lesser extend than US banks. Greek banks are coming back from the brink of collapse. If the Greek sovereign debt swap (PSI) and banks’ recapitalization takes place as planned, state funds will flow in in the form of common stock with limited voting rights. These common stocks could be bought back after an extended period; hence management will stay private and dilution will be limited. That’s not that bad of a solution after all; compared to the alternative of preferred shares, no coupon will be paid and at the same time the state can participate in future capital gains. Common stocks with extended voting rights however would be detrimental for stock prices even the banks themselves and the economy. Public corporations that are also heavily represented in GREK, have been largely earmarked for privatization. Hence they may realize some future gains resulting from the M&A process. They can also be benefited from increased flexibility in labor regulations and lower costs that are to be voted by the parliament.

GREK was launched by Global Funds in December 7, 2011. It should have been probably coming long time ago considering the media attention over Greece and ASE’s volatility. It offers the possibility for both institutional and retail investors to participate in the action. It also offers the possibility for diversifying existing portfolios in search for alpha solely from a quantitative perspective. Hopefully this will bring some attention and new investors to the Greek economy. It is traded in the NYSE (arca platform). It has appreciated by 36% in its 3 months of existence to close at $19.4 on February 17 compared to $ 14.2 at launch. Its trading volumes are still relatively low however compared to other Greek stocks; maybe it’s not that very well known to investors yet.

Another great way to invest in the Greek crisis is the National Bank of Greece (NBG) which is listed in NYSE through ADRs. Investing here however also bears the noise from the Greek banking sector’s recapitalization pains. The stock has been in a free fall over the last year but has rebounded considerably lately. NBG’s ADR almost doubled since the start of the year in the midst of uncertainty over Greece’s fate. It closed at $3.86 on February 17 while its 52 week high is $11.85. It seems the worst are over for Greek banks as current rock bottom valuations and almost option-like features, reflect bankruptcy fears for the country and its banks, as well as severe shareholder dilution from recapitalizations. These scenarios seem to be out of the table for now. NBG is the largest commercial bank in Greece (no connection to the Central Bank of Greece although its predecessor) and is state controlled. Although Greek banks have been devastated by their exposure to the public sector under the legacy Greek economic model, they have relatively limited exposure to non-performing consumer and mortgage lending and satisfactory commission income. NBG’s main advantage lies in its exposure to the booming Turkish economy through its subsidiary Finansbank as well as subsidiaries in the developing southeastern economies of Bulgaria, Romania, Serbia, FYROM and Albania. A further benefit may arise from gradual flexibility in labor regulatory framework and wage decreases if current legislative proposals take effect.

Coca Cola Hellenic Bottling Company (CCH) is one of the largest Coca Cola bottlers that is engaged in distribution in Europe. Its shareholders and managements are largely Greek. The stock has gained 17% since the beginning of the year. This stock doesn’t probably offer the highest exposure to the Greek issue, quite rightly so as it’s a blue chip consumer staples company with a strong brand name and diversified operations extensively outside Greece.

Some other stocks that have seen action the last days whenever news about the Greek crisis were coming out, are Greek owned shipping companies. These are companies mainly based in Greece that have been listed in the New York stock exchanges since some time (due to Greek securities regulations shipping companies cannot or choose not to be listed in the Athens stock exchange). Shipping companies operate under complicated corporate structures often utilizing offshore holdings hence they have small exposure to the Greek economy and probably limited correlation as well, we may say. Moreover, their operations, revenues and expenses are denominated in foreign currencies; often in US dollars (crews are largely non Greeks). However, being or sounding Greek seems to offer some exposure for some investors. Companies in this category are Excel (EXM), Dry Ships (DRYS), Tsakos (TNP), Navios Holdings (NM) and Navios Partners (NMM), Diana (DSX), Euroseas (ESEA), Paragon (PRGN), Danaos (DAC), Costamare (CMRE), Star Bulk (SBLK), Safe Bulkers (SB), Freeseas (FREE), Seanergy (SHIP), Stealthgass (GASS), Aegean Marine (ANW) who are Greece based and to some extent Genco (GNK), Eagle (EGLE) who are headquartered in New York. Not all of the above are the same as they operate in different shipping segments (ie tanker, containers, dry bulk, marine fuel). Excel for example who mainly operates dry bulk carriers trades at around 8-9 PE and its 52 week high is at $5.

Greek shipping is huge but unfortunately for the country not that much connected to the economy, due to its offshore status. As said, speculating in these stocks in relation to the Greek crisis may only be offered for momentum trading and in the short tern in our opinion, while longer term potential should better depend on fundamental analysis. The shipping sector is in rough waters again; the Baltic Dry Index has plummeted recently maybe over concerns for China’s and Europe’s cooling. One then has also to drill down by bulk, tanker and container markets for a better analysis.

Although the recent gains in the Greek stock market, this remains a very risky area, not recommended for the faint at heart. However, as history shows, most stock markets do rebound considerably after a significant crisis. It just then comes down to when one calls the bottom.

