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QUEST MEANS BUSINESS
ECB Growth Warning; Rates Unchanged; Repositioning Business in Light of Economic Reality; Starbucks Tax U-Turn; UK Response to Starbucks Decision; Euro Falls Sharply; Make, Create, Innovate: Making Liquid Energy Out of Air
Aired December 6, 2012 - 14:00 ET
THIS IS A RUSH TRANSCRIPT. THIS COPY MAY NOT BE IN ITS FINAL FORM AND MAY BE UPDATED.
RICHARD QUEST, HOST: Draghi's drag to the economy. The ECB president today announced a slash forecast for economic growth.
Ground down. Starbucks caves in to pressure over its tax affairs.
And the return of the Mac. Apple says some will be made in the US.
I'm Richard Quest. I mean business.
Good evening. Weakness, uncertainty, and more downside risk. Europe's central bank says the euro area is in for another tough 12 months. It has cut growth forecasts both for this year and for 2013. Just look at the forecast cut. The best-case scenario, just 0.3 percent growth in the eurozone next year. The ECB president, Mario Draghi, says the hard times will be here for a while to come.
(BEGIN VIDEO CLIP)
MARIO DRAGHI, PRESIDENT, ECB: The economic weakness in the euro area is expected to extend into next year. In particular, necessary balance sheet adjustments in financial and non-financial sectors and persistent uncertainty will continue to weigh on economic activity. Later, in 2013, economic activity should gradually recover.
(END VIDEO CLIP)
QUEST: Mario Draghi. Both the ECB and the Bank of England left rates unchanged. The BOE left rates at half of one percent, the ECB at three quarters of a percent. The ECB also said it would continue its policy of refinancing with full allotment, its own version, if you like, of some form of quantitative easing.
So, that's the scenario. It comes on top of the chancellor of the exchequer in the UK, with his own higher borrowing, lower economic growth forecast for the UK economy, and the position and picture is clear. Europe once again is stuck in the middle of the recession or stagnant growth.
Joining me now, Sir Martin Sorrell, chief executive of the advertising firm WPP. Martin, I'm not exaggerating here, and I've seen your comment, when you say -- and I've seen your comment that -- how worried you are about the situation in Europe.
MARTIN SORRELL, CHIEF EXECUTIVE, WPP: Yes, I've been slaving over a hot budget here in New York, Richard, and broke off to speak to you, and the patent that President Draghi painted, the president of the ECB, is pretty much what we see for next year.
Western Europe, I draw a distinction between Western Europe and Eastern Europe, certainly Germany. Poland has been under pressure, but I think will be pretty good with its shale oil. It's not difficult to extract, but they have it. And Russia, of course, with its energy resources, and we're very bullish on Russia.
So, the axis of -- if that's the right word to use -- of those three countries I think is very powerful and is very positives, certainly in the short to medium term, and maybe even longer term. But Western Europe, meaning France, Italy, and Spain in particular, it's very tough sledding, and the UK.
The message from Draghi and the message from the chancellor yesterday, it's pretty much the same. This is a decade of slow growth. We're halfway through it. Hopefully we are halfway through it, and there's going to be another three, four, five years of tough stuff until we get out of it around 17, 18, as the chancellor said yesterday.
QUEST: So, what is it that chief execs like you and the clients that you speak to, your clients, who are, let's face it, are in every sector of the economy, what is it you want?
SORRELL: Well, it's -- well -- I think the honest answer is, Richard, that we just have to fight our way through this, because it's very difficult, given the excesses of the past, given the over expansion, the over inflation of the money supply.
The problems that we have which culminated, really -- they started in August of 2007 in the United States, with the subprime crisis and really were topped out by the Lehman crisis of September 2008, really it's going to take a long time for us to get through that.
And one of the things we have to do is to rebalance the businesses that we try to run. In our own case, it's quite clear, it's the BRICs and next 11, is Brazil, Russia, India, China, and the next 11 countries.
I was in India the week before last, I was in Mexico this week. Those are two countries' whose GDP are growing, Richard, by 5 percent, and our businesses are growing by 10 or 15 percent. So, we have to reposition our company that way.
And also, you know about digital and new media. We have to reposition our businesses in those areas, too. And those areas, even in Europe, Richard, are strong. So, as I look at WPP and as I look at the budgets for next year, what we have to do is gun up our --
QUEST: All right.
