Macy’s has been facing a major downfall and its stock price has been tanking for a while now. This problem has been persisting for several reasons, and departmental stores in general have been facing problems making profits. Macy’s stock price fell by 15% in May after its 2016 Q1 financial results were released. Even more recently, in August, Macys announced that it is planning on closing about 100 of their stores. The company executives mentioned that these stores would be performing their final sales in the next year. They have also already had a few recent store closures.

 

There are several reasons that have been costing Macy’s major decline in sales and market share. It’s stock price and overall financial valuation has also been plummeting due to this.

 

Firstly, fast fashion upstarts and established fast fashion companies like Zara, H&M and Forever 21 are rapidly eating away market share because they are able to bring in new styles and designs within short intervals, which is attributable their low costs of production. Also, off price retailers like TJ Maxx and Nordstrom Rack have been providing high quality merchandise at lower prices, which have been attracting a lot of departmental store retailers.

 

However the real game changer in the fashion retail industry has been e-commerce. E-commerce has made a strong dominant presence in the retail world. This is more than evident as Amazon is about to have the label of the largest seller of clothing in the US. Not just Macy’s but multiple traditional retail companies have been struggling to keep up with the e-commerce industry performing at its ultimate peak. Though the profound growth of the online shopping realm is not a firsthand phenomenon, it is now establishing complete control over the apparel retail industry. Macy’s CEO Terry Lundgren is extremely concerned and recently made a statement that “Macy’s has been seeing continued weakness in consumer spending levels for apparel and related categories”. On the other hand, Amazon’s stock has been flying. According to research done by a recognized financial services firm, the Cowen group, its primary growth has been driven by its apparel and accessories businesses, which makes it a key competitor to Macy’s. This is not only apparent from numbers from financial statements and financial valuation represented in stock market prices, but also from increase in the number of shoppers of the companies over time. Cowen and Company, an investment-banking firm performed a detailed survey of 2,500 shoppers in the United States on a monthly basis for the past three years, and their results, which are reflected in the following graph, show that Amazon’s shoppers are continually increasing on an average where as Macy’s number of shoppers has remained the same.

 

Also, there is a current trend of millennial consumers being more willing to spend on services and experiences rather than on material or tangible products. Millennials are defined as Americans who are in the age group of 18-34. They form the U.S.’s largest generation by population and account for about $1.3 trillion of the country’s total annual consumer spending. According to research done by The Boston Consulting Group, the generation values personal experiences much more as opposed to material possessions, weather it is clothes and bags or cars and homes. This generation differs from previous generations in that happiness is a result of sharing personal experiences like a music festival or a vacation rather than of owning a car and a home. This trend has also been slightly contributory to decline in sales of high-end clothing brands, which sell in departmental stores like Macy’s and Nordstrom. The preference shift trend has also obliged many other clothing retail brands to try and adapt and provide experiences along with their products.

 

The stock price of Macy’s for the past year, which is summarized in the subsequent graph, has been quite volatile.

 

 

The key issues that are worrying and need to be carefully addressed by Macy’s can be gathered from data from the company’s recent financial statements. On May 11 2016, Macy’s stock price fell by 15% to $31.38, which was both a highlight of its stock price history and also an alarming wake up call for Macy’s. Macy’s released its first quarter financial results a few weeks before this and they showed that its sales fell from more than 7% from more than a year ago and its performance didn’t meet forecasts. Also, same store sales which indicate the change in sales generated from the existing stores of a retailer, are an important performance metric for retailers, have also been significantly declining for Macy’s.

 

The combination of fierce competition from e-commerce, off price retailers and stores that cater to fast fashion, along with shifts in consumer preferences that are moving away from traditional clothing retail stores have caused problems for not just Macy’s, but even its major competitors that have similar business models, like JC Penney’s, Sears, and Nordstrom.

 

It is crucial for Macy’s to craft an optimal strategy that has features that can address each of the causes for its decline in sales. Addressing each cause of the big problem specifically helps create a detailed approach. Capitalizing on the company’s existing strengths and opportunity is an integral part of implementing any plan to solve business problems. Consequently, Macy’s has announced that they have been taking some initiatives to combat their problems. They have been receiving constructive feedback and response towards these initiatives.

 

Firstly, the company has tried to achieve off price retailing, which is being adapted by many retail departmental stores. Off price retailers sell high quality products for much cheaper prices. The catch is that products are usually second hand goods, last season items, cancelled orders or goods returned by other retailers. They usually have an inconsistent mix of brands. An important characteristic that attracts consumers to departmental stores even today is sales and discounts. Even though departmental stores attempt to restrict discounts, it’s difficult them to do so while retaining their loyal customers. This is because some economically prudent customers get too used to this pricing and it is difficult to get them to pay full price. This is exactly where off price retailing comes into the picture. It caters to these customers by providing a discounted products option all year around. For example Nordstrom, one of Macy’s biggest competitors has introduced Nordstrom Rack, which has a strong presence in the off price retailing industry. Macy’s is also planning to start its own off-price retail store, Macy’s backstage, and aims at opening 15 stores by the end of 2016.

 

While the addition of this segment will definitely give Macy’s a stronger foundation to combat its competitors, off price retailing comes with its own set of troubles. It is important to look from a consumer’s perspective when trying to increase same store sales. Off price retail stores sometimes have defective products, because they are usually returned or rejected products bought out from other retailers. The décor of the store is not at all attractive and welcoming; the manner in which clothes are displayed in these stores are very unorganized and inconvenient for customers as they are all a mix of different kinds of clothes from different brands. Off price retailers project a different aura and feel altogether, and though Macy’s can start an off price retailing division, it would still need to focus on enhancing its primary departmental stores that define its brand image.

 

Another step that Macy’s has made towards progressing is focusing on developing and revamping their cosmetics and accessories department. While the retail industry as a whole has been struggling to perform in the United states, cosmetics and accessories sales have been soaring, and this has proven to be very beneficial to departmental stores. Not just Macy’s revenue mix, every general department store’s sources of revenue has a good proportion of income from the accessories and shoes departments. The revenue of Macy’s specifically is 38% accounted for by this department, which is the largest portion of all the categories.

 

Amidst of the struggle to perform, increase same store sales and expand customer base, Macys made an acquisition of Bluemerucry, which is a luxury cosmetics and spa with 100 stores all over the country. After acquisition, Macy’s is planning on opening 24 Bluemercury stores within the biggest Macy;s stores by the end of next year.

 

Macy’s is indeed making a clever attempt to reinforce their cosmetics department.

 

Sales of cosmetic products have been progressing remarkably and departmental retail stores like Macy’s should intend to take full advantage of this. Sales have been rising due to a combination of several factors. Firstly cosmetics cater to the contemporary trend of willingness to spend money on experiences. Buying make up is an experience, because most cosmetics stores like Blumercury provide in store make up salons and spas, which have in store makeovers. This is essentially the experiential service that Bluemercury stores could add to Macy’s. Exploiting the cosmetics department by selling experiences can play a substantial role in helping achieve higher sales for the company as millennials become more and more inclined towards such services. Another aspect about the cosmetics industry that makes its products so attractive is that it provides luxury at a much a smaller price and level. For example products from luxury cosmetics brands like LeMar, Clinique and Chanel provide millennials with the contentment of owning a luxury product, though it is at a much smaller level.

 

A noteworthy innovation that Macy’s is set to bring to its departmental stores is a virtual store assistant that guides you through the entire collection in the store. Macy’s initiated a partnership with IBM to create an app called Macy’s on call that is driven by artificial intelligence and provides customer with efficient in-store help.

 

A common apprehension that customers have towards large departmental stores is that that they do not get as much help and consideration from store associates as they would get in a smaller standalone store of any brand. Though a lot of times store assistants are helpful to customers, many customers, especially millennials would rather get this help from a smartphone in their hand rather than have to look for a store assistant and have them answer their questions. This app not only caters to such consumer preferences, but would also enhance the efficiency of the shopping process for customers. Such an app would be apt for shoppers with time constraints. Such customers know exactly what they want to buy, and in which size; they would take a few seconds to locate their items on the app and then checkout and get going. However, technology does come with its disadvantages. The risk of issues like network errors, app breakdowns and other technical glitches will subsist. Also, there is still an older group of shoppers who would prefer talking to a human store associate, not only because it might be harder for them to use the app but also because they actually like having the human touch in their shopping experience. Overall, however a user-friendly app like this one would be a considerable addition to improve the shoppers’ use experience and would also help attract more customers to drive sales revenues.

 

Ultimately, Macy’s will need to constantly keep innovating to add creative and unique components to their business to recover from its sales problems. It is not that blunders have been made by the company that have led them into difficulties, it is just that consumer preferences and trends have been rapidly changing, and intense competition from e-commerce and fast fashion retailers has been grasping customers and market share from departmental store retailers. Nordstrom, which is one of Macy’s major competitor, has also been facing a similar crisis, due to almost identical reasons. Departmental retail stores will therefore need to continually add new elements to their businesses, or remodel existing features to accommodate new trends and revolutionize the value of departmental store shopping.

 

 

 

 

 

Text version below.

 

Text version:

I could go a whole week without touching a piece of physical currency once. Apple Pay at Starbucks, credit card at the bookstore, debit card at their favorite food truck, Venmo to split restaurants checks with friends, cash a check on an app, you name it and it can be done from a smartphone.

In today’s digital age, it’s easy to envision a day when grubby green dollars are a relic of a bygone era, like typewriters or pagers, but the evidence points in another direction.

There are two main reasons why the United States will keep printing the Benjamins for many years to come. The first is that most Americans still use cash as a secure way to complete transactions, especially for small payments. Secondly, many developing nations prefer to use American currency instead of their local currency.

In a 2015 study by the Federal Reserve Bank of San Francisco, credit card, debit card, and electronic payment methods were used in 58 percent of transactions. Credit cards accounted for 21 percent, debit cards for 27 percent and electronic for 11 percent of the year’s ways to pay among American consumers. In spite of widespread use of more modern payment methods, cash has maintained its status as the most used payment instrument at 32 percent of all transactions.

While cash remains king for now, it’s popularity declined in the United States from 2012 to 2015 accompanied by in increase in the use of cards and electronic payments. Credit cards, in particular, increased use by 4 percentage points over the three-year period.

Despite declines in cash usage among Americans since 2012, the total Currency in Circulation Value has been rising every year since it was recorded and published by the U.S. Department of Printing and Engraving in 1995. Since then, the value of currency in circulation has increased over 300 percent to $1.38 trillion.

The U.S. Department of the Treasury decides how much physical currency should be in circulation each year by considering how much currency was destroyed in the past year and the projected demand for currency, in its various denominations, for the upcoming year.

It’s not just a response to inflation that is driving up the amount of dollars in existence. The rate of growth of currency in circulation far exceeded the rate of inflation between 1995 and 2015, as determined by the Consumer Price Index. Adjusted for inflation, the $148 billion in circulated cash in 1995 would be equivalent to $230.17 billion in 2015 dollars, just 16 percent of the actual value in 2015.

If the supply of cash is ever-increasing at a rate much higher than that of inflation, demand must also be increasing, otherwise inflation would rise because too many dollars would begin to chase too few goods. Between low inflation rates, since 1995 inflation has averaged around 2 percent each year, and a decrease in demand for cash among Americans moving toward credit and debit cards, there must be a missing piece.