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By Pete Chatziplis, CFA, ACCA, MBA. The writer may trade positions in GREK, NBG, EXM and other stocks named here. The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.
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Entrepreneurism in Greece: causes and problems behind the high numbers

It is often said that Greeks are entrepreneurial. According to OECD, Greece ranks higher among European nations in self-employment; 35.9% of the working population is self-employed, or 28.6% if agricultural employment is excluded. The same pattern is evident in other Southern European economies such as Italy, Portugal and Spain. By contrast the respective US number is only 7.2%.

Some consider the high level of self-employment as a sign of economic vitality; in reality it might well be the opposite. In developed economies, the self-employed represent on average 13% of the workforce while in Africa and South America 37% και 34% respectively. But there’s more to that. Greece and the other PIIGS countries also exhibit a high percentage of very small companies so this is a common pattern. For example, 35.3% of Greeks work in enterprises that employ less than 20 people when the respective number in Germany is 13.0% and in the US 11.1%. Even US high tech computer and research companies that are generally nimble, employ mostly more than 100 people.

As a consequence of fragmentation, Greek companies at least, lack resources to produce innovative, high value added products, take advantage of lower operating costs arising from economies of scale, export in large quantities, grow, hire people and eventually help the country to prosper. But then again that was not probably the idea in the first place. The Greek economy is characterized by a large public sector spanning both state administration and corporations, few big private enterprises and a large number of self-employed. All parties cooperate in harmony in a typical corporatist outlay. This model pretty much worked well, while the economy was mobilized by state funds funneled through public sector payrolls and infrastructure investment towards consumption. In the absence of access to sovereign debt capital markets this model has reached its limitations.

In 2009; a year before the debt crisis and the EU/IMF bailout program was signed, almost half of Greek tax revenues were generated from salaries and pensions. Corporate profits contributed a further 35% while the self-employed, farmers, very small businesses and income earners contributed 17%. In other words although one in three Greeks is self-employed; he/she contributed less than 20% of total tax revenue. In fact 83% of self-employed reported annual revenues below the non-taxable level of Euro 10,500 and paid no taxes. Many suggest that the reason for that is massive tax evasion. It might be; on the other hand that many self-employed truly generate very low revenues. In the absence of better alternatives being self-employed might be a necessity rather an option. It might also be a way for employers to overcome payroll taxes and benefits; employing somebody as independent contractor produced lower overall taxes for both employers and employees.

To increase revenues and cut spending, the Greek government is now pressed to reduce public sector payrolls and increase taxes. No surprise that these plans face severe opposition. As seen by the numbers, public sector workers as well as the self-employed, who are at the core of the Greek corporatist economic system also constitute two large voting blocks; together they form the majority of Greek voters. The government is also considering reintroducing formula-based tax calculation for the self-employed using “objective criteria” as reference. This may as well drive out of business many that indeed generate very low revenues. However it seems the only solution for tax authorities that pretty much have given up on curbing tax evasion. Without trying to find excuses it might not be that easy to keep up with so many self-employed. Imagine if one in three Americans was self-employed or in very small companies; how easy would it have been to administer such an economy?

All these changes will bring, if passed, dramatic changes to the Greek economy and society. Market consolidation might be painful to many small businesses such as independent retailers facing steep competition from large retail chains, but seem as inevitable development judging from experience in developed countries. In this process economic activity should be expanded beyond trade, infrastructure or real estate to industries that will contribute to the reduction of trade deficit. Large companies should be motivated to take advantage of the relatively low, for the European Union, operating costs in Greece and increase production there.

On the other hand this shouldn’t mean the end of Greek entrepreneurism, albeit its transformation to one where innovative, dynamic companies will grow into larger enterprises that will create jobs and exports. In the end, these jobs might be better than some self-employed now have.

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Prepared by Pete Chatziplis, CFA, ACCA, MBA.
The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.

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Επιχειρηματικότητα στην Ελλαδα: αιτίες και προβλήματα πίσω από τα υψηλά νούμερα

Λέγεται συχνά ότι οι Έλληνες διακρινονται για την επιχειρηματικότητα τους. Υπάρχουν πολλά λαμπρα σχετικα παραδείγματα αναμεσα στις ελληνικες κοινοτήτες ανά τον κόσμο. Πουθενά όμως δεν είναι αυτό πιο εμφανες από ό,τι στην ίδια την Ελλάδα. Σύμφωνα με τον ΟΟΣΑ, η Ελλάδα κατατάσσεται υψηλότερα μεταξύ των ευρωπαϊκών κρατων οσο αφορα στην αυτοαπασχόληση, 35,9% του ενεργού πληθυσμού της Ελλαδας είναι ελευθεροι επαγγελματιες. Εαν εξαιρεθει η γεωργική απασχόληση τοτε το ποσοστο αυτο διαμορφωνεται σε 28,6%. Ανάλογη εικόνα παρουσιάζεται και σε άλλες χώρες της Νότιας Ευρώπης όπως η Ιταλία, η Ισπανία και η Πορτογαλία ότι δηλαδή αποκαλείται σήμερα με το ακρωνύμια PIIGS. Συγκριτικα, το αντίστοιχο ποσοστο στις ΗΠΑ είναι μόλις 7,2%.