SORRELL: -- it's a third of our business is the BRICs and next 11. We have to be more. And digital is a third. It has to be greater.
QUEST: We're going to be talking after the break about Starbucks' decision to pay --
QUEST: -- to pay -- I was going to say to pay their tax, but they would say they're making a contribution to British society. Whichever way -- I know you moved your company to Ireland, and now you say you're going to move it back to the UK because of a more favorable tax regime. The question of companies paying their fair share of tax, Martin.
SORRELL: OK. You want to talk about it now or after the break?
QUEST: We'll talk about it now. I just want to get from you a feeling of --
SORRELL: Well, Richard --
SORRELL: You don't -- you don't have to move your company abroad as we did, and our problem was the taxation of overseas problems. Different to the Starbucks problem.
But you don't have to move abroad to avoid tax. You can stay in the UK and you can move your operations offshore to Switzerland or Ireland, wherever it happens to be. So, you don't have to do what you're suggesting, which is actually physically move.
In fact, I am sure there are a number of companies in the UK that still are -- still have their headquarters in the UK that moved departments elsewhere and pay much lower levels of tax. So, it's a very difficult area to police and to interrogate.
Because I'm sure that Starbucks, when it was charging for the Starbucks brand outside the UK, for use of the brand in the UK, agreed with HMRC --
SORRELL: -- the revenue -- agreed the brand charge, and I'm sure that's the same with Google or Amazon or anybody else. But the -- the result of what you saw today with Starbucks is a number of other companies, particularly foreign companies in the UK, are going to come under similar pressure.
And of course, what has driven this has probably been the impact on the brand and the impact on consumer behavior. What Starbucks is worried about --
SORRELL: -- is the implications for its operations in the UK, because people like you are stimulating people to focus on this issue --
SORRELL: -- and they're concerned about it.
QUEST: Right. That -- there's an answer to that, I thank you for that. And I'm looking forward --
QUEST: -- I'm looking forward to seeing you, I hope, in the cold of Davos this year in --
SORRELL: I -- I will definitely be there, and we'll have another joust there, Richard.
QUEST: Looking forward to it. Martin Sorrell joining me from New York tonight.
Now, we talked about Starbucks, you heard us talk about the money involved. We'll tell you about the policy U-turn. You'll hear from the chief executive and from the lawmaker who described its accounting practices as "outrageous." This is QUEST MEANS BUSINESS, good evening.
QUEST: Starbucks says it will pay more tax in the UK. Remember I told you the other day about how the company was running down the revenues with royalties and inter-company transfers and the like. Anything, in fact, so that there were no profits to actually pay tax -- corporation tax upon.
Well, now, the coffee company has changed its policy and is going to start reforming itself. The managing director says it will pay -- commit to paying a significant amount of tax during 2013 and 14, and that is regardless of whether the company is profitable in this year.
It could be up to $16 million a year in corporation tax, up from an average contribution of about $1 million a year since it opened in 1998. The chain has generated about $4.8 billion, but the company says it has not been profitable.
Now, here's the point. The lawmakers have accused the company of immoral accounting practices. What Starbucks now says it will do is no longer take tax deductions for things like royalties or those loans. Instead, it will pay the full weight of tax.
CNN's Poppy Harlow spoke to the chief exec of Starbucks, Howard Schultz in New York. He said it's time to make a bigger contribution to the UK tax money, even though Starbucks has done nothing wrong.
HOWARD SCHULTZ, CEO, STARBUCKS: We've been in the UK for over a decade, and we've made a profit, literally one year out of all the years we've been there. Now, having said that, as a result of that, we have not paid the income tax associated with making a profit.
Now, our revenue has grown every year because we've continued to invest in that country.
POPPY HARLOW, CNN CORRESPONDENT: Right.
SCHULTZ: But we have not paid income taxes. We've paid a lot of other taxes. In view of the concern and the high degree of sensitivity around the austerity issues in Europe and in the UK, we have taken a step back and said even though we have not made a profit, it's perhaps time for us to make a contribution to the UK society, whether or not we made a profit or not.
HARLOW: So, looking forward, Howard, if you want to make a contribution, is that the tax policy you're going to take in the UK for the long term, or is it just because of austerity measures and the economic situation there now?
