Wednesday, June 02, 2010

Strategy Myopia

What is the Philippine's San Miguel Corporation doing lately? Are they following a strategic map? Who is their strategist? Exactly, 12 years ago, on June 2, 1998.... while everybody was praising San Miguel as one of the best managed corporations in the country, someone pointed out a different reality: SMC was a continuing failure, and he pointed out the solution - Strategy Myopia.

Of course, this idea was considered crazy a dozen years ago...




The genesis of a stormy idea and the birth of the Street Strategist
Strategy
Myopia

"Strategy is seeing what everybody else has seen and thinking what nobody else has thought.” – Sir Acid

One of the biggest thrills for a young person is meeting famous people.

Unfortunately, my experience of this kind is dismal – I haven’t met any famous people at all.

Oh, maybe jockeying with Richard Gomez for a taxi one late night in Kai Tak airport would count. Maybe handshaking with John Denver in Kowloon after a concert would count. Maybe calling out to Richard Branson to show him the walkway to Prince Charles’ royal yacht Britannia moored in HMS Tamar would count. Maybe getting an autographed poster from Jamie Rivera, because we stayed in the same hotel in Singapore, would count.

Or, maybe hatching out a plan to kiss Tetchie Agbayani in the Calesa Bar, which my friend successfully implemented while I sat wishing I did it myself, would count.

But these were nonsensical encounters. You can say mine is a pathetic case when it comes to meeting famous people.

One exception
There was a minor exception, though, during a student cocktail party. I was so young that I remember on this occasion I tied my hair into a ponytail. The champagne sure was better than the local gin I was used to.

Andres Soriano III was standing alone in a corner. I suppose he was trying in vain to be inconspicuous.

Looking back, it must have been really some important student cocktail party, or really some influential school, for San Miguel Corporation’s CEO to be present. I think Washington SyCip was there too. There were some corporate big shots but in my ignorance, I didn’t recognize a lot of them.

It was something like a “students-meet-corporate-bigshots” cocktails. It was a nice activity; all schools should have one.

Nobody talked to AS3. It was because we all knew it was AS3 and no one dared approach him.

For me, it was a rare moment. At that time, there was only one question burning in my mind. This was the same question that all students present wanted to ask the CEO of the biggest operation in the country.

The question of a hundred years
Anyway, I went over to AS3. We exchanged “hellos” and he was very polite. He can afford to be polite, he didn’t have anything he couldn’t win. I can afford to be intrusive, I didn’t have anything to lose.

Okay, that’s an unfair statement – I just wanted to say something witty. In truth, he really was a nice person and all. He was holding his champagne flute. I don’t recall if he was drinking wine, or water or beer. By this time, other students had milled around us, having seen the pied piper leading the way.

I asked the question of a hundred years: “Mr. Soriano, why is it that after 100 years, all that San Miguel can do is make beer?”

I knew I was speaking for everyone when I popped that question. This question was not an original. It was a common thread of thought among students and instructors who previously spent more than five sessions discussing SMC from its roots 100 years earlier through the Marcos years, to the present.

(By the way, that series should be required reading in all business courses as I know even SMC employees have not read it. It has very interesting behind-the-scenes accounts like when Cojuangco and Gokongwei waged board room battles with the Sorianos.)

Anyway, we never had the chance to ask this question except among ourselves. This was the chance for us to hear it straight from the horse’s mouth.

Incidentally, that year was also SMC’s 100th anniversary.

Holy management ground
He paused before replying. AS3 was now standing on holy management ground, which at that particular minute had the greatest density of the best young management talents per square meter in the entire country.

These were young people who thought they could function as CEOs of SMC, Metrobank, and Petron the next morning without flinching. If an earthquake swallowed that room, you’d think there would have been a management drought for the next five years.

Certainly, there was intelligent life out there but count me out, I was only biding my time, drinking their wine.
“We try to focus on our core competence. We still have room for growth even within our own business sectors. We still have so much to do.” This is not verbatim. I don’t recall if he used the McKinseyish term “core competence” or the phrase “what we do best.” But that was the gist of AS3’s reply.