Ορισμένοι θεωρούν ότι το υψηλό επίπεδο αυτοαπασχόλησης ένα σημάδι ζωτικότητας της οικονομιας. Στην πραγματικότητα, μπορει να είναι και το αντίθετο. Στις ανεπτυγμένες οικονομίες, οι αυτοαπασχολούμενοι αντιπροσωπεύουν κατά μέσο όρο το 13% του εργατικού δυναμικού, ενώ στην Αφρική και τη Λατινική Αμερική το 37% και 34% αντίστοιχα. Αλλα δεν ειναι μονο αυτο. Η Ελληνικη οικονομια παρουσιάζει επισης υψηλό ποσοστό πολύ μικρών επιχειρήσεων, 35,3% των Ελλήνων εργάζονται σε επιχειρήσεις που απασχολούν λιγότερους από 20 εργαζομένους, όταν το αντίστοιχο ποσοστο στη Γερμανία είναι 13,0% και στις ΗΠΑ 11,1%. Ακόμα και οι Αμερικανικες εταιρείες υψηλής τεχνολογίας, υπολογιστών και έρευνας που είναι γενικά περιορισμενου μεγεθους, απασχολούν ως επί το πλείστον πάνω από 100 άτομα.

Ως συνέπεια του κατακερματισμού, οι Ελληνικές εταιρείες στερουνται των δυνατοτητων παραγωγης καινοτόμων και υψηλής προστιθέμενης αξίας προϊόντων, να εξοικονομησουν λειτουργίκα εξοδα μεσα απο οικονομίες κλίμακας, να εξαγουν σε μεγάλες ποσότητες, να αναπτυχθουν, να δημιουργησουν θεσεις εργασιας και τελικά να βοηθήσουν στην προοδο της χώρας. Ισως ομως και αυτος να μην ήταν ο αρχικος σκοπος της υπαρξης τους. Η ελληνική οικονομία χαρακτηρίζεται από ένα μεγάλο δημόσιο τομέα που καλυπτει τοσο κρατική διοίκηση οσο και εταιρείες, λίγες μεγάλες ιδιωτικές επιχειρήσεις καθώς και μεγάλος αριθμός ελευθερων επαγγελματιων. Όλα τα μέρη συνεργάζονται αρμονικά σε μια τυπική μορφή κορπορατισμού (ή συντεχνιών). Το μοντέλο αυτό λειτούργησε ικανοποιητικά όσο η οικονομία τροφοδοτούνταν από κρατικά κεφάλαια τα οποία διοχετεύονταν μέσω του δημόσιου τομέα σε υποδομές και κατανάλωση, αλλά έχει εξαντλήσει πλέον τα όριά τους δεδομένης της έλλειψη πρόσβασης του κράτους στις κεφαλαιαγορές.

Το 2009, ενα χρόνο πριν από την κρίση του χρέους και την υπαγωγη στο πρόγραμμα διάσωσης της ΕΕ/ΔΝΤ, σχεδόν το ήμισυ των ελληνικών φορολογικών εσόδων προήλθαν από μισθούς και συντάξεις. Οι επιχειρησεις συνέβαλαν ένα επιπλέον 35%, ενώ ελευθεροι επαγγελματιες, αγρότες, εμποροβιοτεχνες και εισοδήματιες συνεισφεραν το 17%. Με άλλα λόγια, παρόλο που ένας στους τρεις Έλληνες είναι ελευθερος επαγγελματιας, συνείσφερε λιγότερο από το 20% των συνολικών φορολογικών εσόδων. Στην πραγματικότητα, το 83% των ελευθερων επαγγελματιών δηλωσε ετήσια έσοδα κάτω από το αφορολογητο οριο των 10.500 Ευρώ και συνεπως δεν κατέβαλε φόρους. Πολλοί θεωρουν την εκτεταμενη φοροδιαφυγή ως την κυρια αιτια γι ‘αυτό. Αν και κατι τετοιο μπορει και να ευσταθει, από την άλλη πλευρά μπορεί και οντως πολλοί ελευθεροι επαγγελματιες να διαθετουν πολύ χαμηλά εισοδήματα. Ο λογος που ειναι αυτοαπασχολούμενοι μπορει να οφειλεται σε ελλειψη καλυτερων επιλογων.

