Archive for the ‘Business’ Category

Design the change — better still, invent it, but don’t forget to manage it

July 10, 2014

(Extracts from a recent lecture on change management).

Without change even time does not exist.

Without change life itself is impossible. Elementary particles could be here or may be there. Schrodinger’s cat may be alive or maybe not. Atoms vibrate. Chemistry happens. Molecules are built. Some reproduce. Life emerges. The earth rotates. The Sun radiates. Energy is transformed. Species appear. Species disappear.  Evolution results. Continents drift. Climate changes. Energy is transformed. Radiation dissipates. Entropy increases. The Universe expands.

Before the Big Bang and the existence of time, all was stasis and maybe there will be stasis again. One day the Sun will die.

But till then we live – and die – with change. “Change Management”  appeared as a new discipline in the 1980’s to try and manage our behaviour during such change. Mergers and acquisitions across borders and cultures has given impetus to the field.

Change makes us uncomfortable but some deny it, some run away from it and some embrace it, but we all have to cope with it. The key lies in how pro-active we can be. We can classify increasing levels of being pro-active:

  1. Deny the change
  2. Observe the change
  3. React to the change
  4. Manage the change
  5. Design the change
  6. Invent the change

In the commercial world I would claim that the greatest benefit lies in being as high up among these levels as possible. I suspect that this applies to all fields of human endeavour and not just to commercial enterprises.

Denying that change has happened generally leads to isolation and eventually to extinction. That applies as well to a species as to a commercial enterprise or to an individual. Change can be gradual along existing trends or it could be a change in the trend or it can be a discontinuity and the start of a new paradigm. Observing and forecasting the changes to come is where change management begins. But there has to be a caveat here. Denying or failing to observe a change is very dangerous but so is assuming that a change is happening when it isn’t. Merely reacting to change is the norm and this passive approach means that the level of control is generally low. What will be will be. If change has happened, passive reaction must be replaced by active decisions. Even a “do nothing” option should be an active choice.

Predicting market trends is the stuff of life for market analysts and commercial enterprises. It is an attempt to observe change before it happens and to try and manage it. Even a defensive strategy should be an active decision. Establishing new products or penetrating new markets are attempts to design and manage a change. While designing a change gives a very strong position, it is no guarantee of success. Subsequent management of the change created will not happen automatically. Inventing change is the most powerful way of handling change but carries inordinate risks. A new paradigm – if created – may be quite unpredictable.

Sony invented Betamax but didn’t properly foresee the changing market they helped create.  But when they created the Walkman they shifted a paradigm. Nokia helped design the mobile telephony market but missed the switch to smart phones. Facebook and Myspace invented something new and a new paradigm of social connections ensued. But Myspace has not managed the subsequent change very well. The US invented the new Iraq but forgot to foresee or manage the change that they set in motion. The Indian electorate has invented Modi and it remains to be seen if he can manage the change and reinvent the country.

My message for all commercial enterprises becomes:

  1. Observe the changes around you (and try to forecast what they will be)
  2. Never forget to react to change
  3. Actively manage the changes which have already happened
  4. Aim to design or invent future changes but don’t forget to manage the change you create.

 

The end of the road for the large Alstom gas turbines?

July 7, 2014

(corrected February 2015)

The large (>50MW) Alstom gas turbines (GT11N2, GT13E2, GT24 and GT26) represent a line of technology which derives mainly from the BBC range of products (developed further as ABB) and acquired by Alstom in 1999. At that time Alstom’s licence with GE came to an end. But as GEC-Alsthom, Alstom had also inherited the gas turbine technology which came out of GEC in the UK. In the current Alstom range not much remains of the GEC tradition. At the smaller end Alstom also once had the gas turbine technology of the Ruston engines from Lincoln and acquired the ABB range of small machines (which themselves carried forward the developments as ASEA and some of the Sulzer range). But the entire range of industrial (<50MW) gas turbines was divested to Siemens in 2003 (and they are doing very well there).