To find the missing piece to the puzzle, travel to Cambodia where locals shuffle crisp one dollar bills from hand to hand at a bustling floating market, Zimbabwe where farmers collect U.S. dollars from customers at the market, or Argentina where middle class citizens buy cars with American cash.

This is called dollarization. It describes the use of a foreign currency in a nation either formally, to replace its national currency, or informally, where individuals use a foreign currency alongside their official national one.

Dollarization in countries like Cambodia, Zimbabwe, and Argentina has led to increased demand on an international scale for American currency. For Cambodians, Zimbabweans and Argentinians alike, the dollar was and remains a safe currency that is stable unlike their native monetary system which has struggled and or continues to struggle with hyperinflation and political instability.

Research conducted by the Federal Reserve has consistently shown that overseas demand for American currency has been strong and will continue grow in the coming years. While there is not way to know exactly how much currency is abroad, estimates in 2011 suggested that about 50 percent of all currency in circulation was held outside of the United States, about $500 billion.

Nations that adopt the dollar as their currency formally, and to a lesser degree those that use the dollar informally, also face some disadvantages in exchange for stability, favorable interest rates, and increased trade opportunities. One of the major drawbacks of formal dollarization is the complete lack of control over monetary policy. Dollarized nations with stagnating or shrinking economies are unable to lower interest rates which would encourage consumer spending, investment and create growth.

All of this begs the question: where exactly does the Treasury belong in foreign nations’ economies?

The Treasury Act of 1789, created by the First Federal Congress, established the U.S. Department of the Treasury to manage government revenue collected mainly through taxes. Since its inception, the role and scope of the U.S. Department of the Treasury has expanded and shifted significantly. A part of government that once served almost exclusively as the American public wealth manager now also has major roles in foreign economic policy and even an office specializing in terrorism and finance intelligence.

Today, it is part of the Treasury’s stated mission to promote “the conditions that enable economic growth and stability at home and abroad” giving a reason for the Department’s support of international economies. Furthermore, providing unstable nations with a stable currency comes at a relatively low cost for the United States while creating some degree of political and economic leverage over the dollarized nation.

In 2015, the cost of printing the year’s currency was $578 million, 0.0001 percent of the year’s federal budget. In exchange for providing dollars, the United States has the ability to strengthen its influence over the nation in question. Additionally, use of the U.S. Dollar abroad facilitates trade by avoiding exchange rates and risks associated with dealing in unstable currencies.

A potential downside to allowing American currency to be used overseas is risking deflation as international demand increases without increases in supply. Luckily for the Treasury, it has the power to print essentially unlimited quantities of dollars in order to maintain the stability of the currency.

There is also no beneficial alternative. If the Treasury only prints what is needed for domestic use, international demand will remain constant with an even smaller supply of currency resulting in an increase in the value of the currency itself. This appreciation might also affect the overall value of the dollar but to a much smaller degree.

Today, the vast majority of money exists virtually in a computer network. The CIA World Factbook estimates that there at $11.78 trillion in virtual and physical U.S. dollars worldwide. This means that physical currency is only 9 percent of all American money in existance. As such, fluctuations in the value of this small portion can only affect the overall value of the dollar by so much.

So, providing currency to the world comes at relatively low cost to the United States and provides some political benefits but dollarization doesn’t entirely explain the increased production of $100 bills.

Hundred dollar bills in particular have become a larger proportion of the Treasury’s annual currency order. From 2010 to 2015, the amount of $100 bills ordered by the Treasury increased 34 percent from 7 billion to 10.8 billion notes. In the five previous years, from 2005 to 2010, $100 bill orders increased by only 18 percent.

Yes, some people have converted their life savings into dollars and are hiding them in their mattresses as a safeguard against the instability of their own currencies. However, logically, most people who are doing this are in developing nations and won’t have vast amounts of savings to convert into dollars and stash away.

A study conducted by Peter Sands, a Professor at Harvard, suggests that a significant amount of American currency, particularly $100 bills, is preferred by and thus facilitating international crime. The study estimates that global crime finance amounts to over $2 trillion U.S. Dollars per year. Sands argues that most of the illegal transactions that combine to make this astronomical figure use cash due to its anonymity, lack of record, and ease of transportation. Given the large sums of money exchanging hands, large denominations of stable currencies issued in mass quantities are the preferred form of payment.

From this point of view, the Treasury can be seen as an organization that is unintentionally aiding international criminals. Upon further scrutiny, however, the Department can’t really be held accountable for how people use its bills. The Treasury would face opposition to decreasing the discretion and portability of cash because those same characteristics make it attractive for law-abiding citizens.

Perhaps the best it can do is limit the supply of large denominations as proposed by both Sands and former Secretary of the Treasury Lawrence H. Summers in order to limit its facilitation of crime.

Troubled Waters

It’s 2007 and The Big Three automakers, Chrysler, General Motors and Ford, all found themselves in big trouble. They were on the verge of collapse, with wage bills spiraling out of control and foreign competition continuing to undercut their former domestic supremacy. GM’s profits were down 90% in the first quarter compared to the previous year, and the automakers looked for any means by which they could save themselves amidst the falling debris of debt, rising gas prices and cars no one wanted to buy anymore.

Most economists argue that globalization is a net positive for economic growth, benefits consumers in a number of ways and should be encouraged. It creates a more competitive environment that in theory increases not only the quality of products available to the average consumer while also decreasing their cost. The American auto market shows us a very clear example of how it works.  The Japanese and Korean automakers entered the US market and essentially took the Detroit giants out at their knees. Companies like Honda and Toyota created cheaper, more efficient and longer lasting cars than their competition and won larges swathes of the market.

In response, American automakers cut costs fast and furiously. For example, in the mid-2000’s Ford downsized significant parts of the company by closing plants in order to reduce excess production and they liquidated thousands of salaried positions. According to it’s 2005 earnings statement, Ford planned to close 14 manufacturing plants by 2012, leaving some 25,000 to 30,000 workers jobless. They did this because they did not have a demand for the vehicles at level needed to operate the facilities at full capacity. In fact, they operated at a mere 75% of capacity as of that earnings release. These initiatives were a direct result of automotive sector of the company losing almost $3.895 billion in 2005.  Eventually, Ford cut over 40,000 jobs between 2005 and 2008.

Ford’s 2005 earnings report shows trend of shrinking market share

This poses a major drawback, for some, of globalization and how it effects workers; it depresses wages. This happens because workers are now faced with a market place flooded with cheaper competition. Logically, that should for the wages for American auto workers to decrease in order to compete with the foreign workers. But in this instance, the wages of the American auto worker have not shrunk to match the other entrants in the field. Author Edward McClelland points out in a Washington Post column that, “because it provides pensions and benefits that GM’s labor costs average $58 an hour, compared with $48 for Toyota and $38 for Volkswagen.” So the Big Three cut jobs, shut down factories and continued to move production into cheaper wage countries like Mexico. These moves cut union membership from 1.5 million in 1979 to 400,000 members as of 2015.

 

 

 

 

 

 

 

 

 

The Big Three and the weakened unions had to confront the wage issue in order to find a workable path moving forward. Faced with the loss of jobs due to reductions and outsourcing, the unions agreed to system in which hourly employees hired before 2007 would have the designation of tier one or “Traditional” employees and their wages would remain frozen, but not cut. Whereas, all new hires from 2007 onward would be deemed tier two employees, and their pay would be capped permanently, with no hope of ever matching the rates of tier-one employees. Basically, they imposed a wage ceiling of $19 an hour on newer hires, no matter how long they worked there, while the longer tenured employees could make up to $28 an hour. The move was justified as a means to save thousands of factory jobs in the U.S. A move that has been since in other companies such as Kroger’s supermarket chain and United Parcel Service. Many point to Ronald Reagan’s use of tiered wages against government employees at USPS in 1984, as the first instance of its use in the US. Now the automakers were betting on its efficacy as well.

 

The Bailout

Initially, the plan did not make a major impact. We know an enormous number of factors played into the demise of the Big Three. After all, if you look at the Ford’s stock over the past 15 years, we see a massive downward trend from 2000, far before the financial collapse, until it scraped the bottom of the barrel in 2008. Foreign competition battered the Big Three, and drastically reduced not only their market share. For a number of years, the Americans could still bank on consistent sales volume to maintain, but after the recession demand dried up producing the crippling blow. Now higher labor costs became an even more significant point of contention in explaining why they couldn’t keep up. Soon Chrysler and GM teetered on insolvency. Ford hung in, but could’ve easily tumbled as well.

Ford Stock Price 2000-2010 Source: Google Finance

In late 2009, both Chrysler and GM filed for chapter 363 bankruptcy. In response, despite some calls to allow the companies to fail, the Obama administration intervened to prevent an, “Industrial Lehman Brothers Effect.” By utilizing TARP, the Troubled Asset Relief Program instituted under President Bush in 2008, the government dispersed $49.5 billion to GM, $17.17 billion to Ally Financial, the former financial arm of General Motors, and $11.96 billion to Chrysler in various loans, bankruptcy payments and share purchases. As a result of this agreement, Chrysler went under the dominion of Fiat, and the two companies merged to become Fiat Chrysler Automobiles US.

Ford, after initially taking part in conversations about a bailout, decided to walk away from the negotiations. It drew on lines of credit that they established in 2006 by mortgaging assets ad setting up long-term borrowing plans for the credit crisis in 2008. This allowed the company to infuse itself with life preserving liquidity to weather the storm of contraction in 2009 and 2010 which included; shrinking sales numbers and, consequently, shrinking production output.

These actions undoubtedly saved a number of jobs, and allowed the American auto industry to continue to exist as we know it. The Center for Automotive Research released a report on the topic in 2013, “Our results show the U.S. government saved or avoided the loss of $105.3 billion in transfer payments and the loss of personal and social insurance tax collections—or 768 percent of the net investment.” The report continues, “Additionally, 2.6 million jobs were saved in the U.S. economy in 2009 alone and $284.4 billion in personal income saved over 2009-2010.” But what did a lot of these “saved” jobs pay? A fair number of them didn’t pay what they used to, and that was the intention. But the results are difficult to argue against. Ford added more than 17,000 hourly jobs in the last five years through in-sourcing, and brought back production of certain pickup truck models from Mexico. Meanwhile FCA brought in around 15,000 new workers since their bankruptcy 2009.

 

Removing the Limiter

The US government attached a number of stringent restructuring requirements to the bailouts of Chrysler and GM. Initially, the tiered wage plan, as agreed to in the labor negotiations of 2007, prevented the Big Three from having any more than 20% of their work-force constituted by tier-two employees. After GM and FCA filed for chapter 363 bankruptcy in 2009, Obama lifted that restriction. The cap was supposed to be reinstituted during labor negotiations in 2011, when the companies became profitable again, but that did not happen and the tiered wage agreement continued. According to the New Labor Forum, FCA’s workforce consisted of up to 45% tier-two employees before the most recent collective bargaining sessions in 2015, while Ford’s number sat at 29% and GM at 20%. As a consequence of having the most tier two workers, FCA saw the greatest benefits to this plan. It saw wages drop to an average of $48 dollars an hour, according to the Center for Automotive Research, as compared to Ford whose costs rested at $57 an hour.

