Jonathan Anderson Doesn’T Think So

McKinsey on Finance

Perspectives on How climate change could affect corporate valuations 1 Corporate Finance Efforts to reduce climate change can profoundly affect the valuations of many and Strategy companies, but executives so far seem largely unaware.

Number 29, Growth and stability in China: An interview with Autumn 2008 UBS’s chief Asia economist 8 Will the country’s economic fortunes fade as growth elsewhere declines? Jonathan Anderson doesn’t think so.

The future of corporate performance management: A CFO panel discussion 14 Two leading CFOs agree that when global companies attempt to improve their performance, simple, transparent metrics are more important than theoretically pure ones.

Why cross-listing shares doesn’t create value 18 Companies from developed economies derive no benefit from second listings in foreign equity markets. Those that still have them should reconsider. McKinsey on Finance is a quarterly publication written by experts and practitioners in McKinsey & Company’s Corporate Finance practice. This publication offers readers insights into value-creating strategies and the translation of those strategies into company performance. This and archived issues of McKinsey on Finance are available online at corporatefinance.mckinsey.com, where selected articles are also available in audio format. A McKinsey on Finance podcast is also available on iTunes.

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How climate change could affect corporate valuations

Efforts to reduce climate change can profoundly affect the valuations of many companies, but executives so far seem largely unaware.

Marcel W. Brinkman, As global warming spawns new regulations, technological remedies, and shifts in Nick Hoffman, and consumer behavior, its effect on the valuations of many sectors and companies is likely to Jeremy M. Oppenheim be profound. The shocks to some industries could be severe—potentially as severe as, for example, the effect of the introduction of wireless telephony on the telecommunications sector during the 1990s and of shifting oil prices on the oil and gas sector during the 1970s and 1980s. Yet executives have so far paid scant attention, either because they don’t understand the effects of climate change on their businesses or they believe them to be too uncertain or distant to model.

To gauge, even at this early stage, the stress Not surprising, we found that carbon- that climate change will place on the cash abatement efforts will put dramatically flows of large public companies, we assessed different levels of stress on the cash the impact of a series of carbon mitiga- flows and valuations of different industries. 1 The six sectors are aluminum, automotive, beer, construction, consumer electronics, and tion scenarios on benchmark companies in The level of change for individual public oil and gas. We tested their sensitivity to six sectors.1 The change in cash flows— companies within a given sector could of three levers for reducing emissions (regulatory moves, technological shocks, and shifts in compared with a business-as-usual scenario, course substantially exceed the average, consumer demand) and analyzed the potential impact of climate change events on the cash but without explicitly considering the depending on their current position and their flows and 2008 net present value (NPV) of an responses of individual companies over ability to respond to new technologies, archetype company in each sector under different climate change scenarios and assum- time—indicates how much pressure changes in consumer behavior, and regulation. ing different climate change drivers and efforts to reduce carbon emissions will exert levels of impact. The events that might take place in these companies and sectors on valuations and how much volatility Varying levels of stress were examined in the short term (2008–11), a sector’s current business systems will face. We assessed company cash flows in each the medium term (2011–16), and the longer term (2016 onward) in the context Such an analysis cannot, however, predict industry in three scenarios: a business-as-usual of their carbon intensity, geographic the actual impact on cash flows, valuations, scenario, a scenario involving the greatest footprint, and ability to pass through costs and to redeploy capital. or share prices. degree of change executives can now imagine 2 McKinsey on Finance Autumn 2008

(the executive scenario), and a scenario that Fundamental demand shifts many scientists believe would be required In some industries, shifts in demand will to stave off a high likelihood of catastrophic have a broadly negative impact on company climate change–related events (the experts’ cash flows and therefore valuations. Oil scenario). We chose a basket of six industries and gas consumption, for example, would to understand how the impact could vary. have to decrease by an average of around In some industries, the mitigation of climate 0.2 percent a year from now until 2030 to change will become a significant corporate- meet emission reduction targets associ- investment theme, either creating fundamen- ated with success in stabilizing greenhouse tal shifts in demand or leading to new gases. The upstream oil and gas industry competitive dynamics and business models. would therefore experience falling demand In others, cash flows will be less stressed as over the long term (2016 and beyond) short-term cost pressures are passed through as the economy shifts toward cleaner sources to customers, thus allowing profit margins of energy (including solar, wind, and to revert to average levels in the longer run carbon capture and storage), and as (Exhibit 1). The nature of the impact oil-consuming sectors (such as automotive willMoF depend 29 2008 on whether an industry shows and power generation) increase their underlyingCarbon valuation structural resilience or expe- emphasis on energy efficiency. Upstream riencesExhibit 1fundamental of 3 shifts in demand or sig- companies could experience falling pro- Glance:nificantly Climate changed change competitive will have a major dynamics. effect on shareholderduction value and insales many volumes but not allby sectors. 2015, with a Exhibit title: Opportunity or threat?

Exhibit 1 Potential impact on industry valuation of carbon-abatement measures, given level of changes currently anticipated by executives, % Opportunity or threat? Short term (≤7 years) Long term (≥8 years) Climate change will have a major effect on shareholder value in many, but not all, sectors. Selected Key drivers industries –30 –20 –10 0 10 20 30 Short term Long term

Auto –15 t Increased regulatory t Technology shifts to new drive pressures—eg, increase trains—if to high degree, costs in emissions standards more than covered by passing (European Union, California) through to consumers; otherwise –30 +10 and consumer incentives costs not passed through

Beer –15 –5 t Higher input costs t No long-term structural t Packaging regulations changes anticipated t Limited passing through of costs to consumers 0

Building 0 t Limited impact t Increased growth from materials tightened building regulations t Increased input costs because of carbon pricing –15 +30

