Currency Conundrum: Is the Strong Rupee Good or Bad for India?

History has been unkind to Canute. The 10^th century king of England was so tired of his fawning courtiers that he took them to the shore and commanded the waves to roll back. It was to be a demonstration of the limitation of his powers. But Canute in popular perception is the man who tried to turn the tide and failed.

Today, India's finance minister P. Chidambaram and Y.V. Reddy, the governor of the Reserve Bank of India (RBI), India's central bank, face Canute's predicament. In the public mind, they seem to be trying to reverse an inexorable inflow of dollars and its consequence -- an appreciating currency. Once traded at 47 or 48, the rupee now hovers at 40 to the dollar. Observers call it the fastest appreciation of the Indian currency in three decades.

Is the rising rupee good or bad for India? What impact will it have on the global competitiveness of Indian firms? Should the RBI or the Finance ministry intervene? Responding to these questions and more, experts at Wharton and elsewhere say that the rupee's rise is the result of India's growing ability to attract global capital. While this creates problems for some companies that earn most of their revenues in dollars -- including IT giants such as Wipro, Infosys and TCS -- it also creates opportunities for Indian firms by making it less expensive for them to acquire overseas assets. In addition, a strong rupee is good for the Indian consumer. It would be unwise for the government to intervene to force down the rupee's value, they note.

What's Driving the Rise?

Dollars are pouring into India. Net investments by foreign institutional investors (FIIs) were $10.16 billion during January-June 2007. This is more than the $8 billion recorded in the whole of 2006. July has beaten all records with an inflow of $5.81 billion (so far). The FIIs are chasing Indian stocks and taking the markets to what many feel are levels of irrational exuberance. The bellwether Bombay Stock Exchange (BSE) Sensitive Index (Sensex) was 15,732 on July 23 against 12,455 on April 2. (Incidentally, that day's low -- the Sensex plunged 617 points during the day -- was caused by the RBI's attempts to control the rupee.)

The foreign direct investment (FDI) numbers are equally impressive. In 2006-07, FDI inflows touched $19.53 billion, a 153% increase over the previous year. (This figure includes private equity and also $3.5 billion in reinvested earnings.) The government is looking at a target of $30 billion in 2007-08. Foreign exchange reserves stood at $214.84 billion on July 6. This is a far cry from $5.8 billion in the dire days of March 1991, when India had to pledge its gold to stave off a default crisis.

External commercial borrowings of Corporate India were $12.1 billion in April-December 2006, an increase of 33%. Remittances from Indian workers abroad -- principally in the Gulf -- rose 15% to $19.6 billion in the same period. And non-resident Indian (NRI) deposits, attracted by better interest rates, were also up 35% in 2006-07 to touch $3.8 billion. These foreign exchange inflows have pushed the exchange rate to around Rs 40 to the dollar. The rupee has risen nearly 10% against the dollar this year. It has appreciated more than 14% from a low of 47.04 in July 2006.

Painful Squeeze

Wharton finance professor Jeremy Siegel notes (in his podcast) that a rising currency can cause distress. "This is painful. It's been the strongest appreciation of the rupee in over 30 years as I look back at some of the data," he says. CEOs of IT companies would agree with that assessment. Speaking at a press conference at Wipro's Bangalore headquarters on July 19, chairman Azim Premji complained about the "strong headwinds faced by us in the form of the appreciating rupee." Wipro reckons that its operating margins were lower by 2.4% in the first quarter because of the currency appreciation. Most IT companies -- the poster-boys of India's economic liberalization -- are in the same boat; they have been unable to meet their forecasted quarterly earnings. Their shares have been beaten down on the bourses, even as the markets are hitting new peaks.

Infosys chief mentor N.R. Narayana Murthy notes, "It (the rupee rise) is a macro-economic issue. I am not worried about factors which are out of my control." Others aren't taking it as easy. "A rising rupee can have a large impact on Indian exports and it could erode our competitiveness in the global market," IT firm Satyam founder and chairman B. Ramalinga Raju told The Economic Times recently. "Countries such as China are continuously suppressing the value of their currencies. So they may have an edge over us.... The government should intervene to bail out exporters who have been hit by the strengthening rupee." (The Indian government has announced a $3.5 billion package to provide relief to exporters in several sectors. But that has been deemed by many as insufficient.)

Jagmohan Singh Raju, a professor of marketing at Wharton, points out that smaller firms, including those "that rely on the U.S. market are clearly hurting. Companies such as Infosys and Wipro are feeling the impact, [but] smaller companies -- garment exporters and auto-part suppliers -- are hurting even more. Many of them banked on the dollar appreciating routinely after signing a contract. Now it is the other way around. I think these companies will be affected more than IT companies."

The Confederation of Indian Industry (CII) says that the worst hit are the textile and leather sectors. While individual exporters and companies have their woes, some complain of damage at a macro-level. A survey by the Federation of Indian Chambers of Commerce & Industry (FICCI) says sectors such as automobiles, consumer durables, food and food processing, gems and jewelry, textiles, handicrafts, and metal and metal products will be particularly impacted. "While the market should determine the exchange rate in the long run, sharp fluctuations in the short term create problems of adjustment for domestic industry," says FICCI president Y.K. Modi. The most affected, he says, is the small and medium enterprises (SME) sector.

Government's Role

When companies and industry organizations complain about such issues, the veiled -- and sometimes not-so-veiled -- argument is that the government should step in to provide support. Should it?

"My feeling is no, they should not intervene," says Siegel in his podcast. "My historical studies showed that a lot of the 1997 crisis was because currencies did not appreciate. That was during the era of fixed exchange rates in Thailand, Taiwan, Indonesia and the Philippines. And by not letting them appreciate, they actually attracted more capital. By letting it appreciate, people are a little bit more cautious because it looks a little more expensive now. And all of the capital that came in -- they couldn't deploy it favorably, and the result was over-consumption, deficits and then finally devaluation."

"I think it is best not to interfere," agrees Wharton's Raju. "Some correction should take place by the end of next year as U.S. expenditures outside decrease." Raju adds that in the short run, "A case can be made to support the very small exporters. But the right way is to allow the rupees to flow out. Let Indians invest in the U.S. -- not just companies, but also individuals. Some recent steps are in the right direction. More can be done."

Montek Singh Ahluwalia, deputy chairman of India's Planning Commission and one of the principal architects of the country's economic reforms, believes that the Reserve Bank and Finance ministry face a difficult set of choices. In an interview in his New Delhi office, he told India Knowledge@Wharton that, "This is a balancing act that the Reserve Bank and the Finance ministry have to play. It is a reflection mainly of the trilemma that economists face; you can only have two out of three things. If you want to have a stable currency, an independent monetary policy and capital account convertibility, you can't have all three. You have to give up one."

According to Ahluwalia, "The positive feeling about the Indian economy is bringing in a lot of capital. The only way you can absorb this capital is to let the exchange rate appreciate." He recognizes that "many people feel the appreciation has gone beyond what is reasonable. But this is a balancing act. What else can the Reserve Bank do? It can intervene to stabilize the nominal exchange rate, and that will generate some liquidity. It can stabilize the liquidity, but that will impact the exchange rate. Whatever it does, there will be some problem. What the Economic Advisory Council has said is that it can do these three things, and it should do a little bit of each."

In an effort to force down the rupee's value, under normal circumstances, the RBI would have bought dollars from the market. This releases rupees which the RBI then tries to mop up by issuing debt instruments. But the RBI has bought some 28.4 billion in dollars between January and May 2007 and it has to draw the line somewhere.

The sloshing liquidity leads to inflation, which is not politically palatable either. Indeed, the RBI sees controlling inflation as its prime mandate. As measured by the wholesale price index, inflation has come down to around 4.3% now, against 6.7% in January. But analysts warn that the trend may reverse soon.

The RBI has pulled out all the weapons in its armory. It has raised benchmark interest rates seven times since October 2005. It has sought to suck liquidity out of the system by increasing the cash reserve ratio (CRR), the amount banks have to keep with the central bank. Explains S.S. Tarapore, former deputy governor of the RBI and the man who has prepared two roadmaps for the full convertibility of the rupee: "While, until recently, the RBI has been intervening in the foreign exchange market buying dollars, the resultant release of domestic liquidity has required the authorities to issue bonds under the Market Stabilization Scheme (MSS), absorb liquidity under the Liquidity Adjustment Facility (LAF) through the reverse repo facility (surplus liquidity in the market is placed with the RBI at a rate of interest of 6%) and to increase the CRR. All this has costs. But these measures have increased interest rates in India and stimulated even larger capital flows."