Now as GE takes over Alstom’s power business (which has still to get final regulatory approval but looks to be a done deal), the days of the Alstom range of large gas turbines are strictly numbered. GE (and Siemens) have their own machines competing directly with the GT24 (60Hz) and GT26 (50Hz) and I do not expect that any more of these machines will ever be sold again. The sequential combustion design concept that these machines employ is so far from the GE approach that it seems impossible for any versions of these machines to continue. Alstom (as ABB) had adopted sequential combustion in the late 1990’s firstly to differentiate themselves from GE and Siemens and to get over their lack of access to advanced, high-temperature materials coming out of military jet engine programmes. Sequential combustion was first used/tested by BBC in the 1960’s 1948* though at much lower temperatures and ABB was trying to create a virtue out of a disadvantage – which the GT24 and GT26 did eventually do, but not without great problems and great cost.

GE may well have some benefit from some of the component solutions that Alstom has been forced to develop – at great expense – to get over the challenges posed by sequential combustion. Similarly some of the low-NOx solutions developed by Alstom could possibly be of use for GE. There may be some tricks for GE to pick-up regarding compressors. Certainly GE will continue with the very lucrative service market in maintaining the Alstom fleet and this will continue for perhaps 10 or 12 years at most. So while GE will benefit from the service revenue and by the reach of Alstom’s global sales organisation, the GT24 and GT26 – as products – have very little benefit to offer. It will not be possible for GE to absorb all the manpower currently employed with Alstom’s gas turbines. Not all those currently involved with the design and manufacture of the GT24 and GT26 will be needed for – or be able to switch over to – the design and manufacture of the GE range. GE’s global procurement network and its qualification of sub-suppliers is probably much more advanced than Alstom’s. I don’t expect that GE’s global sourcing will be much enhanced by the acquisition of Alstom’s Power business. Some job losses at Alstom locations are inevitable and I suspect these will be mainly in Switzerland while jobs in France will be somewhat protected by GE’s promises to the French government. At Belfort, Alstom produced GE machines under licence till 1999 and no doubt this will become GE’s centre for large gas turbines in Europe.

The GT11N2 gas turbine will probably die a natural death. It has not been a really competitive machine for over a decade and even though it has gone through many upgrades and cost reduction exercises, It has some unique advantages with low-Btu fuels but I do not think it offers GE any great advantages and they already have competing machines. The GT11N2 may have survived a little longer within the more restricted Siemens stable but even here it would have eventually withered.

The GT13E2 is possibly the only machine that may survive for a while under GE. It has some unique advantages with low-Btu fuels and could have a geographical market niche in Russia and the former CIS countries. But if it does survive it will do so only as a niche product. Again it would probably have had a longer life under Siemens but my guess is that it will not be sold for more than another 2 or 3 years.

The next market boom for large gas turbines – by my analysis – will come in the second half of 2015. This will be due partly to the 7-8 year “normal” business cycle and partly due to, and reinforced by, the advent of shale gas. And when that boom comes, the Alstom machines will be absent and there will be one less gas turbine technology available in the world. GE, Siemens and MHI will be the only three technologies left and they will be the main beneficiaries. But just three technologies are not enough. A growing market together with a dearth of technology suppliers will probably ensure the entry of another player into the field of large gas turbines.

(Actually Siemens and MHI get the best return at the lowest cost. They gain increased market space as Alstom’s machines disappear at no cost to themselves. GE gains no new products, gets the same increased market space and gets increased service revenue for Alstom machines. But GE has a large cost of acquisition and a great deal of hassle – and cost – to come as they restructure and integrate the Alstom business).

I would guess that this fourth player could well be Shanghai Electric with their newly acquired 40% stake in Ansaldo Energia. This has been something of a coup for Shanghai Electric. Doosan were also eyeing Ansaldo as a way of entering the gas turbine playing field (the entry barriers are too high for a scratch player). Both Doosan and Siemens had made bids for Ansaldo Energia but Siemens’ bid was essentially a defensive and a spoiling bid and they eventually withdrew. Doosan were the sole remaining bidder but it seems that Shanghai have pipped them at the post for this strategic acquisition.