Because as a businessman looking forward, I don't know a lot of heads of businesses that would say we want to make a contribution.
SCHULTZ: Well, we strongly believe that we will make a profit in Europe, and specifically the UK, at some point in the future. And we're deeply committed to that market. And I think in view of the outcry -- and, I think, the misunderstanding -- we want to be respectful of the authorities and respectful of the issues and try and do the right thing.
But it's not because we've made a profit or we've done anything wrong. We're just -- we're trying to do the right thing and make a contribution.
HARLOW: Is the outcry hurting the brand there?
SCHULTZ: Not to any -- no, not to any large degree, no.
QUEST: Now, Starbucks' tax bills are starting to look a little a la carte, with the coffee giant choosing what it paid in corporation tax, according to its own menu before the cries that it wasn't contributing its fair share.
Because what the critics are now saying is that Starbucks is picking and choosing. Voluntary taxation. Originally, of course, it was on the Skinny-size payments. It was certainly cheap. In fact, for the last three years, it was nothing at all by way of corporation tax. That left a bitter taste in the mouth of the public. "Immoral" said a parliamentary committee.
Now, to the menu, we have the Irregular size, $16 million next year and the year after. It's designed to regain the trust of the disgruntled customers. Think of those as the sweetener, the special offer, if you like, with the tax deductions, the royalties, and the inter-company transfers.
So, the critics, as I say, very much saying that what Starbucks is doing is taking an a la carte approach to taxation. So, I turned to the head of the parliamentary committee, Margaret Hodge, and that which is the damning report, and I asked her for the reaction to Starbucks' new arrangement.
MARGARET HODGE, CHAIR, PARLIAMENTARY COMMITTEE ON PUBLIC ACCOUNTS: Well, the interesting thing is that it appears to us here in the UK that corporation tax, which is the tax we've been in dispute over, has almost become a voluntary tax, and that's one of our criticisms.
We think that it's completely basic that any global company ought to pay a fair amount of tax on the profits they derive from their economic activity in a particular jurisdiction.
QUEST: They don't accept that they should pay the corporation tax. They're accepting in this case that they have to make a contribution to British or to the UK economy. Now, that's not the same thing, is it?
HODGE: Well, you may know a little bit more than I. I've seen their statement and I have talked to their chief executive, and it's my view that they do accept they should pay corporation tax relative to their profits.
What they need to now sit down with HMRC and do is to open their books, look at actually the activity here, look to see whether they're manipulating the rules, and it's particularly the transfer pricing rules, to export profits that were made here and export them to a tax haven or a tax jurisdiction where taxes are lower.
And that's what HMRC has got to be tough and challenge, and that's where the negotiation has to take place, and Starbucks has to pay its fair share.
QUEST: So, now Starbucks has opened the checkbook and will have those negotiations, are you confident that Google and Amazon, because they're the two that were before the committee, and others, are you confident that it will create a change and others will follow?
HODGE: I think the mood in the UK has -- is changing. And what has been quite extraordinary about this whole experience was that we put a spotlight on what was happening in Starbucks, and people power took over.
People were very shocked and angry that a company that was making money here wasn't paying its fair share of taxes here, but was consuming the public services provided through taxation here.
And it's people power, really, by people boycotting Starbucks -- I haven't seen the figures, but I guess they were pretty dramatic and most people I talked to started boycotting Starbucks. I think that shocked them into action.
QUEST: That's Margaret Hodge of the parliamentary affairs committee talking to me earlier. Now to today's Corona --
QUEST: -- Currency Conundrum.
QUEST: Let's stay with coffee. They've got a coffee in Brazil, as the famous song goes. The Brazilian real is gaining around half of one percent against the US dollar this Thursday. Earlier this week, Brazil's central bank intervened in the currency market to stem recent losses.
So, the question is, Brazil's modern real was introduced in 1994. Why was the old one scrapped? A, inflation? B, corruption? C, deflation? The answer later in the program.
The euro's sharply lower because of the ECB's gloomy growth outlook. These are the rates --
QUEST: -- this is the break.
QUEST: Quietly tinkering away in a garage in the midlands of Britain. Think of Peter Dearman, who has found a way to make a car run on air. His invention could be the answer to on of engineering's greatest challenges. In this week's Make, Create, Innovate, we look at Peter Dearman's liquid air energy.