Oil and gas –10 +5 t Downstream: impact of carbon t Upstream: decrease in oil pricing on reﬁning demand, because of substitution (volume effect only) –15 –5 How climate change could affect corporate valuations 3

substantial impact on cash flows. If that rates of entry and exit as new technologies happened, valuations would fall by around or regulatory restrictions emerge and 5 percent in the executive scenario and the competitive landscape changes.2 The way by around 15 percent in the experts’ scenario. a company reacts to changing technol- The potential impact on value is relatively ogies and business systems will determine low because of the short-term nature of the its performance. valuations of upstream companies—which mostly reflect their current high-yielding In the automotive sector, novel technologies discovered and developed reserves. These will create new competitive dynamics and have an average lifespan of 10 to 15 years transform business systems in the next one and will be largely depleted by the end to five years. Cash flows could be affected of the next decade. The value of the cash both positively and negatively. In the short flows affected could fall further if term, tighter emission standards will have a dramatic decline in demand pushed an impact on the mix of cars sold, helping down prices. manufacturers with lineups of smaller, more fuel- and emission-efficient cars. Such By contrast, other industries could enjoy con- standards will affect the margins of both siderable gains. Companies in the building- winners and losers and thus their cash flows materials sector—particularly those that do and valuations, which may already reflect business in places where building efficiency some potential changes in value. is not yet a major issue—will probably benefit from rising demand for improved energy Changed fuel efficiency and emissions efficiency and insulation products, which will standards, combined with high oil prices, increase their cash flows. In developed will spur the introduction of new drive- economies, more stringent building stan- train technologies, such as electric and hydro- dards are already creating demand for gen, which could start to reach scale by such offerings, and the same thing will hap- 2015.3 A number of competing technologies, pen in developing markets as well. Analysts including more efficient internal-combustion are already calculating the impact on engines and hybrids, will be introduced, demand of existing regulations and factoring and so will vehicles powered by compressed it into company valuations. As compared natural gas, hydrogen, or electricity. The with the business-as-usual scenario, the valu- impact on valuations will depend both on ation of a representative building-materials which of these proves dominant and on company in the developed world increases by the ability of the automotive OEMs to pass 35 percent in the executive scenario and along the costs of new technologies and by 80 percent in the experts’ one. If more parts to consumers or to capture value from stringent regulatory measures do not other segments of the value chain. materialize, valuations could fall by 10 to 20 percent as a result of possible short- While the actual impact on industry valu- term cost pressures. ations is highly uncertain, it is not 2 During similar periods of discontinuity in unimaginable that its discounted value other sectors in the past, levels of entry and exit rose significantly. As the telecom sector moved Changing competitive dynamics could rise by 10 percent as compared to wireless, for example, only 17 of the top 30 Efforts to offset climate change will structur- with the business-as-usual scenario if the global telecom companies (by market capitalization) in 1997 were still in the top 30 ally transform certain sectors—including electric or hydrogen technologies become in 2007. automotive and aluminum—which will expe- dominant, in combination with a new and 3 In some scenarios, 1 percent of global penetration by 2015. rience more volatile returns and increased cheaper way of generating power, which MoF 29 2008 Carbon valuation Exhibit 2 of 3 Glance: Regional regulatory differences and the access of companies in some regions to cheaper power will make margins within the primary aluminum industry more volatile, creating both winners 4 McKinsey on Finance Autumn 2008 and losers. Exhibit title: Winners and losers

Exhibit 2 Impact on EBITDA1 in primary aluminum industry from introduction of direct emission costs and increases in carbon pricing Winners and losers Hypothetical event: Direct emission costs are introduced in European Union, and cost of carbon increases to $55 (from $25) Regional regulatory differences and the access per metric ton in 2013. Increased costs are not passed through to EU customers, as marginal prices are set outside region. Primary producers in Asia, North Africa, Middle East, and rest of world are not yet subject to direct emission costs.2 of companies in some regions to cheaper power will make margins within the primary Benchmark company Winner Loser aluminum industry more volatile, creating both winners and losers.

28 28 24 18 19 EBITDA margin, % 7

Before After Before After Before After

Power source

Hydro/renewable Coal

Distribution of Asia, North Africa, production facilities by Asia, North Africa, Middle East, and geographic location, % Middle East, and rest of world Europe rest of world Europe 20 40 100 100 40 North America

EBITDA = earnings before interest, taxes, depreciation, and amortization. In a scenario in which aluminium prices increase to reect additional carbon-related costs (ie, costs are fully passed through to consumers), EBITDA margins of benchmark and losing companies will remain constant while EBITDA margin of winning companies will rise from to %.

could let OEMs raise margins by charging • Direct effects. Although the aluminum higher prices. Certain types of regula- industry does not face direct emissions costs tory interventions, however, could raise the at present, they may be introduced in industry’s costs, with no concurrent price the European Union under phase III of the offsets. In that case, the industry’s value could EU Emissions Trading Scheme. The impact fall by as much as 65 percent. Nonetheless, on valuations will depend on carbon well-positioned players with clear leadership pricing and the extent to which the industry in technologies and products should always receives free emission allowances. With- be able to outperform their competitors. out any subsidies or offsets, a carbon price of $55 per metric ton would raise pro- In the aluminum industry, carbon reduction duction costs by 11 percent.4 efforts will affect the cash flows and valuations of primary aluminum producers • Indirect effects. Since energy represents 4 Based on initial cash production costs of $1,853 per metric ton. in three ways: more than 30 percent of the costs of MoF 29 2008 Carbon valuation

HowExhibit climate 3 of change 3 could affect corporate valuations 5 Glance: Stringent standards in the consumer electronics industry would reduce energy consumption and even reduce costs. Exhibit title: Lower consumption, lower costs

Exhibit 3 Consumer cost savings from adoption of 1-watt standby standard1 (based on implementation in California)2 Lower consumption,

lower costs With an extremely small . . . consumer electronics companies can help consumers save impact on proﬁt margins . . . signiﬁcant amounts of energy. Stringent standards in the consumer electronics industry would reduce energy consumption and even reduce costs. US Environmental Protection Current average Annual average cost savings Agency (EPA) estimated standby loss, per device (with 1-watt that cost to manufacturers of watts standard),4 $ adopting 2-watt standard would range from –$2.00 to $0.50 Digital TV 7.33 5.46 per unit.