* Correction – Sequential combustion was first used by BBC at Beznau in 1948, operating on distillate and with a TIT of 575ºC.

Bouygues’ need for cash will make or break GE’s bid for Alstom assets

June 21, 2014

As I suspected it seems to be the share price at which Bouygues are prepared to divest their shareholding in Alstom which will determine whether GE will acquire Alstom’s energy assets or whether the rival bid from Siemens/MHI will succeed. It seems that if a share price of less than €30 per Alstom share is accepted by Bouygues then GE may win the deal with the governments backing. IF they hold out for €32 or more then it may be Siemens/MHI who get the nod.

It is a hectic weekend for Alstom, the French government and Bouygues. The French government’s acquisition of 20% of Alstom’s shares is integral to their backing of GE’s bid over the rival bid from Siemens/MHI.

It is Bouygues need to exit from their 29% shareholding in Alstom and their need for cash which is probably the main driver for Alstom’s divestment. For Bouygues the book value of their holding of some 89 million shares is at about a value of  €33 per share whereas the market price is currently only around €28-29. Clearly the French government would prefer to just pay market price but Bouygues could well argue that their shareholding was acquired at the behest of the French government in the first place. Without their “white knight” intervention Alstom would have gone to the wall.

If Bouygues holds out for close to book value and the French government balks at the price then the Siemens /MHI offer may gain traction – especially if it offers Bouygues not only a higher price but also a clean exit from their entire shareholding.

ReutersTalks on an industrial tie-up between Alstom and General Electric entered a critical phase on Saturday, as the French government wrangled with Alstom shareholder Bouygues over a key plank of the transaction. Sources close to the negotiations said talks were continuing over the price at which the French state would acquire 20 percent of Alstom from Bouygues – a condition for government approval of Alstom’s alliance with GE in preference to a rival Siemens-Mitsubishi offer. ……

French President Francois Hollande applied more pressure to Bouygues, telling reporters in Paris he expected rapid progress in the stake purchase talks. “This is a major condition for the government’s acceptance of the alliance,” Hollande told reporters in Paris. “That’s why I believe we will make progress by the end of the day.” Without an acceptable deal on the Bouygues stake, he added, “it would be necessary to reconsider the alliance as it has just been announced”. …….

……  Economy Minister Arnaud Montebourg finally announced state backing on Friday for a GE-Alstom deal valuing Alstom’s energy business at 12.35 billion euros ($16.77 billion). But the official green light remains subject to strict conditions agreed with GE as well as the government’s successful purchase of a 20 percent stake from Paris-based Bouyues.

Montebourg said the French state was prepared to pay only market price for the Alstom shares, which closed at 28 euros on Friday – about 20 percent short of their accounting value to Bouygues.

My guess is that if Bouygues needs around €2.8 billion and if they hold out for more than €32 per share the GE deal may fail and the scales may tip in favour of the Siemens/MHI bid.

Auction for Alstom develops as GE and Siemens/MHI up their bids

June 20, 2014

UPDATE!

The auction could be over. It looks like the French government is backing GE’s offer and will itself take a 20% stake in Alstom.

France to Back G.E.’s Bid for Alstom Assets

===============================================

Once upon a time I was recruited by ASEA in Sweden. Then ASEA merged with BBC and through no action on my part I became an employee of ABB. Some years later ABB sold all its Power Generation business to Alstom (along with me) and – once again without any action on my part – I became an employee of Alstom. In due course I retired but one of my last actions was to sell off part of Alstom’s industrial power generation business to Siemens as part of a global divestment. Whereupon I was recruited by Siemens in Germany to help with growing the business just acquired from Alstom. And then I finally did “retire” – insofar as “retirement” means that I can now reject engagements which do not interest me.