Η Ελληνική Κυβέρνηση προκειμένου να αυξησει τα έσοδα της και να μειώσει τις δαπάνες σχεδιαζει να μειώσει τα εξοδα μισθοδοσιας στο δημόσιο και να αυξησει τους φόρους. Οπως ειναι αναμενο, αυτα τα μετρα αντιμετωπιζουν σφοδρες αντιδρασεις. Συμφωνα με τα στατιστικα δεδομενα, οι εργαζόμενοι του δημόσιου τομέα, καθώς και οι ελευθεροι επαγγελματιες οι οποίοι βρίσκονται στην καρδιά του Ελληνικού κορπορατικού μοντέλου, αποτελούν δύο μεγάλα κομματια της ελληνικης κοινωνιας και συνολικα αντιπροσωπευουν την πλειοψηφία των Ελλήνων ψηφοφόρων. Η κυβέρνηση εξετάζει επίσης την επαναφορά του υπολογισμου των φορων των ελευθερων επαγγελματιων με βαση “αντικειμενικά κριτήρια”. Αυτό μπορεί να οδηγησει πολλους επαγγελματιες που πράγματι εχουν πολύ χαμηλά έσοδα, να μην μπορουν να συνεχισουν την δραστηριοτητα τους. Ωστόσο, αυτο το μετρο φαίνεται ως η μόνη λύση για τις φορολογικές αρχές που υστερουν στην προσπαθεια καταστολής της φοροδιαφυγής. Βεβαια, χωρίς να προσπαθει να βρει κανεις δικαιολογίες ισως και να είναι οντως δύσκολο να παρακολουθουνται τόσοι πολλοι ελευθεροι επαγγελματιες. Φανταστείτε εάν ένας στους τρεις Αμερικανούς ήταν ελευθερος επαγγελματιας, πόσο εύκολο θα ήταν να ελεγχθει μια μια τέτοια κατασταση;

Όλες αυτές οι αλλαγές, εάν πραγματοποιηθουν, θα επιφερουν δραματικές αλλαγές στην ελληνική οικονομία και κοινωνία. Ο εξορθολιγισμος της αγορας μπορεί να είναι επώδυνος για πολλές μικρές επιχειρήσεις όπως τα μικρα καταστηματα που αντιμετωπίζουν σφοδρο ανταγωνισμό από μεγάλες αλυσίδες λιανικού εμπορίου, αλλά φαίνεται ως αναπόφευκτη εξέλιξη αν κρίνουμε από την εμπειρια στις ανεπτυγμενες χώρες. Σε αυτή τη διαδικασία εκσυγχρονισμου της οικονομιας θα πρέπει ομως να ενταθει η δραστηριοτητα πέρα από το εμπόριο, τις κατασκευες και τα ακινήτα σε τομεις που μπορουν να συντεινουν στην μειωση του εμπορικου ελλειματος. Θα πρεπει να δοθουν κινητρα σε μεγάλες εταιρείες να επωφεληθούν από το σχετικα χαμηλο για την Ευρωπαικη Ενωση λειτουργικο κοστος στην Ελλαδα και να αυξησουν την παραγωγή τους εκεί.

Από την άλλη πλευρά αυτό δεν πρέπει να σημάνει το τέλος της ελληνικής επιχειρηματικότητας, αλλα την διοχετευση της στην δημιουργια καινοτόμων, δυναμικων μικρων επιχειρήσεων που θα εκελιχθουν σε μεγάλες επιχειρήσεις που θα δημιουργούν θέσεις εργασίας και εξαγωγές. Τελικα, αυτές οι θέσεις εργασίας μπορει και να είναι καλύτερες από αυτες που κάποιοι ελευθεροι επαγγελματιες έχουν σημερα.

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Συντάχθηκε από: Παναγιώτη Χατζηπλή, CFA, ACCA, MBA.
Οι απόψεις που εκφράζονται στο ιστολόγιο αυτό δεν απηχούν υποχρεωτικά τις απόψεις του Transatlantic Business Forum.

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The Greek crisis: hidden interests and a case study in the making

The Greek bailout is a heated topic of discussion over the last two years. There are those in favor and those against. Those that believe that Greece should go bankrupt and those that support a rescue plan. There are economists, politicians and businesspeople with differing objectives and audiences preaching their views with passion. It’s very difficult to be informed and follow all aspects of the topic. Although Greece is in the epicenter of the discussion there are further repercussions from the action taken there.

We won’t cover the issues that led to the Greek problem here. We will only attempt to highlight some reasons behind the wide coverage that the Greek issue receives. This extensive interest might sound strange considering the rather small size of Greece’s debt and economy relative to the European Union. It’s also unexpected to see some newly developed support towards Greece. Some in Greece might be delighted with that; however this support shouldn’t be necessarily taken at face value. There may be certain hidden motives behind that. The following list is not inclusive but attempts to highlight some of them:

• Eurosceptics: Not everybody is in favor of strengthening the decision making process and powers of the European Union. Problems emanating from Greece and other economies if escalated can cast some doubts upon EU’s ability to handle such issues, at least under its current form. Some might even go as far as recommend writing-off the debt as a sign of leniency towards Greeks but do not expand on the repercussion if other EU countries or even countries outside the EU will likewise ask for the same treatment. Probably this act would be detrimental to the EU’s finances. Talk is cheap for the supporters of these views; they probably hold no position in the Greek debt or may even have invested on its default. On the other hand tax payers in Northern Europe that are critical of Greece’s economy are also going to foot the bill in the end. Some in Greece and elsewhere believe that this generosity is due to fear that a Greek default would create havoc; on the other hand these fears might be overplayed. They also point out to a potential “sell-off” of Greek assets; although these assets and their management where not able to avert the crisis up to now. In any case the criticism lays the finger on well known problems of the Greek economy that have made many Greeks suffer up to now; it’s probably the way it’s expressed that annoys; but then again all criticisms are annoying.