But Ford still pointed to the new agreement as a key factor in their regaining international competitiveness. From its 2011 earnings report, “In 2011 we signed a four-year agreement with the United Auto Workers that will help us improve our global competitiveness. As a result, we will be investing $16 billion in the U.S. and adding new jobs at our U.S. manufacturing facilities.” They also reported an increase of pre-tax operating profit for their North American operations to $6.2 billion. A massive change from the losses they faced back in 2005. Obviously, many factors play into that resurgence, but wage cost reductions were a major talking point for all of American auto makers.

Source: Ford’s 2011 end of year earnings report

 

The Downside of Tiered Wages

While the new wage structures helped retain many jobs, and played a role in the revitalization of auto industry in the US, sometimes things resonate on a deeper level than just spreadsheets. The wage gaps between employees, with no possibility of ever closing, caused a lot of discontent amongst the workforce. A fact acknowledged on both sides of the negotiations. Imagine getting a job and working alongside people doing the same job, and yet you will never receive the same pay. Many of these workers had close relationships with one another as well, which only made the disparity more difficult to bear for some.

In an excellent article for The Nation about the growing trend of tiered wages in the US, Louis Uchitelle talks about a father and son, Gary and Karl Hoeltge, who both work on a GM assembly line in St. Louis. Karl feels disillusioned with the work and has his sights set elsewhere, in part because, “I’ll never catch up to my father’s pay—not if the union allows the present setup to continue.” Uchitelle describes how father and son must refrain from discussing the issue at the dinner table so they don’t upset the rest of the family. The divisiveness of wage tiers seeping into home life is important to note, because one can imagine how those same feelings must render themselves in the workplace.

The Hoeltge’s paint just one example of the discontent that many autoworkers felt in regards to the tiered wage system. Trey Durant, a 20-year factory employee for Chrysler, has strong feelings on the issue, “Working in the same facility, side by side with someone who has a different wage than you was a bad idea, even though I know why they had to do it when times were tough,” He says. “I want my brothers and sisters to be at full wage also.” And even FCA CEO Sergio Marchionne, whose company benefited the most from this arrangement, called the system unsustainable and pushed for it to end.

The UAW worried that the increasing number of tier two employees at the factories would more firmly entrench the system. Whether they worried about younger workers making ends meet as Trey Durant says or worried about being forced out for cheaper labor themselves is anyone’s guess. What we do know is that the unions made ending the two tier system a key point in labor negotiations with the Big Three in 2015. Ultimately, they reached an agreement that instituted a new eight-year track for new hires to eventually reach the same wage rate as tier one employees. So the controversial wage tiers are no more.

 

Conclusion

Ford utilized the advantages of tiered wages when in-sourcing jobs back from Mexican plants, but now they have to rethink their strategies.  “The business case for in-sourcing is more challenged with today’s agreement versus the prior agreement,” said Joe Hinrichs, Ford’s President of the Americas to Automotive news. “…there will be business choices over time that will have to be looked at, given the new cost structure that we have.” These wage structures made it economically beneficial for the big Three to keep jobs in the US, and now that they’re gone it will be interesting to see what actions they take next to try and keep earnings high. The bail-out and tiered wages certainly helped punch up the economic recovery, but how will these companies choose to compete with foreign competition going forward?

For the worker, the ever evolving market place, in the end, is the primary difficulty they have to face. Tiered wages may have cause unrest amongst the employees, but ultimately they allowed many people to attain jobs they otherwise would not have. Faced with the looming threats of increased automation and further outsourcing to Mexico it appears many of these workers have picked a losing fight.

“Please don’t send gifts to me anymore! Why not buy some snacks if you have extra money?” said Fu Yuanhui, a Chinese Olympic swimmer, after seeing the barrage of virtual gifts such as yachts and sports cars being sent to her via cyber space. Fu, who became famous for her lovely facial expressions and the buzz she generated from her “mysterious power” during the Rio Olympic Games, was live-streaming herself interacting with her fans on a platform called Sina Weibo, the Chinese version of Twitter. More than 10 million people watched this live show and many of them contributed in filling up Fu’s mobile phone screen with virtual gifts.

Though seemingly useless, virtual gifts have more value than is initially apparent. The virtual yachts, sports cars and diamonds are not real ones, but they are paid for with real money by fans, which the live-streamer is then able to cash out proportionally. The prices of gifts range from several cents to thousands of dollars on Inke, a one-year-old live-streaming mobile app that has occupied the No. 1 spot on China’s app store multiple times in the past few months.

Believe it or not, at any given hour, millions of Chinese are live-streaming on their smartphones. Not only celebrities, but netizens from all walks of life are joining the army of live-streamers to showcase themselves performing all kinds of activities. “You can live-stream whatever you want,” said Ge Wang, a student live-streamer studying Communication Management at the University of Southern California. Her graduation capstone project is about how to be an Internet celebrity. Before she started live-streaming this summer, she had already several short videos online. “My friends told me that if I want to get famous, live-streaming would be a good way,” Ge explained.

Welcome to China’s new national reality show industry! Live-streaming is gaining huge popularity among youngsters who are willing to show their personal lives online for fun or fame. Accordingly, the past year witnessed hundreds of new live-streaming social accounts, especially on apps such as Inke and Huajiao, spring up in the country as millions of young internet users became engaged in this activity. No wonder 2016 has been called the national live-streaming year of China.

While China did not invent live video-streaming, it has taken these reality shows to a completely new level. “Dozens of Chinese live-streaming apps almost copy exactly the same format as Twitter’s Periscope and Younow,” Ge explained. Live-streaming is a growing mobile-video market that is hungry for content reflecting young people’s tastes and lifestyles.

 

Platforms, Live-streamers and Content

Live-streaming has been around in the U.S. for years on social media platforms such as Facebook Live, Flipagram, Instagram Stories, Snapchat, Twitch, Periscope and YouNow, but it is not a mainstream activity in the States. However, China is turning it to a national fever.

Video game live-streaming is the most common type of content initially, which is the same case for both China and America. Live-streamed video-gaming targets hard-core gamers and the shows are usually hosted by professionals. For example, Douyu, a competitive live-streaming platform, which is operated by Wuhan Douyu Internet Technology with investments by Tencent Holdings and Sequoia Capital China, debuted as a live video website for gamers in 2014, but then moved to lifestyle live-streaming last year. It is now claiming 600,000 users who have streamed at least once and 120 million active monthly users.

Lifestyle live-streaming then prospered. A lifestyle live-streaming bellwether is Inke mentioned above, which says over 50 million users have downloaded its app since its establishment. Moreover, China’s biggest social media platform Sina Weibo launched its live-streaming platform in May. Since then, Weibo celebrities and influencers have brought a number of live-streaming shows for fans, for fun and even for charity. Video streaming site iQIYI also launched its live-streaming app Qixiu in the following July.

“Everyone can be a live-streamer,” said Ge, “no matter if you are a celebrity, an entrepreneur or ordinary person.” That’s the truth. Approximately 46 percent of China’s internet population used a live-streaming app in June 2016, according to Hua Chuang Securities.

With popularity largely driven by celebrities and key opinion leaders, live-streaming can be especially useful when famous brand ambassadors serve as hosts to the online events. Alibaba’s Tmall seizes this business opportunity as usual. A total of 49 percent of beauty brands have live streamed on Tmall between April and October 2016, The e-commerce giant, Taobao, follows with 35 percent of beauty brands having live-streamed on the site, according to Jing Daily. This September, prominent make-up brand Guerlain partnered with Yangyang, a Chinese celebrity via Tmall Live. The live-streaming show garnered 2.43 million views, 4.55 million likes and most importantly, more than 10,000 of lipsticks sales.

(Guerlain’s partnership with Yangyang)

Papi Jiang, a Chinese cyber celebrity, drew 20 million viewers for her first live-streaming show in July 2016. During her 90-minute unscripted live-streaming show, which was available on eight leading live-streaming platforms in China, including Youku, Meipai and Douyu, Papi Jiang told jokes and shared with her fans details of her daily life and romances. According to the New York Times, there were more than 74 million views in one day, which exceeded what Taylor Swift’s latest music video, “New Romantics,” received on YouTube in four months.

(Papi Jiang’s first live-streaming show)

Renowned entrepreneurs also seek to take advantage of the platforms to boost their brands among young consumers. Wang Jianlin, the chairman of Dalian Wanda Group and China’s richest man, once live broadcasted himself visiting a company theme park and playing cards on his private jet.

(Wang Jianlin’s first live-streaming show)

“I don’t think Chinese live-streaming has good content,” Ge complained. Ge indicated that current live streaming fever is lacking qualified production. A lot of people are live-streaming their lives all day from squeezing in the metro to eating a bowl of ramen. Moreover, Chinese live streaming apps breed soft porn in a society where such content is tightly controlled. Understandably, Americans don’t need Periscope to watch pretty young women, but Chinese need live streaming platforms to help satisfy their sexual cravings.

(A pretty young woman live streams herself.)

Where is the money going?

It is not uncommon to read such an eye-catching title as “China’s Internet ‘Stream Queens’ Are Being Showered With Cash” if you search for live-streaming related content via Google. Is live-streaming that profitable?

“I made 20 yuan ($3) to 30 yuan ($6) every live-streaming show that lasted for an hour,” said Ge. Ge admitted that she was new to live streaming but professional live streamers are able to earn as much as one million yuan ($0.2 million) in a month. Someone even quits his or her full-time job to pursue a live-streaming career because it pays so much more.

How does live-streaming monetize? Through the collaboration of the app, the live streamer and the viewer.

Admittedly, live-streaming is well known for its interaction. However, many Chinese live-streaming apps have integrated an original tipping feature that motivates people to stream more and generate profit for the apps. Other than leaving comments, viewers can also interact with the hosts by buying them virtual gifts, such as flowers, toys and cars through the streaming platforms. Not only the apps are making a profit, the streamers can also trade the token value of the presents for cash.

For example, one yuan (20 cents) on Inke can buy 10 tokens, which users can in turn use to purchase virtual presents, such as a bunch of cherry flowers (one token), a hug (five tokens), a fleet of virtual Ferraris (3,000 tokens each) or a yacht (13,140 tokens). In other words, if you want to tip your favorable host with a yacht, you have to spend 1314 yuan ($190) for Inke’s tokens. Moreover, Live streamers and Inke split the income from token sales. Different companies set different rules for splitting the income. Inke gets 70 percent of the revenue while Douyu says it splits token income with streamers halfway.

Through digital tipping, live-streamers are incented to live stream more frequently. “If you want to build your loyal fans group, you have to post regularly say every Monday evening at 8 pm,” Ge stressed.

Besides live-streamers and live-streaming apps, adding to the monetization of streams are also e-commerce and games sales. E-commerce platforms such as Alibaba also share a huge slice of the profit in this market as viewers might be tempted to buy the same clothes their hosts wear and gamers are more likely to play the games that the host recommends during live-streaming.

Live-streaming directly gives rise to new forms of advertising for different brands. Brands start to advertise on the apps and users pay to watch their favorite personal reality shows.

Investors are thinking highly of this flourishing live-streaming market as it is generating a huge amount of capital. Investment funds and tech giants, including Baidu, Alibaba and Tencent, have invested heavily in the fast-growing industry. According to Hua Chuang Securities, the live-streaming market reached 12 billion yuan ($1.8 billion) last year. It is estimated to grow to 106 billion yuan ($16 billion) by 2020. Credit Suisse stated in its September research report that it believes the Chinese personal live streaming market will be $5 billion next year — already just $2 billion less than China’s movie box office total ($7 billion) and half the size of its mobile gaming market. In addition, 108 out of 116 live-streaming apps have successfully secured financing.