Net costs for manufacturers Personal laser printer 6.1 5.36 are expected to decrease to 0, even with 1-watt standard, All-in-one stereo system 5.7 4.96 thanks to innovation and economies of scale driven by CD player 4.0 3.15 regulation. DVD player 1.7 0.74

Reduction of power consumption for device on standby to ≤ watt. In , California had % higher residential electricity prices (. per kWh) than US average but lower than EU. Based on CNET.com energy-consumption test of popular digital TV models in United States in . Assumes product in use % of time, except for TVs (in use % of time); does not account for any efciency savings while in use. Source: Australian National Appliance & Equipment Energy Efciency Committee; Consumer Electronics Association; Energy Information Administration, US Department of Energy; IDC; Nielsen; US Environmental Protection Agency; McKinsey analysis

primary aluminum producers, more Regional regulatory differences and the expensive power from higher carbon pric- access of companies in some areas to cheaper ing will put significant pressure on power will make margins in the primary- margins. Without any subsidies or offsets, aluminum industry more volatile, creating for example, a carbon price of $55 per both winners and losers. In the short to metric ton would raise production costs by medium term, efforts to reduce carbon emis- 17 percent. sions will probably exacerbate the margin differentials between players with facilities in • Changing demand. As cars become lighter Asia, the Middle East, and North Africa, on to reduce emissions, demand for aluminum the one hand, and in Europe (and potentially from the automotive sector is expected to North America), on the other (Exhibit 2). rise. This increase, however, may be offset Take, for example, a company with only coal- by lower demand from the packaging powered European production facilities. If industry (as a result, for instance, of stricter carbon prices increase to $55 per metric ton, regulation of nonreturnable containers) from $25, but the price of aluminum doesn’t and by a shift toward the use of secondary increase to cover them, the company’s aluminum from increased recycling. EBITDA5 margins would fall to 7 percent, If carbon emissions are strictly limited, from 19 percent. demand for primary aluminum may fall dramatically as less-energy-intensive In the long term, however, the short- to 5 Earnings before interest, taxes, depreciation, and amoritization. materials replace it. medium-term advantage enjoyed by alumi- 6 McKinsey on Finance Autumn 2008

num producers in lower-cost regions like to change as these factors start to affect China, the Middle East, and North their performance. The immediate impact on Africa will probably fall: the global stan- cash flows (and therefore discounted dardization of carbon costs will erode valuations) might be limited, but it will even- margin differentials. tually be significant in some industries.

Structural resilience As nations and companies start acting more Some sectors will experience minimal long- aggressively to reduce carbon emissions, term stress from carbon-abatement efforts: major shifts in the valuations of sectors and they will be able to pass along any short- companies will start to become clearer term cost pressures to customers and will and more predictable. Over the next 18 to 24 not face substitution by other products months, a number of regulatory and policy or significant shifts in demand. In such cases, events, such as the December 2009 profit margins would revert to average Copenhagen conference to replace the Kyoto levels over the medium to long term. The con- treaty, will probably reduce the uncertainty sumer electronics industry, for example, and spark a rethinking of how carbon will probably have the technology to deal reduction efforts will affect valuations across with regulation in a way that will not a wide range of industries. harm the bottom line. Several steps can help companies and their Consumer electronics represents a large and executives as they start to position themselves growing portion of residential electricity to thrive in a low-carbon economy. demand. Using technologies that exist today, the industry can make its products dramati- Assess the impact of abatement efforts cally more efficient at low and diminishing A critical first step is reviewing a company’s costs (Exhibit 3). We expect increased exposure to regulatory measures (such efficiency-improvement pressures, including as carbon pricing, new standards, taxes, and limits on standby and active power subsidies), new technology, and changes consumption, as well as efficiency-labeling in consumer behavior. In our experience, the requirements. The overall impact on strategy mind-set required for this analysis the value of the industry will in our view be doesn’t come naturally to most executives. limited. Some of its revenue and margin They will have to ask themselves, for opportunities could have a positive impact example, how specific changes would affect of up to 10 percent on its discounted a company’s competitive position if other cash flows in the executive scenario, or up companies adopted new business models or to 35 percent in the experts’ one. Higher how a company can gain a competitive costs that could reduce the industry’s value edge by moving more quickly. by 7 percent could, however, offset these opportunities. Strengthen regulatory capabilities Companies should ensure that they have The value of preparation a consistent strategy, informed by analysis, Much uncertainty remains over the course of to participate in regulatory-policy dis- regulation and the pace of change for cussions and to engage with policy makers the other climate change–related forces, such effectively and coherently across business as technology, that will influence abate- units. The best companies will bring public ment levels. The value of companies is likely and private stakeholders together to shape How climate change could affect corporate valuations 7

the regulatory environment—both policy companies understand and manage the principles and specific regulations— impact of climate change. In the hope so that socially efficient solutions are also of developing new solutions, some com- economically attractive. panies in the electric-car segment, for instance, are creating consortia that include Build capabilities to deal with uncertainty power companies, suppliers of high-tech The type of analysis we have conducted only car batteries, and local governments. scratches the surface of what is possible. Sophisticated scenario-planning techniques Review investor relations can give managers an overall view of Companies will need to focus on how and how the economy—and their markets, in when to signal the value of their climate particular—might evolve under different change bets so that investors can assess them. climate change outcomes. Many companies Each company will have to explain its will succeed in managing the major trans- overall level of preparedness for the future, formations their sectors face only if they the way climate change–related events invest in generating more sophisticated could affect its specific cash flows, and what forecasts and deeper insights into climate differentiates it from its competitors in change–related developments. these respects.

Adjust investment review processes So far, companies have had limited success In accordance with the realities of climate in communicating their climate change– change, decisions about new corporate related activities, often because these moves investments should be geared toward carbon- form only a small part of a larger port- and energy-efficient technologies that will folio. In 2008, for example, the Spanish remain competitive over investment life cycles. power generator Iberdrola spun off As part of a portfolio of options, compa- part of its renewables division—among nies may find it necessary to make bets other reasons, to access greater value. (in new technologies, for example) that are BP has looked for ways to realize the value specifically related to climate change. of its alternative-energy investments, proposing a partial flotation. However, very Develop new external links few public companies have succeeded in Venture capital firms, universities, and explaining the more deeply hidden effects of scientists are logical starting points in efforts climate change on their cash flows and

to build external networks that can help competitive strategies. MoF

This article is based on a project that McKinsey undertook jointly with the Carbon Trust during the spring of 2008 to assess the impact of climate change on investments. In September 2008, the Carbon Trust published a long report on that subject, titled “Climate change: A business revolution?” It is available at www.carbontrust.com.

The authors wish to thank Elizabeth Bury for her contribution to this article.

Marcel Brinkman ([email protected]) is an associate principal in McKinsey’s London office, where Nick Hoffman ([email protected]) and Jeremy Oppenheim (Jeremy_Oppenheim@ McKinsey.com) are partners. Copyright © 2008 McKinsey & Company. All rights reserved. 8

Growth and stability in China: An interview with UBS’s chief Asia economist

Will the country’s economic fortunes fade as growth elsewhere declines? Jonathan Anderson doesn’t think so.