Economists and India's money mangers are divided on the virtues of a strong rupee and what the RBI should be doing about it. "I have always argued that we should not intervene much on ups and downs of exchange rates. Let market forces determine that," Satish C. Jha, economist and member of the Prime Minister's economic advisory council, told The Economic Times recently. "We can't forget that the rupee has remained undervalued for quite some time. I feel it will get stronger and will hover around 38 in the next two years. We have seen a strong inflow of foreign capital into the market. How can we expect the rupee to depreciate?"

The rupee will stay strong, says analyst Jamal Mecklai. Speaking to exporters at a seminar on "How to deal with the new improved rupee," held in Mumbai recently, he said this was a period of churn. Big export houses, he added, had weathered the storm because of their professionalism. The small companies should similarly get their act together.

"It is obvious -- from the recent paroxysm in inflation followed by the trauma in the forex market -- that control processes have run their course and, appearances notwithstanding, the Indian economy is being run largely by the free flow of capital," wrote Mecklai in Business Standard. "The increasingly aggressive bleating we are hearing about the strength of the rupee is clearly coming from sources that don't recognize this."

How Should Companies Respond?

"Exports are about job creation, not dollar creation," says Ajit Ranade, chief economist of the Aditya Birla Group. "Unlike earlier, we are not starved of dollars." Ranade says you cannot compare the situation in India with that prevailing in, say, the U.S. The so-called free markets in India are not free and allowing market forces full play has atypical outcomes. "Look at our export-import basket," he says. "Our three principal imports are crude, gems and jewelry, and capital goods. Crude prices are still administered. And gems and jewelry and capital goods do not affect inflation. It would be different in the U.S. But, in the Indian context, a stronger rupee does not mean lower inflation.

"Now look at our exports. Leave IT and software aside for the moment. Some 65% of our exports come from the SME segment. There are 15 million workers in this sector. The SMEs have profit margins of barely 5-10%. If the rupee rises, as it has, their entire profit gets wiped out."

If inflation is unpalatable, the scale of job losses that could take place in the SME sector is even more so. "Total exports are about 20-21% of GDP," points out Ranade. "The entire agricultural sector is less than that."

Wharton professors have words of advice for companies that feel stretched by the rising rupee. Krishna Ramaswami, a professor of finance, points out that Indian companies may not be affected much "if their international competitors' currencies have also appreciated, though he admits that they "may lose some share of their sales in the U.S. market and have their margins squeezed if not." He recommends that these companies could "hedge their currency exposure if they do not already."

Raju of Wharton's marketing department agrees. His advice to Indian firms that are feeling pinched by the rupee: "Do not rely on the U.S. market too much. Get more business in Europe. The euro and the British pound are appreciating with regard to the Indian rupee." Raju believes that just as some companies are hurt by the strong rupee, others benefit from it. "Airlines benefit. It is now cheaper for Indians to travel to the U.S. This is also a great time for Indian companies to buy equipment and technology products from the U.S. Companies that buy components from the U.S. are in good shape. It is a lot cheaper for an Indian PC manufacturer to buy an Intel chip or a Motorola phone. Mobile phone operators benefit from the strong rupee."

Management professor Saikat Chaudhuri recommends that companies would do well to stop complaining and take advantage of the rupee's rise to drive through essential changes. "I don't understand the cribbing," he says. "As the Indian economy grows, the rupee will grow stronger. You can't get the benefits of globalization without feeling the other effects. My view is that there should be a renewed imperative for IT firms to go for high-end work across all industries." Chaudhuri adds that the stronger rupee should make it easier for IT firms to set up operations abroad. "That would be a good trend. Also, resource utilization will have to become better."

As for manufacturers, one thing could make things easier for them, Chaudhuri points out. "Right now, costs are high because of weak infrastructure. As India's infrastructure improves, those costs will come down. As freight corridors are built and airports are finished, that will help the manufacturers absorb the downside of the appreciating rupee." He also believes that the strong rupee could help companies drive through some strategic deals. "The strong rupee is good for Indian companies seeking to make acquisitions abroad. When your deals are worth billions, it makes a difference. We all like it when our money is worth more."

According to Siegel, "It is painful for the exporters, but look at the other side of the coin -- the consumers. A strong currency is good for a country; it's not bad for a country. They shouldn't just be beholden to the exporters. They should listen to the consumers, who are going to gain undoubtedly because of the strong currency."

Source - India Knowledge @ Wharton

Best Global Brands - How five names in this year's rankings staged their turnarounds

Reviving even a storied brand isn't easy once consumers have a negative perception of it. Just ask Ford or Gap, which lost 19% and 15% of their brand value, respectively, in this year's BusinessWeek/Interbrand annual ranking of the 100 Best Global Brands. Even such perennial winners as Coca-Cola (No. 1) can have trouble boosting their brand. The beverage giant claimed the top spot for the seventh year in a row mostly because it is big and everywhere, but it failed to further burnish its reputation because its move into healthier drinks and snacks has yet to resonate. Slide Show

Still, it's possible to stage a brand comeback. Several such stories emerged in this year's ranking, which is compiled in partnership with leading global brand consultant Interbrand Corp. and calculates brand value by using publicly available data, projected profits, and such variables as market leadership. While it's tempting for a challenged brand to emulate the likes of Google (GOOG ) (No. 20), Apple (AAPL ) (No. 33), or Starbucks (SBUX ) (No. 88), doing so can seem audacious at best, delusional at worst. A potentially more useful exercise: examining brands that have stumbled but recovered. "Benchmark brands should be studied, but solutions can seem a lot more accessible when you can see how someone fell and picked themselves up," says Interbrand CEO Jez Frampton. Slide Show

Take Nokia Corp. (NOK ) Given its No. 5 ranking, it may seem crazy to consider the Finnish giant a comeback story. But it is one, as evidenced by a 12% jump in brand value, which extends a rankings winning streak after faltering in 2004. Nokia realized its focus on making cheap handsets for the developing world was hurting it in the U.S. and Europe, where consumers wanted phones that played video and surfed the Web. Nokia released high-end phones aimed at both the consumer and business user and is showing strength in emerging and mature markets alike. Slide Show

Here are five more comeback stories. They detail Nintendo Co.'s (NTDOY ) successful campaign for new customers; what Audi is doing to catch up with BMW (BCX ); how Hewlett-Packard (HPQ ) persuaded consumers that it's hip; Burberry's strategy to escape the taint of ubiquity; and Citibank's (C ) moves to reposition itself as a (very big) local bank. Slide Show

Nintendo
Daring to go after a new crowd
Nintendo's marketers had apretty good idea that the new Wii player would be a game changer, thanks to a newfangled wireless controller that is wielded like a light saber. And yet they didn't slap the Nintendo name on the gadget. Why? Because the company wanted to make it clear that the Wii was not just for gamers but was also a home entertainment system for all. "I'm not concerned about the spread of the Wii brand," says Nintendo President Satoru Iwata, "because I think the brand name of Nintendo is expanding with it."

To get across the message, Nintendo paired its advertising with a savvy PR campaign. The company identified influential bloggers who were either moms or members of large, multigenerational families. Ahead of the November, 2006, launch, Nintendo hosted parties for the individual families or for groups of the moms' friends, showing them how easy the Wii was for anyone to use. "You'd have grandparents picking up the controller and saying: Wow, I can actually do this,'" says Stephen Jones, executive vice-president at GolinHarris, which ran the Wii's PR campaign. "Grandparents could see this as a new way to play with their grandkids." That, along with mentions ranging from TV news stories about Wiis in nursing homes to an episode of South Park featuring a Wii-coveting Cartman, spurred word-of-mouth and buzz in all age groups.

Unless you've been living under a rock, you know that Nintendo's Wii strategy has shaken the $30 billion gaming industry. The innovative player has sold well (9.3 million units and counting) and set Nintendo apart from its rivals. As a result, the company surged seven places, to No. 44, in this year's ranking and boosted its brand value by 18%. Revenues in the most recent quarter more than doubled to $2.83 billion, and Nintendo raised its annual profit forecast 42%, to $2.04 billion.

Audi
Hatching a plan and sticking to it
The Audi brand has long suffered in comparison with its more prestigious German rivals. If Wall Streeters drove BMWs and Mercedes-Benzes, Audi was embraced by suburban lawyers and the like. Now that's changing. Even in its home market, where people can be excessively snooty about their wheels, Volkswagen's premium brand has been ranking high in consumer surveys, with some of its models even placing ahead of BMW and Mercedes.