The crowd grew larger, this time the other big shots and the other students came closer, too.
Jet Magsaysay, editor of World Executive’s Digest, who had been standing there for some time revealed himself to AS3, which prompted the latter to say in jest, “Oh, you might be hiding a tape recorder there somewhere.”

Magsaysay replied in the negative to assure AS3 that none of the conversations would see print.

There were some discussions on the SMC sequestration, and some discussions on SMC’s cost of capital. If you don’t know what “cost of capital” means, don’t worry, neither do I. Defining “cost of capital” is like defining “rate base” which MERALCO and the ERB are having religious battles about.

The CEO who only wanted to be inconspicuous was now reluctantly holding court. The foreigners feasted on his ideas, the other big shots extended their handshakes, and the black-tie waiters offered their drinks.

I felt a tinge of guilt. If I didn’t drag the guy into serious discussions, probably he would have been merrier simply exchanging hellos with the rest of us.

Once I asked the question of a hundred years, others chimed in with their own questions, testing their minds against AS3.

The perfect reply
Before you raise your objection that SMC is also into ice cream, bottles, and softdrinks – hear me out. That’s exactly my point. SMC is maybe Asia’s largest food and beverage conglomerate, but after 100 years is that all it can do?

AS3’s “focus on core competence” vision was the perfect reply. A company must not over extend itself beyond what it excels in doing. A company must first exploit the growth of its industry before it touches another business it knows nothing about. And, certainly, with its army of management consultants, this core competence strategy is the best option available.

Personally, I disagreed with his vision.

In my champagne-encouraged eloquence I privately confided to a few of my friends present, including one who ended up at Citibank and is currently one of the best young investment bankers in the country: “The vision of the CEO is the vision of the company. If the CEO limits his vision, the company’s future is limited by that vision. If his vision is limited to food and beverage, then the company will be forever in food and beverage. If he had the vision, he can easily buy talent to implement that vision.

As an example, if he has zero knowledge on high technology, then he can buy the brains who know about high tech.”

I saw that those companies in the best position to enter into high technology, value-added manufacturing or development were not into the game in a big way. SMC, for instance, was more focused on consumption-based not export-based industries.

Genius does what it must
After 107 years, SMC has only one world class product – San Miguel Beer.

Isn’t that a waste?

Talent does what it can. Genius does what it must. SMC merely does what it finds profitable to do – brewing beer. If we recall the parable of the talents, SMC was that person who merely buried his money in the ground, proud of his prudence, yet chastised by the master because he wasted his talent.

SMC is a unique company. It was the single most qualified private entity to lead the country into economic prosperity. It had all the chances to bring this country into high tech value-added manufacturing or services. It had the clear chance to lead but it failed to grab the baton.

Unfortunately, it was content with being just a beer company instead of being the global world-class powerhouse it could have been.

SMC could have created its own computer brand for domestic and export markets in a technological partnership with HP or Intel. If I assembled my own computer, there’s no reason SMC could not. Instead of Acer or Compaq, we could have been using SMC laser printers and computers this time developing Filipino new technology along the way.

SMC could have gone into power generation. This is not too remote for its management as it already owns and operates power plants for internal use. Even granting it has no expertise at all, then it could have partnered with BC Hydro – not that I’m passing judgment on BC Hydro, but I liked their beautifully landscaped offices in Vancouver.

Recently in Hong Kong, a bus network franchise was awarded to New World, a company with zero transportation experience.

However, the HK government saw it from the angle of New World’s management track record in other businesses coupled with the fact that its technology partner is one of the best bus manufacturers in Europe. The consortium that acquired MWSS is using this strategy. What did they know about water prior to this project? They brought in the foreign water brains.

San Miguel could have gone into banking and financial services maybe by first issuing SMC Visa credit cards after all it had 20,000 employees as captive market. It could have gone into telecom, software, and infrastructure. Don’t point me to ANSCOR which has an anemic brand name as against San Miguel’s.

For what it’s worth, SMC could have gone into record producing, or book publishing to promote Filipino talents to the world.

RP’s first chaebol
Indeed, it could have entered into anything just by the mere fact that its name was San Miguel. Which foreign company wouldn’t have cooperated, or provided technology expertise, or formed a joint venture with SMC?

All SMC had to do was to come up with an idea and everybody would have jumped into the project.