So the current battle going on between GE on the one hand and Siemens/MHI on the other to acquire all of Alstom’s power generation business is of particular interest. The Alstom Board which had -in principle – accepted GE’s offer, is now faced with evaluating two rival bids. During this week both have improved their bids.

Alstom’s Board will convene no later than June 23 to review the bids.

My personal view is that that the Alstom need for divestment is driven not only by their debt but – perhaps more importantly – by the desire of their largest shareholder to exit. Bouygues owns 29% of Alstom and came in – at the behest of the French Government – when Alstom were in dire straits. But now Boygues themselves are in some trouble and need to exit and they need to convert their 29% to as much cash as possible. With Alstom paying no dividend, Bouygues’ 29% holding represents about €2.5 billion locked up as a non performing asset. So in my view the critical points for Alstom in selecting a buyer will be

  1. ensuring that whatever is left of Alstom after the divestment is more than merely viable, and
  2. that Bouygues gets the maximum cash return for its 29% in a “clean” and lucrative exit.

In any event a good, old fashioned, “bidding war” between GE and Siemens/MHI is probably a good thing for all Alstom shareholders – including Bouygues. I recall – during my time with Alstom – when Alstom was forced to sell its profitable industrial power generation business. The final sale price ended up about 48% higher than Alstom’s internally evaluated value – just because an auction did develop between Siemens and Hitachi. And the auction did not just happen – it took much time and effort to promote.

Whether the Alstom Board can engineer a “good” auction to the benefit of the remaining Alstom train business and their shareholders remains to be seen.

Bloomberg: 

Immelt is in Paris to present new details of GE’s $17 billion plan to officials including Economy Minister Arnaud Montebourg, according to GE. Negotiators for the U.S. manufacturer continue to refine specifics ahead of a June 23 deadline, including the structure of Alstom’s renewable energy, grid and transport businesses, the company said.

Seven weeks after unveiling its proposal for Alstom’s energy operations, GE confronts a counterbid by Siemens that seeks to carve up Alstom together with Japan’s Mitsubishi Heavy Industries Ltd. (7011) and Hitachi Ltd. (6501) The Siemens proposal values the energy assets at 14.2 billion euros ($19.3 billion).

Immelt’s return to Paris underscores the stakes in a deal that would give Fairfield, Connecticut-based GE control of Alstom’s technology for electricity transmission and power-plant maintenance as Europe’s economy starts to recover. The acquisition would be GE’s biggest ever and bolster Immelt’s push to return the company to its industrial roots.

Reuters:

Siemens and Mitsubishi Heavy Industries (MHI) raised their offer for Alstom’s energy businesses to compete with a revised bid by U.S. rival General Electric.

Siemens-MHI and GE have been facing off in a battle for control of Alstom’s power businesses that has seen the Socialist government give itself powers to block any deal in the name of protecting local jobs and influence over a strategic sector. 

Under their amended offer, Siemens-MHI would pay 8.2 billion euros ($11.2 billion) in cash rather than 7 billion and value Alstom’s power businesses at 14.6 billion euros, 400 million more than previously and still well above GE’s 12.4 billion.

……. The improved Siemens-MHI proposal still foresees Siemens buying Alstom’s gas turbine business. But MHI is now offering to buy a 40 percent stake in the combined steam, grid and hydro business of Alstom and bundle them in a holding company. It previously planned to create three joint ventures by acquiring 40 percent of the steam business, 20 percent of grid and 20 percent of hydro. The change will increase MHI’s share of the cash payment to 3.9 billion euros from 3.1 billion. Siemens’s contribution rises to 4.3 billion euros from 3.9 billion, with the company saying the increase was based on “a subsequent, more advanced opportunity/risk analyses”.

In addition, Siemens is offering to immediately enter into a joint venture for mobility management, including signalling, with Alstom.

