cdymek's Blog!

It’s time for the BusinessWeek Analysis & Commentary roundup. Having nearly reached page 40 of this week’s edition, I’m ready to provide my critiques of the commentaries, including where I find flaws or reaches within their arguments.

Drug Prices: This week’s editorial chimes in with the argument that high retail prices for precscription drugs are due in large part to the price controls in regulated economies elsewhere in the world. Striking their bleeding heart note, the writers say that Big buyers such as the government and HMOs can often negotiate low prices that rival those found in Canada. To make up for the discounts, though, the industry charges high retail prices. So those who are least able to pay — the uninsured — are often stuck with the biggest bills.

What this strikes me as is not a failure of the drug companies but a failure of government. For those who believes that one of responsibilities of a good government is to provide a minimum of adequate healthcare to all citizens, the government should be providing some relief in these situations. This strikes me as a social policy failure, and is not because other governments have implemented a solution (thought not necessarily the best one) to this issue. Being able to derive a larger amount of profit overseas does not guarantee that companies will suddenly become generous and lower prices elsewhere.

In fact, let’s follow this simple thought experiment. I’m an executive of a pharma company. I can only charge retail rates freely in the U.S., and elsehwere in the world I am restricted in my pricing. My shareholders are expecting me to deliver strong revenue growth each quarter. Suddenly, the regulatory structure changes, and I can charge my own rates in other countries. Do I lower retail prices in the US, knowing that more than 90% of the people don’t pay those rates anyway, or do I maintain my current pricing strategy in the U.S. and raise prices overseas? My apologies, but if you said scenario 1, you’re obviously unaware of the incredible pressure Wall Street exerts on publically traded companies to demonstrate ever increasing sales and more money that will translate in to profits.

The other issue raised is the migration of European pharma to the U.S. By attempting to blame this migration on lower drug prices in Europe, the writers miss an obvious point. U.S. and European companies service both markets. Where a drug is discovered is entirely unrelated to where it will eventually be markted and sold. The real reason is that public investment in the health scienes is higher here with more well-trained, well-educated personnel able to contribute, providing a higher value proposition. Companies are locating R&D in the major research centers in the U.S. because these are some of the best places for health research in the world, due in large part to the people located there. If corporations truly felt it was necessary to locate manufacturing and research in their largest markets, why would Levi’s be closing its last U.S. manufacturing site to move off to China? Because the two are really unrelated, and this is simply a red herring.

On Wesley Clark: I love it when the mass media labels Howard Dean as a liberal. Granted, he wants that label at the moment to carry him through the Democratic Primaries, but we’re talking about a fiscal conservative, small government, relatively pro-gun rights kind of guy. People hold up the whole “civil unions” bill as an example of his so-called liberal tendancies, neglecting the fact that the Vermont State Supreme Court left him little choice.

In any event, my only real comment on the commentary is to ask the question “when is a tax repeal a tax hike?” If I repeal part of a law that hasn’t taken effect yet, like the idiotic elimintation of the estate tax, would that be a tax hike? I’m just curious how the writers of the papers that influence public opinion would answer that question.

On the China job drain: There’s one aspect of this article that I was struck by more than any other. According to this article, Levi’s is moving its last U.S. manufacturing location overseas. According to my sister, Levi’s is slowly closing its own retail outlets, preferring to sell through third-party retailers like, say, Kohl’s. If all the goods are created overseas and sold by other companies, and very little save the corporate headquarters remains in the U.S. under Levi’s command, would Levi’s still be considered an American company? Technically, if it was still “headquartered” here it would be, but if most of its workforce is instead located in other countries and it does nothing but overhead work here, how could it truly be called a U.S. company?

The only aspect of overseas manufacturing, and more and more design, development and support, is that it has the potential to structurally weaken the U.S. I’m far from a closed-borders person (really, really I am), but if the U.S. allows itself to move more and more of its production and those services eligible, there has to be sufficient innovation to provide the same or even more opportunities to those people who are located here. If there is no satisfactory complement to the offshore movement of providing new opportunities, a gradual decline in quality of life will occur as people find themselves unable to afford the living standards they currently enjoy.

