Wow!

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In a positive development for India, the suddenly popular Sonia Gandhi has agreed to step aside, recommending Manmohan Singh to take her place. Singh, widely described in news reports as "the architect of India's free-market reforms of the early 1990s," is an Oxford-educated economist. When the election results came in earlier this week, I suggested that one of the big questions was whether India would continue the fast pace of economic reform. While the pace remains uncertain -- after all, the Communists are still part of the ruling coalition -- but forward progress seems more likely than it did a few days ago.

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The New York Times has a nice article on Google's efforts to add a new desktop search product. The world desperately needs a good desktop search engine, so I am rooting for Google to succeed. Again, advertising seems to be the main revenue source. As for Google's Microsoft strategy, the article notes:

Google's strategy is to move quickly while Microsoft is still developing its Longhorn version of Windows, adding programs and services like its recently announced Gmail electronic mail program. The intent, say people who are aware of the company's strategy, is to lower its vulnerability to Microsoft by adding businesses that are "sticky" - in other words, businesses that create strong customer loyalty or are hard to switch away from.

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This evening we went shopping on Wangfujing, which is a pedestrian mall in Beijing not far from Tiananmen Square. We had asked our hosts to recommend a local market not overrun by tourists, and this was certainly a good pick. We visited several modern malls and shopped for souvenirs and clothing. After two hours of that, we made our way to the Night Market.

The following photographs provides a sense of the Night Market, which is a series of food stands selling primarily freshly cooked kabobs or fruit. The closeups of food show squid (octopus?), frog, snake, fish, and silkworm, among other things. The young vendor is attempting to entice my daughter to try fried centipede, but he didn't close that sale. If you want to see larger versions of any of the following photographs, just click on the photograph.

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The University of Wisconsin attracts a large number of Asian law students for its Masters of Legal Institutions (MLI) program, and a fair percentage of those students hail from China. Last year one of my favorite students was Chen Jianling, who is now teaching at the University of International Business and Economics. Even if you have never met Jianling, you have met someone like her. She is bright and energetic with a contagious smile and a kind word for everyone. Sort of a Mary Tyler Moore from Beijing. She recently applied to pursue a doctorate of laws degree, and she expressed her concern about the entrance examination, which is highly competitive. I hope she makes it, but she is irrepressible. For people like Jianling, failure is fleeting.

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Despite the tone of that last post, I strive to avoid being the ugly American. If you have traveled abroad, you can recognize this person from a distance. We had one -- the same person -- on both of our tours. She took every meal she possibly could at Western restaurants. (The Hard Rock Cafe around the corner came highly recommended!) Chinese customs "don't make sense." Chinese drivers are the worst ever. (They don't hold a candle to the Indians, by the way.) And that annoying habit of writing with characters that I can't read! (Ok, she never said that, but she implied it.) For this person, the only function of China, it seemed, was to be a source of cheap jewelry and clothing. Watching her has reminded me to strive to be as gracious as those who have been hosting us, and that is a high standard, indeed.

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We spent our first two days touring Beijing, and I am exhausted of touring. My problem here is not primarily the physical effort -- though that can be exhausting, too -- but rather the psychic energy required to sustain a day full of Chinese culture. The initial challenge is understanding the Chinese accent, which is coming easier now after a few days, but is not as natural for me as German or Scandanavian accents. Then there is the problem of constructing Chinese history (almost) from scratch. Having been reared on European history, my sense of Chinese time is sketchy at best. Frequent repetition of the dynasties helps, but I need much more practice. (I should mention that I am perhaps the most unprepared tourist in the country. I didn't even read the guidebook before we arrived, so the pain of ignorance is at least partly self-inflicted. I am so thankful for The Last Emporer!)

The most trying aspect of the tours, however, was completely unexpected: symbol overload. Chinese art, architecture, folklore, music, etc. are packed with symbols. I suppose that I knew this, or sensed it, but I felt it deep in my bones by the end of the day yesterday, as our tour group was introduced to various teas and the symbolic meaning of the tea set. Oi! That was painful.