Ericsson’s headcount in India now exceeds that at HQ in Sweden

June 11, 2014

Ultimately, adding value as close to the customer as possible is not only inevitable but it is also going to be the critical criterion which determines which companies will survive.

Ericsson the Swedish manufacturer of telecommunications equipment has just passed a kind of milestone when its headcount in India has now exceeded the headcount at its headquarters in Sweden. This will be seen negatively in Sweden especially by the unions, but it is this readiness and ability to get close to the market which actually gives me confidence that they are on the right track. Ericsson, I think, have played this balancing act of changing roles at headquarters while growing close to the market rather well. (Which is why I have Ericsson in my portfolio).

Mobiletor: Ericsson which prides itself as a growing provider of communications technology and services, now has more employees in India than it does in its home country of Sweden, according to the company’s Facts & Figures web page. The headcount is 17,991 staff in India and 17,545 employees in Sweden, with about 80 percent of its workforce being male. In total, Ericsson has 111,383 employees from across the world working for it and has its headquarters in Stockholm, Sweden. …..

India is the fastest growing smartphone market on the globe and 4G LTE is still at its nascent stage, with few operators still appearing to be in the mood for testing the waters before diving right in. Going by an Ericsson report, the country’s mobile broadband users will grow in number to touch four times the present figures by the year 2020. This is directly tied to the 80 percent of consumers who still haven’t adopted smartphones and are yet to experience the mobileweb.

Ericsson have a fairly upbeat view of the mobile market in the latest Ericsson Mobility Report and their own prospects:

The number of mobile subscriptions worldwide grew approximately 7 percent year-on-year during Q1 2014. The number of mobile broadband subscriptions grew even faster over this period – at a rate of 35 percent year-on-year, reaching 2.3 billion. The amount of data usage per subscription also continued to grow steadily. Around 65 percent of all mobile phones sold in Q1 2014 were smartphones. Together, these factors have contributed to a 65 percent growth in mobile/cellular data traffic between Q1 2013 and Q1 2014.

By 2019, global mobile broadband subscriptions will exceed the world population.

Total mobile subscriptions are expected to grow from 6.8 billion in Q1 2014 to 9.2 billion by the end of 2019. Global mobile broadband subscriptions are predicted to reach 7.6 billion by 2019 and will gain an increasing share of the total mobile subscriptions over time.

Mobile broadband users in India will grow in numbers to reach four times the present figures by 2020. In 2013, people accessing data on their mobile devices reached 90 million. The smartphone penetration of 10% or 90 million devices will grow to 45% or 520 million mobile gadgets by 2020. The mobile subscriber base is expected to increase from 795 million last year to 1145 million by 2020.

AstraZeneca prepared to talk to Pfizer if bid is increased another 10%

May 19, 2014

According to the Svenska Dagbaldet

After AstraZeneca today rejected Pfizer’s latest bid of nearly 770 billion kronor, it looks like no deal for this year But in its written response to the bid Astra Zeneca’s board writes that it is prepared to negotiate with Pfizer if the bid is raised by ten percent.

So I suspect that it may be better for shareholders in AstraZeneca to sit tight and wait for the next bid – but it may take a few months. In the worst case, holding on to an independent AstraZeneca is not such a bad deal in the long run.

I have been a little amused with the conservative politicians in Sweden and the UK abandoning their “free market” principles and  invoking the “public interest”  to oppose the deal. But unless they can convert their concern for the “public interest” into something tangible for AstraZeneca shareholders, they are doing them a disservice. In fact I would argue that without acknowledging that the AstraZeneca shareholder interests are also a public interest to be protected, both Cameron’s government and Reinfeldt’s government are engaging in an extra-legal, repressive and discriminatory behaviour.

Needless to say the Left and the Communists are opposed to the deal on religious grounds because rationalisation  – if it leads to the loss of any jobs and even redundant jobs –  is always a great SIN.

Markets surge as Indian exit polls are awaited after close of polls today

May 12, 2014

UPDATE!