Also, one book reviewer found earlier in this issue that the argument that offshoring and paying criminally low wages so necessary is somewhat bunk:
One of the book’s most surprising findings is that employers who use alternative approaches to compete in low-skilled industries often rely on new labor-market institutions. In industries as diverse as hospitals, hotels, and hosiery, companies band together to train workers, set industry skill standards, and help each other learn how to make strategies such as teamwork really work. Often, local government bodies lend crucial support, with seed money for training and coordination with community colleges. There’s a clear role, the book argues, for government to support management choices that help less-skilled workers.

Here’s a great WaPo editorial on the real issues at stake in the Great File Sharing Debate.

This time of year I always find difficult, as the seasons lengthen and the winter rapidly approaches. I without a doubt miss the warmer days that have just passed and begin thinking longingly of the warmer months yet ahead. Even the time when the days reverse course and begin to lengthen still remains some time in the distance, when Christmas carols are sung and the winter solstice beckons. Even still, it takes so long before the merest moments of the day begin to brighten just a little longer.

As I was out on my walk this evening (well bundled, I might add! It’s already so cold), I found myself time and again taken back to, of all things, my consumerist tendancies toward very badly wanting to buy a Nintendo Gamebody Advance. Why I can’t say, seeing as how I’m outside the core market of, well, children, and how I know I’ll never use it once hte novelty wears off. I already have a Gamecube and a PS2 gathering dust, with games I’ve bought and never even opened. Honestly, who has the time? And the money could be better spent a million and one ways. I would love to apply that toward the money to frame the paintings I picked up in Hong Kong, say, or some of the other frames I need for photos and sketches collected on my travels. Or take the small rug I’d like to buy for my living room. Or some Halloween decorations. And yet I still find myself drawn to that darn Gamebody Advance…

To keep tracking of those soldiers killed in Iraq, the NY Times has started a rolling log on its inside pages. Every few days it updates the list as it receives confirmation from the Pentagon.

If I were the White House, this is not the kind of press I would want to see.

Last night I watched Far From Heaven, a surprisingly good drama about tension and change that occurred in the life of a successful family in 1950s Connecticutt just prior to the Civil Rights movement’s big push. Cathy, the wife of a successful business sales executive, is confronted with choices and change as she navigates her way through a series of events started when she discovers her husband with another man. She befriends her gardener, a strong black man in a city still polarized over race. As life moves forward, she is forced to react to the slander and gossip, making difficult choices that in the end cost her much. Definitely a movie I enjoyed.

I also watched Bloody Sunday last Saturday, which was an extremely powerful recreation of the protests and riots that led to the deaths of 13 in Northern Ireland by British soldiers and sparked much of the ensuing violence in Northern Ireland over the next several decades.

This story talks about a research paper that may cast doubt on whether the RIAA has sufficient grounds to verify an individual really was sharing files, should the case proceed to court.

BusinessWeek had a different article on the hybrid technology finding its way in to upcoming models and specifically addresses the emphasis Toyota has put on the technology. What I find most disturbing about the article is the conclusion, where the author beings with the line Sounds great. Now if only the hybrids can actually make money. BusinessWeek has a tendancy to alternate between the praising the long-term vision that Executives so often seem to lack, such as pushing a whole new method to replace the original combustion engine, and the shortsightedness that is emphasized on Wall Street and that is echoed in comments such as the one above.

Honestly, the value that Toyota is gaining from selling its first generation Prius hybrid, despite losing an estimated $8,000 a car initially, is incalcuble. They are the first in the marketplace with a “mass-market” car, giving them a perception advantage. They have real-world data to drawn on regarding performance, durability, safety, and marketing that provide them with an advantage over their competitors. This is already paying dividends in the next generation of cars and their announcement to offer more hybird models over the next few years. In fact, the value is summed up best by a quote in the same article from a Honda executive: “If Toyota can drive the cost of the technology down, they will have a 5-to-10-year lead on every other manufacturer.”

