Thursday, May 21, 2009

Can China Go Green?

China's unprecedented growth in recent years has come at a terrible price. Two-thirds of its rivers and lakes are too polluted for industrial use, let alone agriculture or drinking. Just 1 in 100 of China's nearly 600 million city dwellers breathes air that would be considered safe in Europe. At a time when arable land is in short supply, poisoned floodwaters have ruined many productive fields. And last year, ahead of most forecasts, China passed the U.S. to become the world's largest source of greenhouse gases.

The immensity of these troubles has produced a result that may surprise many outside China: The nation has emerged as an incubator for clean technology, vaulting to the forefront in several categories. Among all countries, China is now the largest producer of photovoltaic solar panels, thanks to such homegrown manufacturers as Suntech Power (STP). The country is the world's second-largest market for wind turbines, gaining rapidly on the U.S. In carmaking, China's BYD Auto has leapfrogged global giants, launching the first mass-produced hybrid that plugs into an electrical outlet. "China is a very fast follower," said Alex Westlake, a director of investment group ClearWorld Now, at a recent conference in Beijing.


Understanding they are in a global race, China's leaders are supporting green businesses with policies and incentives. Beijing recently hiked China's auto mileage standards to a level the U.S. is not expected to reach until 2020. Beijing also says it will boost the country's share of electricity created from renewable sources to 23% by 2020, from 16% today, on par with similar targets in Europe. The U.S. has no such national goal.

While most environmentalists applaud these developments, China watchers are voicing two very different sets of concerns. Some question whether China will really stand by its ambitious targets and are worried by signs of backsliding as the recession in China's key export markets drags down economic growth. Another group, interested mainly in America's own industrial future, fears that China's growing dominance in certain green technologies will harm budding cleantech industries in the U.S. After all, China's emergence comes just as the Obama Administration is trying to nurture these same types of ventures, hoping to generate millions of green jobs. Many of these U.S. businesses will have trouble holding their own against low-price competitors from China.

Beijing's green intentions will soon be put to the test. China is in the midst of the biggest building boom in history. A McKinsey & Co. study estimates that over 350 million people—more than the U.S. population—will migrate from the countryside into cities by 2025. Five million buildings will be added, including 50,000 skyscrapers—equal to 10 New York Cities. And as quickly as new offices and houses multiply, they are filled with energy-hungry computers, TVs, air conditioners, and the like, sharply increasing demand for electricity, which comes mainly from coal-powered plants.

Environmental groups say it is therefore critical that Beijing promote rigorous, greener standards. And to some degree, that's happening. A government mandate states that by the end of next year, each unit of economic output should use 20% less energy and 30% less water than in 2005. Portions of Beijing's $587 billion economic stimulus package are earmarked for cleantech. On top of that, in March the Finance Ministry unveiled specific incentives to spark solar demand among China's builders. Included was a subsidy of $3 per watt of solar capacity installed in 2009—enough to cover as much as 60% of estimated costs to install a rooftop solar array.


Steps like these will help Himin Solar Energy Group in Dezhou, Shandong Province. Founded in 1995 by Huang Ming, an oil equipment engineer turned crusader against the use of fossil fuels, the company is the world's largest producer of rooftop piping systems that use the sun's rays to heat water.

How Delta Climbed Out of Bankruptcy

Delta Air Lines (DAL) plunged into bankruptcy in September 2005, marking the culmination of more than a decade of management missteps made largely out of hubris. The Southeastern airline allowed itself to go through many of the stages of decline outlined in Jim Collins' new book. Its sense of infallibility helped foster an undisciplined pursuit of practically every new jumbo jet that aircraft manufacturers rolled out, forcing it to fly large planes even on one-hour routes. Add to that a distinct denial of the increasingly grim realities of the airline business, exemplified by the errors made earlier this decade by then-Chief Executive Leo F. Mullin. He launched the trendy Song discount airline, which fizzled amid high costs and stiff competition from JetBlue Airways (JBLU). Worse, Mullin negotiated a 2001 labor deal that paid top pilots a record-shattering $300,000 a year. "Management always had to have the biggest and the best," recalls a former exec. "It was the Delta way."

