The weekly newsletter for everyone interested in barter--the world's most versatile business tool!

November 12, 2002

Written by Bob Meyer, Editor of BarterNews

Three Government-Backed Barter Companies In China Slated To Handle Billions In Idle Inventories

In early 2003, three government-backed companies will be formally inaugurated, they are Shanghai Barter Trading Co., Shanghai Barter Electronics Business Co., and Shanghai Yixie Trade Development Co.

They have invested 6 million yuan (US$723,000) in the Shanghai Yixie Trading Center. And the center's willingness to accept barter deals is a first for China's mainland.

Initial exhibition space is 10,000 square meters (eventually reaching 30,000 square meters) and the trading center can house about 400 tenants. There will also be an Internet matchmaking site.

China's idle inventories were valued at 4.8 trillion yuan (approximately US$500 billion) last year, the prime targets being less-developed countries shopping for bargains.

Barter's Acceptance Growing In India And Vietnam

India's commercial trade exchange industry is estimated to be approximately 60 crore within a span of two years. It is expected to explode to 500-700 crore by March 2005, according to the October 30 issue of Business Standard. (The rupee is the chief monetary unit of India, and 10 million rupees equal a crore.)

Vietnam has held its first bilateral negotiations for World Trade Organization (WTO) membership, with a delegation from the European Union (EU). The November talks in Hanoi discussed barter mechanisms and focused on opening up markets for industrial and farming products as well as services.

Vietnam hopes to join the WTO by the end of 2004. To that end it will hold talks with 30 countries, 20 of which have already agreed to start bilateral negotiations.

"Transfer Pricing" Another Questionable Corporate Practice

Two finance professors, Simon J. Pak of Pennsylvania State University Great Valley and John S. Zdanowicz of Florida International University, have been studying the practice of "transfer pricing" where corporations move income out of the U.S. and into the hands of foreign affiliates. It's a means of evading taxes and is common to criminal money-laundering operations.

Under such pricing schemes, a U.S. company purchases a product at an inflated price from an overseas subsidiary, effectively keeping the money within the corporation while vastly reducing its taxable profit. Examples would include buying lawn-mower blades from Australia for $2,326 each, importing cotton dish towels from Pakistan at $153 each, tweezers from Japan at $4,896 a unit, and plastic buckets from the Czech Republic at $973 each.

Similarly, a manufacturer can write off losses from selling a product overseas at an undervalued price, so the profits are retained by the overseas partner. Examples are missile launchers sold to Israel for $52 a unit, clinical thermometers to Germany for 6 cents each, automated teller machines to France for $97 apiece, and bus and truck radial tires to Britain for $11.74 each.

The new study by Pak-Zdanowicz says such implausible pricing was used last year to avoid paying $53 billion in U.S. taxes.

Given such business ethics, in conjunction with the October 29 "Stealth Pay" story showing the incredible amount of insider-loans, is disconcerting.

Youngsters See Lying, Cheating As Formula For Success

In fact, if you think ethical standards of business management is low today, just wait! That's what was concluded by Michael Josephson, whose Marina del Rey (CA)-based Josephson Institute of Ethics surveyed 12,000 young people on the subject.

Researchers found that 74% of the students said they had cheated on an exam in the last year. And 43% of the respondents weren't ashamed, but downright proud of it, agreeing with the statement, "A person has to lie or cheat sometimes in order to succeed."

To Josephson, a lawyer and onetime teacher, the survey reflects a general decline of ethics in America. And, he contends, the implications for business are great as the atmosphere of deception is destructive to the economy.

Robert Arnott, chairman of Pasadena fund-management firm First Quadrant, agrees. His firm has calculated that outright fraud and deceptive-accounting falsely inflated earnings by nearly 50% in recent years for the Standard & Poor's list of America's 500 largest and best-known firms.

(The widely watched S&P 500 index reported that its companies had aggregate earnings of $52 a share instead of a more accurate figure of $35 a share...which drove the whole stock market higher.)

Josephson's survey shows a glimmer of hope, in that the vast majority of students who responded to his survey acknowledged that their parents wanted them to do the right thing. Let's hope the corporate world shapes up and rewards integrity too.

Ubiguitousness Of Barter In U.S. Continues To Expand

Last week's lead story (The Nilson Report) on the amount of barter taking place around the globe was impressive, but in the total context of how this powerful business tool is used we never seem to cover every aspect of the tradeoffs taking place in our economy.

One such example is the "Incentive Package" that states use to lure large manufacturers. DaimlerChrysler recently accepted a $320 million incentive package from Georgia. The car manufacturer will build a $750 million plant on 1,500 acres just miles from Savannah's ports and airport.

It doesn't stop with the states, as more and more cities are competing for revenues. So we see car dealers, hotel builders and major department store developers being the recipients of generous barter offers. Municipalities need these businesses to generate sales tax revenues, so they'll trade land (often acquired through their powers of condemnation) in exchange for major retailers locating within their regions.

Barter Accounts For 10% Of Web Advertising

Industry trade group Interactive Advertising Bureau and consultancy PricewaterhouseCoopers reported in their quarterly survey, IAB Internet Ad Revenue Report, that sales in the second quarter reached $1.46 billion.

Major web sites are raking in the lion's share of the advertiser dollars, with the top 10 media companies (including Yahoo, MSN, and AOL) accounting for 76% of ad spending.

Of all deals, 90% were cash and 10% barter, according to IAB.

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• The Caribbean is gasping for air as its # 1 industry, tourism, is having a tough time. Overnight hotel stays in the Dominican Republic are down 9.1%, and cruise-ship visitors in Jamaica fell 11.2% in the first half of the year.
  
• Non-farm productivity for the last 12 months (September to September) in the U.S. grew at 5.3%, its fastest rate in 19 years! Economists have attributed the gains to increased efficiencies from computers and the Internet, as well as the fact that employees remaining after a wave of layoffs tend to be more skilled.
  
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• The International Accounting Standards Board (IASB) has outlined a proposal requiring non-U.S. companies to treat stock options as an expense. It's a move that U.S. standard setters (the Financial Accounting Standards Board) will use as a starting point for reviewing their own stock option rules.

  The IASB proposal, which would take effect in 2004, would require all companies to value share options at the moment they are granted, and to treat them like any other business expense. Many U.S. companies already have voiced their opposition to what international rule makers are proposing.

  Still, there has been a remarkable shift in attitude over the past year, following the collapse of Enron Corp. and the demand for better financial reporting. At least 110 U.S. companies this year have said they would begin expensing options.

• The Carnival-Princess union will see Carnival cruises increasing its dominance of the fast-growing cruise industry...together, the companies will own 73 ships and nearly 114,000 beds, or more than 43% of the $11 billion world cruise market in 2003. (Royal Caribbean would remain a distant second, with 27 ships and 56,000 beds, or about 24% of the market.)
  
  Some travel agents, mindful of devastating commission cuts by airlines, are worried about Carnival's expansion. Cruise lines still pay big commissions to agents, who book the majority of cruises, but Carnival's hold on the market could mean some changes are coming.

• The yearly rent in an average U.S. shopping mall is about $28 a square foot. New York is the world's most expensive retail market at $700 a square foot, easily surpassing Paris's Avenue des Champs-Elysees, at $577 a square foot, the world's most expensive retail market outside the USA. Next came Hong Kong's Causeway Bay area at $500 a foot. (In March, British luxury retailer Asprey signed a lease for $1,200 a square foot in Trump Tower on Fifth Avenue.)