Ralph Weyler, the management board member in charge of global sales and marketing, credits a plan put in place 20 years ago to make "bold technological and design statements."Audi gradually gained respect throughout the 1990s and has had a slew of design hits of late, among them the R8 street racer, the Q7 SUV, and the A5 coupe. Models like these are transforming Audi from a mass-market carmaker to a premium one and help explain why the brand is on a tear. "An organization's long-term commitment to a sound, consistent plan can protect a company from a lot of mistakes that hurt brand value," says Interbrand's Frampton.

At the same time, Audi has been listening to consumers. A survey of 65,000 people worldwide conducted since 2001 shows that Audi now trails BMW and Mercedes by only a narrow margin in Europe and Asia. In the U.S., the automaker is spending heavily to polish its image. A long-running campaign that Americans found vague, themed "Never Follow," has given way to "Truth in Engineering." Global sales are up 9.8% overall in the first half of this year. And Audi has moved up six spots in the rankings, to No. 68, and increased its brand value 17%.



Hewlett-Packard
Challenging the status quo
Regaining your position as the world's biggest seller of personal computers is impressive, especially when just two years earlier critics were clamoring for you to get out of the PC business altogether.

Credit goes to CEO Mark Hurd, who told his lieutenants that Hewlett-Packard Co. had to stop building and marketing the PC as if it were a commodity. Designing PCs that consumers actually want was, of course, the starting point. Besides making them more attractive, HP included such features as the ability to check e-mail and appointments without wasting precious minutes booting up.

The marketing team then went about pitching HPPCs as a personal reflection of consumers' desires and needs. Hence the slogan: "The computer is personal again." Last summer the company rolled out ads showing hip-hop mogul Shawn "Jay-Z" Carter mixing music and planning tours using an HPPC. Rising sales and market share show that customers increasingly see HP's products, particularly its laptops, as cooler, hipper, and just plain better than Dell Inc.'s (DELL ).

Hurd also has focused on HP's sprawling global operations, using the same marketing strategy it is employing in the U.S. to ramp up consumer sales in emerging markets. In Russia, for example, HP has recently started mass advertising and selling PCs through retailers.

The comeback is reflected in the rankings. HP has gained 9% this year in brand value and 18% since 2005. That follows a 10% slide from 2004 to 2005. What's more, Hurd managed to keep his focus on the business even as his board broke into open warfare following a spying scandal that dominated the business news for several weeks last year.

Burberry
Mining the past to seize the future
When British soccer fans began donning Burberry hats en masse about five years ago, it became clear that the fashion icon had forfeited some of its prestige. Ditto when a British soap opera star appeared in the tabloids with her new baby swaddled head to toe in the iconic plaid pattern. When holiday sales tanked in 2004, Burberry knew that it was on its way to becoming overexposed. It was time to retrench. Since then, Burberry has walked a careful line: moving beyond plaid without disrespecting its fashion history.

In 2006, to mark its 150th anniversary, Burberry mined its design archives and launched the Icons collection, comprising luxury handbags, shoes, boots, trench coats, and small leather goods. The collection combined the classic Burberry look with such flourishes as quilted linings. Customers applauded. "It's a blend of old and new, functional yet fashionable," says Chief Financial Officer Stacey Cartright.

Meanwhile, Burberry began to do away with lower-end products such as stadium hats and scarves that retailed for less than $50. Originally these were aimed at winning younger shoppers who would trade up later on. But Burberry decided they undermined the brand and were too easy for counterfeiters to copy.

So far, the new direction is paying off. Burberry shares are up almost 40% in the past year alone, after taking four years to double from the July, 2002, initial public offering. And the company moved up three places in the rankings, to No. 95, and watched its brand value jump 16%. With its brand on the mend, Burberry is branching out into jewelry, such as bracelets that employ leather to mirror the brand's aesthetic, but skip the plaid.

Citibank
Staying big but going local
Wall Street and some institutional investors continue to push for a breakup of Citi, which they say should choose between being an investment bank or a consumer lender. And the stock is still languishing. But while the institutional banking side of the house has suffered setbacks under Citigroup CEO Charles "Chuck" Prince, the retail and consumer side of the business is growing and was the primary driver of global brand value in 2006. Indeed, Citi posted a 9% gain and held on to its position as the No. 11 global brand, thanks to a concerted effort to boost its retail presence.

Citi has long been a familiar brand, but it also shorted customers worldwide on retail services. In the U.S. and abroad, it badly trailed such rivals as Bank of America (BAC ) and even regional banks in terms of branch and ATM locations. What's more, its fees tended to be higher than competitors'.

As it opens thousands of branches worldwide, Citi has been focusing on looking more local. It's a strategy of selling itself as a "neighborhood bank" but one with the resources of the global giant it is, says Ajay Banga, chairman and CEO of the bank's Global Consumer Group.

Citi is going to its customers rather than the other way around. In the U.S. it put ATMs in more than 5,000 7-Eleven stores. In India, it has been opening branches on corporate campuses. In Singapore, its branches and ATMs are appearing in subway stations. Citi's new global ad campaign, "Let's Get It Done," replacing "Live Richly," reflects its focus on consumers' practical banking needs.

Although Citi is widely viewed as a U.S. company, Banga says the goal is to derive 60% of its consumer business outside the U.S. within a few years, from around 45% today. To win over South Indians, it made low-cost loans available to fisherwomen. In Turkey, it dialed down service fees and interest rates on credit cards, so it was no longer the priciest bank despite its premium-brand position. "We learned not to use your brand to stay at the top end of pricing, because it reduces trust," says Banga.

Source - BusinessWeek

Complete list of global brands 2007 can be obtained Here

The Last Rajah

India's Ratan Tata aims to transform his once-stodgy conglomerate into a global powerhouse. But can it thrive after he steps down?

Among Asia's business titans, Ratan N. Tata stands out for his modesty. The chairman of the Tata Group—India's biggest conglomerate, with businesses ranging from software, cars, and steel to phone service, tea bags, and wristwatches—usually drives himself to the office in his $12,500 Tata Indigo Marina wagon. He prefers to spend weekends in solitude with his two dogs at a beachfront home he designed himself. And disdainful of pretense, he travels alone even on long business trips, eschewing the retinues of aides who typically coddle corporate chieftains.

But the 69-year-old Tata also has a daredevil streak. An avid aviator, he often flies his own Falcon 2000 business jet around India. And in February he caused a sensation at the Aero India 2007 air show by co-piloting Lockheed (LMT) F-16 and Boeing (BA) F-18 fighter jets.

Tata's business dealings reflect the bolder side of his personality. In the past four years he has embarked on an investment binge that is building his group from a once-stodgy regional player into a global heavyweight. Since 2003, Tata has bought the truck unit of South Korea's Daewoo Motors, a stake in one of Indonesia's biggest coal mines, and steel mills in Singapore, Thailand, and Vietnam. It has taken over a slew of tony hotels including New York's Pierre, the Ritz-Carlton in Boston, and San Francisco's Camden Place. The 2004 purchase of Tyco International's (TYC) undersea telecom cables for $130 million, a price that in hindsight looks like a steal, turned Tata into the world's biggest carrier of international phone calls. With its $91 million buyout of British engineering firm Incat International, Tata Technologies now is a major supplier of outsourced industrial design for American auto and aerospace companies, with 3,300 engineers in India, the U.S., and Europe.

The crowning deal to date has been Tata Steel's $13 billion takeover in April of Dutch-British steel giant Corus Group, a target that would have been unthinkable just a few years ago. In one swoop, the move greatly expands Tata Steel's range of finished products, secures access to automakers across the U.S. and Europe, and boosts its capacity fivefold, with mills added in Pennsylvania and Ohio.

Now, a new gambit may catapult Tata into the big leagues of global auto manufacturing: The company is said to be weighing a bid for Jaguar Cars and Land Rover, which Ford Motor Co. (F) wants to sell. On top of all this, the group plans $28 billion in capital investments at home over the next five years in steel, autos, telecom, power, chemicals, and more. "We rescaled our thinking in terms of growth," Tata says over tea at Bombay House, the group's headquarters since 1926, a tranquil oasis with well-worn marble floors, a vast collection of modern Indian art, and staffers who circulate with bowls of vanilla ice cream every day at 3 p.m. "We just forced and cajoled our businesses to make this happen."