That strategy helped the Atlanta-based carrier rack up billions in losses, pushing it into bankruptcy. And management was so slow to accept its humbling fate that one bankruptcy judge told executives: "I have not heard anything that I will say remotely impressed me that you have the money, the talent, or the thought that you could successfully reorganize in this case." Admits President Ed H. Bastian: "There were periods when Delta could have been just 24 hours from disappearing. If the pilots had walked out, I'm not sure we could have pulled through."

Less than four years after it was left on life support, Delta is now the picture of health. Thanks to a management overhaul, a rigorous shift towards more profitable international routes, aggressive cost-cutting, and a shrewdly timed merger with Northwest Airlines, Delta is now viewed by many analysts as the country's top-performing major carrier. It boasts the strongest balance sheet, the best route structure, and the best prospects for future profitability. "They transformed the company amazingly well," says longtime critic Roger E. King, an analyst for CreditSights, a New York-based institutional research firm.

It was a hard-won battle to reverse the downward spiral. In 2004, with cash running low and most assets hocked, Delta struggled for many weeks to find the debtor-in-possession financing to keep operating. It also came within 24 hours of failing to avert a pilots' strike. The carrier had to fight hedge fund managers pushing for a sale or breakup, then a hostile bid from US Airways (LCC).


What put Delta on the path to recovery and renewal was a willingness on the part of management and employees alike to make sacrifices. Gerald Grinstein, a director who had stepped in as CEO in early 2004, convinced the pilots to swallow deep pay cuts while reducing his own salary by 25%. (For good measure, he later donated his bonus to a scholarship fund for the children of employees.) Together with Bastian, he convinced a key group of creditors—suppliers including Boeing (BA), Pratt & Whitney (UTX), and Coca-Cola (KO)—that they'd lose big under a merger with US Airways, which flew mostly Airbus planes using General Electric (GE) engines. And Bastian persuaded creditors to accept Delta's plan over US Airways' takeover bid, which was more dependent on outside financing. "They took the bird in hand," he recalls.

But simply warding off failure wasn't enough.

Sunday, May 17, 2009

Cisco's Big Push into New Markets

Pulled up close to a conference table at Cisco Systems (CSCO) headquarters in San Jose, CEO John T. Chambers talks about what feels to him like a tipping point in the company's history. In recent weeks, Cisco has cut deals with customers looking to use its technology in more expansive ways than ever before—Major League Baseball teams that want fully wired stadiums, the city of Miami as it develops a smart power grid. "It's been like that for the last 120 days," Chambers says. "We're in the right place at the right time."

Chambers is betting big that Cisco can capitalize on such opportunities. While many companies retrench, the tech giant has strong profits and $33 billion in cash in its coffers. More important, in Chambers' eyes, is Cisco's position as the dominant provider of the networking gear that runs the Internet. Just as the tech world revolved around IBM (IBM)'s mainframe computers in the 1970s and Microsoft (MSFT)-powered personal computers in the 1980s and '90s, Chambers believes Cisco has an opportunity now to make its digital networks the platform on which new innovations are built. "There's an inflection point happening," he says. "Cisco and the network are at the center of it."

Investors certainly hope so. Cisco's stock, now $18 a share, is at the same level it hit in 1998. Although Chambers has assured shareholders that Cisco can increase revenues 12% to 17% annually, that looks increasingly difficult now that the company has grown to $39.5 billion in revenues.

To hit that growth target, Chambers is hastening efforts to move beyond the core business of selling switches and routers. This year Cisco hiked the number of new markets it is targeting to 30, so it can offer everything from digital billboards to stereos and video surveillance systems. Chambers also is using the company's cash to buy his way into other markets, as he did in March with the purchase of the Flip video recorder maker Pure Digital. Chambers tells BusinessWeek that Cisco likely will hit a total of 50 fresh markets within a year. "We're moving into new [areas] with a speed nobody has ever attempted," he says.