• Corporatists and power brokers: by this we refer to the corporatist nature of the Greek economy. Under the current model the economy was energized by state funds that were funneled through public sector payrolls and infrastructure investment to consumption, while some leaked away to the undercover economy. In any case the public sector, professional groups and small businesses worked in tandem through an interwoven grid of common interests. This model has reached its limitation due to the lack of access to sovereign debt markets. Change for many will not be easy; hence the unrest.

• Speculators: there’s a lot of money to be made in foreign exchange, sovereign debt and stock markets globally. In the aftermath of the 2008-09 crisis massive amounts of capital moved to macro funds that since then are doing pretty well. Each time that the Greek issue looks like heading to a deadlock then doubts over the Euro’s long term viability are granted and speculation can run rampant. A lot of money can be made in this trade. Capital markets can act more quickly than political systems in taking advantage of market panic or optimism. Don’t forget the fortunes made with the sterling’s exit from the ECU in 1992.

• Bigots: there are people within the European Union and elsewhere that would prefer Greece and other countries outside the European Union. Mistrust, even reservation between Europe’s south and the north exists; these feelings in some people can be magnified in difficult times. In this context many have found the opportunity to support Greece’s exit from the Euro, even the EU claiming that this will be to its benefit, it will better suit it’s economy. No discussion off course on whether this would solve Greece’s problems in the medium to long term.

• Economic debate: it won’t be surprising to see in future textbooks Greece feature as a case study on economic policy. The theoretical debate in developed but aging economies is whether to sustain the high cost of living and social welfare by increasing taxes and national debt or curb entitlements. This is an ongoing discussion in the US and elsewhere. Apart from the opinion that prevails in the end; the Greek case may not be the most suitable example for this discussion. For example the massive Greek public sector, low tax revenue base and labor productivity is not comparable to that of other western economies. What might work in one environment might be tragic in Greece and vice versa. However, the theoretical debate and prejudices complicate action taking on the ground.

As said this list is not inclusive. There’s more in to come as history is made.
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The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.
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The Greek economy’s Competitiveness: Myths, Reality and Prospects

The sovereign debt crisis brought Greece to the spotlight of world news, albeit in a rather undeserving way. As the country struggles to meet the requirements of its IMF/EU bailout plan but as well to grow out of a recession, attention is finally starting to draw to the core of the Greek economy’s problem: competitiveness, or lack thereof.

Looking back at the time that Greece joined the European Union its GDP stood at 65% of the European average; infrastructure, production capabilities and exports were not that great either. Over the years the Greek economy had to converge to the European average. But how could this happen? It seems that Greece’s and European Union’s plan, either intentional or not was to achieve that through public spending either by raising debt or EU subsidies that eventually trickled down to consumption and real estate. State spending accounts for 50% of the Greek economy and without elaborating further here, much of it as well as of EU subsidies, has been consumed in unproductive ways. This shouldn’t have to be this way, but unfortunately it is. What are the results? An overburdened state budget and a marginalized private sector.

Salary levels and productivity: the facts

The EU with the recently proposed Competitiveness Pact, later renamed to Euro plus Pact, is aiming at raising weak European economies’ competitiveness by taking aim at their wages levels. It’s true that salaries in Greece have increased considerably over the last years, however when compared to European ones are already much lower. Therefore, contrary to simplifications and prejudices, this is not the cause of the problem, at least not the only one. In fact it may as well be its solution.

On the other hand equally important for competitiveness, is what’s produced with this labor cost. Looking at labor productivity we can see that Greeks work more hours than their Northern European counterparts, mainly due to shorter paid leave. At the same time however they produce much less in terms of output value, as indicated by GDP per hour worked. The simplified explanation is that they are not efficient or hard working; the actual one mainly lies with the type of production. The Greek economy is characterized by services and agriculture while Northern Europe’s by high value added/export oriented technological products. In simple words, there’s just as much olive oil one can produce, on the other hand car manufacturing output will always worth more. Ηowever low salaries αρε, Greece would still not be able to grow and converge to EU averages. A vicious cycle..

So what’s the solution?

Greek R&D expenditure accounts for 0.6% of GDP compared to 1.9% for the EU average and a 3% target. In 2000, there were 0.4 patents per 1,000 residents in Greece while the EU average is 2.3. Technology and Computing firms accounted for 6.7% and 2.2% of the Greek economy respectively compared to 19.6% and 7.7% for the EU average. The above figures highlight the backwardation of the Greek economy (Source:
Bust: Greece, the Euro and the Sovereign Debt Crisis, Matthew Lynn, Bloomberg Press, Wiley, 2011). Greeks don’t lack ingenuity as it’s proven by their record around the world; so this situation can change. Successful R&D however requires research infrastructures, sizeable pools of competent R&D personnel, venture capitals and well functioning regulations.

To enable the Greek economy’s transformation to a high value added, robustly growing economy, a well thought long term plan is needed as well as input from prominent investors. If we agree in that then the next question would be which industries to invest in. In our opinion it’s of paramount importance to focus on specific sectors and establish strong local champions that will create exports and jobs, directly and indirectly. Since Greece lacks heavy industry it would be realistic, at least in the medium term, to invest in less capital intensive industries such as software, niche technologies and services while further capitalize on transportation and tourism. Even outsourcing could be an option; Ireland has followed this path. Green technology is another option that can as well offer the additional benefit of reducing oil imports.