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What did Richard Nixon say about the Great Wall? "It sure is a great wall" ... or something like that. I visited the Great Wall today, after arriving in Beijing late last night. We visited the Jūyōngguān Pass section of the wall, which is the closest section to Beijing. (That's me in the white "Wisconsin" shirt. Click on the photo for a better look.) This was a strategically important section, as it was positioned to guard the pass from Mongolia into Beijing. For my purposes, however, this section of the Wall was just steep. Embarking from the bottom of the pass, we climbed uneven stairs for an hour at a very steep incline, ascending about two-thirds of the way to the top. When a thunderstorm chased us inside one of the towers, I decided that I had reached my limit. My daughter and two other women from from our small tour group proceeded to scale the mountain, and the men didn't hear the end of it for the rest of the day. Here's my travel tip: if you come to China hoping to appreciate the magnitude of the Great Wall, don't visit the Jūyōngguān Pass, which provides none of the grand vistas of the Wall stretching across China's northern desert.

Earlier in the day, we visited a Ming tomb just outside of Beijing. It was mostly not worthy of pictures, but I noticed that the toilet received a four-star rating, and that drew me in for a visit. Apparently, the person who rated the toilets was a man, because the men in our group were raving about the cleanliness and quality, while the women were all complaining about the accommodations.

Other signs that caught my eye: "No striding" (on the Great Wall ... apparently an admonition against running) and "Do not scale" (a warning at the Ming tomb not to climb on the wall).

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We made it. The trip to China was largely uneventful, which is a minor miracle given that we passed through both O'Hare and Narita on the way.

My first impression of Beijing was the beautiful road from the airport to the city. Not beautiful in an aestheitic sense, but rather in a functional sense. Smooth and organized. The drivers stayed in their lanes, and we saw no elephants or camels. Such a contrast to the roads of Delhi. The Indians envy the Chinese their physical infrastructure, and my initial encounters with Beijing's roads suggests that their envy is justified.

Beijing seems like an intensely ugly city. Many of the buildings we have seen are dreary and gray. The color in the urban landscape is provided mainly by enormous billboards. Though trees are plentiful, mountains surround the city and create LA-like smog. Worse actually. Thankfully, it rained yesterday and for a brief time today, clearing much of the pollution in the afternoon.

If our hotel is any indication, the people of Beijing are accustomed to Western tourists. Although fluency in English appears to be rare, most people we encounter are able to provide simple directions ... and to bargain, of course. We went to several shops on our first day, and the bargaining proceeding much like it did in India, though it seemed less desperate for some reason.

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Christine Hurt has contributed a great series of posts on Google to Venturpreneur. See here, here, here, and here. If you haven't taken the opportunity to read them, you should. As she was posting the last in her series, I was packing for China, and I have not had the opportunity to thank her. So here it is: thank you, Christine, for taking the time to teach us. At one point during this, Christine suggested to me that she might start her own blog, and I look forward to learning more from her when that happens.

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I haven't had much of an opportunity to observe the business environment in China, and Beijing is not the best city to do that. (By all accounts, Shanghai is the place to be for business.) But my small Great Wall tour group (seven people) included two businessmen, one from Sydney and one from Mexico City. As you might guess, both are importers who were visiting China to check on their relationships with suppliers. I asked one of them why China had been so successful in obtaining manufacturing business, and he noted that China offers one-stop-shopping. Fabric, buttons, zippers -- whatever you need to make a complete garment can be supplied by a firm in China. If you were to attempt the same thing in Cambodia, for example, where labor is even cheaper than in China, many of the component parts would need to be imported. This would entail additional taxes as well as the usual payments made to government officials. Enough of those and fairly soon you have lost any labor cost advantage.

The "bloke" from Sydney also related an interesting story of a joint venture involving an Australian firm, a Taiwanese firm, and a Chinese firm. To encourage the formation of the joint venture in China, local government officials were exceedingly accommodating. They helped the joint venture partners obtain land, and taxes were relatively low. Once the joint venture had returned the initial investment, however, all sorts of new taxes began to be levied. It became clear to the Australian party that the local government officials were attempting to use the success of the joint venture to build local infrastructure, and the Australians sold their share.