Such frantic expansion comes with risks, and not just the danger of losing focus. The biggest concern is that Cisco will alienate key partners that as a group deliver more than 80% of the company's sales. IBM, Dell (DELL), and Hewlett-Packard (HPQ), for example, sell billions in Cisco gear each year as they help companies build tech systems. But Cisco's move this spring to sell its own servers makes it more of a rival to those three, which sell similar products. "They definitely risk relationships [with IBM, HP, and Dell]," says Greg Simpson, chief technology officer for General Electric (GE). HP and Cisco already have begun to spar publicly.


Tensions also appear to be rising with IBM, which resells about $3 billion in Cisco gear to clients, analysts say. The spat started when Cisco swooped in to buy Internet conferencing company Webex Communications in 2007, after IBM had thought it had sealed the deal. But the big blow came when Cisco unveiled its new servers, which are designed for the operators of so-called data centers, a prime piece of Big Blue's business. "[Chambers] is known for trying to find a win-win," says one tech CEO. "This isn't a win-win. It's a declaration of war."

About That New, "Friendly" Consumer Contract

Out of the ashes of the financial crisis small flowers are beginning to bloom. One is an initiative in Washington—and among some companies—to curb ambiguous and sometimes abusive consumer contracts, especially in the credit-card industry. But before anyone celebrates the budding reforms, it's worth looking at how an earlier campaign to clean up customer agreements led right back to confusion and frustration.

Democratic lawmakers see an opportunity to take advantage of popular hostility toward banks and other financial-services companies. Committees in both the Senate and the House in recent weeks have approved new restrictions on credit-card interest rates that would go beyond curbs adopted by the Federal Reserve in December. President Barack Obama called bank CEOs to the White House on Apr. 23 to tell them that he backs the legislation and will fight to see it enacted.

Rising consumer impatience with contracts for credit cards, cell phones, health insurance, and cable television has also spurred action in the marketplace. Western Alliance Bancorp's (WAL) PartnersFirst unit is pitching a card that would guarantee some customers no interest rate hikes in the first year or on any existing balances. "PartnersFirst is already well ahead of proposed legislation when it comes to offering consumer-friendly credit-card programs," according to a marketing presentation PartnersFirst is sending to credit unions, which would promote the card to consumers.

Upstart Virgin Mobile and other smaller cell-phone companies are selling monthly service without the baffling one- or two-year contracts that lock in customers of giants Verizon (VZ) and AT&T Wireless (T). "It's not about inventing a new technology; it's about providing better service in an industry where [service] is done poorly," says Peter Lurie, general counsel of Virgin Mobile. In the mortgage field, ING Direct (ING), the country's largest Internet-based bank, is advertising a simplified two-page home-loan agreement. "The marketplace is coming to us," says Arkadi Kuhlmann, ING Direct's CEO. "I don't want to be judged by what is in the fine print, but what [consumers] think is right."

As promising as these developments seem, any enthusiasm should be tempered by experience. In the 1970s, the consumer movement inspired by Ralph Nader sparked a revolt against legalese. Enthusiasm for "plain language" spread through some state legislatures and major corporations. In 1975, Citibank (C) reduced its standard consumer loan agreement from 3,000 words to 600. Other banks followed. "Control by obfuscation was minimized," Nader now says.

The victory was short-lived. Building on the plain-language breakthrough, state and federal lawmakers approved disclosure laws intended to provide consumers with more information about their credit arrangements. But some companies responded by reviving lengthy and confusing credit agreements, notes Katherine Porter, a law professor at the University of Iowa. "The more things we make [companies] say, the more places they have to hide stuff," she argues.

By 1990 the typical credit-card agreement was back up to five dense pages. Today it is more than 30. The plain-language movement "failed miserably," says Duncan E. MacDonald, a former Citibank lawyer who helped write the bank's consumer-friendly contracts in the '70s, and later served as general counsel of Citi's North America and Europe card unit.

The Art of CEO Succession

This is not an easy time to nurture a new generation of corporate leaders. Training budgets are being slashed while a depressed housing market has made it harder to move around for better job opportunities. And yet the need for top talent is growing. A record 1,484 U.S.-based chief executives left their jobs in 2008, according to outplacement firm Challenger, Gray & Christmas. Many more could step down this year as losses mount and executive angst runs high. "The CEO job today is more stressful and draining than at any time in history," says Tom Stemberg, the founder and former CEO of Staples (SPLS). "People have just run out of gas."