In Hong Kong, it is said that for every dollar you spend, 30 cents goes into Li Ka-shing’s pocket. That’s how diversified Cheung
Kong Holdings is. In Singapore, Temasek Holdings is leveraging its power into French bread, property, shipyards, media, and the internet.

Others are beating SMC to the draw. The Lopezes went into defensive investments as power, water, and telecom. While originally into media, now they added internet business. That Bill Gates signed an agreement with a Lopez instead of with a Soriano is a big blow to the country’s most popular brand name.

Concepcion wants to find out what a silicon chip looks like, and Sy knows shopping malls are not everything.

We have all these family-based groups yet all suffer from the same inward-looking syndrome. They are not aiming to become world-class players.

The Thais want to lay out our railways, the Indonesians are building our expressways, the Malaysians are buying our MacArthur suites and steel companies, and the Singaporeans would be erecting our office buildings.

Instead of San Miguel invading these economies, we are the ones being eaten. Come to think of it, we don’t even have the equivalent term of Korea’s chaebol or Japan’s keiretsu and sogo sosha.

Maybe AS3 was afraid that he would be spreading himself thinly. Does he really oversee the inventory of beer in Davao on a day-to-day basis?

Strategy Myopia
All told, SMC was poised to be the economic messiah; could have been the benchmark for Filipino companies with global ambitions; could have been our first chaebol.

Sad to say, even the biggest company sometimes depends on a single person’s vision.

Can the country’s only world-class, albeit single-sector, company afford to be myopic in its vision?

There could have been other factors that prevented SMC from getting into other businesses. Nationalization or outright confiscation under the Marcos regime could be one. Probably an unwritten code of not competing with its kin and friends who are in banking and property development could be another.

Strategy myopia could have been the greatest factor. Even during the Marcos years, San Miguel could have operated its worldwide expansion out of Hong Kong where it had a presence since the 1950s.

Salim of Indonesia used Hong Kong as its acquisition home base. Even now, that the political environment is business-friendly, what does SMC have in mind? Have you read SMC’s latest stockholder address? All talk about beer, milk, spirits, soda, and more beer, and a Johnny-come-lately act in property.

In March 1998 in New York, AS3 said that “although for the first 100 years we operated largely within the Philippines, and intend to continue our leadership in that market, we are transforming San Miguel into a major regional player.”

Hold it right there. After 107 years, SMC is not a major regional player yet? You would have thought SMC would have moved on to bigger playing fields and developed new technology and diversified away from beer.

The problem with beer is that it is consumption-oriented hence counter-cyclical to the push for savings needed for a strong economy. Beer technology is mature, therefore being ahead does not translate into an advantage. It is not a basic human need and very volatile in terms of demand particularly for low-income countries like the Philippines.

SMC’s too much dependence on beer is fragile. If I started a microbrewery tomorrow with a magic formula mixing chili and humulus lupulus that captures the palates of drinkers, creating the Viagra of beers, SMC could be out of business in five years.

Selecta’s assault on Magnolia is a harbinger of SMC’s beer future.

Chili beer – now that’s an interesting idea.

San Miguel could have been the Philippines’ answer to Hyundai or Daewoo. But then SMC’s management and external consultants would tell you that it should focus on its core competence.

San Miguel’s core competence
Let’s talk about SMC’s core competence. Let’s sit back for a moment, and look at the big picture.

Let’s answer the question: “Exactly what is San Miguel’s core competence anyway?” Is it brewing beer? Or making chocolate drinks or ice cream? Is that what you see?

In February 1998 in London, AS3 revealed that SMC relies so much on beer to a point that a huge portion of its total revenues, 38%, comes from beer sales.

In words and in deed, there’s no question San Miguel still talks, walks, and quacks like a beer company and will continue to be so in the near future.

Let’s take a snapshot of Samsung. In addition to foods, textile and chemicals subsidiaries, Samsung is the world leader in semiconductor memory technology. It is into computers, heavy industries, and other business sectors including financial services such as credit cards, insurance, and securities, and even fashion, hotels, movies, and magazines. Samsung even acquired universities.

We are not talking here about simply trading or distribution, either. We are talking about actually building, manufacturing or developing its own new technology.