David Cogman and Even before the financial crisis descended on Wall Street in mid-September, the persistent Thomas Luedi slowdown of Western economies had observers in developed markets increasingly worried that the malaise would inevitably spread to the major emerging markets as well. After all, most of their stock markets slumped dramatically this year—and their economies face continuing inflationary pressures. China, in particular, is struggling with the twin chal- lenges of declining demand from importing countries and an overheated domestic economy. Many executives are now wondering whether their hopes over the past few years for growth in China were not misplaced.

On the eve of the Beijing Olympic Games, Jonathan Anderson: The bottom line we met in Shanghai with long-time emerging- is that China will slow gradually as market observer Jonathan Anderson to the world around it does, by around one discuss whether these concerns were justified. percentage point next year, perhaps Anderson, the author of The Five Great slightly more. Myths About China and the World and head of Asia-Pacific Economics for UBS, sees Indeed, in the first half of this year, everything quite a different story emerging. seemed to be going weak. Exports and trade were slowing, domestic consumption was on McKinsey on Finance: Some commenta- the decline, the property and construction tors worry that a slowdown in Europe and sectors were under very sharp pressure, and the United States will have an overwhelm- a few bubbles burst. And while employ- ingly negative effect on the Chinese economy. ment was strong and wages actually grew at How realistic are these concerns? a good clip, food became so expensive 9

that it started to cut into other kinds of by borrowing short in the money market expenditures—meaning that spending and then faced a fire sale when the mark in areas such as telecom and discretionary to market went against them. The average was weak. Chinese or Asian institution bought a lot less, in a relative sense, and had no leverage But as we move through the second half on the liability side—and they’re perfectly of the year, inflation is slowing, so the happy to hold them to maturity. People’s Bank of China can start to loosen monetary policy. That means property So regardless of a US slowdown and what’s construction will likely rebound by the fourth happening in Europe and the rest of quarter, and price indicators should then the world, Chinese growth should be all stabilize. On the urban-consumption side, right for the next few years. China has many food prices are starting to level off. massive surpluses on its current account, With wages still growing and employment and it has the world’s largest stock of still high, that should mean better con- reserves. It’s also just been through a big sumption numbers over the next 12 months. bank cleanup, which means that regard- Overall, we’re on track for real GDP less of any near-term misbehavior, balance growth of around 10.5 percent this year, sheets are much better than they were and just under 9 next year. five or six years ago. Also, Chinese tax reve- nues to GDP are rising dramatically, McKinsey on Finance: So China’s already and there’s a surplus on a cash basis. That seen the worst of it? means the country can spend money to help stabilize the economy. There’s also Jonathan Anderson: Yes. The good a much broader consumption base, so news for China, and most of the emerging for the first time in three or four years, even world, is that most of the impact of farmers are making money. the slowdown has already been felt, and it wasn’t a very big hit. Most of the McKinsey on Finance: Energy prices are fallout from the subprime banking mess hit at an all-time high, as are prices for raw the financial markets—particularly the materials. Won’t that have an impact on equity markets, where there’s been a big China’s economic growth? sell-off over the past nine months. Jonathan Anderson: Clearly, there But if you look at the real impact on growth, will be an impact if these prices continue to on domestic money markets, on financial skyrocket. It’s a very different situation if liquidity and so forth, the emerging markets coal is at $100 and oil is at $120 and food generally have sat this one out. There’s prices are at today’s levels than if they been almost no impact in China or the rest all triple over the next two or three years. of Asia, because although Chinese, Taiwanese, Eventually, high prices would start to and Korean banks were buying some hurt growth. mortgage-backed and subprime assets, they weren’t leveraging. Owning these assets Furthermore, this is not a China-specific in itself isn’t lethal, but rather the fact that issue. Chinese demand may be driving many institutions levered up 10 or 20 times energy prices up, but the Chinese aren’t the 10 McKinsey on Finance Autumn 2008

only ones suffering. High global prices What pressures are compelling them affect everyone, and in fact, China is not to do so? necessarily even the country with the highest exposure. Jonathan Anderson: It’s always been a stated policy goal. There’s a broad view Nor is it clear that we’re looking at a long- that countries are better off when they term environment of rising commodity have relatively free and open capital flows, prices. A lot depends on your supply outlook. but also that they want to take it slowly There are good arguments that oil may and gradually. Moving too quickly to cap- actually stay around $120 and $125 a barrel. ital liberalization is something that can Food prices may have jumped enormously be damaging: one of the key causes of the in the past 12 months, but they’re starting to Asian financial crisis at the end of the look “peakish.” Fertilizer prices are now 1990s was flinging open the doors and let- falling. Grain prices are falling. We could see ting money rush in at too rapid a pace. things stabilize or even fall off. There’s no guarantee that commodities will continue to In the meantime, allowing domestic go up. investors to seek better returns elsewhere helps reduce the volatility of wealth McKinsey on Finance: And after the next in China. If you lock them up at home, then few years? they are very exposed to big boom– bust cycles in the domestic economy. Jonathan Anderson: At the middle of the next decade, big demographic changes McKinsey on Finance: As we’ve just will start to kick in, bringing significant seen—China’s A-share markets have come structural changes to China’s industrial base. down by almost 50 percent over the Low-end light manufacturing will likely go past six months. In any other economy, that through wrenching structural shifts because would be a major event. Why, in China, wages are rising aggressively for unskilled did it almost go unnoticed? labor and there are shortages of skilled workers. This is one scenario the big multi- Jonathan Anderson: This is actually the nationals complain about very heavily. third big collapse of the Chinese equity market in the past 15 to 18 years, so in some China’s financial system will also go sense it is business as usual: this is a market through another set of wrenching changes in that goes up and down by enormous the next five to seven years. They’re prob- margins. Furthermore, China can have these ably going to open up the capital account on massive boom–bust cycles with such the external side, and banks, as a result, alarming regularity because the equity market will begin to see money leaving the system. is awfully small. If you look at the actual They’ll also start to see their margins free float—the traded shares, with market squeezed and a lot more volatility as they exposure, held by corporations and get back to areas like bonds and exter- households in China, excluding government nal capital flows. These all have the poten- holdings—it started at about 3 percent tial to destabilize. of financial wealth at the bottom of this cycle, in 2005. At its peak, in October McKinsey on Finance: Why will China 2007, it was up to about 15 percent of finan- eventually have to open a capital account? cial wealth—and now it’s come back Growth and stability in China: An interview with UBS’s chief Asia economist 11