Furthermore, investors are swooping in. Inke, which now has more than 2 million users, raised 68 million yuan ($10.3 million) in January from Beijing-based web game developer Kunlun Tech. In March 2016, Douyu raised $100 million in a round led by Chinese web giant Tencent Holdings. Enlight Media, a Shenzhen-listed entertainment company chaired by billionaire Wang Changtian, invested 131 million yuan ($20 million) for a controlling stake in live-streaming platform Guagua this May.

 

Where is the future? Tighter government supervision and better content

Earlier this year, some of the most viral content on these live streaming apps reflected pornography such as topless women in front of the camera and suggested erotic behavior. Those streams were deleted quickly. However, the Ministry of Culture, the national anti-pornography office and other regulators have investigated 19 live-streaming platforms for potentially criminal, pornographic or violent content, according to state media reports. Almost all bigger Chinese streaming apps were named or fined, including Inke and Douyu.

In front of the grey areas that exist on the streaming apps, government is trying to tighten its supervision and the sites are also trying to rein in what users post. Nonetheless, pornographic content is more lucrative as users are more willing to pay the live streamers.

Another future challenge is a tension between the quantity of the production and the quality of the production. Although the streaming industry provides a steady supply of content, the market has a low entry barrier. During the interview with Ge, she mentioned that live-streaming is a good way to pass time as a lot of people can live-stream for a whole day. “Maybe it’s ridiculous but I think people are live-streaming because they get bored,” Ge answered with laughter. One of the most astounding statistics of the live-streaming trend in China is that the most active hours are between 10pm and 4am, with peak usage at midnight. Live-streaming may be an answer to loneliness. Moreover, to drive more short-term profit, live-streaming apps are likely to hire beautiful female hosts to attract users and drive sales of virtual gifts.

China’s web has become increasingly mobile-driven, with more than 92 percent of the country’s 710 million internet users now accessing the web via their mobile phones, according to a report published this month by the official China Internet Network Information Center. Undoubtedly, live streaming dramatically changes and broadens people’s social life as everyone is under the spotlight. Everyone can watch each other.

When asked about her future plans to build her brand, Ge said she gave up starting with live-streaming to get fame. She plans to continue and prioritize making funny short videos regularly to increase her viewership and build her loyal fans group, just like how Papi Jiang accumulated her fans before. She highlighted that only short-form videos are considered good content now. Ge has already gained more than 30,000 views for one of her short videos uploaded to YouTube. “If you want to build your brand, live-streaming might not be a good way as no one will pay attention to you until you become someone,” said Ge.

###

Sources:

http://www.wsj.com/articles/live-streaming-apps-flourish-in-china-1462995001

http://www.forbes.com/sites/ywang/2016/06/02/in-china-millions-are-broadcasting-their-personal-lives-online-including-the-countrys-richest-man/#63a0a0e57cb4

http://www.cnn.com/videos/world/2016/08/15/china-live-streaming-matt-rivers-pkg.cnn

16 Observations on Livestreaming in China

http://www.economist.com/news/china/21707070-authorities-wish-they-wouldnt-chinas-netizens-love-sharing-live-video-themselves

http://www.voanews.com/a/china-live-streaming-apps-surging-in-popularity/3356667.html

https://www.techinasia.com/weibo-live-streaming-china

https://www.bloomberg.com/news/articles/2016-11-01/chinese-live-streaming-apps-employing-censorship-against-rivals

Live-streaming in China

http://www.bbc.com/news/world-asia-china-37127904

https://www.bloomberg.com/news/articles/2016-07-04/millions-of-chinese-stream-reality-shows-starring-themselves

Airbnb and its hosts are broadening their business. During the company’s annual conference in November, Airbnb’s CEO Brian Chesky announced “experience” and “places” will be the two new features joining “homes” on its app. Besides booking a spare room rental, travelers can now use Airbnb to reserve tours and activities.

These two new features are design to help travelers to make more in-depth planning and to have a fuller travel experience. The launch marks Airbnb’s start of transitioning from a home rental site to an integrated travel-planning platform.

“Places” are the travel guides curated by local hosts or experienced traveller. They are essentially lists of places to go. Hidden artistic corners, must-try restaurants, unlikely music venues, etc. Travelers do not have to pay to read these recommendations. This feature has potential to help Airbnb attract more travelers to view its content. Most travelers like to look for places to go before they take off. Some ask on Facebook, some turn to TripAdvisor. But this new “places” feature offers organized personal recommendations that people can eyebrow base on their own preference.

Some curators may recommend places or activities that they have special access to, and that leads into the “experience” feature. “Experience” allow travelers to purchase travel packages on Airbnb. Currently, about 500 activities are available on Airbnb’s app. They are generally more personal and sometimes more creative than the tours from travel agency. For example, travelers can connect to a film producer who can put up a set for them to try out acting. Or they might stay with ranch owner for a few days to ride horses and harvest fruit. Most of these experience packages have activities on multiple days, cost anywhere from $200 to $1000 and provide amenities such as food, drink and tickets. Like home rental, the experience service providers are also individual hosts; Airbnb remains a platform for people to share and meet.

The expansion didn’t come from sudden. Airbnb has been planning and testing on this launching since a while ago. A “journey” feature was tested in the bay area last year, which encourages hosts to plan a whole trip for travelers. In August this year, an app called Airbnb Trip was available briefly on Google Play Store. Similar to “experience”, Airbnb Trip allowed users to reserve activities in their destination, such as booking a restaurant or connecting with a tour guide. In September, Airbnb acquired a travel site called Trip4Real, which also emphasize on unique local experience. The fact that Airbnb raised $850 million in capital this August at its $30 billion valuation also signals a big move.

It is quite an ambitious transition for a company that has only be in the competitive market for a few years. But Airbnb isn’t afraid of trying, because it has the strongest supporters. The annual conference held three days in Los Angeles’s Orpheum Theatre. Although the admission was between $275 and $345 — and Airbnb does not pay for that fee, over 7000 excited hosts from all over the world still rushed to L.A. Many applied to be hosts of “experience”, but the company decided it was going to be more selective at the beginning. Depending on the market needs, there should be more “experience” hosts joining the party.

Hosts are supportive of Airbnb’s new attempt because they are benefited by Airbnb’s operation. Chinese e-commerce giant Alibaba created Taobao and became the most popular online trading site; one of its keys to success is that it provided individuals the opportunity to become business owner. Similarly, Airbnb offers a chance for individual homeowner to become a host. As of July 2016, listings on Airbnb has exceeded 2.3 million. Some people even make enough that they decide to run b&b full time. Gabrielle Catania for example, owns a house in Oregon that has four guest rooms. Her place is always reserved as she keeps getting fantastic complement on the breakfast she made. Gabrielle spends at least an hour preparing breakfast for her guests. Apple rose is her favorite desert to serve. She enjoys being an Airbnb host, because it gives her a chance to meet guests from different background while making enough money.

 

Airbnb’s influence over the hospitality industry has been rising drastically since 2013. According to Forbes, Airbnb over 100 million travelers have used Airbnb’s home rental service. The average number of nightly stays is about 500,000. And the valuation of the company has exceeded hotel giant Hilton; about five times of Hyatt.

   

It succeeded for a reason; Airbnb came in at a perfect timing with extensive understanding of the market and consumers. There are always people with extra space in their homes; many even have extra houses. While renting in long term can be troublesome, many welcoming homeowners are willing to rent short term to travelers. There is supply, and there is demand. Internet has encouraged a culture of sharing. Travelers nowadays are often not satisfied with traditional hotel experience. They want a sense of excitement and belonging for their journey. More importantly, they are usually on different budgets. This is when Airbnb kicks in. It partners with homeowners to offers unique accommodations that feel like home at various prices. Travelers can choose to pay $40 a day to live in a tiny tidy single room in Monterey Park, or they can reserve a beautifully designed luxury villa in Malibu that costs $1500 a night. The prices are very flexible, because the market demand is generally high, and it isn’t too difficult to enter the competition and become a host. So even on a relatively low budget, travelers can still compare and choose from different home styles. They like to be able to choose, so they keep coming back.

The home rental is already making great success. But Airbnb still decides to expand its business, because finding a place to “live” is just the start of a great journey. They are aware of this long before they launch these new features. For a long time, Airbnb has been using slogan “Live there, even if it’s just for a night,” to encourage travelers to value their “living experience.”

But there might be other reasons why Airbnb is expanding to promote travel experience. As a platform, sometimes it is hard for Airbnb to background check every host. Many authorities are worried about some of the listings fall foul of laws, so they try to make policy to implement stricter regulations. The state of New York passed law in October to curtail Airbnb and other short term rentals. To ease the worry, Airbnb has been “compromising” by being transparent to the public and releasing users data. Although the enforcement has been postponed, the future of short term home rental in New York cannot be guaranteed. Airbnb needs an alternative, a new area of business to support its operation if any unpredictable happens.

While Airbnb is making a reasonable business expansion, there might be other problems to consider. Airbnb’s selling point is that its activities are provided by local experts, but many local travel agencies have already been in the business for a long time and know the area very well. Although localization is always on the top of Airbnb’s mind, it cannot guarantee its experience packages to be better than what travel agencies offer. Some hotels may find it hard  to keep up with Airbnb because they have established environment, but travel agencies can easily adjust their travel plans and make them more exciting to compete with Airbnb and its proud hosts. At the same time, these local agencies have better relationship and understanding to the government.

Airbnb also needs to be smart on communicating with its hosts if it wants to remain outstanding in the competitive local market. Afterall, Airbnb relies on the hosts to provide great experiences to the customers. It does not interact with the travelers directly. So how can I insure the uniqueness and quality of the service? In a long term, that can be a challenge.

 

 

Reference:

https://www.theguardian.com/travel/2014/jul/08/airbnb-legal-troubles-what-are-the-issues

http://www.wsj.com/articles/the-enforcement-of-airbnb-law-postponed-again-1478305423

Airbnb releases first transparency report on government requests for user data

http://www.forbes.com/sites/briansolomon/2016/07/13/airbnb-confronts-racism-as-it-hits-100-million-guest-arrivals/#4fab57e41c3c

Airbnb Now Has 100 Million Users and More Grown-Up Problems

These days, it seems that everyone from factory workers to United States president-elect Donald Trump cannot help but reminisce about the ever-vague “good old days.” Many say these were simpler, more predictable times, and it was easy to repeatedly use the same strategy to find success. This is no longer the case, and people and industries as a whole have had to shift their mindsets and continuously innovate in order to stay afloat. This is perhaps most evident in the toy industry and Toys “R” Us specifically as both have been through a roller coaster of progress throughout the last few decades as technology has gotten better and toy preferences have changed.

The modern toy industry was born at the end of World War II. The Great Depression and the World Wars did not leave people with much spending money, but the return of prosperity and the introduction of television and plastic propelled modern American consumption. This was perfect timing for Toys R Us founder Charles Lazarus, who believed that “toys are a great kind of thing to sell, because they don’t last that long.” Lazarus’ strategy was to offer name-brand merchandise at less than list price, and toy manufacturers were willing to compromise because Toys R Us was one of the only retailers that offered year-round sales. Traditionally, toy stores did 70% of its sales during the 6 weeks leading up to Christmas. This meant that the carefully selected stocks of toys were cut dramatically from January to August, which made the toy year short and unsustainable. Toys R Us was unique in that its stocks were maintained throughout the year with toys from manufacturers’ entire catalogues.