The good thing about Samsung is that it has world-class quality. You think Intel manufactures the fastest CPUs? No, Samsung does with its Alpha 21264 CPU. You think only the US makes F-16 jets? No, Samsung makes it in Korea, too. It also makes helicopters, power plants and ships. It manufactures the world’s first 256 Megabit DRAM, the world’s first 128Megabit FLASH RAM, the world’s lightest PCS handset and the world’s first completely flat Braun tube. It is also the world’s largest manufacturer of color picture tubes.

Samsung Aerospace plans to build space stations in Mars. Now that’s vision. However, on Earth, Samsung Motors will first build automobiles. If Samsung followed the “core competence” strategy, then it would have remained selling fruits, dried seafood, flour, and noodles, and making beer as when it was founded.

After only 60 years, Samsung’s revenues is US$93 billion annually, while after 107 years, SMC’s revenues is a pitiful US$2.3 billion. In terms of contributing to the economy, Samsung employs over 260,000 in 68 countries compared to SMC’s 18,500.

Paradigm shift
Lubbock once said, “What we see depends on what we look for.” What do I see in San Miguel? You might have been thinking what a scatterbrain would suggest that SMC should have been producing Filipino rock stars.

Going back to core competence, here is my idealized vision of what San Miguel’s statement of core competence should be: “San Miguel’s core competence is not making beer but creating new businesses.”

I know that was easy, anybody could have seen that. What if nobody has thought like that? Seeing what everybody else has seen and thinking what nobody else has thought, is a talent I would like to have or anybody would like to have for that matter.

But it’s not easy.

Even if you have thought about it, it would have been hard to act on it. Even if you have the facts right, you’re not necessarily going to work on it. Facts alone do not form a belief.

Ever noticed cement companies are as inert as their products? They cannot change their mind-set away from being manufacturers of cement. They never thought of themselves as business creators.

Have you noticed we are contented with operating power plants instead of creating our own generators? We always thought of ourselves as users of technology instead of creators of technology.

How can we ride the paradigm shift if we are not aware what our real competence is?

Thinking that “creating businesses” is a company’s core competence is a revolution. This idea would not sit well with managers who are mostly inbred through years of evolution from the bottom ranks floating to the top.

If you spent 20 years breathing in and out thinking that your company has the best beer in the country, what would you say to somebody who tells you that it should open up a biotech division? You’d say, “What has sheep cloning got to do with Coke bottling?” Revolution from within is always the exception, not the rule. But can a company manage an exception?

Intellectual capital
Once you embed in your psyché that “creating businesses, not making beer” is your core competence, your perspective changes; your assessment of your intellectual capital changes; and your viewpoint on unrelated businesses changes. Things somehow fall clearly into their places.

You’d realize that your greatest asset is not the secret recipe of Pale Pilsen but your excellent management ability. No matter what the business may be, software or rocket assembly, it doesn’t matter any longer. You can go into banking or even into railway construction.

Usually intellectual capital stems from a company’s internally developed technology but since San Miguel failed to develop any notable technology after all these years, we can proceed to count its management skills.

Undoubtedly it has stable manufacturing skills, and if you heard AS3 in New York, he declared that SMC is one of the most efficient Coke bottlers worldwide.

The greatest intellectual asset of San Miguel is its brand name. Yet, one could sense SMC thinks that San Miguel is a beer brand and nothing more. If you shift your paradigm from “makers of beer” to “creators of business,” you’d begin to think your brand is no longer a beer brand but a management brand.

Cultural icon
San Miguel is probably the only corporate brand in the Philippines to qualify as a cultural icon. It is almost legendary. It is the most recognizable brand in the country enjoying instant recognition virtually anywhere. It has always been known with strong leading brands, high quality and excellent service. Its brand has no negative associations; not associated with bad management practice; not known for tax-evading practices nor linked to corruption. SMC has a clean and wholesome image.

To call SMC a beer company because it is famous for San Miguel beer is like calling Leonardo da Vinci a painter because he was famous for the Mona Lisa. Painting was only one of his talents and forgetting Leonardo’s other talents that made him the greatest genius mankind has ever seen is sacrilege. The same with San Miguel.