down to around 10. These are not big cent nonperforming loans in the late 1990s numbers, and as a result, there are no big and early 2000s. wealth effects when this market goes up and down. They’ve since cleaned that up, but as long as bank finance is the primary fuel for the McKinsey on Finance: Do you see economy, there will be problems. That’s why China’s approach to equity markets and China’s been moving to open up its equity capital as a long-term liability? and bond markets. But the starting position is still pretty low, and it’s going to be Jonathan Anderson: It’s certainly an a long time before equities and bonds con- environment that raises risk profiles. Twenty tribute a meaningful amount to finance years ago, China’s socialist economy in China. didn’t have working equity or bond markets. Everything was done within the budget, McKinsey on Finance: How did policy through interbudgetary transfers. Since then, makers think about the role of equity all of the growth, all of the liberalization, markets in improving governance at big and most of the new investment has basically flagship companies? come from the banking system. Asset holders and borrowers had really no place Jonathan Anderson: The hope in the else to go—and no way to get out of 1990s was that all these marginal, not-so- the economy. So these big ups and downs good state companies could be listed, of overlending followed by a bust do and through the magic of equity ownership create big risks for the banking system. This they would suddenly improve and turn is why Chinese banks had 35 to 50 per- around. That turned out to be a false hope,

Education Career highlights Earned MA and PhD candidacy in economics UBS Investment Bank (2003–present) in 1990 from Harvard University • Managing director and head of Asia-Pacific Economics (2007–present)

• Chief economist for Asia (2003–07) Goldman Sachs (2001–03) • Chief China economist International Monetary Fund (1992–2001) • Resident representative in Russia

• Resident representative in China (1996–99)

Fast facts Jonathan Anderson Author of The Five Great Myths About China and the World Ranked highly among various broker polls including Asiamoney, Institutional Investor, TheAsset, and FinanceAsia Speaks fluent Mandarin Chinese and Russian 12 McKinsey on Finance Autumn 2008

and for the past ten years they con- but when companies prepare quarterly tinued to be marginal players with medio- reports to international standards for out- cre performance. side shareholders, this automatically ensures that investors have a clearer view Part of the reason is the state of the Chinese of the company’s strategy. I suspect that equity market, which has always been a until they listed abroad, many of these large heavily retail-oriented market of either large company managers did not know what private investors or small retail holders. a return on asset or a return on equity was Without the big institutional mutual funds and had never thought about what their or large institutional investors, it wasn’t cost of capital was. Now they have to answer an environment where outside owners could this question five times a day. It’s like exert much influence on the way companies a crash course MBA: it doesn’t necessarily were run. That’s changing over time, change anything immediately—but it as the mutual funds and large institutions can’t be bad. come in, but the investment industry is nowhere near where the government wants Perhaps more important is that such an IPO it to be, particularly in comparison with drastically eliminates the potential for major the United States and Europe. Because of misbehavior. At one time, many Chinese this, in part, the strategy now for listing companies were linked by strange holding larger state companies is more to push them structures, and whenever there were big abroad to go to the H-share markets— problems, managers could just shift assets to Hong Kong and to some extent to and liabilities around between balance Singapore and the United States, where they sheets. It was too easy to hide a lot of quasi- face a much stronger history of share- fiscal acts like speculative transactions holder activism. And of course, the interna- just by moving things around. That’s tional professional-services firms come gone now. in and clean up the balance sheets, so investors get much better visibility than they McKinsey on Finance: You mentioned would with a domestic listing. some wrenching structural changes in China’s future. How serious will those be?

Jonathan Anderson: The big issue ‘ In terms of fundamentals for the next couple of years, right now is rural migration. From, say, the emerging world is going to be where all the action is’ 1995 until 2003, an ever-increasing supply of young, unmarried workers came out of the interior and went to the manufacturing areas and the coast. This fueled McKinsey on Finance: Yet these Hong the rapid expansion of China’s light Kong IPOs are typically for 5 percent manufacturing, with wages that grew very or even less of a company that’s a subsidiary slowly—2, 3, 4 percent a year. The aver- of a giant state-owned parent company. age rural migrant was making perhaps $65 How can an IPO that small have a tangible to $70 a month in net cash wages. impact on management? But in the last three or four years, wages Jonathan Anderson: It won’t radically have picked up, growing at 10 to 15 percent change the way a company does business, a year, maybe even slightly faster, depend- Growth and stability in China: An interview with UBS’s chief Asia economist 13

ing on whom you talk to. Today, the average What that means is that China’s going to wage is $135 to $140 a month. Within start to price itself out of markets for things five years, at this pace, with the renminbi like sporting goods and textiles. It’s not moving, it’s going to be $300 a month. happening quite yet—nor will it be an abrupt change when it does. It isn’t easy to find Why the change? Because of demographics. 50 or 60 million people elsewhere who are China’s running out of young, cheap, single, going to work for cheaper wages. But rural labor. The one-child policy came we’re at the beginning of that turning point into effect about 30 years ago, so if you look where new investment is going elsewhere. at the under-30 demographic cohort, there’s Eventually, China’s share in all of those mar- actually a declining number of people under kets will fall—even as its competitive 30 every year. And with 100 million rural advantage further up the value chain con- migrants already working outside of their tinues to grow, such as in electronics home towns and villages, there’s not and technology. a lot more to drag out. The good news is the emerging world is As a result, wages are starting to rise. It’s not still growing at record rates, and even if you the end of the Chinese manufacturing take some of this gloss off the story, it’s story. But this is the rising part of the labor still a very vibrant place. We may not see supply curve—and it’s going to continue, the best market performance over the because the demographic pressures are going next six to nine months, but in terms of to be there for a long time to come. Vietnam, fundamentals for the next couple of India, Cambodia, and Indonesia are all years, the emerging world is going to be already lower than China in terms of wages. where all the action is. MoF That gap is going to widen very quickly.

David Cogman ([email protected]) is an associate principal in McKinsey’s Shanghai office, where Thomas Luedi ([email protected]) is a partner. Copyright © 2008 McKinsey & Company. All rights reserved. 14

The future of corporate performance management: A CFO panel discussion

Two leading CFOs agree that when global companies attempt to improve their performance, simple, transparent metrics are more important than theoretically pure ones.

With edgy investors warily watching every report, companies are under intense pressure to improve their performance. The challenge is all the greater for global companies, whose performance-management efforts must stretch across industries, geographies, and cultures.

