Category Archives: creating value

Should South Africa import Chinese TVs?

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Should South Africa import Chinese television sets? Your answer to this question depends probably on your education.

If you were university educated in South Africa, you are likely to be in the market at various times in your life for a large LED backlit LCD panel with a high refresh rate and more HDMI inputs than you will ever need. You will also quite likely have a market-oriented, Anglo-Saxon view of government’s role in industrial policy and international trade. Thus you would probably say “yes, import cheap TVs from China so I can buy a cheap TV and not pay for inefficient local firms to manufacturer expensive, inferior TVs.”

If you are a TV snob, you will still want free imports of Chinese TVs to keep the prices down of competing, but fancier Sony and LG models from Japan and Korea.

If you are a little cynical, you might say South Africa could never have the manufacturing capability and scale to produce all the components and assemble them into a modern LCD TV. That’s not actually the debate I ant to pursue now, so in that case let’s say the alternative would be to locally assemble sets made with significant local components, even if the LCD panel itself were imported. Of course, the reason South Africa doesn’t have the scale to produce the panels themselves at the moment is a function of industrial policy decisions decades go. There is no absolute reason we couldn’t have that capability. But, that debate is related but separate post. Continue reading →

Coffee as the thin edge

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Pick n Pay is starting to gain some useful insights into customer behaviour and purchasing decisions at different stores. They’re using coffee as a key product to better understand who buys what, where and when.  They’re tossing out (more likely de-emphaszing) LSMs as a method of categorising customers and moving to more sophisticated measures (including whether the purchaser has children or not, but also I’d expect location, purchase frequency, average basket size, mix of goods etc.)

Pick n Pay had to spend a fortune on the Smart Shopper system and has ongoing expenses in terms of rewards and analysis. The curious thing for me is how many loyalty cards incur the system and reward costs for retailers, but without gaining the full benefit of analysis and thus insight into customers.

I don’t get tailored book suggestions from Exclusive Books. They also haven’t tried to entice me back to their stores since I started buying first from Bookfinder.com and then almost exclusively ebooks from Amazon. They’ve basically lost a customer and haven’t done anything about it.

Even my friend’s St Elmos offers sweet deals to customers who haven’t ordered in a while to entice them back. Pick n Pay turned sub R100 pm customers into R350 pm customers (at least while the special was one) by specifically targeting customers that are familiar with Pick n Pay but need a push to become regular, high-spending customers.

I haven’t had a movie card with Ster Kinekor in a while, but I always use the same email address and credit when I purchase tickets online (which I do almost universally). There have been periods of several months where I haven’t gone to the movies, but no attempt from Ster Kinekor to woo me back with free popcorn or a careful movie recommendation.

Retailers are missing a trick to get an edge over their competitors.

 

We can’t all be Germany

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Some interesting thoughts on what drives Germany’s apparent success.

The article does understate the problem that Germany’s success is significantly export driven – not everyone can export for obvious reasons.

Also, the author notes that consumption has grown more slowly than economic growth without understanding that is exactly the source of an export-encouraged boom. Growth in consumption will also grow imports!

Symmetry and savvy

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The DA is quite negative on the new taxes proposed for the mining sector. They seem to argue that higher taxes will discourage employment and investment.

I haven’t analysed the details thoroughly so maybe they are correct. I suspect that it’s more dogmatic following of views from those who don’t understand the pros and cons well enough to change their mind.

For example, if higher taxes are bad for employment and investment, surely lower taxes would be good for employment and investment? I doubt that the DA is arguing that the current level of taxes is exactly optimal, so shouldn’t they have been campaigning more loudly for lower taxes?

The reality is that, considered on their own, higher taxes will reduce rates of return to shareholders. This will make marginal operations unecnomical, which could result in job losses. The lower after-tax profit may also push  operations with marginal rates of return to below the required hurdle rate of some investors, reducing total investment in the sector.

This is, of course, true for all taxes. Hopefully there aren’t too many people left who believe that taxes should not exist.

So one real question is whether the tax rate is optimal, given the funds that can be directed towards government revenues in general and to specific employment creation and industrial development programmes specifically.

A second real question is whether the “price” for the permanent removal of natural resources being charged is appropriate (a combination of taxes and royalties) and from a philosophical perspective, who “owns” our country’s natural resources?

This leads to the third question or point that the DA really should be more aware of. Nationalisation, the Freedom Charter, and vast income inequalities are all part of a potent political conversation in South Africa. With nationalisation almost entirely off the table at the moment, being able to demonstrate in some manner that the “riches under the ground” are better being shared with everyone is an important political point to counter the more extreme political views.