Greece, already offers a low cost European base and is currently under a long term overhaul administered by the IMF/EU. Well targeted investment can offer significant benefits to investors and the economy. It will also create employment for scientists and professional and avert another bailout.
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Prepared by Pete Chatziplis, CFA, ACCA, MBA. Originally published at the Cosmopolis Greek American Magazine in June 2011.

The articles published here do not necessarily reflect the views of the Transatlantic Business Forum.————–

Aνταγωνιστικότητα της ελληνικής οικονομίας: Μύθοι, Πραγματικότητα και Προοπτικές
Η κρίση του χρέους έφερε την Ελλάδα στο επίκεντρο των παγκοσμίων ειδήσεων, αν και οχι με τον καλυτερο τρόπο. Καθώς η χώρα αγωνίζεται να ικανοποιήσει τις απαιτήσεις του σχέδιου διάσωσης των ΔΝΤ/ΕΕ, αλλά και να εξελθει απο την υφεση, η προσοχή αρχίζει επιτέλους να στρεφεται στον πυρήνα του προβλήματος: της ελληνικής οικονομίας: το κατα ποσο δηλαδη ειναι ανταγωνιστικη.

Οταν η Ελλάδα προσχώρησε στην Ευρωπαϊκή Ένωση το ΑΕΠ της ανερχοταν στο 65% του ευρωπαϊκού μέσου όρου. Υποδομές, παραγωγικη δυναμικοτητα και εξαγωγες δεν ήταν ιδιαιτερα ισχυρες. Τα επομενα χρόνια η ελληνική οικονομία επρεπε να συγκλίνει προς τον ευρωπαϊκό μέσο όρο. Αλλά πώς θα μπορούσε να συμβεί αυτό; Φαίνεται ότι ο τροπος που επιλεχθηκε τοσο απο την Ελλάδα οσο και την ΕΕ, συνειδητα η οχι, ηταν μέσω δημοσίων δαπανών, είτε αυτες προερχονταν απο την αύξηση του εθνικου χρέους ειτε απο κοινοτικές επιδοτήσεις, οι οποιες κατεληξαν στην καταναλωση και την στεγαστικη αγορα. Οι δημοσιες δαπανες αναλογουν στο 50% της ελληνικής οικονομίας. Χωρίς να επεκταθουμε περαιτερω εδω, ένα μεγάλο μέρος αυτων καθώς και των ευρωπαϊκών επιδοτήσεων, ειναι αρκετα αποδεκτο οτι έχει αναλωθεί σε μη παραγωγικες χρησεις. Δεν θα επρέπε αναγκαστικα να ισχυει κατι τετοιο, αλλά δυστυχώς ισχυει. Ποια είναι τα αποτελέσματα; Ένας υπερβαρος κρατικος τομεας και ενας περιθωριοποιημένος ιδιωτικος.

Μισθοι και της παραγωγικότητα: η πραγματικη εικονα
Η ΕΕ με το πρόσφατα προταθεν Συμφώνο της Ανταγωνιστικότητας, το οποιο αργότερα μετονομάστηκε σε Σύμφωνο για το Ευρώ, στοχεύει στην αύξηση της ανταγωνιστικότητας των αδύναμων ευρωπαϊκών οικονομιών, επικεντρωνοντας κυριως στα επίπεδα των μισθών τους. Είναι αλήθεια ότι οι μισθοί στην Ελλάδα έχουν αυξηθεί σημαντικά τα τελευταία χρόνια, ωστόσο ειναι χαμηλότεροι σε σύγκριση με πολλους ευρωπαϊκους. Ως εκ τούτου, αποφευγωντας απλουστεύσεις και προκαταλήψεις, οι μισθοι δεν είναι η αιτία του προβλήματος, τουλάχιστον όχι μόνο αυτη. Στην πραγματικότητα, μπορεί επίσης να είναι και η λύση του.

Εξίσου σημαντική για την ανταγωνιστηκοτητα, είναι και το τι παραγεται με αυτο το εργατικο κοστος. Αν αναλυσουμε την παραγωγικότητα της εργασίας μπορούμε να δούμε ότι οι Έλληνες δουλευουν περισσότερες ώρες από τους Βόρειοευρωπαίους, κυρίως λόγω της μικρότερης άδειας που παιρνουν. Την ίδια στιγμή όμως παράγουν πολύ λιγότερη αξια, όπως προκύπτει από το μεγεθος του ΑΕΠ ανά ώρα εργασίας. Η ευκολη εξηγηση ειναι οτι δεν ειναι αποτελεσματικοι η εργατικοι, αλλα η αιτια βρισκεται κυριως στο παραγωμενο προιον. Η ελληνική οικονομία χαρακτηρίζεται από τις υπηρεσίες και τη γεωργία ενώ της Βόρειας Ευρώπης απο τα υψηλής προστιθέμενης αξίας και εξαγωγικού προσανατολισμού τεχνολογικα προϊόντα. Mε απλα λογια οσο ελαιολαδο και να παραχθει αυτο δεν μπορει να ειναι πιο προσοδοφορο απο την παραγωγη αυτοκινητων. Οσο χαμηλοί και να γινουν οι μισθοί, η Ελλάδα θα εξακολουθει να μην είναι σε θέση να αναπτυχθει και να συγκλίνει με τους Ευρωπαϊκους μέσους όρους. Ένας φαύλος κύκλος ..