SPIRITUAL CEMENT
The forcing and cajoling has worked brilliantly. The market value of the 18 listed Tata companies has swelled to $62 billion, from $12 billion, since 2003. Group sales and profits have doubled, to $29 billion and $2.8 billion, respectively. The three big companies that account for 75% of sales—Tata Steel, Tata Motors, and Tata Consultancy Services—are enjoying some of their best years ever. And in May, Tata Tea netted $523 million in profit when Coca-Cola Co. (KO) paid $1.2 billion for its 30% stake in Energy Brands Inc., the maker of Glacéau Vitamin Water. Not bad for a purchase made just nine months earlier. "This is a transformed Tata," says Rajeev Gupta, managing director of private equity shop Carlyle Advisory Partners.

The global push began four years ago. After a rocky first decade as chairman, Tata commissioned a sweeping review to plot strategy, including a study comparing India with China. He was struck by the sheer audacity of Chinese projects. "Whether they built a port or a highway, they did it big, the kind of scale that caused skeptics to say, My God, this is over the top,'" he says. "But China always grew into it." India, he concluded, should also think big—and so should Tata Group. By leveraging India's vast potential, he thought, the company could shift into turbocharged expansion to become a global heavyweight.

Tata is arguably the most important among a new pack of multinationals charging out of big developing nations such as China, Brazil, and Russia. These emerging giants can tap into abundant low-cost labor, tech talent, and mineral resources, while cutting their teeth in the world's biggest growth markets. Brimming with cash and confidence, they also are starting to export innovative business models honed in some of the planet's most challenging places to operate.

Building an organization with a coherent vision and capable of succeeding in so many industries and so many markets, though, is a daunting task. Asia has witnessed the rise of many soup-to-nuts behemoths that thrived when economic tides were high, such as Korea's Daewoo, Thailand's Charoen Pokphand, and Indonesia's Salim Group. Most eventually fell apart. The real test for Tata, too, is likely to come when India's boom abates and battles for talent and market share involving both aggressive Indian rivals and deep-pocketed multinationals intensify. But unlike most other Asian groups, "Tata already has proved it can survive turmoil and constantly reinvent itself," says Harvard Business School professor Tarun Khanna, who has closely studied the group for a decade.

At the center of the empire is Tata himself. An architecture graduate from Cornell University in 1962, he serves as the group's chief dealmaker, visionary, and spiritual cement. He joined the company after college, then steadily rose through the ranks. He took over 16 years ago—after the death of his gregarious uncle, J.R.D. Tata—just as India began dismantling decades of socialist-style business controls. Tata has overseen sharp downsizing, risky plunges into auto manufacturing and telecom, and a transformation of the conglomerate's insular and lethargic management culture. Now he wants to prove Tata companies can compete in the rich West as well as in the unpredictable but hugely promising markets of the developing world. What's more, Tata wants to set the group solidly on a path to achieving all this before he retires.

The barrel-chested tycoon hasn't named a successor or said when he plans to step down. He'll turn 70 in December, but he still has a vice-like handshake, and associates are amazed at his command of numbers and technical details of the various Tata companies. That makes his failure to designate a successor all the more disconcerting. Some even question whether his departure might spur the group's breakup. "Who will be the glue?" worries one veteran insider. "Will there even be a central leader?"

Ratan could even be the last Tata to oversee the group. The Tata family tree, on display at a company museum, stretches back 800 years through generations of Parsi priests, an Indian minority descended from Persians. It ends with Ratan—single and childless—and his siblings. Younger brother Jimmy and three half-sisters aren't involved in Tata businesses. His reclusive half-brother, Noel, runs a Tata-owned retail chain, but it's unclear whether he's tycoon timber. Succession "is a problem," Ratan acknowledges. "I am involved in more issues than I think I should be."

When he does step down, Ratan Tata will leave a big void. Even though he and other family members own just 3% of shares in Tata Sons, the private holding company with controlling stakes in its businesses, Tata himself chairs key units including Tata Motors and Tata Steel. He is intimately involved in all major deals and pushed for acquisitions such as Corus. The ventures into passenger cars and telecom are his babies. And Tata is instrumental in hatching new businesses, bouncing ideas gleaned from his travels to managers for follow-up.

Ratan Tata serves another vital function: While at ease with lawyers and investment bankers, he remains firmly planted in the developing world. He is a passionate promoter of corporate social responsibility, a mission that dates to the group's founding in the 1870s by Tata's great-grandfather, Jamsetji Tata. The founder was a pioneering industrialist, philanthropist, and fervent nationalist who traveled to the U.S. with a swami, meeting the tycoons of the day. He opened India's first textile mill, in large part to wean Indians from their industrial dependence on Britain, which until then had milled much of the subcontinent's cotton and then shipped the high-cost cloth back to the colonies. Tata offered worker benefits such as child care and pensions long before most companies in the West, and later one of Jamsetji's sons helped bankroll a young Mahatma Gandhi while he agitated in South Africa for the rights of immigrant Indians.

To this day, the Tata Group remains devoted to good works: Charitable trusts own 66% of the shares in parent Tata Sons, and many of its companies fund grassroots anti-poverty projects that seem far removed from their core businesses. Ask the chairman to name the group's biggest challenges and he quickly cites two: "Talent, and retaining our value system as we get bigger and more diverse. We have to increase the management bandwidth, and with the same ethical standards."

He also concedes that the group is much less focused than he envisioned back in 1991, when he pledged to pare it from scores of companies to just a dozen or so. Tata did dump marginal businesses—cosmetics, paints, and cement—but entered retail, telecom, biotech, and others. Today, Tata Group comprises nearly 100 companies with 300 subsidiaries in 40 businesses. Slimming the group down "is one area where I have not succeeded in what I set out to do," he admits.

`I'M NOT MOVING'
His hope is that Tata's unorthodox structure will give individual companies the agility to respond to new opportunities and threats. "The organization is a lot lighter than a Western conglomerate," says Alan Rosling, a Briton who spearheads international expansion for Tata. "There is no central strategy. We don't even have consolidated financial statements." The group is bound together by the small staffs of Tata Sons and another holding company, Tata Industries. These two, chaired by Ratan, provide strategic vision, control the Tata brand, and lend a hand on big deals. And Tata Sons can raise cash to launch new businesses or help fund purchases such as Corus. In 2004 it pulled in $1.3 billion by floating a 10% share in Tata Consultancy Services.

Bombay House also exerts influence through the Group Corporate Office, another Ratan invention. The nine senior executives in this unit sit on the boards of Tata companies and act as "stewards," mentoring managers and promoting corporate responsibility values. For example, former Tata Tea and Indian Hotels chief R. K. Krishna Kumar helped incubate Ginger Hotels, a new chain of budget inns offering free Internet and cable TV for about $25 in India's most expensive business hubs—one-tenth of what most business hotels charge. R.Gopalakrishnan, who retired from Unilever's Indian affiliate in 1998, is chairman of a new Tata drug-research company and has advised fertilizer maker Tata Chemicals on an ambitious new strategy to market everything from seeds to low-cost insurance by setting up a network of stores and working with poor farmers to improve crop yields. Bombay House "offers guidance and sets perspective," says Satish Pradhan, who heads the Tata Group's sprawling management training center in Pune. "We hand-hold the businesses in a nonintrusive manner."

The chief steward, though, clearly is Ratan Tata. He negotiates major deals and steeps himself in the details of automaking, telecom, or steel. "He has a tremendous technological brain," says Tata Steel Managing Director B. Muthuraman. He's also not afraid of a fight. During a strike at Tata Motors' Pune plant, militant unionists assaulted Tata managers and occupied a section of the city. "If you put a gun to my head," Tata declared, "you had better take the gun away or pull the trigger, because I'm not moving." Tata signed a deal with a rival union and broke the strike after a confrontation between police and the militants. "While he doesn't look it," says Muthuraman, "he's one of the toughest people I've ever known."

The transformation of Tata Steel illustrates his impact. In the early '90s, when India started opening to global competition, the 100-year-old company was saddled with antiquated plants, a bloated payroll, and "no market orientation...we were a good study in demise," recalls Muthuraman. Over the years, Tata cut the workforce from 78,000 to 38,000 and spent $2.5 billion on modernization. A decade later, Tata Steel had become one of the world's most efficient and profitable producers and began to acquire rivals. "Ratan was the chief architect" of the Corus deal, says Muthuraman. "I was worried about the magnitude and the amount of money. But he instilled confidence." The strategy: Because Tata is one of the few big steelmakers with its own abundant coal and iron ore reserves, it can produce raw steel at low cost in India, then ship it to Corus' first-rate mills in the West to make finished products.