BusinessWeek’s most recent issue featured a new “smarter” look, but some of the writing is as dumb as ever. Always striking me as prone to overbroad, partially innacurate statements, this week’s commentary on energy prices contained several sweeping generalizations that are definitely misleading at best.

Take this line about the recent runnup in gas prices. Because refiners underestimated demand, they cut back on production. Then, when summer driving came in above expectations, prices shot up, allowing refiners’ profit margins to triple or more.

True, they may have cut back on production. But not all of those production cutbacks were intended. A variety of factors affected gas prices in mid-August, including the normal high summer demand leading up to Labor Day, higher crude oil prices, generally low gasoline stock and disruptions such as a broken gasoline pipeline in Arizona, refinery problems in California and the blackout-related refinery shutdowns.The recent blackout halted refining operations in the Northeast and Midwest. Nowhere is there mention of any of the more likely culprits in the BusinessWeek analysis.

They also throw out the line that pats US on the back for our conservation effort. In the U.S., output per unit of energy, adjusted for inflation, is up 77% since 1973, the year of the first Arab oil embargo. While it is true from the data that energy efficiency had increased significantly during the years after the Oil Embargo, the demand for energy has increased dramatically during the years since. And at the same time, measures to further increase efficiency have not taken root, as energy prices have remained relatively favorable since the embargo. According to a 1998 report from the US Energy Information Administration, per capita consumption of energy has not significantly changed, indicating that energy usage has increased per person each year since 1983. So depsite our increased efficiency AND population growth, each person today uses more energy than a person going about his or her day in 1983, on average.

Finally, there’s no real mention of the lack of new refining capacity in the country. Perhaps that’s because the Department of Energy faults deregulation for removing the incentive to create new capacity, something that the anti-regulation BusinessWeek finds disturbing. According to the DoE’s web site

The United States experienced a steep decline in refining capacity between 1981 and the mid-1990s. Between 1981 and 1989, for instance, the number of U.S. refineries fell from 324 to 204, representing a loss of 3 MMBD in operable capacity, while refining capacity utilization increased from 69% to 86%. Much of the decline in U.S. refining capacity resulted from the 1981 deregulation (elimination of price controls and allocations), which effectively removed the major prop from underneath many marginally profitable, often smaller, refineries.

Without the spare capacity that this provided, any disruption in refinery activity, such as a blackout coupled with a pipeline interruption and some routine maintenance is enough to lead to price spikes. But for some unknown reason, BusinessWeek didn’t find it necessary to look in to these issues.

This one last statement in the BusinessWeek article, however, I fully agree with. Global growth isn’t exactly torrid.

I was reading the news this evening, and beyond President Roh of South Korea resigning from the Millenium Democratic Party, there was an alleged sex orgy in a hotel in Zhuhai on September 17 by Japanese tourists gathering at a congratulatory meeting for their company. While still under investigation, what I found most interesting was the general subtext of the article, given this appears in a Japanese newspaper. The most overt line was found toward the end of the article, where they quote the following line from a Chinese newspaper: The People’s Daily newspaper noted that the mass orgy happened on the eve of the 72nd anniversary of the Manchurian incident marking the start of Japan’s invasion of northeastern China. While in Europe World War II may be a memory, albeit a powerful one, in Asia it is still very much alive. From Hong Kong to Singapore, the topic still very much exists and is poignant in ways that it isn’t in the West. China, Korea and Japan still have unresolved issues, flaring up periodically in their diplomatic relations, such as when the Japanese PM visited a certain war shrine in Japan. While still morally outrageous, the fact that it was Japanese tourists accused of having this event occur with Chinese prostitutes only increases the tension level.

Last night was another MND, with an even more successful turnout than in weeks past. The arrival of Mike and Pete made it an even better event, given that I have only seen them once or twice in the past two years. These were the two characters of McCormick who would perform random acts of amusement all around Busch campus during my junior and senior years. A full contingent of the regulars were also there, and this week’s location had some good pizza as well.

All in all, this is rapidly becoming one of the highlight events of the week.