Yet many performance-improvement efforts performance-management philosophy into fail because of excessive complexity, a lack the company. of transparency into the performance of the whole organization, or a disconnect between Michael Mack: We’ve long believed that performance measures and compensation we’re known for making great products, but and rewards. when we examined our performance back in 2000, we realized that if we were honest These are among the perspectives of a panel with ourselves, we haven’t always been of experts convened at McKinsey’s 2008 a great investment. And we wanted to make Global CFO Forum, in London. What fol- our business as great as our products. lows is an edited and abridged version of the discussion between panelists Alain So to start, we established what we called Dassas, the CFO of Nissan, and Michael shareholder-value-added [SVA] performance Mack, the CFO of Deere. Bertil Chappuis, a metrics, which are very much like the more partner in McKinsey’s Silicon Valley office, familiar metrics of economic value added moderated the discussion. [EVA] or economic profit. We also measured operating return on assets, though we adjust McKinsey on Finance: Michael, tell our targets as a function of volume—setting us about Deere’s journey to instill a new them higher if we’re in a higher-volume 15

environment—to recognize the operating can visualize. And there are very few leverage inherent in a business like ours. fancy financial calculations around these metrics in terms of how we calculate Ultimately, I think it’s fair to say that we economic profit. transformed our company from an operating perspective and certainly from a financial We also have been very transparent. You perspective. For example, prior to 2001 we can look in our annual report every year were in the bottom quartile in terms of since we adopted this, and we’ve shown return on invested capital, whether measured the calculations for the company total as well against peers or even very broad ranges, as by division. So there was nowhere for like the top 500 industrial companies in the underperformers to hide. And in fact, when United States. In fact, after we adopted we started to publish these numbers, we our initiatives to improve performance man- weren’t doing very well, and part of turn- agement, in 2001, we not only became top ing things around was highlighting what quartile; we were top decile by 2003—about needed to be improved. That was part of a four years before the more recent strength broader effort, around communications, in the global agricultural environment. We’ve that made a real difference—staying on point, also dramatically improved the efficiency on message, and relentlessly consistent in of our working capital—we turn our assets communicating with any audience, internal now about two-and-a-half times faster or external, about how this works and as a whole company than we did before. what we’re trying to do.

McKinsey on Finance: This wasn’t your McKinsey on Finance: Did you change first effort to improve performance. Why did the company’s compensation and rewards this effort work where others had not? in any way to support the shareholder- value-added goals? Michael Mack: I recall being personally part of an earlier EVA project that didn’t Michael Mack: Yes. We designed work, because it was too complex. If the a variable compensation scheme to reinforce point of these efforts was to talk a few the strategy. Basically, part of the bonus people in the finance department into sup- of every salaried employee in the company— porting your goals, a complex program about 25,000 people—is based on this might have been OK. But the idea is to per- operating-return-on-asset metric. meate deep into the organization, globally, and get people to behave differently. That We could, of course, have set quite different kind of effort has to be very simple goals for different business or for differ- rather than theoretically pure. I think we ent regions, based perhaps on different risk have accomplished that. For example, as factors, different specifics of the markets. I mentioned, we look at operating return on But we opted not to do that. And while in assets, rather than return on invested capital, some ways this is not as pure theoreti- because we thought the former was more cally, getting it 80 percent right but well intuitive to people who work in factories understood and well executed is far than those who work in sales branches. better than having it 100 percent right They know what a receivable is; they know theoretically. And in retrospect, that what inventory is. So it’s something they was the right decision. 16 McKinsey on Finance Autumn 2008

The panelists

Alain Dassas is CFO of Nissan Motor (2007–present). Michael Mack, senior vice president and CFO of Prior to joining Nissan, he spent ten years at Renault, in Deere (2006–present), joined the company in 2001 as several roles, including president of the Renault vice president of marketing and administration. He Formula 1 Team and senior vice president of finance. is chair of the Iowa State University Engineering College Alain serves on the board of directors at RCI Banque, Industrial Advisory Council and is a registered Renault Finance, and Renault Samsung Motors. professional engineer.

One of the consequences is that you can go reinvest in the business, even when this anywhere in the company—whether it’s exceeds the cost of capital. And I think that India, China, the United States, or Russia— is how one can balance the short-term and even people deep in the organization requirements and work on our efficiency, as can articulate how their particular division well as the longer-term requirements to or unit is performing against this metric, reinvest in the business and achieve growth. because whether or not they are going to get a bonus depends on how they’re performing. McKinsey on Finance: Alain, Nissan formerly used a return-on-capital approach The second compensation metric that but recently switched to free cash flow. reinforces the SVA approach is based on What’s your experience, relative to what economic profit; it’s a medium-term Mike described? incentive that affects about 6,000 employees. So performance incentives are not just for Alain Dassas: Until a few years ago, a few employees at the top; they go pretty Nissan was managed by volume, which was deep in the organization, and this is based not exactly the best way to get profitabil- on growing the business as well. It’s not just ity. Then it was managed by profit. Then we the return on assets or return on invested switched to ROIC, which is still one of capital—it’s based on raising the bar every our major metrics. But as Michael said, it’s a year and some absolute number for eco- bit of a complicated measure, especially nomic profit. That creates an incentive to to explain to the whole company. So The future of corporate performance management: A CFO panel discussion 17

we decided to switch to the more familiar free cash flow, compared with revenue, was concept of cash. Everybody inside the in 2007, and the goal from 2008 to 2012 company understands what cash is—and is to reach 5 percent of revenue. The way we it’s fairly straightforward from under- do this is very pragmatic. It covers all standing cash to understanding cash flow activities of the company in our four regions,1 and free cash flow. and we’re trying to focus the responsibility on every factor that can generate cash or use The idea is to find a metric that can be the cash. We want to avoid being overstretched, basis for evaluating the financial perfor- but we want to be sure that we cover as mance of our company, and free cash flow is much as possible—and that includes a lot of a very comprehensive measure of all the items that are outside the working capital activity of the company—P&L, balance sheet, and capital expenditures. and every item on the total balance sheet. It’s also useful to improve visibility into the It’s not yet a measure for evaluating man- short-term performance of the company. agement performance, but it will be Our finance function probably has not been next year. And as Michael said, we want to as visible as those in some Western com- involve not only the top 10 to 20 execu- panies. Using cash flow is one way to make tives but rather 1,500—which is a large part everyone aware of the importance of certain of the company’s management—and financial ratios, both internally and externally, to include a free-cash-flow component in

for investors and financial analysts. their evaluation. MoF

McKinsey on Finance: How is that implemented on a global scale?