Consistently one of the most admired companies in Asia, it enjoys great respect and admiration. As such, it has the status of a super company – already a legend, an icon. SMC must cease thinking of itself as a food and beverage elephant. San Miguel should stop being a beer brand. San Miguel is a cultural icon and it should become a management symbol, a management icon.

Any project that carries the SMC imprimatur becomes golden, enjoying the support of the capital markets and technological partners. SMC is not an ordinary company that should focus on an operational activity such as making beer, as its core competence. It should rise above such mentality. It should leverage its excellent management skills, leverage the equity of its powerful brand, and leverage its access to capital to fire up other industries and sectors trailblazing the way for the other companies.

Portfolio management
Then SMC can dwell on the “portfolio management” approach to business. It can bulletproof its portfolio by business diversification so that cyclical downturns in other sectors can be softened by other sectors that are counter-cyclical. If the economy shifts from consumption mode to savings mode, meaning people drink less beer and put their money into banks instead, then SMC Bank would benefit from the loss of SMC Brewery.

Worries about spreading the CEO’s attention thinly can be answered by independently-managed businesses. I had the chance to meet in Seoul some senior treasury managers of Samsung Corporation (the trading arm) and during the discussion I realized that they had almost complete independence from the other subsidiaries of the group. Usually, treasury independence is a good indication of management independence.

Three days later, in my ignorance, I walked away from a meeting at Cheil wondering why one of Korea’s big companies was holding office in a Samsung building. Later did I realize Cheil was a subsidiary. You couldn’t have gathered that from our discussion, which centered on treasury decision making. I thought that was an isolated case but talking to treasury managers at Ssangyong Oil, Daewoo, LG, Sunkyong, Kolon and Tong Yang among others, made me think they are practically on their own, yet part of the same brand name established by the patriarch.

The corporate raider
Acquire or be acquired. Since SMC failed to acquire other businesses into its portfolio, it is now in danger of becoming just another balance sheet item of a corporate raider’s portfolio.

Currently, San Miguel is right for the picking. Filipino managers, originally trained as investment bankers, camping out of Hong Kong, using Indonesian money, could be hatching the biggest, most ambitious, most flagrant corporate takeover in Philippine history.

Cash is power
If you were raiding SMC, you’d probably generate much cash for your war chest. First, you’d sell off your telecom operations in Hong Kong, your stakes in a US bank, and your investments in Europe. Wait for the right conditions such as undervalued stock price, depreciating peso, and lower profits, which means stock valuation will go down further. Look out for stockholders in a hurry to offload their shares primarily those wanting to unwind from legally disputed holdings. Use stealth by pretending you have no intentions of a takeover while at the same time using the lull to consolidate your takeover strategy with your investment bankers.

Use foreign currency to your advantage. If you were sitting on US$2.5 billion cash, and if today the Philippine currency depreciates by one peso, then you have an extra PHP2.5 billion to buy more SMC shares.

Let’s visualize how large that windfall profit is. Assuming a town has 50,000 residents, you can give PHP5,000 for each man, woman and child of 10 towns. By doing nothing you earn that obscene amount of money in one day just because of depreciation.

We’re not even talking about the original US$2.5 billion itself which can buy six units of Tamaraw FXs each worth PHP400,000 for each the Philippines’ 40,857 barangays. Indeed if you were the chap who’s sitting on this money right now, you could have won the presidential election easily by giving one Tamaraw FX per barangay with tons of money left over.

This is not child’s play anymore. We’re talking big league power play here.

By the way, how much is SMC’s market capitalization? A mere US$2.7 billion.

Hey, looks like somebody is storing just about the right amount of cash to buy the entire SMC shares.

Power, the ultimate high
Why would you raid San Miguel?

One reason is that you, as a raider, probably realized what AS3 and his current management still does not realize – that SMC has underutilized its brand, skills and position in a global market place. You can unleash SMC’s huge goodwill value. You can create a world-class company with world-class technology with world-class products.

Another reason is that, if you really have to spend all that cash and energy acquiring companies anyway, why not focus the best part of it on the biggest game in the land?