Ποια είναι η λύση λοιπον;
Η δαπανη για ερευνα στην Ελλαδα αντιπροσωπευει το 0,6% του ΑΕΠ έναντι 1,9% για το μέσο όρο της ΕΕ και το στόχο του 3%. Το 2000 αναλογουσαν 0,4 διπλώματα ευρεσιτεχνίας ανά 1.000 κατοίκους στην Ελλάδα, ενώ ο μέσος όρος της ΕΕ είναι 2,3. Τεχνολογικες επιχειρήσεις και επιχειρησεις πληροφορικής αντιπροσώπευαν το 6,7% και 2,2% της ελληνικής οικονομίας αντιστοίχως, σε σύγκριση με 19,6% και 7,7% για τον μεσο ορο της Ευρωπαϊκή Ένωση. Τα παραπάνω στοιχεία υπογραμμίζουν την καθυστερηση της ελληνικής οικονομίας. Οι Έλληνες δεν υστερουν σε εφευρετικότητα όπως αποδεικνυεται από τις επιδοσεις τους σε ολον τον κόσμο. Συνεπως αυτή η κατάσταση μπορεί να αλλάξει. Για να αποδωσει η ερευνητικη δραστηριοτητα ομως απαιτουνται ερευνητικες υποδομές, σημαντικος αριθμος ικανου ερευνητικου προσωπικού, χρηματοδοτικα κεφαλαια (venture capital) και ορθο θεσμικο πλαισιο. Η ερευνα δεν μπορει να αποδώσει απο μονη της.

Για να μπορέσει η ελληνική οικονομία να μετασχηματισθει σε μια δυναμικά αναπτυσσόμενη οικονομια υψηλής προστιθέμενης αξίας, χρειαζεται ένα καλά μελετημένο μακροπρόθεσμο σχέδιο και ιδεες απο σημαντικους επενδυτες. Αν συμφωνούμε σε αυτό, τοτε το επόμενο ερώτημα πρεπει είναι σε ποιους τομείς θα πρεπει να κατευθυνθουν οι επενδύσεις. Κατά τη γνώμη μας, θα είναι πολυ σημαντικο να επικεντρωθεί η επενδυτικη δραστηριοτητα στη δημιουργια μεγαλων επιχειρησεων που θα δημιουργήσουν εξαγωγές και θέσεις απασχόλησης, τοσο άμεσα οσο και έμμεσα. Δεδομένου ότι η Ελλάδα δεν διαθέτει σημαντικη βαριά βιομηχανία, θα ήταν ρεαλιστικό, τουλάχιστον μεσοπρόθεσμα, να επενδυσει σε τομεις χαμηλης εντασεως κεφαλαιου, όπως η πληροφορικη, ορισμενες εξειδικευμενες εφαρμογες υψηλης τεχνολογιας και φυσικα να αξιοποίησει περαιτερω τις δυνατοτητες που υπαρχουν σε μεταφορες και τουρισμο. Ακόμη και η αναληψη δραστηριοτητων απο αλλες εταιριες (outsourcing) θα μπορούσε να είναι μια επιλογή. Η Ιρλανδία έχει ακολουθήσει αυτό την πρακτικη. Οι εναλλακτικες μορφες ενεργειας είναι μια άλλη επιλογή που μπορεί επίσης να προσφέρουν το πρόσθετο οφελος της μείωσης των εισαγωγών πετρελαίου.

H Ελλάδα, προσφερει μια χαμηλου κόστους παραγωγικη βαση στην ευρωπαϊκή και βρισκεται υπο αναδιάρθρωση υπο την επιβλεψη του ΔΝΤ και της ΕΕ. Καλα στοχευμένες επενδύσεις μπορούν να προσφέρουν σημαντικά οφέλη για τους επενδυτές και την οικονομία. Θα δημιουργήσει επίσης απασχόληση επιστημόνων και επαγγελματιών και να αποτρέψει μια αλλη οικονομικη κριση.

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Συντάχθηκε από: Παναγιώτη Χατζηπλή, CFA, ACCA, MBA. Αρχικά δημοσιεύθηκε στο Ελληνοαμερικανικό περιοδικό Cosmopolis, Ιούλιος 2011.