Toys R Us stores revolutionized the toy industry. Whereas toy stores used to be small with much of their merchandise stashed in the back room, Toys R Us introduced the warehouse shopping experience. Toy packaging design was now centered on how it would look on the shelf, and from 1975 to 1985, annual revenues at Toys R Us grew from just over $200 million to over $2 billion. The emphasis on the shopping experience worked, and it brought in great success for that time.

Ironically, the toy’s short lifecycle that attracted Lazarus in the first place needed to be adjusted in order for the industry to have consistent sales. Toys that only get played with once or twice is a waste of money in the parents’ eyes, so for a line to stay popular over time, children must want to continue playing with it. The emphasis on sustainable toy lines also keeps prices down by allowing manufacturers more time to get their return on investment while keeping quality up. Children only return to a toy if it has a deeper meaning than just being a plastic object. This could be in the form of a story that is supplemented by a television short or a movie. In the 1980s, the Cabbage Patch dolls and the Transformers took exactly this route, which allowed children to better relate to their toys. Unfortunately, the 90s brought the Internet and technology that offered instant gratification, and static toys no longer held the same appeal.

Instead of producing a toy and creating a story to go with it, toymakers began seeing the benefit of making the two a more streamlined experience through videogames or interactive toys. Videogames tell the story over time, and children can play by themselves in a way that keeps them engaged. In the early 90s, toy spending peaked for four-year-olds, but by the end of the decade, the peak for spending was for three-year-olds. Children were simply outgrowing their toys earlier and finding more interest in electronic games at a younger age.

This shift forced Toys R Us to revamp their stores, and in 1998, it greatly expanded its electronic section. While this was new for Toys R Us, its competition already offered that and more. Wal-Mart, Target, and other discount stores put pressure on Toys R Us as they captured more and more of the toy business. In the mid-90s, Toys R Us held 20% of the market, and Wal-Mart and Target were insignificant. By 2004, Wal-Mart had 20% of the market, Target had 18%, and Toys R Us was down to 17%.

In the 90s, many moms including Kathy Klatman used to regularly shop at Toys R Us, buying dolls and play sets from the toy giant. By the mid-2000s, all of the toys she bought fell into two categories: the more expensive toys, such as American Girl Dolls, were bought through catalog, and the cheap toys, like Matchbox cars, were purchased during her weekly shopping trips to Target. Unfortunately, this did not leave much space for Toys R Us. Klatman says that her kids “already have so many things to play with that [she has] a tendency to look for quality and whether they will play with it for a long time.” When the kids need to be pacified with a simple toy, she can easily pick them up at Target cheaper than she could at Toys R Us.

This was a troubled time for Toys R Us; however, the retailer came up with a plan to stay competitive. In 2000, Amazon and Toys R Us signed a ten-year agreement in which Amazon would devote part of its website to products chosen specifically by Toys R Us. This allowed Toys R Us to select the most popular products and get them to customers more easily. This alliance was widely applauded as a seamless connection between traditional brick-and-mortar stores and new-age Internet companies, but it eventually became entangled in allegations that both sides were not doing as they promised. Toys R Us accused Amazon of allowing other companies to sell toys through their website, and Amazon claimed that Toys R Us was not maintaining a high quality selection of toys. The biggest problem was that online toy sales just were not at the level that both parties anticipated, so they were not making the profits they hoped. By 2004, lawsuits from both sides effectively ended their contract, and Toys R Us was left on its own again.

Toys R Us was at a crossroads. It seemed on the verge of collapse as its market share decreased and the falling out with Amazon worsened. Toys R Us had actually given up rights to its own website in its partnership, so there was not much hope for a quick rebound in online sales. However, Toys R Us was more motivated than ever to take back their place at the top of the toy industry, and they did so by acquiring three pertinent brands: FAO Schwartz, eToys.com, and KB Toys. As much as Toys R Us suffered during this period, its smaller rivals were on the verge of bankruptcy, which meant that Toys R Us could acquire them at a relatively low cost. The acquisitions allowed Toys R Us access to the companies’ established websites, trademarks, and some of their stores. All three of these companies already had well-known brand names, which gave Toys R Us the opportunity to sell a wider variety of products.

To give a greater push during the holidays, Toys R Us began opening temporary pop-up stores that were smaller but require less staff and stock. They were located in malls and shopping centers that could not hold the traditionally massive warehouses of Toys R Us. The widespread and obvious presence of the retailer garnered high sales and happy customers. This was so successful that the company ended up keeping a third of its locations after the holidays in 2010.

Toys R Us also benefitted as the industry as a whole made its comeback. From 2014 to 2015, annual toy sales rose over 6% to $19.9 billion, which was the largest increase in ten years. Popular Hollywood films fueled the popularity of collectibles, which boosted sales like it had in the 80s and 90s. This not only appealed to children, but it also helped toy manufacturers capture the preteen and adult crowds with paraphernalia from movies like Star Wars. Even Frozen, a movie targeted for children, was able to become a top toy brand with $531 million in sales in 2014.

There were also huge developments in technology, which gave toys the ability to interact with children in a more animated and stimulating way. Toys are able to interpret speech and react in the appropriate way using chip technology, which has become cheaper and more powerful. Dolls can have conversations with users and toy cars can be controlled by smartphones. The new Barbie Dreamhouse by Mattel is voice activated, and the music, appliances, and even the elevator can be controlled by simple commands. In this modern era of touch screens and applications, toy manufacturers have to put in extra effort to make sure that physical toys can compete with the seemingly limitless iPads and smartphones.

As for its competition, Toys R Us can be proud to report strong sales, especially during the holiday season. Sales went up 3.7% in the holiday season of 2015 compared to that of 2014 for stores open at least a year. The demand was high for toys, learning products, and seasonal goods, and low for electronics, video game consoles, and videogames. The advantage that Toys R Us has over Wal-Mart and Amazon is that Toys R Us is in the toy business for the entire year, whereas its competition only pushes toy sales during the end of the year. Vendors know this, and they can give Toys R Us more favorable margins.

Toys R Us also has had great success internationally, especially in Canada and Japan. Sales went up 13% in Canada in 2015, and Toys R Us became the largest retailer of children’s products in Japan. The retailer used partnerships to cater to the Japanese market specifically, and there was a strong cultural fit. Japanese families often allow children to choose their own gifts, so the store layout and experience was well-matched with their culture.

Looking to the future, Toys R Us CEO Dave Brandon wants to revamp its stores by turning them into an experiential destination. By creating an interactive space, he hopes that children will begin dragging their parents down to the stores to play at Toys R Us on weekends. Children already love the store, and by giving it this new dimension, they will want to continue going back. The company is now testing sound effects and colorful lights, and they are unboxing more toys in play areas. They are also hosting events including card trading and birthday parties.

Toys R Us is already moving towards their goals, and by mid-2017, the company projects 14% inventory growth. This will make their inventories at the highest amount in almost a decade, and it is proof that they are serious about putting money back into operations. Toys R Us seems to be moving in the right direction, and now it is a waiting game whether the company will go for an initial public offering. The retailer needs to have a successful 2016 holiday period in order to lay the groundwork for a potential second run at an IPO. Toys R Us was a public company until 2005, when it was taken private by investors for $6.6 billion. With strong sales and measureable improvements, 2017 may be the right time for private equity backers to strike. The toy industry will continue to be volatile as technology changes and competition gets tighter; however, Toys R Us has been in the game for quite a while now, and it has gained knowledge and experienced that will help it navigate the whirlwind of its market. Toymakers have every reason to root for Toys R Us, and hopefully, the children of today and the future will make Toys R Us great again.

Since the results of the 2016 United States presidential election rolled in on Tuesday, November 8^th there has been plenty of speculation regarding what a Trump Presidency will mean for the United States. Issues regarding foreign policy, the environment, women’s rights, healthcare and so on were widely debated and contentious topics leading up to the election. One issue in particular – the US economy — is a burning question that’s left many Americans wondering who will benefit from President-Elect Trump’s economic plan.

Brexit and the subsequent economic implications including the devaluation of the British pound seemed almost like a harbinger or warning call of what the Armageddon-like results of 2016 would be like if Donald Trump won the election. In the days following the November 8^th result the stock market responded in a way that left many economists, political pundits and speculators curious to say the least. The early stock market response was overly positive with the DOW, Nasdaq 100 and S&P 500 spiking up considerably in the morning after the election and continuing to show positive trends. But what exactly elicited such a positive response from the markets, which all seemed to signal economic victory?

Some experts believe that it may have to do with the Trump administrations promise to cut regulations, a vow to dismantle the Dodd-Frank financial reform, and the corporate tax rate, a move that would benefit the private sector tremendously. The “Trump-ed up” trickle down economics that Hillary oh so cleverly coined during the debates, refers to his plans to cut corporate taxes, from a top rate of 35 percent down to 15 percent; in addition, cutting taxes on America’s wealthiest from 40 to now 33 percent for top rates.

Others believe that the results motivated investors to pour money into major construction and engineering stocks in anticipation of a Trump stimulus package for America’s infrastructure that would include major improvements to roads, bridges, telecommunication, public transportation, “world-class” airports, security and utilities while simultaneously creating new jobs and higher wages.

“For the U.S. domestic economy, the obvious winners are infrastructure, with a focus on roads, bridges, and airports,” said Mark Burgess, global head of equities at fund company Columbia Threadneedle Investments (Dieterich).

Burgess’s reasoning would explain why the DOW, Nasdaq 100 and S&P 500 companies dealing primarily with industrial materials and services have experienced continued growth in stock values since November.

 

“A Goldman Sachs report cautioned that the new U.S. infrastructure spending — which Trump has put at from $500 billion to $1 trillion — would not begin until the third quarter of 2017. Moreover, the price tag is a combination of private and public money, so the scope of Trump’s plan depends on how he counts,” (Mufson).

With all this in mind the question remains, where should we invest? In order to answer this question, it is important to first take a look at the President-Elect’s economic plan. While Trump’s plan could change at the drop of a hat as soon as he enters the Oval, analyzing his current proposal is one of the first steps prior to making investments.

Trump’s vision includes the creation of a dynamic booming economy with 25 million new jobs over the next decade. Trump believes that under his presidency there will be a 3.5 percent growth per year on average. Creating all of these new jobs will result from the Trump energy policy, which he plans to “unleash” as soon as he takes office. The energy policy main objective is to make the US entirely energy independent and in doing so create millions of new jobs and protecting clean and clean water. One of the main problems that has been cited with this plan though is that Trump wants to focus all of this energy plan’s efforts on coal, oil, and natural gasses – all of which contribute to pollution and directly contradict the Paris Climate change agreement. Shifting the focus away from environmental protections and issues could mean an overall increase in drilling everywhere, especially Federal land holdings:

“Lifting unnecessary restrictions on all sources of American energy (such as coal and onshore and offshore oil and gas) will (a) increase GDP by more than $100 billion annually, add over 500,000 new jobs annually, and increase annual wages by more than $30 billion over the next 7 years; (b) increase federal, state, and local tax revenues by almost $6 trillion over 4 decades; and (c) increase total economic activity by more than $20 trillion over the next 40 years,” (www.donaldjtrump.com).