Narendra Modi - The next Indian Prime Minister (photo Forbes)

Narendra Modi – The next Indian Prime Minister (photo Forbes)

The real results have to wait till Friday but early exit poll results suggest that

  • the BJP led alliance (NDA) will get over 280 seats in the Lok Sabha (272 needed for majority) while the Congress led alliance (UPA) will get less than 120 seats. 
  • BJP will be the largest single party
  • the AAP may get 5 seats
  • Narendra Modi will be the next Prime Minister

The markets rose over 3% today.

Turnout was a record at just over 66% (of an electorate of over 800 million voters).

========================================

The Indian markets are reacting to rumours and “inside information” as to what the exit polls will reveal when they are published later today. The Election Commission has confirmed that the results of exit polls – which have been carried out over the last 6 weeks of polling and are prepared and waiting to be released – can be released after the polls close at 1830 local time (1500 CET) on the last day of the last phase of voting today.

Exit polls don’t have a very good record in predicting the result of Indian elections – especially when they are extrapolated. But we have the peculiar situation of markets being driven by the expectations of what the exit polls will say and where the actual results will not be known till Friday. Capital inflow from overseas has been particularly high and there is a feeling that this cannot be just on the advice of local investors without any special knowledge. There is a suggestion – not at all implausible – that some large investors and their overseas partners may well have carried out their own, private, exit polls. And, the story goes, these show that Narendra Modi and the BJP will get close to an absolute majority.

On Friday the BSE Sensex rose over 3% and so far today has risen another 2+%  – over 1000 points in a day and a half of trading.

BSE Sensex 12th May noon

BSE Sensex 12th May noon (Reuters)

NDTV

It seems that investors are betting that the BJP-led NDA will emerge victorious on May 16, when results are announced, analysts say.

“There is a lot of political hope that has got baked in valuations. Markets are factoring numbers close to 230-240 seats for the BJP alone, and if that is the case, the NDA will get a majority on its own. That will lead to pro-growth, right of central, stable formation, which is enthusing for the investors,” said Manishi Raychaudhri, strategist and head of research at BNP Paribas Securities.

Polls have consistently shown the BJP and its prime ministerial candidate Narendra Modi ahead, raising expectations that the opposition party, which is seen by markets as being more investor- and business-friendly, will either win or come close to an outright majority. The surprising part, however, is markets seem to be factoring in the best possible scenario (stable government led by Mr Modi) even before exit poll results, due later in the day. 

 One possibility why markets have not waited for exit poll results might have to do with speculation that big investors have already got a whiff of what results would be. In fact, overseas investors bought shares worth Rs. 1,268.78 crore in the cash market on Friday, their biggest purchase since March 28. Friday’s gains came at a time when markets had shed 2 per cent after hitting a record high of April 25. Clearly, smart money had some information. 

Deven Choksey, managing director of brokerage KR Choksey told NDTV that somewhere from the media, numbers suggesting that the BJP will get 260-270 seats, came out. It was in circulation on social media and markets took advantage of that, he said.

 

Boeing 787 Dreamliner still not out of the woods

March 9, 2014

The Dreamliner woes continue with cracks in the wings found during manufacture and another emergency landing for a JAL Dreamliner. And in the meantime Norwegian Airlines is in rough seas as a consequence of their Dreamliner problems but have still ordered another four aircraft. Their eggs are all in the Dreamliner basket now but Boeing must have provided a great many sweeteners. The Dreamliners are proving not to be as fuel efficient as it was claimed they would be when they were being sold. Air India which has taken delivery of 13 Dreamliners and has a total of 27 on order is also reported to be seeking compensation from Boeing.

JAL Dreamliner makes emergency landing in Honolulu

Japan Airlines said Sunday its Dreamliner flight from Tokyo to San Francisco made an emergency landing in Honolulu, reportedly due to a possible problem with its hydraulic system.

The pilot of flight JL002, carrying 171 passengers and crew, decided to divert to Hawaii after a warning message about falling pressure of lubricant oil in its right engine, according to Japanese national broadcaster NHK.