Οι απόψεις που εκφράζονται στο ιστολόγιο αυτό δεν απηχούν υποχρεωτικά τις απόψεις του Transatlantic Business Forum.————–

US imports-exports increase by 16% in 2011; Transatlantic trade well over $600bn

US international trade recovered in 2011 seeing US exports reaching approximately $1.5 tr, up almost 17% from 2010, while imports increased by 16% reaching $2.2tr. Although trade deficit widened in 2011 was well below historical highs. Around 15% of US trade is with the EU which remains one of US’s main trading partners along with China, Mexico, Canada, Japan, South Korea and Brazil. That pattern is expected to persist although growth potential shifts to emerging markets. Ex-Im Bank that provides financial support to US exporters has identified nine key target export markets in emerging large economies, i.e. Brazil, Colombia, India, Indonesia, Mexico, Nigeria, South Africa, Turkey and Vietnam.

EU imports reached $1.9tr in 2010 increasing by 25% while exports reached $1.7tr, increasing by 23% according to the latest Eurostat figures. Apart from the US, EU’s external trade concentrates in the European region with countries such as Switzerland, Norway, Turkey as well as Japan and China in Pacific Asia. EU has been adversely affected by the sovereign-debt crisis. This has taken its toll on consumer and investor confidence, affected investment and consumption while fiscal consolidation is restraining domestic demand. These trends are expected to hold for several quarters, tilting growth prospects as well as the outlook for labor market developments to the downside. The first signs of improvements for GDP are projected for the second half of 2012 although this will not affect employment significantly.

At the same time the US economy is also experiencing a long period of slow recovery following the 2008-2009 crisis and subsequent recession. High household debt, subdued real estate prices, high persistent unemployment at 8.5-9% are adversely affecting consumer confidence, household and business spending. FED forecasts GDP growth of 2.5%-2.9% for 2012 and will keep rates unchanged through mid 2013 to support growth. In 2010 total US imports reached $1.9 trillion of which minerals, vehicles, other machinery and chemicals constitute the bulk; 5% is for food imports. Main US trading partners are China (19% of imports), Canada and Mexico (NAFTA partners), Japan, Germany, South Korea, Brazil and Netherlands. At the same time US exports reached $1.3 trillion with major destinations being Canada, Mexico, China, Japan, United Kingdom, Germany, South Korea, Brazil and the Netherlands.


Total bilateral US-EU Transatlantic Trade exceeds $600 bn. US imports from the EU reached $320 bn in 2010 (16.7% of total imports). At the same time US exports reached $340bn, hence a trade deficit of $80 bn. US’s larger EU trade partners are:
• Germany (machinery, vehicles)
• Netherlands (dairy, flowers, chemicals, beverages),
• UK (drugs, chemicals, arts, arms),
• Italy (dairy, olive oil, vinegar, apparel, marble, ceramics, boats, arts)
• Ireland (drugs, essential oils, chemicals)
• France (beverages, dairy, drugs, perfumes, aircrafts, art, vegetable extracts)
US mainly imports nuclear machinery, vehicles, pharmaceuticals, aircrafts, chemicals, minerals and beverages from the EU; foods represent 5 % of imports.

We see continued potential in high value added products when it comes to transatlantic trade. Lower Euro values might help tourism and EU exports across the board, although this shouldn’t be assumed a sustainable trend.

Our Import Promotion Services
The above information is a small part of the information included in an extensive market research we carried out regarding the potential of transatlantic trade with a particular focus in the food sector. Contact us if you would require further information or to purchase certain related publications such as:
• US economic outlook and imports data
–The state of the US economy and outlook (main statistics and commentary)
–US imports (top importers and imported items; imports by EU country)
• US Food Market
–Total size and trends
–Market segmentation (ie frozen food, prepared food, oils, sauces and condiments, cereals, pasta etc)
• Food Retail Channels (New York metropolitan area)
–Main retailers and profiles
–Benchmark and Financial analysis
• Business Regulatory Framework
–Business types and characteristics (C Corp, S Corp, LLC, Partnerships)
–Tax framework (taxes at federal and state level)
–Legal framework (liability protection, employment law, administrative requirements)
• Procedures for Food Imports to the US:
–Customs procedures, Import quotas and Tariffs
–FDA regulatory framework (for food products)

Additionally, capitalizing on our consulting experience in Europe and US, we have now launched import promotion services in the US, for European exporters. We have developed a robust methodology to assist in the successful entry of products to export markets.

Our Import Promotion Methodology

We provide a large array of import promotion services to our clients:

• Go-to-Market Strategy
• Product/Business Plan Preparation
• Marketing Strategy
• Business Matchmaking
• Entrepreneur Coaching
• Capital Raising/Commercial Financing
• Company Establishment
• Business Process Outsourcing
• Cultural Orientation
• Public Relations
• Trade Finance
• Distribution Channel Planning
• Event Planning
• Corporate Branding

We also offer in cooperation with external experts:

• Tax Planning
• Company Formation
• Product Label Design
• Regulatory Framework Compliance
• Import Procedures Clearance.

Finally but not least, we also undertake imports through an affiliated company. We are mainly interested in gourmet food products at this point.

Other sectors that we are interested in, regarding import promotion or trade/investment facilitation, are Business Process Outsourcing, Professional Services Outsourcing, Financial Services, Real Estate, Tourism, Energy and Green Technologies.

For a detailed analysis of our services and publications refer to http://www.transatlanticbusinessforum.com/Services.html. For more information you may contact Pete Chatziplis at info@transatlanticbusinessforum.com.