The energy policy could mean big returns on energy investments. The big American oil companies, Exxon Mobil (XOM) and Chevron (CVX), will undoubtedly benefit from a pro-oil and natural gas administration. Companies dealing with energy infrastructure should also be given a closer look. Making federal land readily available and investing less in alternative clean energy would drastically support big oil in general. The appointment of Scott Pruitt, former Oklahoma attorney general, to President-elect Trump’s to run the Environmental Protection Agency is a clear signal that the Trump administration plans to shift energy policy’s attention away from clean and renewable energy. Mr. Pruitt, a Republican, is already noted as being a climate change denialist. During his time as Oklahoma’s attorney general, he fought vehemently against President Obama’s climate change policies battling on behalf of the coal industry. In fact, as Oklahoma’s top prosecutor Pruitt went so far as to sue the EPA. The appointment, while bleak does spell out good news for the fossil fuels industry and those who wish to invest their assets in the same companies that gave Pruitt under the counter campaign contributions.

The energy policy makes a stipulation that under a Trump administration the President-Elect would like to see the US become the world’s leader in energy technologies including nuclear power.   A company like BWX Technologies (BWXT), which specializes in energy infrastructure –more specifically nuclear energy technology – with a large government, services and facilities management division could see a rise in stock earnings over the next few years. The day of the election BWX Technologies stock traded at 36.63 before spiking up the next day to 39.54, with continued growth since the election and a 5-year record high on November, 25^th at 40.52.

“Analysts at Cantor Fitzgerald recently predicted that there would be a “violent increase” in uranium prices at some point, theorizing that as much as 80 percent of the uranium market might be uncovered in terms of supply by 2025, and that demand would by then outstrip supply,” (Stafford).

Beyond the infrastructure and energy sectors, there are several top industries that will be impacted by the upcoming Presidential administration. Defense  will be huge, YUGE! Trump has already indicated that he wishes to expand the size of the Army and Marine Corps dramatically, build new vessels for the Navy and jets for the Air Force, all while modernizing the US’s nuclear arsenal. Lockhead Martin (LMT), Raytheon (RTN), General Dynamics (GD), and BAE Systems (BA), are just a few of the big name defense stocks that have enjoyed growth in investments following last month’s presidential election. Trump’s rhetoric of slashing corporate taxes while beefing up America’s military was the perfect concoction for what resulted with investments in the defense sector.

“‘Trump’s win is good news for the defense industry, especially when coupled with Republican majorities in the House and Senate,” said Loren Thompson, a defense consultant who advises many of the nation’s top-tier contractors,’” (Heath).

Defense shares have continued to hold on to steady numbers and still offer new buying opportunities for interested investors. Lockheed Martin alone, experienced a 20-point stock jump following the election results and — as of December 7^th — continues to hold on to a solid 266.38 valuation (Carson). Trump’s eagerness to increase the size and capacity of the military will directly benefit defense contractors like BAE Systems and General Dynamics, as well as helicopter and plane manufactures like Boeing.

“Eaglen acknowledged that “‘the major defense contractors are part of the establishment he’s railing against.’” But she said Trump does not really have a choice but to stick with them. “‘If he wants to show results, he’s got to live with the contractors he has,” she said. “‘You have to go with the production lines you have open,’” (Heath).

A conservative estimate of Trump’s promised budget has been projected at an additional $55 billion in defense spending. A question that remains though is where exactly Trump plans to find the money to pay his steep tab.

Speculative investments on defense contractors have run rampant in the past month. One company that drew attention, in particular, was Magal Security System (MAGS), the company responsible for building the infamous high-tech fences and walls along Israel’s volatile border. Magal Security System was also responsible for the erection of a massive separation barrier along the West Bank, which includes cameras, sensors, and robotic technology. The supposed wall that Trump plans to build across the US-Mexico 1,933 mile long border likely has something to do with Magal Security System’s uptick in stock prices. The company’s shares were up 24 percent from its 4.45 closing price on Election Day.

“‘We believe that the U.S. government is going to increase its security budgets in the upcoming years and definitely we look forward to take part in it,’” the company’s chief executive, Saar Koursh,” (Scharf).

If your consciousness has not already felt besieged by the possibly lucrative albeit morally ambivalent ways in which you can see investment returns over the next 4 — hopefully 2 — years than prepare yourself for the next industry that might be headed for an upswing. Private prisons.

It was only two months ago that the Justice Department announced a plan to abolish the use of private facilities for its federal inmates. The decision led to a correlated stock dip in corrections companies – an arguably rightly so.

Unfortunately, Trump’s win has revived the stock earnings of America’s controversial industry. While the President-elect has yet to mention any specific plans of private prisons during his presidency his Nixon-esque “Law-and-Order” candidate rhetoric has left many people believing that he will ensure and protect these private facilities. Investors are speculating heavily that the administration will require the private prison infrastructure to carry out its “feasible” plan fro a mass-scale deportation plan.
Two of the largest private prison companies – CoreCivic (CXW) and the Geo Group (GEO) – saw spikes in their stocks following the election results (Harlan).

Ultimately – though – our hot Cheeto President-Elect has a hot temper and trigger finger when it comes to shooting out tweets and absurd statements that have the power to increase and decrease the value of stocks in a matter of seconds. Just yesterday morning, Trump tweeted out:

“Boeing is building a brand new 747 Air Force One for future presidents, but costs are out of control, more than $4 billion. Cancel order!”

The problem with his tweet? Other than falsely overestimating the budget of the Air Force One replacement program by roughly $2.0 billion is the impact his words had on Boeing stock. The Boeing stock took a momentary nosedive before recovering by the closing bell. The event is just one example of how the reckless and ill-informed words of America’s soon to be leader could have dire impacts on the US economy and stock market.

 

 

 

 

 
Sources:

http://www.thefiscaltimes.com/2016/12/07/Nuclear-Power-Could-Boom-Under-President-Trump

https://www.donaldjtrump.com/press-releases/fact-sheet-donald-j.-trumps-pro-growth-economic-policy-will-create-25-milli

https://www.washingtonpost.com/news/energy-environment/wp/2016/12/07/trump-names-scott-pruitt-oklahoma-attorney-general-suing-epa-on-climate-change-to-head-the-epa/?utm_term=.ac7913795562

http://www.nytimes.com/2016/12/07/us/politics/scott-pruitt-epa-trump.html

https://www.washingtonpost.com/business/mr-business-goes-to-washington-now-what/2016/11/12/8c7f7846-a6e2-11e6-ba59-a7d93165c6d4_story.html?utm_term=.801e360cc433

http://www.investors.com/research/ibd-industry-themes/5-defense-stocks-in-or-near-buy-zones-after-trump-offensive/

http://www.usatoday.com/story/news/world/2016/11/24/trumps-mexican-wall-boon-israeli-security-company/94377438/

http://www.nasdaq.com/article/how-to-invest-during-the-trump-presidency-cm708605

 

For decades, the National Football League (NFL) has dominated not only professional sports television, but the entire field of network programming. During the 2015 season, the NFL owned all of the top 25 programs on television after years of climbing ratings and brought in $15 billion in revenue (The Ringer). However, the 2016 season has been a different story. Through Week Six, overall NFL ratings were down 11%, causing the national media to question if the NFL was beginning a permanent decline. Ratings have slightly rebounded, but the NFL has been exposed as a vulnerable property, something that was once unthinkable. The decline in NFL ratings can be attributed to a combination of competition from other entertainment sources, oversaturation of games and a lower quality product, issues it will have to resolve to stay relevant.

2016 has been a rough year for the NFL because it has faced unprecedented competition for viewers from the historic presidential election and Major League Baseball (MLB) playoffs.  NFL ratings have declined in the past due to the presidential election, with declines of -10% in 2000 and -2% in 2008 (Washington Post). However, declines were as high as -15% during the 2016 election (Washington Post). This can possibly be written off as a product of the media circus surrounding this election, but is nonetheless the highest decrease in recent history. After the election, games did slightly rebound, with the Cowboys-Steelers prime time game finishing +2% and the Patriots-Seahawks prime time game finishing +16% (Forbes). Still, the regional games on Fox finished -19% while the CBS regional games were down -7% (Forbes). The election is likely partially responsible for the decline in overall ratings, but is not the sole culprit.

Perhaps more concerning was the success of the MLB against the NFL. While football ratings languished, baseball ratings skyrocketed. This culminated in the October 30th Chicago Cubs-Cleveland Indians World Series matchup having more viewers than the Dallas Cowboys-Philadelphia Eagles Sunday Night broadcast. This is only the third time the MLB beat the NFL since they began going head-to-head in 2010 (USA Today). The World Series even drew 40.045 million viewers for the final game, more viewers than any NFL game since Super Bowl 50 (Rum Bunter). Like the election, this unlikely success for baseball might be due to the exciting narrative of the Cubs snapping their 108 year drought against the similarly long-suffering Indians. Ultimately, baseball beat football for the first time in the 2010’s and the NFL proved it was not matchup-proof.

Another simple economic explanation for the NFL is the supply for the product has increased, causing demand to decrease. For much of its history, NFL games were on Sunday afternoons with one Sunday night game and one Monday night game. Now, the NFL airs 15 games per season on Thursday nights along with the Sunday and Monday night games, which are sometimes doubleheaders (The Ringer). The NFL has also added 9:30 a.m. EST games in London to build an international audience (The Ringer). There are also multi-game packages geared towards fantasy football players such as DIRECTV Sunday Ticket and streaming options on WatchESPN and Twitter. Others simply follow games at bars or via scoring or fantasy apps on their phone.

The NFL has created a problem for itself by making its product too widely available. By increasing its supply of games, it is making it harder for viewers to devote time to games. Viewers used to be able to watch their team’s Sunday afternoon game interspersed with highlights from other games, leaving time to watch the prime time matchups. Committing to a Thursday night game, three Sunday games and a Monday night game is a lot of time for a person to spend watching television. It doesn’t help that games run for three hours, much of which is advertising. Encouraging people to spend more time watching football does not reflect trends in television viewership. Since 2010, the time Americans spend watching TV has dropped 11 percent (Washington Post). For social media-obsessed people under 24, TV time has plunged more than 40 percent (Washington Post). As commercial-free streaming options such as Netflix and HBOGo continue to grow, less people will want to watch three hours of ad-heavy football. Time is scarce, and people are choosing to spend less of their time watching television. The NFL is fighting this trend by making their product less of an event and demand is decreasing as a result.

The oversaturation issue is further amplified by the concern that the quality of product the NFL is pushing has declined. Thursday night games are frequently criticized as less entertaining than Sunday and Monday games. Teams have only four days to create a game plan and recover from injuries, resulting in sloppy games that often end in blowouts. The average margin of victory for 2016 Thursday night games is over two touchdowns while the Vegas underdog team has only won twice (Sports Illustrated). This is not just a Thursday night issue, competition is down overall. Through Week 12, Vegas underdogs have only won 39% of the time (Sports Illustrated).

Not only are games more predictable, there is a growing concern that officials are making them more unwatchable through excessive penalties and fines. Many of these penalties have been unsportsmanlike conduct flags thrown for rather innocent touchdown celebrations by superstars such as Antonio Brown and Odell Beckham Jr. Viewers have taken notice, including Monday Night Football announcer Sean McDonough:

“If we’re looking for reasons why TV ratings for the NFL are down all over the place, this doesn’t help. The way this game has been officiated is not something anybody wants to watch.” (The Ringer)

While individual games struggle, larger NFL narratives that drove the league’s entertainment value for years are also disappearing. For much of the last ten years, the central battle in the NFL has been between its two top quarterbacks: Peyton Manning and Tom Brady. Manning is now retired, while Brady was suspended for the first four games of 2016 and is likely a few years from retirement. Other star players such as Marshawn Lynch and Calvin Johnson have retired over fear of lasting injury from football. There is no Cubs-Indians narrative to excite fans in sight for the NFL. It is difficult to draw people to prime time games without marketable stars.