Boeing Has a New 787 Dreamliner Headache With Wing Cracks

Boeing’s 787 is the airplane program that keeps on giving—problems. The company will inspect about 40 airplanes and delay some 787 deliveries after Mitsubishi Heavy Industries, which makes the plane’s carbon fiber wing, discovered small cracks in newly built wings following a change in its manufacturing process, Boeing said Friday.

The cracked area is very small and will require repairs that will take a week or two per airplane, Boeing spokesman Marc Birtel said. “We are confident that the condition does not exist in the in-service fleet,” the company said in an e-mailed statement. “We understand the issue, what must be done to correct it, and are completing inspections of potentially affected airplanes.”

Mitsubishi Heavy crafts the wings in Nagoya, Japan, and Boeing flies them to its 787 assembly plants in Everett, Wash., and North Charleston, S.C. About 17 of the 787s being inspected are fully completed, and seven have been undergoing predelivery flight tests, according to the Wall Street Journal, which first reported news of the cracks.

Profits down after Dreamliner dramas

Norwegian Air reported a profit in 2013 for the seventh year running on Thursday, but takings were significantly down on previous years. Major problems setting up its new long-haul routes with trouble-plagued Boeing 787 Dreamliners led to a huge amount of customer complaints, and the budget carrier angered unions and other airlines over pay conditions and its use of cheaper Asian crews. Norwegian reported its pre-tax profits for 2013 were NOK 437 million (USD 71.5 million), down from NOK 623 million in 2012. The airline lost NOK 283 million in the fourth quarter.

Norwegian orders four more Dreamliners and reports Q4 losses

Norwegian Air Shuttle announced on Thursday the lease of four more Boeing 787 Dreamliner aircraft, despite a series of technical hitches with the planes. The contract, which brings Norwegian’s planned Dreamliner fleet to 14, was signed with the US aircraft leasing company International Lease Finance Corporation (ILFC) but no financial details were released.

Boeing Says Air India Unhappy With 787 Dreamliner’s Performance

Boeing Co. said Air India Ltd. is dissatisfied with the performance of its 787 Dreamliner, joining other carriers including Norwegian Air Shuttle ASA in slamming the manufacturer for repeated faults on its marquee jet. “Yes, they are not happy with the reliability portion, neither are we,” Dinesh Keskar, a senior vice president at the Chicago-based planemaker, said in an interview at the Singapore Air Show today. “Over the last few months, we understood which are the components that were causing issues, which software needs to be upgraded.”

…. Air India diverted one of its 787s to Kuala Lumpur this month as a precaution after a software fault on a flight to New Delhi from Melbourne. Boeing is upgrading software and changing some components on Air India 787s whenever the planes can be taken out of service, Keskar said, adding that a 13th Dreamliner will be delivered to the carrier this month. …… Air India, which has ordered 27 Dreamliners, will seek compensation from Boeing after the carrier found that its 787s aren’t as fuel efficient as the planemaker had claimed while selling them ……. Fuel efficiency of the Dreamliner is improving after earlier models didn’t “quite make the mark” on this count, Keskar said.

Chinese corporate bonds no longer have a government backstop as solar cell firm defaults

March 7, 2014

Overseas investors have so far assumed that Chinese corporations would be bailed out by banks and the government if there was any danger of them defaulting. That assumption has now gone up in smoke as the Chinese Government – probably intentionally and as a signal – has allowed Chaori Solar to default. Chinese corporate bonds are now going to get a lot less attractive.

The strange fact about solar subsidies – around the world – is that the equipment manufacturers and the consumers have not benefited. Only plant developers have effectively walked away with the subsidies and they are usually very good at milking subsidies. As subsidies dry up it makes more sense for them to just walk-away. Solar (and wind) equipment manufacturers ramped up their production capabilities – sometimes by very expensive acquisitions – and are now in dire straits as subsidy reductions has caused the market to dive.

