Kevin Hung Blog

Parking Space

Parking facilities in Manhattan – scarcity of space inspires out of the box thinking. Other points of consideration – how is the storage and retrieval of vehicles scheduled in order to minimize customer wait-time?

Perfect Competition

I was recently in Cocoa Beach, Florida and visited two local "big box" surf shops. Interestingly, these two are located right next door to each other and only separated by a narrow street. Local legend as I discovered was that a long time manager of one of the shops, left his position disgruntled and decided to open a shop which directly competed with his former employer. The result is two magnificent shops always trying to "one up" each other in attempts to win new customers. This example really does demonstrate that with industry competition, the customer always benefits in that as a result of these two surf shops' on going rivalry, there is free parking, both stores are open 24 hours a day, prices are fair and merchandise selection is extraordinary. I'm not sure if any of these amenities would exist if only one of these stores existed.

Our Economy

Given all the financial turmoil in the news, I was reminded of an article I wrote in March 2007 for a job interview.  As the debates continue on over the $700 billion dollar bailout plan, I thought it would be interesting to share what I wrote over a year ago here. The topic I was assigned was basically to write about how the economy will affect consumers in the coming year.

China’s Influence on the US Economy
Two significant global economic forces which will affect consumers in coming years are the United States’ massive trade imbalance with China, and the currency peg on which both countries trade.  As a result, we may be heading into an inflationary time period with higher prices, interest rates and more difficult access to credit. As always, financial service companies can help their customers weather these uncertainties with products and services that help them actively save rather than spend.

Made in China
In case you haven’t heard, China has arrived on the world stage and it plans to stay awhile. We’ve all seen the staggering numbers: double digit year over year GDP growth with 2006 clocking in at 10.5%, (The Economist Intelligence Unit), 1000 new cars added per day in Beijing (Globe and Mail 01.20.07), >$1  trillion in foreign reserves (International Herald Tribune 03.05.07). 

But here’s another number that has only recently begun to get some publicity (and probably not coincidentally due to 2008 being an election year): $763 billion (International Herald Tribune 02.13.07). That’s the record breaking US trade deficit in 2006, about a quarter of which (roughly $200 billion) is solely with China.  In fact, this issue has received so much attention that it was even made a topic of  “The Word” on the highly acclaimed and irreverent nightly program “The Colbert Report,” when China was described as our “Frenemy” (Comedy Central, The Colbert Report 2.13.07)

“Making these purchases that weren't reciprocated by sales, the U.S. necessarily transferred ownership of its assets or IOUs to the rest of the world. Like a very wealthy but self-indulgent family, we peeled off a bit of what we owned in order to consume more than we produced"
- Warren Buffet – Berkshire Hathaway Letter 2006

China: Supplier, Competitor and Banker to the US
Ever since China turned on its economic engine more than 25 years ago, its goods have been sold in the US and therefore competed with products made domestically. With lower costs and an abundant labor force, China has been able to compete in our market on price and in the long run, put many domestic industries out of business. This is further enabled by the roughly 8 RMB=$1 currency peg on which our countries trade.  If left to float “naturally”, with all the sales China is making, its currency, the RMB, or “yuan” should have gained value and therefore, resulted in more expensive “Made in China” products in the US. However, in order to keep their products inexpensive, China has actively managed the value of its currency to maintain its competitive position.  While we lost jobs and shuttered factories, we gained and became dependent on China as a reliable source of inexpensive manufactured goods to feed our consumer lifestyle.  As a result, China has been able to earn a significant amount of US dollars in its foreign reserve accounts. 

Meanwhile in the past few years, American consumers due to low interest rates, easy access to credit and a controlled inflation environment fell into a comfortable habit of spending beyond our means (think credit card debt, buying houses we can’t afford). Simultaneously, our government has also spent more than it takes in each year.  So how has all this spending been possible without any kind of inflation or hike in interest rates?

Remember all that money that China’s been earning from selling us products? China (as well as other foreign lenders) has been lending us the money to essentially run our economy. In a perverse cycle, we borrow money from China in order to fund our consumption of “Made in China” goods, which then enables China to lend us even more money.

“As long as I can still get my everyday low prices, who cares?”
For sure, all this talk about trade policy and deficits is usually dismissed as something for our elected leaders in Washington to worry about. However, the average consumer is affected by this imbalance more than they know. 