 

 

 

 

 

 

 

 

 

 

The NFL’s suspension policy has also been a major public relations issue for the league. The league has faced criticism for giving players found guilty of domestic violence light suspensions, such as Ray Rice (two games) and Josh Brown (one game). Meanwhile, Tom Brady got four games for possibly helping deflate footballs and star running back Le’Veon Bell got three games for skipping a marijuana test. This failure to punish criminal issues while using a heavy hand on comparatively trivial ones is a huge point of contention for many fans, especially women. The league’s handling of players protesting social issues by refusing to stand for the national anthem, led by former starting 49’ers quarterback Colin Kaepernick, has also alienated some fans. According to an October Rasmussen Poll, 32% of respondents said they were less likely to watch a game because of Kaepernick (Sports Illustrated). The NFL has not done a good job of consistently disciplining its players for issues fans deem important, making its stars less marketable.

The NFL needs to take multiple steps to address its slumping viewership. League executives should begin by firing Commissioner Roger Goodell. While Goodell has overseen successful years and has gone on record saying he wants to grow the league to $25 billion in revenue by 2027, he has made many poor decisions (The Ringer). Goodell oversaw the expansion of the unpopular Thursday night games and has failed to address the domestic violence and concussion issues while encouraging punishments for touchdown dances. He inherited a wildly successful organization and has not been able to effectively grow it or tackle controversies. Like when a corporation suffers a scandal and fires its CEO, a change in leadership would show the public that the NFL has heard its criticism and is willing to head in a new direction.

That new direction should tackle two of the largest issues that the NFL faces and has control over: decreased quality of play and oversaturation. The NFL should begin with eliminating Thursday night games. This will attract more viewers to Sunday games as all but two teams will be playing on one day. Placing most games on Sunday will also make it easier to show marquee matchups in prime time. Almost every team would plan on playing the same day and there would be more daytime slots available to help tweak the schedule in favor of a good Sunday night game. The NFL can combine this with looser rules on penalties, allowing fans to watch a more uninterrupted, clean product. This will help make football what it is meant to be: an entertaining experience. Cleveland Browns left tackle Joe Thomas summarized the best approach for the NFL, saying, “I think [officials] would be wise to remember that the NFL is about entertaining — first and foremost — and they do not want to do things that take fun and excitement out of the game.” (Baltimore Sun)

The NFL can improve the viewer experience while avoiding an impending revenue crisis by focusing on streaming. Streaming services are quickly becoming the norm as more people stop buying expensive cable packages. The NFL’s consistent ratings dominance has been the reason cable companies stay relevant, but it is now beginning to show chinks in its armor. Major cable companies and carriers have committed a total of $50 billion to the NFL through the early 2020’s (The Atlantic). They are willing to spend such large amounts money on the NFL because advertisers are willing to pay top dollar ($5 million for a 2016 Super Bowl ad) for the large, consistent audiences the NFL promises (CNN Money). The NFL may soon lose these audiences if they do not adapt to the changing television landscape, causing advertisers to seek less expensive alternatives such as hockey, baseball and eSports.

When its cable contracts expire, the NFL should create a comprehensive streaming package, either separately or through an established provider such as Netflix. One of the bright spots in the NFL’s recent history is the creation of Sunday Ticket, a package that grants fans access to all NFL games. The well-received package is perfect for fans who want to see highlights from many games, such as fantasy football players, due to its RedZone component that constantly switches between highlights from current games. It also keeps fans who want to watch one game at once happy. This model could easily be adapted to a subscription streaming service and allow the NFL to consolidate its viewership by placing all games in one place rather than across multiple media outlets on multiple days. The NFL has already had success with the WatchESPN streaming app, which grew by 73% in 2015 (Washington Post). This would help the NFL become less reliant on ad revenue as fans are directly paying for the games, not a cable package that offers them.

The NFL is not going to start losing money any time soon, but has been notified by its fans thats it is not infallible. Television habits are changing, and the NFL is not immune, especially if it fails to address concerns about its product. The NFL must take steps to adapt to the changing television landscape before its revenue begins to fall as its ratings have.

Word Count: 1917

Works Cited:

http://www.si.com/nfl/photo/2016/10/20/nfl-television-ratings-decline-causes

http://www.si.com/nfl/2016/11/29/nfl-thursday-night-football-future-schedule-ratings

https://www.washingtonpost.com/business/economy/nfl-ratings-plunge-could-spell-doom-for-traditional-tv/2016/10/14/a7a23dc2-915f-11e6-9c85-ac42097b8cc0_story.html?utm_term=.6ec7aac0843e

http://www.theatlantic.com/business/archive/2016/10/nfl-ratings-just-fell-off-a-cliff-why/503666/

http://www.forbes.com/sites/maurybrown/2016/11/15/heres-the-real-reasons-why-nfl-tv-ratings-will-continue-downward/#12006b957f18

http://www.baltimoresun.com/sports/ravens/bs-sp-ravens-tv-1116-20161115-story.html

https://theringer.com/nfl-tv-ratings-crisis-81fd9dbd53a#.8k7mkxgvv

http://www.denverpost.com/2016/12/04/nfl-tv-ratings-down-denver-post-survey/

http://money.cnn.com/2016/11/11/media/nfl-ratings-roger-goodell/

The World Series beat Sunday night NFL in TV ratings and that doesn't actually mean much

The financial tension of the Chinese tech company LeEco has escalated and sprawled overseas. Faraday Future, a California electric vehicle (EV) builder mainly funded by LeEco, is under a cloud of suspicion about the company’s cash flow and the production capability.

Faraday Future’s Teaser Video

On Nov. 17, Nevada State Treasurer Dan Schwartz questioned the financial condition of Faraday Future, which was expected to invest in a $1-billion electric vehicle factory in Nevada but missed three months of payments. But Faraday’s China team responded in a statement that the Nevada factory has never been halted and will start the second phase of construction next spring.

The Nevada state treasurer doubted the business model of LeEco. “This is a Ponzi scheme,” Schwartz told Sina Tech Media. “You have a new company that has never built a car, building a new plant in the middle of the desert, financed by a mysterious Chinese billionaire. At some point, as with Bernie Madoff, the game ends.”

Faraday Future signed a contract with the Nevada government to invest in the factory, with the state providing more than $200 million in incentives. But Faraday didn’t pay $21 million due in September according to Aecom, the prime contractor for Faraday’s car factory. “The state has not suffer fiscal loss yet, but it is time consuming and reputation influence,” said Schwartz in another interview with Caixin Media on Wednesday.

Faraday Future Factory Overview

Faraday claimed the company had enough capital for the Nevada factory. According to the Chinese media Sina, Yueting Jia, the CEO of LeEco, attracted 10 investors from his classmates in Cheung Kong Graduate School of Business and raised $600 million from those entrepreneurs. The purpose of the funds is not clear.

In October, Jia allegedly sent an alarming letter to all his employees and admitted the cash crunch caused by overstretched business. After Jia’s letter went public, LeEco’s stock market flopped. “We have frozen all the original employment,” said Kevin Zheng from the supply chain department of Faraday Future.

There have long been worries about LeEco’s expansion into almost everything, consisting of interconnected LeEco hard- and software. The ecosystem includes streaming-content services, smart bicycles, smart TVs, cloud-computing, smartphones, smart-apartments, and automobiles.

The letter came three weeks after a massive press event in San Francisco’s Palace of Fine Arts. LeEco claimed to tackle the U.S. market by a variety of products such as smartphones and TVs. Faraday Future’s EVs are also in the portfolio of products LeEco wants to introduce to the global market.

The original plan was for Jia to drive Faraday Future’s concept car across the red carpet onto the stage. But it turned out he ran out himself. “The car was broken during the sloppy transportation from our office to San Francisco,” Zheng recounted. Another car from the filming scene in London was transported instead and only displayed after the event.

LeEco EV Strategic Map

Faraday Future, with its headquarters located in an automobile industrial area in Gardena, CA, served as a significant part of LeEco’s EV strategy. Faraday Future now has up to 1,000 employees. Its design and engineering team will also help LeEco’s Chinese EV brand LeSee, which is based in Beijing with its plant in Zhejiang province.

The two companies will target consumers from different levels. Faraday Future aims at the high-end market and the EVs produced by LeSee in China will be more affordable. Zheng said that Faraday Future wants to target “high-tech fans and wealthy people’s second cars.” The first production car will be priced around $80,000 to $100,000, equivalent to Tesla’s Model S. Faraday Future also signed a cooperation deal to build electric vehicles with Aston Martin in the future.

Beyond sharing market risks by different level products, the U.S. market “will help us establish a global brand,” Zheng said. The connection between Faraday Future and LeEco has remained ambiguous till now because the “made (and designed) in America” marketing package made Jia’s EV plan convincing. Zheng said Chinese investors tend to trust the technology and management team from the mature automobile market in the U.S.

The “Our Team” section of Faraday Future’s webpage only shows a few VPs, who worked previously in other automakers including Tesla, BMW, Audi, and Ferrari. “Faraday Future has been hiding in plain sight,” the Clean Technica reported. But the incorporation papers filed with the California secretary of state’s office revealed its CEO was Chaoying Deng, a corporate director at LeEco’s subsidiary LeVision Pictures. Ding Lei, CEO of LeSee, participated as the main role of Faraday Future.

As the main funder, LeEco faces challenges if it wants to continue supporting Faraday Future. The current EV market faces a “chicken and egg” problem. The profit returns are expected to be slow and even Tesla has not made money yet except for a few quarters. The market requires pre-investment in charging facilities and the incentives to the consumers. This is why governments in many countries provide rebate policies to the EV makers. But as the Chinese government plans to phase out of the subsidies before 2020, both LeSee and Faraday Future will benefit less than what they could obtain from the confident investors. Jia expects to raise money by loans, which will be released by three phrases – Series A, Series B, and Pre-IPO placement. LeEco is estimated to raise a total investment of $7.9 billion before 2022. Except Jia’s classmates in Cheung Kong Graduate School of Business, Faraday Future needs more investors to buy the company’s story and trust its production capability.

After all, Faraday Future faces fierce competition. In California’s EV market, there are mature auto companies with massive dealership networks and existing customers such as Tesla and Audi. Other start-up makers are leaping into this competition, such as NextEV, launched by Tencent, another Chinese internet behemoth.

Faraday Future believes in its unique strategy to win this game. Selling services will be a big part of the company’s business model. “We envision this like a smartphone. The revenue starts once you get the device in the owners’ hands. We’re looking at subscriptions and apps and other opportunities,” said Nick Sampson, Faraday’s vice president of research and development.

Rather than hearing about Faraday’s future business strategy, the Nevada state treasurer is more eager to see the first production car manufactured by the plant.

However, Faraday Future has comforted the plant’s prime contractor Aecom. “We remain fully committed to our client and our employees working on this project, and we look forward to the facility’s successful delivery,” said Brendan Ranson-Walsh, the vice president in the global external communications department of Aecom. According to an official statement, Faraday Future is temporarily adjusting its construction schedule with plans to resume in early 2017.