However, the best reason for targeting San Miguel for a takeover has less to do with money. The second most famous person in the Philippines, next to the country’s president, is the CEO of San Miguel. Being SMC’s figurehead brings power, popularity, and respect not only from Filipinos but from the international players as well.

It’s not even about the money. Dealwise, you can generate more money from acquiring other companies in dire straits.

Salarywise, it’s not enticing. Has anybody ever heard of Manny Pangilinan?

Probably not, but he was the highest paid CEO in Hong Kong in 1997, one of the richest places on Earth, with a yearly pay of US$14 million. To picture that amount, if you are a kindergarten teacher earning PHP30,000 per month, it would take you 1,556 years to earn that money. Yet, Pangilinan is practically unknown.

There’s something more important than money: Power.

Whoever gets to be chief executive of San Miguel gets instant recognition as the most powerful private individual in the country. There’s no doubt about that.

You can forget money but you cannot kill ambition. Some people have money but no power.

That is the seed of ambition. Power is the ultimate high.

Break it up
SMC’s break-up value is higher than its current market value as a group. It means the stock market players suggest that SMC is better broken up into pieces.

By way of illustrating the concept of break-up value, take Korean Airlines. Its total shares in the stock market are only the equivalent of a few jets.

However, it has 29 Boeing jets, 34 Airbus jets, and 16 MD jets. Therefore, you buy all its shares in the stock market and then you sell off its jets, office buildings, and equipment. Selling “chop-chop” would be more profitable.

However, since market valuation includes so much psychological factor, it doesn’t follow that instead of acquiring new businesses San Miguel must break itself up, but the pressure is there.

Still there are others ways of achieving the goal of breaking up as a means to liberate the company’s stored value. One of them is listing its major divisions as separate companies on the stock exchange, still making use of the same powerful San Miguel brand name. Expanding while breaking up is not necessarily inconsistent.

If the current management wouldn’t do this, the corporate raiders might.

San Miguel is the perfect takeover target for several reasons mentioned above.

We are watching how the Wassertein Perellas of the world are going to defend SMC in this colorful possible takeover battle.

Currently SMC is trading in the PHP46 range which might be a good buy for two reasons – current undervaluation as it is given its strong position in the sector plus future stock price appreciation as a result of a takeover skirmish.

In the event of a takeover battle in the next 18 months, it might good to buy stock now and hold it for your child’s high school graduation as a gift.

Res ipsa loquitur
Sorry San Miguel folks, I hope you won’t be cross. It’s easy to generate ideas. It’s easy for ideas to be formed into words. It’s easy for words to be written down. Yet it’s not easy to run a business, so I might have been unduly unfair to you.

But Hyundai transformed itself in only 50 years from an auto repair shop into a US$93 billion group with artificial satellites, magnetic levitation trains, ships and semiconductors, oil refineries and stockbrokerages giving employment to 200,000 people.

Why could SMC, after 107 years, only do US$2.3 billion employing only 18,500? Quite frankly, the chaebol model is under attack, but not after they became engines of South Korea’s spectacular economic success.

I’m not saying that Hyundai or Samsung are the best models, but look at their results compared to yours.

Maybe you really did miss out on being the single most qualified Filipino private entity to create world-class businesses making world-class products developing world-class Filipino technology along the way.

Res ipsa loquitur – the thing speaks for itself.

SMC’s greatest enemy
San Miguel’s greatest enemy is itself – it has strategy myopia.

Snap out of it. You are a Leonardo da Vinci capable of anything. Buy the brains, buy the skills and leverage on the brand that is already a cultural icon. Do not change the way you manage your business, rather, change the way you think about your business.

Anyway, I’m no MBA-staffed McKinseys of the world who gets paid hundreds of thousands of dollars by the SMCs of the world to strategize for them.

I’m just a person in the street with naive opinions and wild generalizations; writing without thinking.

One nice thing though about street-based analysts is that we can freely dispense ill-informed ideas without having the corresponding punishment of losing our personal money if they bombed out.

Maybe that’s exactly why we are out here in the street merely talking about how to run SMC, instead of being in the penthouse actually running SMC.

Shades of the novel “Zorba the Greek” – there are people who want to write about “life” but those who are actually living “life” are too busy to write about it.