But Tata Steel highlights the challenges of balancing Old World ways with New Economy realities. Jamshedpur, the company's home base in northern India, resembles a time capsule of a more paternalistic industrial age, a leafy city of genteel colonial-era structures and wide boulevards hacked from the jungle in 1908. Tata spends some $40 million a year supplying all civic services and schools, even though it employs just 20,000 of Jamshedpur's 700,000 residents. And in its downsizing program, workers who agreed to early retirement got full pay until age 60 and lifelong health care.

Tata Steel also spends millions annually on education, health, and agricultural development projects in 800 nearby villages. In Sidhma Kudhar, for instance, a dusty outpost of whitewashed stone houses with thatched roofs, the 32 families until two years ago subsisted on a single crop of low-grade rice and the $1 a day they could earn by stripping branches from nearby hills. Thanks to funds from Tata, they now have irrigation systems that allow them to grow rice crops and a variety of vegetables. The hillsides are now covered with thousands of mahogany and teak seedlings for future income, as well as jatropha bushes, whose seeds can be used for biofuel. Most children now attend classes in the refurbished school, and the village has three televisions, powered by Tata solar units that also supply enough juice for electric lights and clocks.

Such generosity will be put to the test now that Tata owns struggling Corus. The deal loads the Indian steelmaker with $7.4 billion in debt, and absorbing Corus' higher-cost operations will weaken margins. One key question is what to do with Corus mills such as the one at Port Talbot in Wales, which employs 3,000 workers. Tata says it will proceed with Corus' plans for the mill. But the union representing most Corus workers wants Tata Steel to invest an additional $600 million in Port Talbot to assure it will remain competitive so it won't have to cut jobs. A delegation of 20 Corus labor reps visited Jamshedpur in April to meet the mill's new owners, but Tata executives declined to give guarantees. "We were extremely impressed by their workforce and commitment to social responsibility," says labor leader Michael Leahy. "But how will they be able to translate those principles into the British and European context? They couldn't answer that."

A bid for Jaguar and Land Rover might present an even more daunting challenge. The Ford assets would give Tata a luxury brand and a big boost in SUVs, but it would be an uphill climb to restore Jaguar's luxury cachet, which was damaged by sharing basic designs with Ford. Tata executives, who won't confirm their interest in Jaguar and Land Rover, have downplayed auto ambitions in the U.S., citing the high cost of entry and their commitments in emerging markets. And an attempt to sell small cars under the Rover name in Britain lasted just two years amid complaints about quality. Tata Motors, which once made only trucks, surprised skeptics with the success of the Indica, an affordable passenger car developed from scratch and rolled out in the 1990s. The Indica is now India's No. 2 car and is selling well in South Africa, Spain, and Italy. Tata also will soon start exporting cars and trucks through a venture with Fiat (FIA) and is eyeing a similar project in South America. The company had another big hit in 2006 with the Ace, a bare-bones truck for less than $6,000. Tata already is boosting its output from 75,000 minitrucks to 250,000.

INEVITABLE STUMBLES
Ratan's big passion, though, is the "one lakh" car. (One lakh is 100,000. And that many rupees equals about $2,500.) Since the mid-'90s, he has wanted to develop reliable but supercheap vehicles, a project he believes could ultimately revolutionize the auto industry and make India a major economic power. Tata personally supervised the project and traveled frequently to Tata Motors' development center in Pune to check on progress. Originally he envisioned a fundamentally new kind of vehicle—one made of plastics, for example, that didn't even resemble what we think of today as a car. He concedes that the spartan, oval-shaped model to be launched in early 2008 doesn't meet his lofty aims. It's made of steel. And it looks like, well, a car. To get the price to $2,500, engineers shrunk the size and stripped out frills such as reclining seats and a radio. "There is not a lot of innovation," he says. "We didn't reinvent the business."

Tata has similar ambitions to reinvent solar energy. Tata BP Solar Ltd., a $260 million venture with British energy giant BP (BP), supplies buildings in Germany with rooftop solar-electric systems. But in developing nations, the company sees a vast market in bringing affordable power to villages that are off the power grid. The company has introduced low-cost, solar-powered water pumps, refrigerators, and $30 lanterns that burn for two hours on a day's charge. And it has fitted 50,000 homes with $300 systems that can power two lights, a hot plate, a fan, and a 14-inch TV. "But this is a drop in the ocean," says Tata BP Solar CEO K. Subramanya. "We ought to be touching millions."

There is little question that the opportunities for Tata in India and abroad are staggering. But can the group succeed on all these fronts simultaneously? The interesting dilemmas will come when the Indian economy slows and some Tata affiliates inevitably stumble. Future managers could look at expensive burdens such as Jamshedpur and rural-development projects as tempting targets for cuts when times get tight. Tata companies could lose interest in low-cost goods for the masses without a passionate promoter as group chairman. And the group could take a tougher look at businesses to spin off.

For the foreseeable future, though, these are nonissues. Though Tata vows that he "won't carry this on endlessly," he says he will stay on at least two years beyond when he chooses a successor. So he seems likely to fulfill the last big item on his agenda: building a network of companies capable of thriving in 21st century global competition while still adhering to traditional values long after the departure of Ratan Tata.

Source - BusinessWeek

Resources - View slideshow on Tata Group

Consumerist's 10 Tips That Will Make Sure You'll Stay Broke

We know you don't really like having money. That's why we've put together these 10 tips that will help ensure you never will:

1) Make Shopping Your Hobby.

Nothing to do on a Tuesday night? Go to the store. Doesn't matter which one. Just go and bring your credit card. Better yet, open a store credit card and buy a bunch of stuff. Hey! You saved 10%! Sure, you didn't actually know you "needed" this stuff until you saw it at the store, but its just so cute.

2) Don't Have a Budget.

Look, you know about how much money you make and about how much you spend on basic costs. Then you need your "play money." After that, if there's anything left, it can sit in your non-interest bearing checking account until next month. As long as there is something in there, you're doing well.

Sure, you overdraft now and then, but big deal. It doesn't happen every day.

3) Impress Your Friends By Buying Them Expensive Stuff You Can't Afford.

If Betty registers a $10,000 silver platter for her wedding... you should get it for her. Yeah, so you went in to debt? Betty is your best friend . She'd do the same for you. What? You don't want to look cheap !

4) Go Grocery Shopping When You're Hungry, With No List.

Don't plan you meals. Always eat "whatever you feel like." Go shopping when you're really hungry and make sure to buy everything that looks yummy!Mmmm! Lobster! Another good tip is to go shopping on "sample day" and buy everything you try. Smoked Gouda! Caviar! Little pigs in a blanket! Pizza rolls! Yay!

5) Go To The Little ATM At The Gas Station. A Lot.

It's only 1.50, get over it. The bank is sooooo far away. Just get money wherever it's convenient. Who cares about the fees? Same goes for overdraft fees and other banking fees. It's not that big of a deal.

6) Buy Lots and Lots of "Comfort Items" Without Considering The Cost.

You need your latte. You need your new shoes. You need Madden 08. You need a blu-ray player. You need cable. You need an iPhone. You need more DVDs. You need to buy a book instead of going to the library. You need to play a MMORPG . You need 150 shades of lipstick. You need to see every movie that comes out, then buy the poster and an action figure. You need to go to every concert. You need to buy the T-shirt. You need lots of brand new clothes every month.

You need these things to be happy. If you don't have each and every single one of them

7) Don't Open A High Interest Savings Account you will be so depressed that you may actually die. Don't take the risk.

High-interest savings accounts are for old people. You don't need to save yet. Or at all. You have that, you know, plan thing at work where they save money for you. And you can use your credit cards for any emergencies that might come up. So you'll be OK.

8) Run Up Lots Of Credit Card Debt

Don't worry, you'll pay it off at some point. When? Um. When you make more money than you do now. Duh. Besides, if the credit card company says you can afford to take out $17,000 at 18% they must know what they're talking about, right? They don't want to lose their money!

9) Let Yourself Go.

Don't work out or change the oil in your car. If you get sick, take half the medicine, that way you'll get sick again really quickly and get to spend more on medical bills. Take crappy care of your car and your house so that when something breaks it costs a ton of money to fix. Also, buy a gas guzzling car and leave your windows open with the air conditioning on. Don't brush your teeth or eat healthful foods. Make sure to buy lots of things that are very expensive to maintain, then neglect them. Who cares?

