Saturday, September 13, 2008

How bad is the economy really

As we are trying to restructure our business, but also launch in the new countries at the same time, the key question that we need to answer is - by our best estimates, how bad is the economy and how long this crunch time is going to last?

This week had its share of bad news. Lehman Brothers, an Wall Street institution but now a struggling bank, is on the verge of collapse. Since it announced bigger than expected losses last week, most of its market value has been wiped out already. The executives at the Lehman Brothers are trying to find a buyer - Bank of America is in the reckoning as well as Barclay's - and they must do this by tomorrow evening. If they can't do it before the Asian markets open on Monday, we are possibly looking at a full collapse - of the bank, but this will possibly affect banks elsewhere and may be countries.

The housing market news isn't any better. It continued its downward trend in the United States, and in Britain, the house prices are down 15% from their last September peak. Firms continue to fail - the latest high profile collapse was of XL, Britain's third largest Holiday Travel company, and they left thousands of tourists stranded in different locations in the middle of this holiday season.

There are other significant developments, like the recent rescue of American mortgage guarantors, Fannie Mae and Freddie Mac, and the bankruptcy of Al Italia, Italy's national airlines. The economic gloom continues to create political uncertainty, Gordon Brown is all set to become its most celebrated casualty, though Bush administration is hardly showing any more inventiveness or resolve to drive out of trouble. The only change is that there is a swing to good old fiscal solutions - Bush announced a stimulus and Brown flirted with the idea of waiving stamp duty - from the favoured monetary solutions, which dominated economic management for last two decades.

Given this broad background, we must answer the question - with a limited perspective - how long this trouble is going to last, how it is going to affect us and what we should do about it.

To start with, our business has two parts - training and recruitment. Training is a recession-proof business, and certain kinds of training businesses actually do better in recession. However, recruitment is bound to be hit. Being a small business, we have never benchmarked ourselves well and therefore, do not have an estimate is what to expect without the buoyant market conditions.

The other factor to consider is that we are a globally diversified business. While the Northern Ireland recruitment may be hit by the downturn, our business may be sustained by the boom in Dubai. Or, may be not - as in my opinion, Dubai is too much of a bubble, and we haven't diversified ourselves enough in the Gulf. I am increasingly of the opinion that we are better off focusing on Abu Dhabi and Kuwait, the original oil-rich economies, rather than Dubai, which is an offshoot of Western wealth and therefore, will be strung along the western recession.

Similarly, India is no longer an exception. While I expected Indian real estate markets to remain firm - given the black money sunk into it, credit crisis should not have much effect - it is already showing signs of weakness and Indian service sector is reeling under the US recession. That affects everything - the newly emergent Indian consumption class already taking the hit. The stock market has been decimated, from the previously unknown heights only a few months back to a deep downturn, and the economy is battered by a 12% inflation. The Indian banks are clueless, the interests are already too high at 14% and it is hurting the expanding economy.

So, this downturn is global, all pervasive and affecting everyone. Given the sheer scale, it seems it will last, it isn't easy to correct such global trends by a few policy twists. World's governments are not known to be good at cooperating with each other. The banks, which unleashed the problems on us by reckless lending in the first place, is still grappling with the problem, and no end is in sight for their woes. By a BusinessWeek estimate, for every $1 loss, the banks must claw back $15 in credit; given that the combined loss of banks will exceed $100 billion or more in next three years, we are talking about $1500 billion credit claw-back over this period. That will destroy businesses, governments, countries and lives.

My fear is that this is surely going to affect highly leveraged businesses. Ours is one by some definition, as some of the real estate interests of the main shareholders are backed by credit. My initial business plan was also based on significant credit-backed expansion. In fact, while I was despondent that the credit crunch hit us as we were just starting off, at the hindsight, the timing was a blessing rather than a problem - committing ourselves to a credit-backed expansion would have made us go down by now.

So what do we do now? I think the answer is in boot-strapping. This is what I am going to share with all my colleagues - we need to change gears and behave that we are absolute start-ups. I did stop taking money from our Head Office funds in April, partly for an emotional reason, but it seems to have turned out to be good strategy. This has put pressure on individual units to generate their money and become more sensitive about expenses. But, above all, this has put HQ at ease, in the middle of financially trying times. However, I haven't spoken about boot-strapping yet, which I would do so now.

The final question is - do I call this boot-strapping or a return to Noah? Do I say that we have an eternal, exciting future, if we see through a few trying months. My instincts tell me that it is going to be a return to Noah - an exercise in survival when the world falls apart. However, the salesman in me is prompting me to talk about boot-strapping, so that we keep on dreaming to be out of trouble soon, at least for the moment.

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