NICK GLASS, CNN INTERNATIONAL CORRESPONDENT: We all know that renewable energy -- wind turbine, solar power, and the like -- is a good idea. But how to store that power they generate? One man thinks he's found a way.
GLASS (voice-over): Peter Dearman is a genial 61-year-old British engineer. A nutty professor, as one of his sons used to tell his schoolmates. In his garage workshop among a mess of tools and contraptions, he's been experimenting with liquid nitrogen. This can be extracted from the air by using the energy of renewable power sources. He calls it "liquid air energy."
PETER DEARMAN, INVENTOR: Liquid air's been around for a long, long time. What makes it viable now is people are sort of beginning to realize that fossil fuels aren't going to last forever and they are going to continue to get more expensive.
GLASS: Colder than ice, liquid nitrogen instantly vaporizes in warm air. As it vaporizes, it expands, and that expansion can turn a piston. But Dearman discovered the performance was greatly enhanced by keeping the liquid air warm, but mixing it with a heat exchange liquid, in this case, anti-freeze. This makes liquid nitrogen a viable power source.
DEARMAN: I pour the liquid nitrogen here under fairly low pressure, running into the engine, but then adding in the heat exchange fluid. That keeps the gaseous nitrogen warm, and as it expands in the cylinder, and that runs the engine.
GLASS (on camera): It all happens in a single fuel, here.
DEARMAN: That's right. It's much more efficient to pour down in the cylinder in one go.
GLASS (voice-over): Well, I've seen it working in Dearman's garage to power a small motor, but what about a car? At a nearby farm, his next experiment, an old banger, a Vauxhall Nova, adapted for liquid air energy. Under the bonnet, an engine built in the Peter Dearman way.
DEARMAN: I'm just going to put some liquid nitrogen in the tank, here, which I'm using an adaptive beer barrel.
GLASS (on camera): You are.
DEARMAN: Yes. Oops. No, no, that's alright.
GLASS: It works.
DEARMAN: Yes. It's just an experimental one, just to show it can power a car.
GLASS (voice-over): From a car to a pilot power plant, the first in the world just powered by liquid nitrogen. Could this be part of our energy future? A huge vacuum flask holds 60 tons of the stuff. Instead of anti-freeze, here they mix it with waste heat from the neighboring power station.
DEARMAN: We take a very large tank of liquid nitrogen, we pump it up to pressure. We then heat it with waste heat from the power station, which comes through here, and create -- that creates the pressure that runes the turbine that generates the electricity.
GLASS (on camera): Simple as that?
DEARMAN: As simple as that, yes.
GLASS (voice-over): This experimental plant isn't a substitute for a main power station, but it will help top out the grid during hours of peak demand. The next step is a plant ten times the size. To Dearman, the advantages of this kind of energy are self-evident. The only waste is cold air.
GLASS (on camera): Storing renewable energy has always been a problem. Could a cocktail of liquid nitrogen and a heat exchange be the answer? A new energy source plucked out of thin air.
QUEST: Make, Create, Innovate, where we bring you the ideas, the inventions, and the thought of those looking to the future for manufacturing and production.
The US jobs report. It's a monthly number. We see it tomorrow. This one's been exposed to the full force of Super Storm Sandy. We'll look at the likely impact. Maggie Lake's in New York after the break.
QUEST: Hello, I'm Richard Quest. More QUEST MEANS BUSINESS in just a moment. This is CNN and, on this network, the news always comes first.
(BEGIN VIDEO CLIP)
QUEST (voice-over): Tanks have moved to clear protesters from the area around the presidential palace in Cairo. Overnight clashes between supporters and opponents of President Mohammed Morsi have left at least five people dead. An Egyptian newspaper reports that the president has taped a speech to the nation. It's not yet known or clear when or if that will be broadcast.
The Eurozone will suffer from uncertainty and economic weakness in 2013, according to the European Central Bank. ECB president Mario Draghi has cut growth forecast for this year and next, saying the risks of sovereign debt and the fiscal cliff in the U.S. could (inaudible) recovery.
A walkout from members of Silvio Berlusconi's party may mean the Italian prime minister, Mario Monti, has lost his majority in parliament. Members of Berlusconi's PDL party walked out of a Senate confidence vote and have threatened to do so again. Mr. Berlusconi, who is Monti's predecessor has said he's considering running for office in March elections.