10) Buy Your Children Whatever They Want

Your kid can't go to school unless he/she is dressed in all the latest fashions. Also, he/she must have better toys than other children or you are a bad parent. Disappointment is bad for children. If children don't get everything they want, it makes them bad at math. True story. Also, if you don't sign your kid up for tons and tons of expensive classes and activities, he/she will fail at life and live under a bridge. And it will be your fault.

What are your tips for staying as broke as possible? Share them in the comments!

What businesses need to know about the US current-account deficit

At $857 billion and growing, the US current-account deficit absorbs the vast majority of the world’s capital outflows. To finance this chronic deficit, the United States has amassed trillions of dollars of foreign debt, leaving itself vulnerable to sudden changes in the sentiment of global investors.

A variety of forces, including demographics, technological change, and shifts in consumer demand, could cause the United States to export more and import less. But the further depreciation of the dollar is the most direct correction mechanism—and the most widely anticipated one.¹ The uncertainty surrounding such a correction complicates efforts to establish priorities for business investment and government policy.

New research from the McKinsey Global Institute (MGI) offers some guidance. Our findings suggest that the depreciation will most likely be gradual—but would have to be very large to eliminate the deficit. This depreciation would lead to significant changes in the current pattern of world demand and trade.

If the dollar were to fall sharply, European demand for many types of financial and business services from the United States would increase, and European companies would find the United States a more attractive location to build manufacturing and R&D facilities. US policy makers should cultivate the open and competitive environment necessary for continued innovation in these sectors.

The US trade deficit with many Asian countries, including Japan, South Korea, and Taiwan, would become a trade surplus. Many Asian companies would have to intensify their efforts to increase exports to non-US markets and would find US companies more competitive in their own domestic markets. In contrast, China would retain both its manufacturing cost advantage and its trade surplus with the United States—suggesting that industry groups should focus less energy on pressuring China to revalue its currency.

As the dollar declined, Canada and Mexico would lose their manufacturing cost advantage, and imports from the United States would increase, particularly in high-tech products and machinery. This would create a new set of employment challenges and opportunities across the entire North American Free Trade Agreement (NAFTA) region. Companies in Canada and Mexico should prepare for the potential depreciation of the dollar—for example, by strengthening their efforts to export to Central America.

MGI reached these conclusions by analyzing two very different five-year scenarios describing the evolution of the US current account. (For more detail, see the full report, The US Imbalancing Act: Can the Current Account Deficit Continue? available free of charge online.) In the first, we assessed whether it could continue to grow over the next five years if exchange rates remained the same and whether the rest of the world could finance an ever-larger US deficit. The second scenario describes a world where the dollar depreciates enough to eliminate the entire US current-account deficit—by some 30 percent from the dollar’s level in January 2007—and the impact on trade patterns. While reality is likely to lie somewhere between these two extremes, understanding them should help business leaders and policy makers better prepare for what lies ahead.

Two views of the future

MGI created two scenarios by using a microeconomic approach² to analyze the effects of a depreciation of the dollar on demand for 30 different product categories in 100 countries, as well as on US foreign assets and liabilities. The two scenarios paint vastly different pictures of the US current account, trade balance, and net foreign income in 2012.³

Continued growth of the US current-account deficit

If current trends in global savings and investment continued for an additional five years and there were no adjustments in exchange rates, the US current-account deficit would reach $1.6 trillion by 2012, or 9 percent of GDP (Exhibit 1). However, under plausible assumptions, global capital outflows from other countries, reaching $2.1 trillion in 2012, would also grow large enough to finance a deficit of that size.⁴ Under this scenario, the US deficit would simply resemble a more exaggerated version of the status quo, and the United States would increasingly borrow from abroad to pay for it.

It’s not implausible that the United States could pay for such a large imbalance. Running a current-account deficit of this size would triple today’s net foreign debt, from $2.7 trillion at the end of 2006 to $8.1 trillion in 2012, or 46 percent of GDP. Yet a number of countries, including Australia, Ireland, and Mexico, currently carry a net external debt of a similar size relative to GDP. Furthermore, the United States is likely, at least over the next five years, to retain some unique advantages that help service a large foreign debt. Most obviously, it is denominated in the country’s own currency, the dollar, eliminating the risk of ballooning payments resulting from currency swings.⁵

What’s more, the United States has historically earned higher returns on its foreign assets than it has paid to overseas investors. One consequence is that the US net foreign debt today is significantly smaller than the sum of past current-account deficits (Exhibit 2). If this pattern continues, interest payments on the large external debt resulting from an even larger current-account deficit would be relatively low, at less than 1 percent of GDP.

Elimination of the US current-account deficit

A variety of economic shocks could spark changed global trade, consumption, and savings patterns that might eliminate the US current-account deficit by 2012. US consumers may be forced to save more as the housing boom ends, for example. Asian countries might boost domestic consumption, perhaps through increased spending on education and health care, and save less in the form of US securities. Such changes would increase the supply of and lower demand for the US dollar, leading its value against other currencies to fall.

Our analysis suggests that a 30 percent depreciation of the dollar from its January 2007 levels would fully balance the US current account by 2012.⁶ A smaller decline—of 20 to 25 percent from January 2007 levels—would reduce the deficit to roughly 2 to 3 percent of GDP, respectively, which many economists feel is sustainable.

Notably, even after a depreciation of this magnitude, in 2012 the US trade deficit in goods would remain quite large—around $720 billion, roughly today’s level. However, the United States would export more services and earn more income from overseas investments.⁷ Indeed, rather than being a large net debtor owing about 46 percent of GDP, the country would be a significant net creditor, with claims equaling some 28 percent of GDP. The factors underlying this dramatic reversal are the same ones that limit the accumulation of net foreign debt today: the positive spread between the interest that the United States earns on its foreign assets and what it pays on its liabilities, as well as the appreciation of US assets abroad, in this case accelerated by a depreciation of the dollar.

Preparing for both scenarios

Which of these scenarios is likely to play out? Since the United States could continue running a large current-account deficit for the next five years, there’s no reason to expect that the dollar will depreciate abruptly. For many years, foreign investors have displayed a growing appetite for dollar assets. The United States has offered better returns on financial assets and business investments than have other mature economies, such as Europe and Japan—along with lower volatility and better institutional protection than can be found in emerging markets.

There’s also no reason to expect that today’s global trade, consumption, investment, and savings patterns will persist indefinitely. Redressing the imbalances will require the United States to save more and consume less, while other regions—especially Asia, Canada, Europe, and Mexico—would consume and import far more than they do today. As imports become more expensive for consumers in the United States, companies around the world will intensify their sales efforts elsewhere and lessen the global focus on the US economy.

The prudent course for business is to prepare for an adjustment of the US deficit, whether that happens gradually or abruptly. Despite the great uncertainty surrounding the deficit’s fate, few companies have developed contingency plans for a significant depreciation of the dollar and the major shifts in trade and investment that would follow. Our analysis describes the implications of these changes.

Europe and the United States

The United States runs a trade surplus with Europe across many service subsectors, including business services (such as consulting, accounting, financial, and computer and information services), education, telecommunications, and travel. If the dollar declined and US services became cheaper for Europeans, these surpluses would more than triple in value.⁸

After a depreciation of the dollar, the US trade deficit in goods with Europe would shrink but not disappear. Two-thirds of the improvement would come from increased US exports to Europe—particularly of machines and other goods, such as farm and construction equipment. Also, US imports of manufactured products from Europe, such as scientific instruments and consumer goods, would decline.

European companies should prepare for the possibility that they will face new, more cost-competitive US entrants, perhaps by further differentiating their offerings. In general, they would also find the United States a more attractive place to build manufacturing and R&D facilities to serve both it and other markets.

Asia and the United States

The US trade deficit with China will persist for years, even in the unlikely event of a major short-term depreciation of the dollar against the renminbi.⁹ The reason is that China’s exports to the United States today are five times as large as its imports; moreover, the cost difference in the goods the United States imports from China—such as toys, clothing, and consumer electronics—is too large for even a significant depreciation to erase. What’s more, China imports many components of the goods that it exports, and a stronger renminbi would reduce the cost of those inputs, helping to preserve China’s manufacturing cost advantage. As a result, the preoccupation of business and government leaders with the depreciation of the renminbi seems misplaced.