 

New Year’s Day is always special, but for Finland in 2002, the day was very, very special. In the afternoon, I walked across Esplanade Park in Helsinki heading to a restaurant and stopped by on an ATM to withdraw money.

The cash machine did not give me Finnish marks, as it would have done the day before, but pumped out euro notes.

My home country had a new currency. I was holding my first euros in my hands.

Euro had come into existence virtually on January 1, 1999, and now, two years later, notes and coins started to circulate. Eleven EU countries took part in common currency’s first phase, and Finland was one of them – alone in Northern Europe.

I was an undergraduate student and did not have much on my bank account but I was thrilled about the euro. I no longer needed to exchange money when travelling to Central Europe. I bemoaned euro hadn’t been there already year before when I spent an exchange semester in a journalism school in Brussels.

I thought my Swedish and Danish friends were so unlucky not to be part of the joy. Their countrymen had rejected euro membership in referendums and they still had their boring crones.

I considered very carefully how much Finnish marks I would save for the future as a reminder of the “old times”. People said that some day marks could be considered rare items of collection. Would I want to give marks to my children some day?

The dual circulation period lasted two months, and at the end of February 2002, I put some mark notes and coins to an envelope. Shops no longer accepted them. I solemnly thought they were for the future generations.

 

I couldn’t have guessed that just 15 years later there would be serious talks about getting marks back as our currency, as soon as possible.

No one is celebrating euro anymore. It is now the common currency in 19 out of 28 EU countries and used by nearly 340 million people every day – and it has become a synonym of a crisis.

In 2015, Finland’s economy is in recession nearly for the fourth consecutive year, and many blame euro.

The former Minister of Foreign Affairs, Paavo Väyrynen, is one of the loudest critics. Last summer the stubborn old statesman started collecting signatures for a petition to get Finland’s departure of euro membership before the Finnish parliament.

I have no idea where my envelope of old Finnish marks has gotten. Should I start looking for it?

Could I possibly use them one day?

 

Paavo Väyrynen, at present a member of the European parliament, says that with the petition he is doing what is necessary. With its own currency, Finland could reign its own monetary policy and devalue.

Finns remember what devaluation means, as it solved the country’s most severe peacetime crisis in 1993. Economy overheated largely due to a change in the banking laws in 1986.

Eventually Finland let mark float and adjustment mechanisms worked. More competitive exchange rates enabled the country sell its products at a cheaper price.

Väyrynen was elected into Finnish parliament for the first time in 1970, and he’s served in eight cabinet of ministers of Finland. He’s now got over 50,000 signatures on the petition which means Finnish parliament might to have a look at the issue. Väyrynen wants the parliament to debate whether the country should exit eurozone and to enact a law that would make “Fixit” – Finland’s euro exit – possible.

In his opinion, the elite of the country cannot admit they made a mistake.

”Elite does not want this topic even to be discussed,” Väyrynen wrote me.

I asked him why did he decide to collect signatures – and what are his party colleagues thinking of it. Väyrynen’s party Keskusta – The Center – is Finland’s prime minister party at the very moment, and Prime Minister Juha Sipilä is not criticizing euro at all – on the contrary.

Väyrynen answered me saying he is sure his petition will proceed into the parliament and as he no longer has official status in Finland he feels the petition is justified as a method of exercise of power.

Väyrynen has objected euro and Finland entering the eurozone from the beginning. His party was eurosceptic but as soon as it won the election last spring, the ones in power have committed themselves to the common currency. The official stand is that euro brings “stability”.

Väyrynen says that half of his party does not believe in that but the others remain silent.

 

On December 10, 2015, the governor of the Bank of Finland, Erkki Liikanen, held a press conference about the economic situation of Finland. I watched it online (here: http://cloud.magneetto.com/suomenpankki/2015_1210_liikanen/angular). It was a very monotonous talk for which Liikanen had given a very dry and long title. The translation into English would be something like: “About economics, monetary policy and financial stability in Finland. Ten year’s economic development 2007-2017 from five different perspectives.”

I was anyway curious to find out what Liikanen’s five perspectives were, as other experts seemed to have just one viewpoint. The economy of Finland is miserable, no matter where you look at it.

In the third quarter of this year, Finland’s economy contracted by 0.6 percent. Odds are that this year will end up being the country’s fourth consecutive year of recession.

There are – for now – some nice numbers and qualifications related to Finnish economy: rating AAA- of sovereign debt. Quite moderate 62 percent government debt-to-GDP ratio. Ranking among the top ten most competitive economies in the world by the World Economic Forum.

But these don’t seem to help (and the last one, in my opinion, has to be a miscalculation).

Finland’s debt-to-GDP ratio is now nine percent bigger than in 2007. The Bank of Finland estimates it to grow from present 62 percent to 68 percent by 2017.

Between 2008 and 2014 Finnish exports shrunk by 12 percent.

This is why country’s Prime Minister Sipilä’s goal is to bring about internal devaluation as quickly as possible. The former businessman has been in power since the spring 2015 and has shaken the Finnish political culture. He is ruling like a CEO, not like a negotiator. He is determined to get the labor costs down in spite of the trade unions’ strong objection.

He believes in austerity, as does the governor of the Bank of Finland Erkki Liikanen.

 

In the press conference Liikanen offered five familiar explanations to Finland’s state, no fresh viewpoints.

Finland’s overall production is in a downturn because both productivity and the amount of workers are decreasing.

The age structure of Finland is a disaster. According to the Bank of Finland’s estimate, in 2017, there will be 200,000 more pensioners, 50,000 more unemployed, 5,000 more under 15-year-olds and 50,000 less workers than in 2007.

In the third quarter of 2015, the value of exports was 19 percent smaller than in the second quarter of 2008, which was the best economic quarter of 2000s in Finland. ”No other developed country has seen this big decline in exports during these years,” Liikanen said and reminded us that Finland’s eastern neighbor Russia, the main export market, is in a ”deteriorating economic state”.

Bank of Finland estimates that between 2007 and 2017 the debt to GDP ratio will raise from 53 percent to 68 percent. The same time the deficit in the whole eurozone is about to decrease by two percent in the average.

Because pensioners and unemployed now bring more costs, the government of Finland has less to spend on other areas. In 2007, money spent on pensions was 29 percent of country’s budget. In 2017, it will be 32 percent.

”Actions are necessary,” Liikanen said in the end, not surprisingly.

Necessary actions, according to Liikanen, include improving cost competitiveness and restructuring the pension system and social security system. People should a have more active work years in their lives, he continued.

”Electronic and forest industry are highly cost competitive areas of business.”

Electronic industry have suffered from Nokia’s collapse. It used to be the biggest employer of Finland and played a major role in exports. Forest industry is still the basis of Finland’s exports. But:

”Salaries have risen more than in the eurozone on average, and at the same time, Finnish companies’ ability to pay salaries have gotten worse. Companies must be able to offer their products overseas with competitive prices,” Liikanen said in his laconic style.

He added that Finland needs less regulation and more competition. He undoubtedly meant that trade unions have too much much power. Finland is ranked 103rd out of 144 countries for labor flexibility in 2015 by the World Economic Forum.

”When there are new entrepreneurs, there is more competition and thus more innovations,” Liikanen said.

 

As the Governor of the Bank of Finland Liikanen is also a member of the Governing Council of the European Central Bank and a Governor of the International Monetary Fund for Finland.

He has strong ties to European Union’s institutions. In 1990, he became the first Finnish ambassador to the European Union and in 1994 he became the first Finnish Member of the European Commission. He was Commissioner for Budget, Personnel and Administration.

I wouldn’t expect him to critisize euro. But I would have expected him to talk more about ECB:s monetary policy.

All he said was: ”Monetary policy is already supporting the recovery of national economics but as the interest rates are low, we must take care that negative side effects do not occur. So macroeconomical stability policy is needed.”

Liikanen pointed out that statistics show that Finland has used more mechanisms of finance policy than any other country in eurozone to help its’ economy to recover.

He rejected stimulation by saying:” Because Finland’s problems lie in exports, stimulation is not an answer. The biggest losses are in the industry, whereas the service sector has grown. This is why raising the internal demand by stimulus is not a solution. However, public investments that are likely to accelerate private investments are to be implemented.”

Finland’s largest sector of the economy is services at 65.7 percent. Manufacturing and refining together make up 31.4 percent. Primary production is 2.9 percent.

 

Journalist Simon Nixon sounded just like the Finnish government on November 25, 2015, when he wrote on Wall Street Journal that “Finland’s Problem Isn’t the Euro”.

”It is easy to exaggerate the role devaluation played in the British and Swedish recoveries”, Nixon wrote.

Sweden has cut its public spending from over 60 percent of GDP in the mid-1990s to just over 50 percent now. Finland’s public spending is at present 59 percent of GDP.

Finland’s working-age population economically active is five percentage points below that in Sweden — “a serious problem for a country whose workforce is already shrinking as a result of having the worst demographic profile in the EU,” Nixon compared.

He reminded his readers that ”two of the fastest-growing economies in the EU now are Ireland and Spain, both of which are in the eurozone.”

And that Finland has benefited from unprecedentedly low funding costs since the start of the euro crisis. ”That reflects Finland’s high levels of fiscal credibility, based on its low debt and deficits and its commitment to complying with the eurozone’s fiscal rules.”

Helena Yli-Renko, Assistant Professor of Clinical Entrepreneurship at University of California, also emphasizes the positive effects euro has had. Common currency has helped Finnish companies to grow global, she said to me. ”Common currency has been a way of simplifying processes.”

 

Opinions about euro are many and mixed so I asked even more of them.

Unto Hämäläinen is eminent political commentator in Finland and senior editor of the leading newspaper Helsingin Sanomat. He pointed out that, first of all, Paavo Väyrynen has revenge going on with his petition.

Väyrynen is bitter of not getting minister’s post after this year’s elections, after which he decided to stay in The European Parliament and get back at the party’s leader, Prime Minister Sipilä. Väyrynen is an attention seeker, Hämäläinen said.

Hämäläinen in convinced that Fixit won’t happen and is not even discussed about because the two parties that were originally against euro are now the two ruling parties of Finland. In Finnish parliament, there is no party that would support Fixit.

Another journalist, prominent economic writer Paavo J. Teittinen says that he believes Finland would be better off without euro. He himself supports Fixit, but he does not believe mark will ever come back. In Teittinen’s opinion, it’s ridiculous that Finnish politicians blame other countries for not following the euro regulations because the biggest problem in euro is the regulations themselves. Currency it’s not planned well at all.

Euro was just a mission of peace in Europe.

It allowed Finland to position itself in the core of Europe and away from the unpredictable Russia.

Ove the years the ones who have been against euro are the ”foolish conservatives” or the ”provincialists”. The populist right-wing party Perussuomalaiset had the departure of euro in their agenda – until they became a governing party.

Many others are just unrationally attached to euro.

 

 

Teittinen hopes that the possibility of the exit would anyway be studied thoroughly and discussed seriously.

We do not want to be in a situation where we face more troubles and ask ourselves silently if they are due to a malfunctioning currency.

I agree.

I will not climb to the attic to look for my envelope full of Finnish marks. Not yet.

 

Sources also: The Wall Street Journal

Bank of Finland

Helsingin Sanomat

The World Economic Forum.