The 2020 European football championships will be held in various cities across Europe. UEFA says there will be no single host country for the tournament. It's the first time the competition will be staged in this way. UEFA says it has not yet decided how many cities will indeed (inaudible) will host games during the event.
QUEST: The mayor of New York has launched a long-term plan to help the city recover from the superstorm and to protect it against future natural disasters. Bloomberg says the city must become, in his words, smarter, stronger and more sustainable.
Maggie Lake is at the South Street seaport, which was so badly hit. I know; it's difficult to say. You try it at this time of the day. But Maggie is there and the recovery is still underway at the seaport. But clearly this is the sort of place that the mayor's talking about.
MAGGIE LAKE, CNN CORRESPONDENT: Absolutely, Richard, and it's the sort of place we're looking at -- let's say and this place should be full of office workers, of people shopping, out eating at restaurants. Instead, we have a couple of straggling tourists.
This is what you see, the cleanup that's going on, the businesses here boarded up, restaurants like this one that, again, should be full, especially during the holiday season, gutted down to the studs as they try to recover from Sandy.
The city estimates that 13,000 small businesses that employ 143,000 people were impacted by Sandy. And for many of those small businesses, it's mean layoffs. Have a listen.
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MAURA KILGORE, GM, COWGIRL SEAHORSE RESTAURANT: There are at least five, six people who I haven't -- who have not started working again and probably won't. And you know, my staff, who are working now, have half a schedule. They're no -- we have nowhere near the need for shifts that we did before this.
ADAM WEPRIN, OWNER, BRIDGE CAFE: My staff, I unfortunately had to let everybody go, and the main reason why is I have no money coming in. And that was a devastating staff meeting to tell them that. It's something that I never expected to tell anybody ,that for the unforeseen future, because we have no clue whether it's two months, three months or five months, we're going to be down.
(END VIDEO CLIP)
LAKE: And that's the thing, Richard; even with all the help coming from the government, it's going to take time. And those small businesses really just can't float the employees. And it's the story you're hearing up and down the East Coast. Remember, a huge area impacted. And it's going to hit the national job numbers.
We're getting a monthly number tomorrow from the government. And in - - and this Sandy is going to have a drag. But there is a silver lining. Right now, as you saw before and you can see from the bins behind me, we are still in the cleanup phase in the hard-hit areas. But that will transition into rebuilding. And when we get there, you're going to see jobs added, especially in construction and retail.
So it will be a boost in 2013 in support. But right now, it's going to influence that economic (inaudible), Richard.
QUEST: Maggie Lake, who's in New York at the South Street seaport -- I knew it would get it right before the hour was over -- Maggie, we thank you for that.
Now as we look for tomorrow, we will have the results of the latest job numbers. And we'll put it into perspective for you when you consider how the United States with its unemployment rate at 8 percent versus say the European Union with 11.8 percent, 11.9 percent or the U.K. and similarly.
We'll be back with the weather update. Maggie was cold in New York. In Europe, the weather is pretty awful. Jenny Harrison's after the break.
(BEGIN VIDEO CLIP)
QUEST (voice-over): The "Currency Conundrum," and Brazil's modern real was introduced in 1994. Why was the old one scrapped? The answer is to draw a line in the 30 years of runaway inflation. It was initially pegged to the dollar and tightly controlled.
(END VIDEO CLIP)
QUEST: (Inaudible) the European markets moved higher, despite the warnings from Draghi. The DAX -- this is fascinating -- the DAX is at its highest point in almost five years. German factory orders were up almost 4 percent in October, far more than expected.
One share to note: Rolls-Royce may be prosecuted over corruption allegations in China, India -- Indonesia -- beg your pardon -- and other markets. The company says it is cooperating with the British serious fraud office.
The markets that are open and doing business, they are in New York at the moment. And the Dow Jones just up 21, a relatively flat session. The fiscal cliff remains in focus.
We have the jobs report that we told you about already that comes out on Friday, probably the single most important economic data out of the United States, particularly bearing in mind that the U.S. Federal Reserve has said that it is the jobless total that is going to determine when they start tightening monetary policy or unwinding QE.