Another example of the way in which China uses outside investors to build local capacity: when a joint venture locates in China, it must hire local managers to work alongside the outside managers. The local managers do not have the same level of management experience or industry expertise as the outside managers, but over the course of years, the local managers develop both. When the joint ventures dissolve, therefore, the local managers are in a good position to assume control. (Because the outside managers would not accept such a position at the level of pay offered to the local managers, the outsiders are paid a Chinese salary here, but supplemented by payments outside the country.)

For these two international businessmen, both longtime followers of China, the economic advances here have been dramatic. They view as naive those who protest against low wages in developing countries, not because they misapprehend the benefits to the outside firms, but because they fail to account for the benefits to the local economy. Both of these fellows expected much of the cheap manufacturing to leave China within a generation or two in search of lower labor costs elsewhere, and they fully expect China to replace any losses of that sort with indigenous firms serving both the local economy and the export market.

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I am about to pack up my computer for the trip to China, so blogging will be light over the next couple of days. I hope to post some thoughts on entrepreneurship in China, and I am bringing my camera in hopes of doing some photoblogging. Until then ...

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This day is all about celebrating student accomplishments, and our program was just that. The non-student speakers were mercifully short, fully aware that their words were not likely to echo through time, but rather to dissipate into nothingness in that vast hall. The student speakers ranged from the ridiculous the the sublime, but all were entertaining in their way. Sap that I am, I cried when one of the students honored her grandfather and asked others to honor with a moment of silence the loved ones who supported them through law school. I get teary when I think about the support that my wife was through law school. It was an amazing display of love that I have not yet been able to repay.

Our little meeting (just over two hours) is called a hooding ceremony. I have never seen anything quite that chaotic on the stage of such an event as students presented their own hoods to a faculty member (not of their own choosing in most instances), who proceed to choke them with it or pierce their eyes. The students then posed for a picture with the Dean, who was comically try to show his face to the camera situated behind him.

The faculty took turns hooding, in no particular order and for no particular length of time. I was going to sit the whole thing out, but Jane Schacter wouldn't allow me to do it. "You have to do at least one," she said. Finally, inspired by Peter Carstensen's habit of placing the hood on upside down, I leapt into the action. Once I got into the swing of it, I found it quite enjoyable, except for the really tall students.

The big suspense for me was whether any student, overcome with emotion, would feel prompted to give me a hug. Sitting between Jane and Juliet Brodie, who were hugging every other student, I felt completely left out of the hugfest. Finally, while I was hooding, Thomas Mitchell took pity on my pathetic soul and stood up and gave me a hug. I later stole a hug from one of my master student advisees, but she clearly had to be persuaded (a point which Thomas did not fail to note). In the end, I decided that I just am not really all that huggable. And frankly, I don't like the hug scene all that much. Today was pure peer pressure.

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Gordon asked me to blog on Google, and one of the many interesting aspects of the Google IPO is the relationship that Google has struck with its investment bankers. Google definitely seems to have the power in this relationship, which is definitely rare for most companies anticipating an IPO. Most IPO issuers are young companies (besides spin-offs), and in hot markets like 1999-2000 market, the companies are even younger and less powerful. Gordon had mentioned a few weeks ago that he had heard that Google had even negotiated a 3% rate with Morgan Stanley and CSFB, which would be completely amazing. (If anyone kind find confirmation of this, let me know).

Investment bankers are considered one of three gatekeepers to the capital markets, the others being attorneys and accountants. However, IBs seem to have escaped the scrutiny and reputation-bashing that the other two groups have endured in this wave of investigations and new regulations.