In contrast, the US trade deficit in goods with Japan, South Korea, and Taiwan would become a trade surplus in the event of a significant depreciation; US imports of automobiles, computers, electrical appliances, and telecommunications equipment from them would decline. These three countries have major trading relationships with many other markets and would need to increase exports to them. And despite lower exports to the United States, Japanese, South Korean, and Taiwanese companies would enjoy lower costs for building and running plants there to serve its domestic market.

Still, policy makers in the three countries (and others that have traditionally depended on exports to drive economic growth) would find it prudent to foster domestic consumption by liberalizing their service sectors, improving their credit systems and products to facilitate consumer borrowing, and letting their currencies appreciate to improve consumer purchasing power. Although US consumption played an important role in revitalizing these economies after the 1997 financial crisis, it cannot continue to fuel global growth forever.

Canada, Mexico, and the United States

Canada and Mexico, whose trading relationships with the United States make up the majority of their total trading activity, would be significantly affected by a short- or long-term depreciation of the dollar. Because of the relatively low labor costs of these countries, they have enjoyed many production cost advantages over the United States since the creation of NAFTA, in 1993. After a major depreciation, however, those advantages would largely disappear. Instead of increasing investments in offshore-manufacturing facilities in Canada and Mexico, US companies would find it more cost effective to produce goods at home, where labor costs would be comparable and new factories could be built without the complexity and expense of operating abroad.

Exports from Canada and Mexico to the United States could decline as much as their imports from it increased, creating a double shock. Both would have lower exports of manufactured goods there, especially furniture and clothing, and Canada would also export smaller quantities of mineral fuels. At the same time, both would consume more US goods, especially industrial and electrical machinery, medical devices, computers and other high-tech gear, and farm and construction equipment. Canada and Mexico might need to increase their trading with Central America and other parts of the world as a result. To do so, Mexico would have to move more quickly into higher-value-added types of products, since it could no longer rely on low wages to compete.¹⁰

Maintaining healthy economies throughout the NAFTA region benefits everyone, so the three members should work together to prepare for the possible effects of any depreciation of the dollar. Even if differences in their production costs narrowed after it, the free-trade area would continue to benefit all member countries; the growth unleashed by the integration of European economies in recent years is a testament to this point. By reducing trade barriers, NAFTA has already allowed low-cost manufacturers, especially in Mexico, to increase their exports to the United States. Increases in other types of cross-border commerce are still possible. All three countries should continue to build the physical and telecommunications infrastructure necessary to facilitate such trade by harmonizing product standards and regulations and streamlining border procedures and red tape.

Lessons for the United States

For US companies and government leaders, economic pragmatism is surely the wisest course. Emphasizing those areas in which the United States has genuine potential to improve its trade and current-account position will have more impact than focusing on some of the red herrings—revaluing the renminbi, for example—in the current public debate. The highly productive and innovative US high-tech sector warrants special attention because of its direct exports and its role in facilitating innovation in other sectors; it produces not only computers and semiconductors but also components for a wide range of goods, such as surgical instruments and medical devices, office equipment, farm and construction machinery and vehicles, and air-conditioning and heating systems.

Fostering the high-tech sector will require the United States to provide an environment that facilitates innovation. Competition is vital, as is the free flow of ideas across companies and borders. Since the terrorist attacks of 9/11, policy changes prompted by national-security concerns may have jeopardized this flow. The current long delays in approving visas for highly skilled foreign workers and graduate students are shortsighted. Policies that discourage investment by foreign companies in the United States also will do more harm than good.

Service businesses in the United States should prepare to increase their exports to Europe by tailoring their offerings to meet local regulatory requirements and consumer preferences. Other companies ought to consider what adjacent services they might provide. US trade negotiators should continue trying to reach global agreement on the removal of tariff and nontariff barriers to trade in services, and policy makers would be wise to initiate broader long-term efforts to break down the language and cultural differences that constrain the growth of service exports. Foreign-language study, for example, should receive more emphasis in US schools.

The US current-account deficit could continue to grow for at least the next five years. When the adjustment does take place, it is more likely to be gradual than abrupt. Still, a major depreciation of the US dollar and large shifts in global consumption and savings are possible. Governments, business leaders, and investors around the world should prepare for the potential effects.

About the Authors

Diana Farrell is director of the McKinsey Global Institute, where Susan Lund is a consultant.

The authors wish to thank team members Alexander Maasry and Sebastian Roemer, both McKinsey consultants. We are also grateful to our academic advisers on this project: Martin N. Baily, senior fellow at the Peter G. Peterson Institute for International Economics; Richard Cooper, Maurits C. Boas Professor of International Economics, Harvard University; and Kenneth Rogoff, Thomas D. Cabot Professor of Public Policy and Professor of Economics at Harvard.

Remarks of Bill Gates - Harvard Commencement

President Bok, former President Rudenstine, incoming President Faust, members of the Harvard Corporation and the Board of Overseers, members of the faculty, parents, and especially, the graduates:

I've been waiting more than 30 years to say this: "Dad, I always told you I'd come back and get my degree."

I want to thank Harvard for this timely honor. I'll be changing my job next year … and it will be nice to finally have a college degree on my resume.

I applaud the graduates today for taking a much more direct route to your degrees. For my part, I'm just happy that the Crimson has called me "Harvard's most successful dropout." I guess that makes me valedictorian of my own special class … I did the best of everyone who failed.

But I also want to be recognized as the guy who got Steve Ballmer to drop out of business school. I'm a bad influence. That's why I was invited to speak at your graduation. If I had spoken at your orientation, fewer of you might be here today.

Harvard was just a phenomenal experience for me. Academic life was fascinating. I used to sit in on lots of classes I hadn't even signed up for. And dorm life was terrific. I lived up at Radcliffe, in Currier House. There were always lots of people in my dorm room late at night discussing things, because everyone knew I didn't worry about getting up in the morning. That's how I came to be the leader of the anti-social group. We clung to each other as a way of validating our rejection of all those social people.

Radcliffe was a great place to live. There were more women up there, and most of the guys were science-math types. That combination offered me the best odds, if you know what I mean. This is where I learned the sad lesson that improving your odds doesn't guarantee success.

One of my biggest memories of Harvard came in January 1975, when I made a call from Currier House to a company in Albuquerque that had begun making the world's first personal computers. I offered to sell them software.

I worried that they would realize I was just a student in a dorm and hang up on me. Instead they said: "We're not quite ready, come see us in a month," which was a good thing, because we hadn't written the software yet. From that moment, I worked day and night on this little extra credit project that marked the end of my college education and the beginning of a remarkable journey with Microsoft.

What I remember above all about Harvard was being in the midst of so much energy and intelligence. It could be exhilarating, intimidating, sometimes even discouraging, but always challenging. It was an amazing privilege – and though I left early, I was transformed by my years at Harvard, the friendships I made, and the ideas I worked on.

But taking a serious look back … I do have one big regret.

I left Harvard with no real awareness of the awful inequities in the world – the appalling disparities of health, and wealth, and opportunity that condemn millions of people to lives of despair.

I learned a lot here at Harvard about new ideas in economics and politics. I got great exposure to the advances being made in the sciences.

But humanity's greatest advances are not in its discoveries – but in how those discoveries are applied to reduce inequity. Whether through democracy, strong public education, quality health care, or broad economic opportunity – reducing inequity is the highest human achievement.

I left campus knowing little about the millions of young people cheated out of educational opportunities here in this country. And I knew nothing about the millions of people living in unspeakable poverty and disease in developing countries.

It took me decades to find out.

You graduates came to Harvard at a different time. You know more about the world's inequities than the classes that came before. In your years here, I hope you've had a chance to think about how – in this age of accelerating technology – we can finally take on these inequities, and we can solve them.

Imagine, just for the sake of discussion, that you had a few hours a week and a few dollars a month to donate to a cause – and you wanted to spend that time and money where it would have the greatest impact in saving and improving lives. Where would you spend it?

For Melinda and for me, the challenge is the same: how can we do the most good for the greatest number with the resources we have.

During our discussions on this question, Melinda and I read an article about the millions of children who were dying every year in poor countries from diseases that we had long ago made harmless in this country. Measles, malaria, pneumonia, hepatitis B, yellow fever. One disease I had never even heard of, rotavirus, was killing half a million kids each year – none of them in the United States.

We were shocked. We had just assumed that if millions of children were dying and they could be saved, the world would make it a priority to discover and deliver the medicines to save them. But it did not. For under a dollar, there were interventions that could save lives that just weren't being delivered.