At a time when corporations worldwide are crying out for new thinking, BusinessWeek (MHP) decided to take a look at some of the CEOs of tomorrow. These are senior executives who are not yet in the corner office but who have won the attention of headhunters, peers, and their own bosses. Some of the 20 leaders profiled in the next few pages are company veterans. Others have eclectic rsums that cite experience in different industries and jobs. What unites them is an understanding of the global marketplace as well as a knack for sensing and seizing new opportunities.

What's striking about many of these candidates is that they were identified as promising early on and given opportunities to prove themselves. Their careers highlight the critical importance of an oft-ignored management priority: succession. While the median CEO tenure today is just six years, according to Booz & Co., few boards and managers carefully nurture a stable of successors. Last year, the National Association of Corporate Directors found that 42.4% of companies had no succession plan at all.

The economic crisis has exacerbated this problem as resources have diminished. Guy Beaudin, an executive coach at RHR International in Toronto, has seen a 25% reduction over the past year in work helping clients groom future leaders. Veteran coach Marshall Goldsmith, who just wrote a book on succession, compares such moves to cutting back on research and development: "There's a short-term benefit but a long-term cost."

For a sense of how to do it well, look at the seamless CEO transition at DuPont (DD) earlier this year. Chief Executive Charles O. Holliday Jr. had spotted top lieutenant Ellen J. Kullman as a potential successor more than a decade ago. Holliday, a gregarious Tennessean and DuPont lifer who became CEO in early 1998, had mentored Kullman since they met in the early 1990s in Tokyo. He was running the Asia-Pacific operations, and she was visiting as a senior manager in the electronic imaging unit. He was impressed with Kullman's willingness to learn. "There goes a future leader," Holliday recalls saying to himself. Kullman remembers being peppered with questions. "He scared me," she says.

Kullman joined DuPont as a marketing manager in 1988 and was quickly promoted, distinguishing herself by improving troubled units. She was tapped in 1995 to run DuPont's $2 billion titanium technologies business and later turned a newly formed safety-products division into what became the company's highest-earning segment during the time she ran it. "We had to change our business model three times before we found the right one," Kullman recalls. "There were times when I questioned whether we could get there or not."

Kullman was executive vice-president when Holliday told her last September that she would soon replace him in running DuPont. While her appointment came a bit sooner than Wall Street analysts expected, no one was surprised to see her taking over as CEO at the start of this year. (Holliday, 60, has stayed on as chairman.)

Within DuPont, a 206-year-old Wilmington (Del.) conglomerate, executives appreciate the importance of cultivating the next generation of leaders.

Marcial: Medarex, a Bright Spot in Biotech

The world of biotechs is a tricky place for investors. Ambitious young companies aspiring to become future drug kings require huge financial resources to produce life-changing medicines that take many years to develop. Most firms never make it beyond the development stage. Nonetheless, some biotechs manage to reap enormous rewards once they reach near-commercialization of their products.

That is where Medarex (MEDX), a biopharmaceutical outfit focused on monoclonal-antibody-based therapeutics for cancer and inflammation-related diseases, appears to be headed, according to several investment pros. Medarex believes antibodies have proven to be useful elements in making drugs. Analysts note that as of December 2008, the Food & Drug Administration has approved 24 therapeutic products based on antibodies.

Medarex is one of the few biotechs that has chalked up handsome gains this year. It shot up to 6 a share on May 1, from a 52-week closing low of 3.40 on Mar. 3, 2009. On Aug. 1, 2008, the stock had been much higher, streaking to a 52-week closing high of 10.12. So the bulls are optimistic the stock could bounce up some more, to the 10 to 11 level in 12 months. The Standard & Poor's Biotech Index declined 8.7% year-to-date through Apr. 8, 2009.

The company is close to becoming a major biotech player, says analyst Mark Monane of investment bank Needham, given its late-stage development drugs aimed at major diseases, including metastatic melanoma, prostate and lung cancers, psoriasis, rheumatoid arthritis, and clostridium—a deadly form of diarrhea. (Needham has done banking for Medarex.)