So join me over in the library as I tell you the tale of the tasty Apple. Apple says it will spend $100 million to start making Macs in the United States. So Tim Cook --- he's the chief exec; took over from Steve Jobs -- you know that. He revealed this in an interview. He said that they would -- they would make one line of Macs.
Some already are assembled in the United States. Macs are (inaudible) assembled in America, but now he says we have a responsibility to create jobs. So they're going to make a particular, what, we believe it's one of the iMac ranges that they will do. How much manufacturing is involved or assembly or part components? That, of course, will be the crucial question.
Apple very much mired in the Foxconn controversy. Tim Cook has visited the Foxconn factories in China. He ordered fair labor association audits of their factories and has enforced changes that many people said.
So when you look at what they've done with their promise, this is the way the Apple share price has responded since Monday. You have a -- well, I say (inaudible), you have a dip there and a rather sharp -- so something's going on there. That could be a case of buy on the rumor, sell on the news, or the opposite.
The share price is up around 1.5 percent, down 6 percent on Wednesday. Research data showed strong outlook for tablet competitors -- that includes Amazon and Samsung, and that, of course, is what you were seeing over there at the moment.
Still way up there amongst the most valuable companies if not the in the world.
Now you don't need me to tell you if you've been out and about that you'd better dress up warmly. It's parky out there. In fact, it's more than parky; it's downright cold. Jenny Harrison's at the World Weather Center.
JENNY HARRISON, CNN METEOROLOGIST: It really is, Richard, and I tell you what, it's going to get windy. We're going to see more snow. It is going to be a testing couple of days, I think, if you're traveling.
Let's look at the satellite, huge amount of cloud, bringing with it all of that weather. Now this is the next big system. This is the one bringing the fairly widespread but also heavy snow across areas of Europe. We have seen some rather heavy rain and some snow across the central Med as well in the last few hours.
But look at these temperatures. So right now in London it's 4 Celsius, not too bad; -4 in Copenhagen, -10 in Oslo. But then you factor in the wind and, in fact, interestingly, that temperature is not changed. It has been, up until literally 10 minutes ago, but elsewhere it has taken the top of those temperature, it feels like -11 in Berlin.
This is the snow over the last few hours, the last few days, really, it has to be said, Germany in particular. Look at all this snow that's been heading across. And then what a mixed bag across the U.K., snow to the highlands, snow across all the high ground, sleet, rain, some of it heavy, and just literally working its way across the entire country. That is that system.
This is the one that's going to head to mainland Europe as we go through Friday and bring that snow with it. The cold air is actually plunging even further south from the north and then you thought that one was bad, there's another system which is actually going to make its way down in a couple of days beyond that.
So it is just a continuing very unsettled and very wintry picture. At the same time, this system, the central Med, we could have some fairly heavy rain, too, across southern Italy and across into the southeast. But look at the snow accumulation in the next 48 hours. (Inaudible) 511/2 centimeters in Paris, another 5 in Brussels, Amsterdam another 6.
I say that because we've already had quite a lot of snow and then when you factor the wind in, this is the wind forecast. So this is that system coming through the U.K. now, heading to mainland Europe. There's the next one, pushing in from the north a couple of days' time.
So all of the major airports, be prepared on Friday, very strong winds, a lot of snow, very icy conditions and it really could delay you at some of the London airports too, in fact, Gatwick is one that probably could go on that list. But just be prepared for all of that.
You can see the snow coming through, the rain sweeping through the Med and as I say, of course, pretty cold, too, with that cold air plunging down from the north. So these are the actual temperatures on Friday, -2 in Berlin, -8 in Stockholm, -1 in Vienna . But then with that wind, it will probably feel colder than that.
So not bad in London at but probably feeling more like about 3 or 4. So as Richard said before I began, wrap up well and you shall be fine. And just take something with you to the airport, Richard, if you're going anywhere, because you could have a rather long wait for that plane.
QUEST: Yes, well, I am actually on Saturday. But I think I'm going south. But we'll talk more about -- we might see what weather I might experience there tomorrow's program. Jenny Harrison, we thank you.
And that is QUEST MEANS BUSINESS for tonight. I'm Richard Quest. Whatever you're up to in the hours ahead, I do hope it's profitable. MARKETPLACE EUROPE is next.