Just a precaution while I’m still here, please don’t take seriously what I wrote above. I have to say that because some ideas I wrote a while back about a fast food company wound up as clippings circulated among the senior management of its competitor, of all places.

On another occasion, I once wrote down some ideas privately to a friend which included creating a monthly strategy newsletter, and before I knew it the US securities house he worked in implemented it soon thereafter. Goes to show some guys take my words more seriously than I originally intended.

That’s bad and that’s why I have to warn you off. Spare yourself the trouble of analyzing and refuting my statements, as this is not a scholarly treatise. I’m just your unknowledgeable average armchair strategist with wild ideas that hopefully provided amusing reading, only this and nothing more.

Yep, quoth the Street Strategist, “Amusing reading, merely this and nothing more.”

Now, go to the world, start your own microbrewery producing Chili beer, and drink. I don’t.

Drink beer, that is.

Wait a minute, I started out with Richard Gomez so I might as well end with him.

I arrived from Taipei and he from Manila, one very late night. I didn’t know who it was until I saw a taxi coming and so I looked at my competition for the ride.

When I recognized Richard, I looked up at him, and he looked down at me, and then both of us looked at the taxi. We were about two feet apart standing side by side.

He probably was unaware that I knew he was a famous movie star; after all, he was a stranger in the city and I look just like the average Asian. I was torn between getting his autograph and getting a hard-to-find taxi.

In that area in Kai Tak, only alighting was allowed and the loading area was far away, one floor below, and easily an hour longer because of the queue.

The taxi stopped – it was not supposed to; Richard made his move, his lady assistant was too slow; I hopped into it.

Ah, sometimes boys can be petty when jockeying for a ride. Sorry Richard.

But then, I lost my Ormoc girl while you found yours. I guess life is more than just a taxi ride.

Then again, I found my best muse later anyway. And life can be so grand riding shotgun in the last taxi in Hong Kong.



(Exactly one month later, on July 2, 1998, Andres Soriano III resigned. Thads Bentulan, June 2 & 3, 1998.)
* * * * * *



streetstrategist@gmail.com

Tuesday, June 01, 2010

Hyperwage Is The Solution to the Budget Deficit


Question: Can Hyperwage address the issue of budget crisis that our country is said to be facing, considering a budget crisis would possibly hamper Hyperwage's implementation especially in the government sector?
Answer: Hyperwage is the answer to the budget deficit.  First, assume a Keynesian multiplier of 5 given a marginal propensity to consume of 80%. Please read the Hyperwage book on how this multiplier is derived.
Let us have some back-of-the-envelope calculations.
For an income of P2,000 per month, after the multiplier effect, the income to the economy becomes P10,000 per month. Subject this to an assumed income tax of 20% and the remaining 80% (P8,000) will have to be spent anyway, subject to a VAT of 12%.
P10,000 per month x 20% = P2,000 income tax per month
P8,000 x 12% = P960 VAT per month
The total tax collected per year is P2,960 x 12 = P35,520 per year
For 30 million workers, this could be P1,065,600,000,000 or P1.065 trillion

Under a Hyperwage minimum wage of P20,000 per month, then after the multiplier effect, the economy earns P20,000 x 5 = P100,000 per month. The tax collected will be:
P100,000 x 20% = P20,000 income tax per month
P80,000 x 12% = P9,600 VAT per month
Total tax collected per year is P29,600 x 12 = P355,520 per year.  (That’s P355T vs only P35T in taxes)
For 30 million workers, this could be P10,665,600,000,000 or P10.65 trillion
These are theoretical multipliers and taxation leakages are not accounted for.
Conclusion: Without Hyperwage, both income tax and VAT for 30 million workers is expected to be P1.065 trillion while under Hyperwage it is 10x higher at P10.64 trillion.
It is very clear, that the budget deficit will be reduced, and the fiscal position of the government will be increase. Again, reminder, the costs will not necessarily move up in the same proportion (the principle of non-linearity).
While the exact amounts are subject to refinement, the economic principles behind the calculations are the same.
Now, can you see why and how countries like Singapore have GDP higher than the Philippines despite their tiny land areas and zero natural resources?
High wages are the source of taxes, source of fiscal income, and source of deficit reduction, and source of high GDP.