If you believe that every life has equal value, it's revolting to learn that some lives are seen as worth saving and others are not. We said to ourselves: "This can't be true. But if it is true, it deserves to be the priority of our giving."

So we began our work in the same way anyone here would begin it. We asked: "How could the world let these children die?"

The answer is simple, and harsh. The market did not reward saving the lives of these children, and governments did not subsidize it. So the children died because their mothers and their fathers had no power in the market and no voice in the system.

But you and I have both.

We can make market forces work better for the poor if we can develop a more creative capitalism – if we can stretch the reach of market forces so that more people can make a profit, or at least make a living, serving people who are suffering from the worst inequities. We also can press governments around the world to spend taxpayer money in ways that better reflect the values of the people who pay the taxes.

If we can find approaches that meet the needs of the poor in ways that generate profits for business and votes for politicians, we will have found a sustainable way to reduce inequity in the world. This task is open-ended. It can never be finished. But a conscious effort to answer this challenge will change the world.

I am optimistic that we can do this, but I talk to skeptics who claim there is no hope. They say: "Inequity has been with us since the beginning, and will be with us till the end – because people just … don't … care." I completely disagree.

I believe we have more caring than we know what to do with.

All of us here in this Yard, at one time or another, have seen human tragedies that broke our hearts, and yet we did nothing – not because we didn't care, but because we didn't know what to do. If we had known how to help, we would have acted.

The barrier to change is not too little caring; it is too much complexity.

To turn caring into action, we need to see a problem, see a solution, and see the impact. But complexity blocks all three steps.

Even with the advent of the Internet and 24-hour news, it is still a complex enterprise to get people to truly see the problems. When an airplane crashes, officials immediately call a press conference. They promise to investigate, determine the cause, and prevent similar crashes in the future.

But if the officials were brutally honest, they would say: "Of all the people in the world who died today from preventable causes, one half of one percent of them were on this plane. We're determined to do everything possible to solve the problem that took the lives of the one half of one percent."

The bigger problem is not the plane crash, but the millions of preventable deaths.

We don't read much about these deaths. The media covers what's new – and millions of people dying is nothing new. So it stays in the background, where it's easier to ignore. But even when we do see it or read about it, it's difficult to keep our eyes on the problem. It's hard to look at suffering if the situation is so complex that we don't know how to help. And so we look away.

If we can really see a problem, which is the first step, we come to the second step: cutting through the complexity to find a solution.

Finding solutions is essential if we want to make the most of our caring. If we have clear and proven answers anytime an organization or individual asks "How can I help?," then we can get action – and we can make sure that none of the caring in the world is wasted. But complexity makes it hard to mark a path of action for everyone who cares — and that makes it hard for their caring to matter.

Cutting through complexity to find a solution runs through four predictable stages: determine a goal, find the highest-leverage approach, discover the ideal technology for that approach, and in the meantime, make the smartest application of the technology that you already have — whether it's something sophisticated, like a drug, or something simpler, like a bednet.

The AIDS epidemic offers an example. The broad goal, of course, is to end the disease. The highest-leverage approach is prevention. The ideal technology would be a vaccine that gives lifetime immunity with a single dose. So governments, drug companies, and foundations fund vaccine research. But their work is likely to take more than a decade, so in the meantime, we have to work with what we have in hand – and the best prevention approach we have now is getting people to avoid risky behavior.

Pursuing that goal starts the four-step cycle again. This is the pattern. The crucial thing is to never stop thinking and working – and never do what we did with malaria and tuberculosis in the 20th century – which is to surrender to complexity and quit.

The final step – after seeing the problem and finding an approach – is to measure the impact of your work and share your successes and failures so that others learn from your efforts.

You have to have the statistics, of course. You have to be able to show that a program is vaccinating millions more children. You have to be able to show a decline in the number of children dying from these diseases. This is essential not just to improve the program, but also to help draw more investment from business and government.

But if you want to inspire people to participate, you have to show more than numbers; you have to convey the human impact of the work – so people can feel what saving a life means to the families affected.

I remember going to Davos some years back and sitting on a global health panel that was discussing ways to save millions of lives. Millions! Think of the thrill of saving just one person's life – then multiply that by millions. … Yet this was the most boring panel I've ever been on – ever. So boring even I couldn't bear it.

What made that experience especially striking was that I had just come from an event where we were introducing version 13 of some piece of software, and we had people jumping and shouting with excitement. I love getting people excited about software – but why can't we generate even more excitement for saving lives?

You can't get people excited unless you can help them see and feel the impact. And how you do that – is a complex question.

Still, I'm optimistic. Yes, inequity has been with us forever, but the new tools we have to cut through complexity have not been with us forever. They are new – they can help us make the most of our caring – and that's why the future can be different from the past.

The defining and ongoing innovations of this age – biotechnology, the computer, the Internet – give us a chance we've never had before to end extreme poverty and end death from preventable disease.

Sixty years ago, George Marshall came to this commencement and announced a plan to assist the nations of post-war Europe. He said: "I think one difficulty is that the problem is one of such enormous complexity that the very mass of facts presented to the public by press and radio make it exceedingly difficult for the man in the street to reach a clear appraisement of the situation. It is virtually impossible at this distance to grasp at all the real significance of the situation."

Thirty years after Marshall made his address, as my class graduated without me, technology was emerging that would make the world smaller, more open, more visible, less distant.

The emergence of low-cost personal computers gave rise to a powerful network that has transformed opportunities for learning and communicating.

The magical thing about this network is not just that it collapses distance and makes everyone your neighbor. It also dramatically increases the number of brilliant minds we can have working together on the same problem – and that scales up the rate of innovation to a staggering degree.

At the same time, for every person in the world who has access to this technology, five people don't. That means many creative minds are left out of this discussion -- smart people with practical intelligence and relevant experience who don't have the technology to hone their talents or contribute their ideas to the world.

We need as many people as possible to have access to this technology, because these advances are triggering a revolution in what human beings can do for one another. They are making it possible not just for national governments, but for universities, corporations, smaller organizations, and even individuals to see problems, see approaches, and measure the impact of their efforts to address the hunger, poverty, and desperation George Marshall spoke of 60 years ago.

Members of the Harvard Family: Here in the Yard is one of the great collections of intellectual talent in the world.

What for?

There is no question that the faculty, the alumni, the students, and the benefactors of Harvard have used their power to improve the lives of people here and around the world. But can we do more? Can Harvard dedicate its intellect to improving the lives of people who will never even hear its name?

Let me make a request of the deans and the professors – the intellectual leaders here at Harvard: As you hire new faculty, award tenure, review curriculum, and determine degree requirements, please ask yourselves:

Should our best minds be dedicated to solving our biggest problems?

Should Harvard encourage its faculty to take on the world's worst inequities? Should Harvard students learn about the depth of global poverty … the prevalence of world hunger … the scarcity of clean water …the girls kept out of school … the children who die from diseases we can cure?

Should the world's most privileged people learn about the lives of the world's least privileged?

These are not rhetorical questions – you will answer with your policies.

My mother, who was filled with pride the day I was admitted here – never stopped pressing me to do more for others. A few days before my wedding, she hosted a bridal event, at which she read aloud a letter about marriage that she had written to Melinda. My mother was very ill with cancer at the time, but she saw one more opportunity to deliver her message, and at the close of the letter she said: "From those to whom much is given, much is expected."

When you consider what those of us here in this Yard have been given – in talent, privilege, and opportunity – there is almost no limit to what the world has a right to expect from us.

In line with the promise of this age, I want to exhort each of the graduates here to take on an issue – a complex problem, a deep inequity, and become a specialist on it. If you make it the focus of your career, that would be phenomenal. But you don't have to do that to make an impact. For a few hours every week, you can use the growing power of the Internet to get informed, find others with the same interests, see the barriers, and find ways to cut through them.

Don't let complexity stop you. Be activists. Take on the big inequities. It will be one of the great experiences of your lives.

You graduates are coming of age in an amazing time. As you leave Harvard, you have technology that members of my class never had. You have awareness of global inequity, which we did not have. And with that awareness, you likely also have an informed conscience that will torment you if you abandon these people whose lives you could change with very little effort. You have more than we had; you must start sooner, and carry on longer.

Knowing what you know, how could you not?

And I hope you will come back here to Harvard 30 years from now and reflect on what you have done with your talent and your energy. I hope you will judge yourselves not on your professional accomplishments alone, but also on how well you have addressed the world's deepest inequities … on how well you treated people a world away who have nothing in common with you but their humanity.

Good luck.