The DA, in this instance, is blind to the subtler political benefits of this approach, blind to the definite benefits of increased revenues, blind to the possible benefits of focussed attention on this industry cluster, but completely convinced of the first-year economics free market principle of “tax leads to deadweight loss of consumer and supplier surplus” and thus lower employment and investment.

No nationalisation, more certainty and probably higher taxes

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There are times when I’m impressed with elements of government and the ANC. It took them far too long, they allowed too much debate and uncertainty, but their ultimate conclusions on nationalisation and how to direct additional mineral wealth back into the fiscus, further develop a beneficiation industry around the mining industry are solid.

I always maintained that “nationalisation” isn’t necessarily appropriation of assets without compensation, although the popular views and worst fear-mongering viewed this as the only possibility. It’s refreshing to hear that “nationalisation” was considered on its merits against private operation of firms rather than just as a way to redistribute wealth. (Ok, at least one article wasn’t mad panic.)

The increase in taxes is also basically expected. Although new and changing taxes does add uncertainty, it provides a sense that the rules are being followed.  Tax rates on energy companies in many Middle Eastern countries is high – sometimes near 50%. So the government fiscus does benefit from the energy that belongs to all its citizens.

It’s also a, slightly sneaky, way of re-settting historical land ownership and mineral right royalties and licensing. If “we got it wrong and sold them too cheaply in the past, we can always recoup through higher or new taxes”. Maybe a little cynical but not surprising.

The real free market fanatics will no doubt be in uproar about higher taxes destroying jobs and misallocating resources. There is a debate here, but the free market fanatics all too quickly forget that it’s hard to argue that the value of the minerals under our country have been fairly priced. Those markets can easily be described as “failed markets” with a number of externalities involved.

Even the hardest neoclassical economist will recognise these are very real limitations on Adam Smith’s invisible hand.

Lose a Million

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The Make a Million competition, as I’ve mentioned before, is an awful idea. It doesn’t promote investing or even “normal” trading, but rather massive, speculative risk-taking trading because the prize for performing well is nothing and the prize for performing best is significant.

I’m continually disappointed that Moneyweb continues to partner with this distraction.

As I’ve done in the past, I’ve analysed very quickly some of the results of the most recent competition. As background to that, the basic rules are:

  1. Put up R20,000 of your own money
  2. Trade over three months in currencies, commodities single stock futures and some index trackers.
  3. Whoever has the most at the end wins a million rand
  4. Everyone keeps what is left of their initial “investment”

So let’s be clear, there are no long-term investment learnings here.

The winner did return 165.5% over 3 months, which is not an impressive performance even though it might look like it.  The point is, given the volatility of the investment universe available for the competition and the encouragement towards rampant risk-taking, it’s entirely pedestrian performance.  It’s very likely an individual’s performance will be good given the wide range of possible outcomes.

Let’s look at some other statistics

Average performance -18.4%
Annualised average performance -73.4%
Proportion making a profit 26%
Total amount won -R1 020 762
Standard Deviation of performance 48.0%
Annualised standard deviation 96%

These are not performance statistics of which to be proud. They are similar to the losses incurred in prior competitions.

So in short, the competition cost the entrants in total just over a million rand. Losing a million rand is a great way to Make a Million.

Narratives vs facts

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I don’t usually write about The Final Frontier, but this article has a great parallel to what I do write about.

It’s worth reading the entire article, but the main message is that we cannot use the dream or story or fairy tale of imminent migration into space and other planets as an excuse not to deal with the very real problems we have on Earth right now. The misconceptions, Hollywood induced and otherwise, about the ease of space travel or even the extent of our current capabilities, are massive.

As with so many things, the stories that fill our society can be very different from the harsh reality.

Communicating harsh truths

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Communication is critically important for any business. Communication with clients and employees defines those relationships and the value they can create for everyone.

Managing poor performance is tough because it’s so easy and so attractive to shy away from communicating the truth. Avoiding conflict and not addressing problems is far worse for all concerned.

Robert Kiyosaki, author of “Rich Dad, Poor Dad” outlines a similar viewpoint in response to research that shows “nice guys earn less than mean guys”. His take is that it’s not actually “nice” to hide the truth and dance around issues. There’s never a need to make attacks personal, but sometimes the news is not good and it needs corrective action.

As Kiyosaki says, “cowards finish last”.