I don't want to give the impression that IBs are never sued in the wake of securities scandals. They are sued all the time, and the latest wave of scandals is no exception. However, IBs seem to be immune from getting the bad reputation that attorneys have with the general public and were immune from the decimation that the public accounting firms have seen. Arthur Andersen basically dies after the Enron scandal, but the IB firms that counseled Enron, including one that was a party in a sham barge sale, are still going strong. Attorneys and accountants are heavily regulated gatekeepers, but IBs live a more liberal life under the NASD rules. However, IBs have more conflicts as gatekeepers than attorneys and accountants.

In a typical IPO, IBs get 7% of the total amount of capital raised in the offering following the first sale of the shares to the public. This 7% is charged by every major IB firm; putting the Google rumor aside, it is virtually non-negotiable. (In fact, one large lawsuit that was dismissed charged the IB firms with violations of antitrust laws.) The other interesting aspect to this fee is that if the IPO does not happen, the IB does not get paid. IB fees in mergers and acquisitions are similarly contingent. This fee structure must lead to some really warped motivations when deals or IPOs are not coming together. The lawyers on the deal, who hopefully are being paid by the hour, generally have the clarity to tell their clients to walk away. The IBs do not. When I was practicing, there was a type of gentlemen's agreement in the business world that if you hired one IB firm to consult with you on a certain merger and that merger did not happen, that you hired that same firm back the next time to repay the firm. But still, the IB firm (and especially the individual banker) has an incentive to drive the deal to closure.

My other posts have talked about the agency problems between the issuer and the IB concerning other aspects of the IPO, such as underpricing and allocations, but the fee structure also creates agency problems between the two groups. In addition, the market tends to see the IB firm as a gatekeeper to the capital markets; if the IB firm is bringing a firm to IPO, then the market treats that IPO as a Good Housekeeping Seal of Approval for the company. In hot markets, when IB firms bring so many more firms to market than normal, this Seal of Approval may not be legitimate, but may be available to anyone willing to pay the fee for admission.

When I was practicing, I never understood why attorneys got such a bad rap for not adding value to a transaction but walking away with huge fees. However, the IB's fees were astronomical compared to attorneys fees. I was talking to an attorney friend the other day who is involved in a large transaction in San Antonio. He has become friends with one of the investment bankers on the deal, someone around 30 years old, who told him that he was going to walk away personally with $9M as his fee. My friend (who probably makes $130k/year) expressed his shock, and the banker's response was that he does a lot of deals that never close. Well, even if he doesn't close a transaction for the next 15-20 years, he's doing pretty well! The motivation to drive a deal to close to walk away a millionaire has to trump an IB's judgment to tell the client to let this opportunity pass by.

So, I've been wondering why the general public thinks of attorneys as having the same integrity as a used car salesman, but doesn't think anything at all about investment bankers. I have some thoughts. First of all, the general public has no idea what an investment banker is or does. Unless you live on the island of Manhattan, are in the financial services industry, or happen to be an attorney, accountant or business executive, you probably don't know any investment bankers. Also, the average person never has any contact with an investment banker and doesn't know anyone else that does, either. Attorneys have contact with people in all walks of life, whether through divorce actions, probate, adoptions, personal injury cases, or property disputes. Investment bankers do not. You can't hate what you do not know.

Also, in the latest wave of lawsuits and investigations, I think IB firms hung the analysts out to dry. Even though the entire underwriting process contributed to the problems, IB firms were quick to concede that the analysts had conflicts and to agree to structural reforms to separate research from investment banking. Regulation AC and a new NASD rule governing analysts were passed quickly and with much less comment than NASD rules proposing to overhaul the IPO underwriting process. IB firms entered into the $1.4B Global Settlement, admitting to improper actions regarding analysts, but neither conceding or denying improper spinning actions.

Thank you for listening to my thoughts, and thank you to Gordon for giving me the microphone.

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My old Civ. Pro./Fed. Jur. professor Larry Kramer was just named the new dean at Stanford Law School. Stanford's Provost proudly proclaimed, ""Stanford is probably unique in having an unbroken run of four constitutional scholars at the helm of its law school over the last generation." And this is good because ... ?

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