Medarex's state of drug production is the envy of other biotechs. "Medarex has one of the most robust pipelines in the industry, with 40 compounds in development, either internally or through partnerships, including three that are in phase III clinical trials," says analyst Jeffrey Loo of Standard & Poor's, who rates the stock a buy. (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP).)

More Than 50 Partnerships

On Apr. 24, the FDA approved one of Medarex's products developed in partnership with Johnson & Johnson (JNJ) called "Simponi," as a once-a-month subcutaneous treatment for moderate-severe rheumatoid arthritis. In December 2008, J&J got approval from Canada to market another Medarex drug called Stelara, for treatment of severe plaque psoriasis in adults. And in January 2009, the European Commission gave its approval for the same drug. Stelara is still under review by the FDA for the U.S. market.

Medarex has been busy teaming up with some of the biggest pharmaceutical companies. Loo notes that as of Dec. 31, 2008, Medarex had more than 50 partnerships with pharmaceutical and biotech companies to jointly develop and commercialize products, including Pfizer (PFE), Amgen (AMGN), Bristol-Myers Squibb (BMY), J&J, Eli Lilly (LLY), Abbott Laboratories (ABT), Human Genome Sciences (HGSI), and Novartis (NVS).

Why Indians Are So Thrilled by Tata's Nano

For his first meeting with the object of his desire, Rajesh Murthy, 32, clean-cut and handsome, gets a haircut, a new shirt, and a wad of cash. The resident of Ghaziabad, a low-income suburb of New Delhi, wakes up early, calls his boss at the restaurant where he runs the cash register to say he's taking a sick day, and then drives a half-hour on his motorcycle to a dealership in South Delhi. There, he stands in line with hundreds of fans, pushing through the crowd at every opportunity, eagerly craning his neck for a glimpse. "I can't wait," he says, his eyes darting around to look for an opening in the throngs of people. "I saw it once two years ago, and since then I have been dreaming of bringing it home, surprising my parents. Oh, my wife, she will be so happy."

Suddenly, the doors open and he is ushered into another crowded room. There, in the corner, just as he remembered it, is a pristine, white Tata Nano. Brand-new, the factory paint still shiny, a bright red ribbon crisscrossing its hood, its doors invitingly open, the car seems to beckon to Murthy. In the two and a half years since Murthy first saw pictures of a Nano prototype, the car has become an obsession for him and countless other Indians. He dreams about the $2,000 "People's Car," he tells me sheepishly, running his hand through his hair. "Quickly," he says, grabbing my hand, and together we half-run to the car.

Like 350,000 other people all across India, Murthy puts down an $80 deposit to enter a lottery. Only a lucky 100,000 winners will get to buy a Nano in the next 12 months. They have to take their chances, because Tata Motors (TTM), which dreamed up, designed, and then produced the cheapest car in the world, has a problem that General Motors (GM), Ford (F), and Chrysler only wish they had: far too many customers. Pressure from local politicians angry about Tata using farmers' land for its proposed factory in West Bengal forced the company last year to give up and start again in Gujarat, a state in India's west with a pro-business government. The new factory there won't be complete until late 2009, so for now Tata has to ration access to the Nano.

It is difficult for many Westerners to imagine what cars mean for Indians. For decades, Indians chafed under a controlled economy, choosing from two cars—the tank-like Ambassador, unchanged since the 1950s, with its sofa seats and lumbering engine, and the ladylike Fiat, modeled on the 1957 1200D, short and petite, with an awkward gearbox attached to the steering wheel. Few people could afford new cars, and secondhand, thirdhand, and even fourthhand cars were coveted.

Car Blessings

In the early '90s, the economy opened up, and suddenly there were choices, some affordable, most not. New cars, almost always the Maruti 800, designed by Japan's Suzuki (7269.T) and built by the Indian government, would be delivered to houses, their gleaming, factory-fresh bodies festooned with ribbons and flowers. With envious neighbors glaring, the new owner would gingerly drive the car to a temple, where a priest would crack open a coconut and say a prayer, blessing both the car and its occupants.

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