Bloomberg:Chaori Can’t Make Payment in China’s First Onshore Default

A Chinese solar-cell maker failed to pay full interest on its bonds, leading to the country’s first onshore default and signaling the government will back off its practice of bailing out companies with bad debt.

Shanghai Chaori Solar Energy Science & Technology Co. (002506) is trying to sell some of its overseas plants to raise money to repay the debt, Vice President Liu Tielong said in an interview today at the company’s Shanghai headquarters. The company said March 4 it will only be able to pay 4 million yuan ($653,990) of an 89.8 million yuan coupon due today.

The BBC warns:

Up until now, the Chinese government and state-owned banks have helped bail out or provide last-minute loans to Chinese firms in trouble. That has led many investors to park their funds in the corporate bonds of many Chinese firms, on the belief that the government would help ensure that these firms could continue to repay their debts.

However, a significant portion of this debt is set to mature in 2014 – with more than $1.5 trillion of corporate bonds outstanding at the end of January. …… That is why the Chinese government may be making a strategic decision to let some firms fail – particularly those, like Chaori, that may not have a huge knock-on effect in the market.

China’s solar industry has been suffering from an overcapacity problem for some time, as cheap financing and local government support led to a glut of firms entering the industry. That has led to a sharp fall in price, and the Chinese government has since hinted that it supports consolidation in the industry. ……… 

Yet while some see the default as a good thing for China’s corporate bond market, others worry it could be a sign of a wave of defaults to come. Bank of America analysts wrote in a recent note that the default could be “China’s Bear Stearns moment”. “In the US, it took about a year to reach the Lehman stage when the market panicked and the shadow banking sector froze,” they wrote. “We assess that it may take less time in China, as the market here is less transparent.”

Why insurance companies love alarmism

March 5, 2014

A fundamental for all insurance companies is that their profits are highest when perceived risk is higher than actual risk. There is a double benefit when the perceived risk can be hyped by alarmism  – whether about hurricanes or earthquakes or epidemics. The greater the alarmist meme, the higher the premiums that can be charged for the perceived risk. It is not surprising therefore that there is no insurance company which will publish a report – any report – about decreasing risks. It’s bad for business. But any alarmist report helps put up premiums for no increased risk. It is why many of them (and Munich Re comes easily to mind) employ many academics to produce alarmist reports. They find new risks to be alarmist about so that new insurance products can be invented.

And as Warren Buffet points out climate change alarmism has simply made hurricane insurance more profitable, driving up premiums without increasing risk”.

CNSNews: Any climate alarmist will tell you that climate change is increasing extreme weather events, but liberal billionaire Warren Buffett easily destroyed that argument.

Buffett told CNBC March 3, that extreme weather events haven’t increased due to climate change, saying that weather events are consistent with how they were 30-50 years ago. Buffett, who is heavily invested in various insurance markets, said that climate change alarmism has simply made hurricane insurance more profitable, driving up premiums without increasing risk

Buffett said the supposed increase in extreme weather “hasn’t been true so far, Joe. We always think it’s cold. We always think it’s cold in Omaha. But, it was cold in Omaha 50 years ago.”

CNBC’s Becky Quick asked Buffett on March 3’s “Squawk Box” if extreme weather events have increased, affecting insurance markets. Buffett responded that “the effects of climate change, if any, have not affected our – they have not affected the insurance market.”

Specifically, Buffett rejected claims that hurricanes have increased due to climate change, citing his experience in hurricane insurance. He said “we’ve been remarkably free of hurricanes in the United States in the last five years.” He added “If you are writing hurricane insurance, it has been all profit.”

Buffett compared the climate to previous decades, dismissing claims that weather events have been more unusual. He said “I think that the public has the impression that because there has been so much talk about climate, that events of the last 10 years, from an insured standpoint on climate, have been unusual. The answer is, they haven’t.”

 


Follow

Get every new post delivered to your Inbox.

Join 706 other followers