MAX FOSTER, CNN HOST: From the top of the BT Tower in London, welcome to MARKETPLACE EUROPE. I'm Max Foster. The tower is a familiar feature of the London skyline and has played a major role in connecting the world since it was built back in 1965. Globalization is making the world smaller and in this program, we look at how businesses are maintaining their competitiveness.
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FOSTER (voice-over): Coming up, cushioning the blow of rising costs. The company that's bringing manufacturing back to Britain. And I do some networking with the CEO of BT Global Services.
LUIS ALVAREZ, CEO, BT GLOBAL SERVICES: Our flexibility and the ability for us to supply services in, let's say, pay-per-use mold, is absolutely critical in these days.
(END VIDEO CLIP)
FOSTER: Not so long ago, British companies facing rising costs started looking overseas at cheaper production bases in China and the Far East. Now it seems backshoring is back in fashion as rising wages and transportation costs make foreign production lines less competitive. Isa Soares reports now from the northwest of England.
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ISA SOARES, CNN CORRESPONDENT (voice-over): For nearly a decade, this cushion factory on Merseyside has stitched together its production with a manufacturing giant: China. It was the collaboration design to lower overhead. But now that rationale has been turned inside out, with labor costs rising in China, production is coming back to Britain.
Tony Caldeira has grown his company from a humble market stall. It now exports to more than 20 countries.
TONY CALDEIRA, CEO, CALDEIRA: How's it going now? Who's (inaudible) for?
UNIDENTIFIED MALE: This is for (inaudible).
CALDEIRA: What's fascinating is the changes in the global economy and how it affects even a simple business like my making cushions. Wages have (inaudible) in China for many reasons. It's -- the cost of living in China is -- has risen more quickly than it has in the U.K. and in Europe. And of course, wages have had to rise as a result to cover those costs.
Of course, as the Chinese economy has become more westernized, it has become more developed, more advanced, people's standard of living and their expectation has also risen.
SOARES (voice-over): Since 2004, Caldeira's British employees are seeing their wages increase 25 percent, while their Chinese counterparts are still paid less, their pay packets have quadrupled. And it's not just labor costs that are making manufacturing in China increasingly expensive. Rising costs of shipping, packaging, duty rates and textile costs all have an impact.
CALDEIRA: There are quite a few differences between my Chinese workforce and U.K. workforce. The U.K. workforce tends to be more productive. You tend to get more cushions out per hour, but they tend to work less hours per week; whereas in China, they want to work more hours if they can because a lot of them actually live onsite.
And what they would like to do is earn as much money as they can. And in Chinese culture, a lot of workers would actually move every year after Chinese New Year. They look for a new contract. The contract is only a 12-month one. And at the end of the contract, they see what's the best opportunity for them in the market.
SOARES (voice-over): Most of the workers in the British factory have been here for over 10 years, despite many salaries being kept at minimum wage.
UNIDENTIFIED FEMALE: I've been sewing since I was 12, 30-odd years. And about -- we go back 20 years, I earned more money 20 years ago than what I'm earning now. Seriously. But the fact is they were paying me more money, (inaudible). I mean, I know we are -- our money's only (inaudible). But, yes, I've got (inaudible).
UNIDENTIFIED FEMALE: We always knew that China would eventually catch up with us. And it has come. But we didn't really think that it would come as quickly as it has.
UNIDENTIFIED FEMALE: I have worked the press before, where the (inaudible) and become bankrupt because those (inaudible). So as long as (inaudible) that's fine.
SOARES (voice-over): Loyal staff. But the next problem looming is a skills gap.
CALDEIRA: Most of the staff we have in the U.K. may be in the 50s or even the 60s, but they probably won't like me saying that. But that's the reality, because they actually have the skills. They were trained with apprenticeships and in training skills, maybe back in the '70s or in the '80s. They learned their skills. And those skills, unfortunately, aren't being taught the same now in the U.K.
In China, the workforce is much younger, maybe in their 20s or their 30s, because what they're looking to do is work harder at a younger age so that they can save for retirement.
SOARES (voice-over): The workforces are different, but the price of production is converging. These striped velvet cushions cost 90 cents less to make in China last year. But that saving has shrunk to 13 cents this year. And next year, the company predicts it'll cost about the same. But there are some advantages to keeping a Chinese operation as well.