Alain Dassas: We started, only a few months ago, to have the company focus on free cash flow, and we’ve tried to have common principles to evaluate cash flow 1 Europe, Japan, United States, and the rest of the world. and free cash flow. We know what our

Why cross-listing shares doesn’t create value

Companies from developed economies derive no benefit from second listings in foreign equity markets. Those that still have them should reconsider.

Richard Dobbs and Conventional wisdom has long held that companies cross-listing their shares on Marc H. Goedhart exchanges in London, Tokyo, and the United States buy access to more investors, greater liquidity, a higher share price, and a lower cost of capital. In the 1980s and 1990s, hundreds of companies from around the world duly cross-listed their shares.

Yet this strategy no longer appears to make Boeing and BP, have recently withdrawn sense—perhaps because capital markets their listings. have become more liquid and integrated and investors more global, or perhaps Whatever benefits companies might once because the benefits of cross-listing were have derived from cross-listing, our analysis overstated from the start. From May shows that in general it brings few gains 2007 to May 2008, 35 large European com- but significant costs, at least for most companies, including household names such panies in the developed markets of as Ahold, Air France, Bayer, British Airways, Australia, Europe, and Japan. Danone, and Fiat, terminated their cross- listings on stock exchanges in New York as Limited benefits—or none the requirements for deregistering from Previous research2 attributes several US markets became less stringent.1 These categories of benefits to cross-listing. We moves represent the acceleration of an investigated each of them to see if it

1 Since March 2007, foreign companies have existing trend: over the past five years, the still applies now that capital markets have been allowed to deregister with the US number of cross-listings by companies become more global. Securities and Exchange Commission if less than 5 percent of global trading in their based in the developed world has been shares takes place on US stock exchanges. steadily declining in key capital markets Improved liquidity 2 For example, see Craig Doidge, Andrew Karolyi, and René M. Stulz, “Why are foreign both in New York and London (Exhibit 1). Although liquidity is difficult to measure, firms that list in the U.S. worth more?” On the Tokyo Stock Exchange, too, the trading volumes of the cross-listed shares Journal of Financial Economics, 2004, Volume 71, Number 2, pp. 205–38. some well-known companies, such as (American Depositary Receipts, or ADRs) MoF 2008 Cross-listings

Exhibit 1 of 4 19 Glance: The number of cross-listings from companies based in developed markets is decreasing. Exhibit title: Different directions

Exhibit 1 Foreign listings on NYSE Different directions Sarbanes–Oxley 550 The number of cross-listings from companies 500 based in developed markets is decreasing. 450 400 350 Developed markets1 300 250 200 150 Emerging markets Number of foreign listings 100 50 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Foreign listings on the London International Main Market (IMM)

800 700 600 500 400 Developed markets1 300 200

Number of foreign listings 100 Emerging markets 0 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007

Developed markets: Australia, Canada, Japan, New Zealand, United States, Western Europe. Source: Datastream; www.londonstockexchange.com; www.nyse.com (–)

of European companies in the United States listed companies receive more coverage from typically account for less than 3 percent analysts, but the reason, in part, is that of these companies’ total trading volumes. cross-listed companies are on average larger. For Australian and Japanese compa- After correcting for the impact of size, we nies, the percentage is even lower. We did found that cross-listed European companies not analyze the trading pattern for UK are covered by only about 2 more analysts or Japanese secondary listings, but the US than those that are not cross-listed—a very finding hardly suggests that they do modest difference, since the average much to improve liquidity. number of analysts covering the 300 largest European companies is 20 (Exhibit 2). More analyst coverage Such a small increase is unlikely to have any Academic research indicates that compa- economic significance. nies get better or more analyst coverage when they cross-list in the United States—and Broader shareholder base that potential investors therefore get better In an age when electronic trading provides information. It is indeed true that cross- easy access to foreign markets, the argument 20 McKinsey on Finance Autumn 2008

that foreign listings can give companies the world. Those higher standards lent a broader shareholder base no longer credence to the argument that companies holds. Furthermore, a foreign listing is not applying for cross-listings in the United even a condition, let alone a guarantee, Kingdom or the United States would inevita- for attracting foreign shareholders. It may bly disclose more and better information, improve access to private investors, but give shareholders greater influence, and pro- as capital markets become increasingly global, tect minority shareholders more fully— institutional investors typically invest in thereby improving these companies’ ability stocks they find attractive, no matter where to create value for shareholders. However, those stocks are listed. One large US inves- other developed economies, such as the tor—CalPERS—has an international equity continental member states of the European portfolio of around 2,400 companies, for Union, have radically improved their example, but less than 10 percent of them own corporate-governance requirements. have a US cross-listing. In fact, because As a result, the governance advantages of better trading liquidity in the home mar- once derived from a second listing in the ket, institutional investors often prefer United Kingdom or the United States to buy a stock there rather than the cross- hardly exist today for companies based in listed security. developed countries.

BetterMoF 2008 corporate governance Access to capital UKCross-listings and US capital markets may once have When companies can’t easily attract large hadExhibit higher 2 of 4corporate-governance standards amounts of new equity in their home thanGlance: their In the counterparts FTSEuroﬁrst 300in other Index, partsUS cross-listed of companiesmarkets, get it makesonly slightly sense to issue new equity higher coverage by analysts. Exhibit title: Comparable coverage

Exhibit 2 FTSEuroﬁrst 300 Index, Dec 2005 Cross-listed companies Noncross-listed companies Comparable coverage Regression line, cross- Regression line, non- listed companies cross-listed companies In the FTSEurofirst 300 Index, US cross- 50 listed companies get only slightly higher coverage by analysts. 45