With so much overspending and debt underpinning our currency, the dollar is starting to lose its value as its purchasing power decreases on anything that is not made in China.  Is it any wonder why prices at the gas pump have gone up in recent years while goods at Wal-Mart and Target continue to be inexpensive? (To be sure, oil prices are determined by a variety of factors. However, China’s energy needs requires it to import so much oil that by next year, it will overtake the US as the largest importer of oil. Given that oil is sold in US dollars, China’s recent oil demand has played a part in the increase in gas prices.)  Want another shocking reality check? Go to your local mall and compare the prices of items not made in China. Or take a trip to Europe and see how little a dollar buys these days.  The US dollar, once the foreign reserve currency of choice for central banks around the world is beginning to lose its strength and if the situation doesn’t change, we as Americans in the most extreme case may be left holding currency worth only the paper on which it is printed. Remember, each US dollar is not backed up by anything these days (you’d have to go back over 30 years to get your dollar’s worth in gold) but the “faith and credit of the United States government”.  If this is eroded, it can (again in the extreme case) lead to a complete meltdown of our entire economic system.

“Central banks around the world are continuing to diversify their reserves by cutting their dollar holdings”
-Reuters, 02.26.07

Of course we won’t let the extreme happen. However, one or more of the following will most likely occur in the coming years to begin rectifying the enormous hole we have managed to dig ourselves into as a country:

•    Interest rates will rise to curb our spending and easy access to credit will be a thing of the past
•    Pressure from Washington to Beijing to revalue the yuan against the dollar will increase prices of goods made in China     (practically every manufactured consumer good these days)
•    As government spending is expected to rise again starting in 2008 (the beginning of 78 million baby boomers retiring, collecting Social Security and Medicare benefits), our government may just print more cash to finance our country’s spending (in what economists call “monetizing the debt”) which will also lead to inflation

Financial Service Companies: Help Your Customers Prepare for Uncertainty
With great financial uncertainty always comes great opportunity. Financial planners and economists have been urging restraint to consumers during our recent spending binge and to also save more. In fact saving anything at all would be an achievement for us at this point -  2005 marked the first time since the Great Depression that our country’s saving rate was less than zero (Associated Press 02.01.07). 

Personal finance and money management continues to be surprisingly absent in school curriculums.  As with dieting and nutrition, there is too much information that exists regarding personal finance. However without any guidance or handholding, almost all consumers end up knowing what they should do but in reality, find it difficult to break out of spending habits and adopt new, more fiscally responsible behaviors. 

Make Saving Automatic
Financial service companies can create products that enable saving automatically, leveraging consumers’ inaction towards these routines. A few products already exist:

•    Bank of America’s “Keep The Change” Credit Card leverages consumers’ spending habits and converts these actions into savings. Essentially, each charge a customer makes on this card, BOA will round up to the nearest dollar and deposit the difference into an interest bearing savings account. In addition, BOA will match all contributions for the first three months.

•    American Express “One” Card also leverages spending habits and deposits funds each time a cardholder makes a transaction. The difference between this product and the BOA one is that the cardholder sets the savings goal and the time period in which the goal should be reached. American Express then adds the appropriate amount each time a transaction is made.

•    ING Direct is a bank that in the words of its CEO Arkadi Kuhlman “is leading Americans back to savings”. The bank promotes the virtues of savings and financial security and only offers simple uncomplicated products that promote savings (such as savings accounts, CDs and mutual funds).  It does not offer “spending” products such as credit cards or auto loans. How has this kind of a bank performed in such a crowded, highly competitive space and in a high consumption culture?  The results speak for themselves: The bank started in September 2000.  In 2004, the company reported a pre-tax profit of $250 million with only 1,000 employees. By 2005, it had signed up 3.5 million customers with total deposits of over $40 billion.  At its current rate, each month it signs up 100,000 new customers (40% through word of mouth) and takes in $1 billion in deposits. (Mavericks At Work – Taylor and LaBarre 2006)

Other Opportunities to Consider

•    Points for Saving: Just as in the current space, financial service companies create incentives to spend through points and frequent flier miles for each dollar spent on a credit card, why not turn it around and offer points for each dollar saved in a savings account?

•    Partner with Customers to control spending on card by blocking transactions at certain types of merchants. Customers are cutting up their cards in order to “protect” themselves from spending. Rather than losing the customer’s business completely, why not work with them to learn if there are certain purchases the customer feels are okay and some on which they want to curb their spending? Can spend limits be placed on certain transaction types?

•    Invest in human customer service: Focus customer service calls on customer service (i.e. don’t try to fix their problem as quickly as possible so you can sell them more stuff). After all, they have entrusted you with their money and their spending and they really need you in these uncertain times. Get good service reps, not the cheapest possible. Remember, these people will be representing your company whenever a customer calls in. Each opportunity to talk with a customer is a chance to create goodwill and cement your relationship as well as tap into a goldmine of feedback.

You may have to cut into your earnings today with these ideas. However what you will gain in return, if you are able to help customers save and handhold them through the financially uncertain atmosphere we may enter soon, is their loyalty, great word of mouth buzz, and the ability to stand out in an industry that has recently been seen in an unfavorable light.