CALDEIRA: There are still some things that my Chinese factory does better. I'm very fortunate and I have a very good workforce in China. It's becoming more expensive, but it's still very good. And they are closer to certain markets in Asia.
They're also closer to a lot of the supply chains. So it makes more sense to make the finished products closer to where there were materials are manufactured. However, as their cost rises, I suspect that more and more work will come back to the U.K.
SOARES (voice-over): The wheels of change continue to turn, increasing competition and making the manufacturing industry here in Britain stuffed full with potential.
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FOSTER: Isa Soares reporting.
Coming up after the break, keeping companies competitive and connected. We'll get down to business with the CEO of BT Global Services.
FOSTER: Welcome back to the program to MARKETPLACE EUROPE.
Companies are only as strong as the systems that support them. And as businesses face tougher trading conditions, so their margins come under more and more pressure. Companies need robust networks to stay ahead of the competition.
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FOSTER (voice-over): BT is the world's oldest telecommunications company. Its global services division is a world leader in managed network I.T. services. Operating in more than 170 countries, the company provides services to around 7,000 large corporate and public sector organizations.
With 89,000 employees, global services generates annual revenues of around $12 billion.
ALVAREZ: Everybody wants to have their emails or their phone calls to be answered immediately. You send messages on your mobile phone or you drop a message and you want understand immediately what is the response (inaudible) used to have more (inaudible) forward approach so that you send something and you expect to be answered in weeks or days.
Now you need the answer immediately. And this affects our customers, because they want to understand what is happening to their distribution, their channels, to their own customers around the globe. And as well, we call instant globalization.
Our job is to make in this world flat for our customers so that they connect their research centers, their shops, their sales force and also their customers or their suppliers in a seamless way.
FOSTER: Presumably emerging markets are a big force. Are you setting up entire systems in the emerging markets?
ALVAREZ: Well, what we are trying to have the -- what we call the global consistency and the ability to deliver locally because to some extent our customers do as we do. You talk to Fiat (ph); they are a global company who operates in several countries around the globe. But at the same time, when they have their large manufacturing (inaudible) in Brazil, they are extremely local. Right?
So we do that combination of having the global expertise and our ability to be very close to our customers in each one of the markets where they operate. Emerging markets is a -- is a great example of that, because customers want to enter in a market very fast.
At the same time, sometimes to reconcile the procedure in a down market also really fast. Our flexibility and the ability for us to supply services in, let's say, pay-per-use mold, is absolutely critical in these days.
FOSTER: But how are you managing to do business in the Eurozone or plan for the future of the business in the Eurozone?
ALVAREZ: Our customers (inaudible) restructuring their operations. We look to the financial services sector. They are consolidating in places like Spain, for example. They are producing the number of, let's say, seats in the trading or (inaudible) some banks. But at the same time, they are looking to new markets and new opportunities. And we need to be able to support them through that.
FOSTER: Still making money there, it's just different solutions for those companies in those?
ALVAREZ: Well, I think that the more difficult is business or the more difficult the market, the harder you need to work to be able to do that. We have the, for example, this year, we have been able in the market like Spain, which is very challenging; we have been able to even increase our market share from 20 percent to 21 percent.
FOSTER: You got this fantastic view of London here. Of course, the world was watching London over the summer, at the Olympics in particular. You were one of the main sponsors of the Olympics, weren't you?
Hugely expensive exercise. But how have you managed to measure the benefits now that there's been a few months?
ALVAREZ: Well, I think that our role in the Olympics, fortunately -- we are extremely proud of that -- was not only our sponsorship. The most important thing is that we deliver all the telecommunication services.
And this has been the most connected games every in the history, seven times the bandwidth required versus Beijing, more tweets in one day than the whole Olympics in 2008. And I think that that pride of being able to deliver a fantastic Games and both in the Olympics and the Paralympics, has made us learn a lot about our strength, our capabilities.
A number of customers we have already gone through their boards and we have talked about our experience in terms of dealing with a very complex project, transforming a city in itself and at the same time being able to have a very strong theme, learning how to improve continually in a very, very challenging environment.
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FOSTER: Luis Alvarez, CEO of BT Global Services, bringing this edition of MARKETPLACE EUROPE to a close. We'll be back again next week. Thank you for watching. Goodbye.