15 Coverage, number of analysts

0 1.0 3.0 10.0 30.0 100.0 300.0 Company market capitalization, € billion Why cross-listing shares doesn’t create value 21

in foreign ones through a cross-listing. As cross-listing their shares in the United investors increasingly come to trade around States doubled, on average, their US acquisi- the world, however, local stock markets tion activity over the first five years after have provided a sufficient supply of equity the cross-listing.4 There may thus be a real capital to companies in the developed benefit fromUS cross-listings for companies economies of the European Union and Japan. planning US share transactions. A UK or US cross-listing therefore does not appear to confer a compelling benefit. Significant costs—and few gains— Besides, three-quarters of the US cross- for valuations listings of companies from the developed Maintaining an additional listing generates economies (through ADRs) have actually extra service costs—for example, fees for 3 This figure is based on 420 depositary receipt issues on the NYSE, NASDAQ, and never involved the raising of any capital in the stock exchanges—and additional report- AMEX from January 1970 to May 2008 MoFthe United 2008 States.3 What they did was to ing requirements, such as 20-F statements (adrbny.com). Cross-listings 4 Pasi Tolmunen and Sami Torstila, “Cross- provide foreign companies with acquisition for ADRs. Although these service costs tend listings and M&A activity: Transatlantic Exhibitcurrency 3 offor 4 US share transactions. As to be minor compared with the cost of evidence,” Financial Management, 2005, Volume 34, Number 1, pp. 123–42. Glance:academic On average,research companies has shown, don’t companies suffer negative sharecompliance price movements (particularly after the with announcement US regulations of a delisting. Exhibit title: Investors don’t care

Exhibit 3 Average cumulative returns to shareholders before/after delistings1 announced from Dec 31, 2002, to Dec 31, 2007, % Investors don’t care Total returns to shareholders (TRS) Involuntary delistings2 Excess TRS relative to MSCI World Index On average, companies don’t suffer negative 5 share price movements after the announcement 4 of a delisting. 3 2 1 Delistings 0 5 –1 –2 4 –25 –20 –15 –10 –5 0 5 10 15 20 25 3 Days before/after announcement 2 (announcement date = 0) 1 0 Voluntary delistings –1 5 –2 –25 –20 –15 –10 –5 0 5 10 15 20 25 4 3 Days before/after announcement 2 (announcement date = 0) 1 0 –1 –2 –25 –20 –15 –10 –5 0 5 10 15 20 25 Days before/after announcement (announcement date = 0)

Sample: delistings by foreign companies in developed markets from London International Main Market, NASDAQ, or NYSE, of which were voluntary and involuntary. For example, delistings occurring as result of bankruptcy, mergers, or takeovers. Source: Bloomberg; Datastream; London Stock Exchange; NYSE; Reuters MoF 2008 Cross-listings Exhibit 4 of 4 22 McKinsey on Finance Autumn 2008 Glance: Companies from developed markets do not appear to beneﬁt from US cross-listing.1 Exhibit title: No impact on valuation

Exhibit 4 Developed-market companies No impact on valuation US-listed companies Non-US-listed companies

4.5 30 Companies from developed markets do not 1 4.0 appear to benefit from US cross-listing. 25 3.5 2

1 3.0 20 2.5 15 2.0 Tobin’s Q Tobin’s 1.5 EV/EBITDA 10 1.0 5 0.5 0.0 0 0 20 40 60 80 0 20 40 60 80 ROIC, exclusive of goodwill,3 % ROIC, exclusive of goodwill,3 %

Tobin’s Q is dened as the market value of a company divided by the book value of its assets: (total assets – book value of equity + market value of equity) ÷ total assets at year-end. EV (enterprise value) at year-end divided by EBITDA (earnings before interest, taxes, depreciation, and amortization). Average ROIC (return on invested capital) from to . Source: Bloomberg; Datastream; NASDAQ; NYSE; McKinsey analysis

such as Sarbanes–Oxley), they have grown that the key drivers of valuation are growth enormously over the last few years. and return on invested capital (ROIC), British Airways and Air France, which both together with sector and region. A cross- recently announced their delisting from listing has no impact (Exhibit 4).6 US exchanges, estimate that they will save around $20 million each in annual ser- The skinny on emerging markets vice and compliance costs. This sum prob- We are still analyzing the benefits and costs ably doesn’t include the time executives of dual listings for companies in emerg- spend monitoring compliance and disclosure ing markets, where the advantages and for the US market. disadvantages vary more from country to country than they do in the developed As for the creation of value, we haven’t world. Our analysis so far has uncovered no 5 Involuntary delistings occur, for example, as a found that cross-listings promote it in any clear evidence of material value creation result of bankruptcies, mergers, and takeovers. 6 Using multiple regression, we estimated to material way. Our analysis of stock mar- for the shareholders of these companies. We what extent a cross-listing influenced a company’s valuation level as measured by ket reactions to 229 delistings since 2002 on found neither anything to suggest that the ratio between enterprise value and UK and US stock exchanges (Exhibit 3) cross-listing has a significant impact on invested capital (Tobin’s Q) and the ratio between enterprise value and earnings before found no negative share price response from their valuations nor any systematically interest, taxes, depreciation, and amortization the announcement of a voluntary delisting.5 positive share price reaction to their cross- (EBITDA). Of course, we took into account the 7 company’s return on invested capital (ROIC), Our comparative analysis of the 2006 listing announcements. consensus growth projections, industry sector, valuation levels of some 200 cross-listed and geographic region. 7 This finding might be explained by the much companies, on the one hand, and more Nonetheless, we did uncover some findings smaller size of the sample of companies than 1,500 comparable companies without specific to companies from the emerging from the emerging world and the much higher average volatility of their equity returns. foreign listings, on the other, confirmed world. Cross-listed shares represent as much Why cross-listing shares doesn’t create value 23

as a third of their total trading volume, Companies from developed economies with for example. Furthermore, some of these well-functioning, globalized capital mar- companies have succeeded in issuing kets have little to gain from cross-listings and large amounts of new equity through cross- should reconsider them. Companies from listings in UK or US equity markets— emerging markets may derive some benefit,

something that might have been impossible but the evidence isn’t conclusive. MoF at home. Last but not least, compliance with the more stringent UK or US corporate- governance requirements and stock mar- 8 See Roberto Newell and Gregory Wilson, “A ket regulations rather than local ones could premium for good governance,” The McKinsey Quarterly, 2002 Number 3, pp. 20–3. generate real benefits for shareholders.8

The authors wish to thank Martijn Olthof and Stefan Roos for their contributions to the research underlying this article, as well as Professor Tim Jenkinson, of Oxford University’s Saïd Business School, for his advice on methodology.

Richard Dobbs ([email protected]) is a partner in McKinsey’s Seoul office, and Marc Goedhart ([email protected]) is a consultant in the Amsterdam office. Copyright © 2008 McKinsey & Company. All rights reserved. 24 Podcasts

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