Economic Calendar

Thursday, November 17, 2011

Nokia Cites Good Response to Windows Phones

By Cornelius Rahn and Diana ben-Aaron - Nov 17, 2011 3:37 PM GMT+0700

Nokia Oyj (NOK1V) Chief Executive Officer Stephen Elop said there has been a promising early response for the company’s Windows Phones and predicts demand will be boosted by Microsoft Corp. (MSFT) spreading the tiled interface to personal computers and tablets.

“The reaction is remarkably positive,” Elop said in Barcelona at a conference organized by Morgan Stanley yesterday. “We need to introduce the experience to consumers to get them to try it because we know once they try it they will like it.” Nokia starts selling the Lumia 800, which Elop calls “the first real Windows Phone device,” in six European markets this month.

Elop, 47, last month unveiled Nokia’s first Windows Phone models after the company lost ground with its own 10-year-old Symbian software. Nokia has lost more than 60 billion euros ($81 billion) in market value since Apple Inc. (AAPL) introduced the iPhone in 2007. The company intends to widen its range from the 420- euro Lumia 800 and 270-euro Lumia 710 with both cheaper and more expensive devices, Elop said today.

Nokia, based in Espoo, Finland, is running advertising campaigns focusing on the handsets’ interface of square tiles that dynamically update with new information.

The phones will benefit as Microsoft puts a similar interface on its Windows 8 software for computers and tablets, which will be in front of “hundreds of millions of people,” Elop said. Nokia hasn’t disclosed any plans for its own tablet though it sees an “interesting opportunity,” he said, reiterating prior remarks.

Nokia dropped 0.3 percent to 4.91 euros in Helsinki trading as of 10:33 a.m. Before today, the stock had declined 36 percent this year.

‘Step by Step’

Nokia teamed up with Microsoft to establish a “third ecosystem” competing with the handset and services offerings of the iPhone and devices running Google Inc. (GOOG)’s Android system, which have gouged its market share. Fourth-quarter sales of the Lumia handset could be between 1 million and 1.5 million units, according to Morgan Stanley’s analysts.

“We have taken a very deliberate strategy to how we roll out the Lumia product line,” Elop said. “We know we have a lot of work to do step by step, so we look at it as a build.”

Nokia is customizing the Lumia and its services packages for each market, he said. The U.S. will get Lumia handsets in early 2012 and China in the first half of the year.

Android Attack

Nokia’s share of the smartphone market declined to 16 percent in the third quarter from 50.8 percent when the iPhone was introduced, according to Gartner Inc. Android is the biggest category of devices with 52.5 percent of smartphone sales, and the iPhone is third. Nokia remains the world’s biggest supplier of mobile devices overall by units.

“Our highest priority is to help the Windows Phone ecosystem compete against Android,” Elop said. There are still millions of Nokia users who have not yet purchased Androids or iPhones, he said.

The CEO, a former Microsoft executive, said he is enforcing clearer decision-making and has removed five layers of management. He’s restructuring Nokia’s sales organization after sales plummeted in the second quarter on inventory build-up at retailers.

Painful Quarter

“The second quarter was very painful for everybody, a self-inflicted problem that shouldn’t have happened,” he said. “When a company shifts from a position of great strength and taking orders to selling and having to drive demand, you have to go through a transition. The only thing that matters is driving sell-out” to consumers.

Changing Nokia also means dealing with the unprofitable Nokia Siemens Networks venture with Siemens AG, the company’s last major non-handset-related asset. Nokia and Siemens appointed Jesper Ovesen, a former chief financial officer of Denmark’s TDC A/S and Lego A/S, as executive chairman of the unit in September.

“What you should expect to see from us is clearly a pattern of very aggressively going after the challenges there and making the changes necessary,” Elop said. “The new chairman is off to a very aggressive start on that already.”

To contact the reporter on this story: Cornelius Rahn in Barcelona at Diana ben-Aaron in Helsinki at

To contact the editor responsible for this story: Kenneth Wong at


Telefonica Weighs Asset Sales to Cut Debt in Strategy Shift

By Cornelius Rahn and Manuel Baigorri - Nov 17, 2011 4:14 PM GMT+0700

Telefonica SA (TEF), Europe’s largest phone company by market value, may sell assets that “underperform” to reduce debt and regain investors trust after sales in Spain slumped and growth in Brazil slowed.

Speaking at an industry conference in Barcelona, Finance Chief Angel Vila ruled out selling Telefonica’s operations in Germany, Mexico and the Czech Republic, or its 9.7 percent stake in China Unicom (Hong Kong) Ltd. The Madrid-based company said as recently as Nov. 3 that it’s not considering asset transactions.

Telefonica is assessing its businesses to find non-core or underperforming assets that can be divested, Vila, 47, said yesterday at the conference organized by Morgan Stanley. “No one thing will have a multi-billion impact. It’s going to be an addition of several smaller efforts.”

Chief Executive Officer Cesar Alierta is slashing the Spanish workforce, halting major mergers and acquisitions and trimming debt to stem a 19 percent slump in the stock this year. As Spain’s high unemployment rate prompted consumers to cancel subscriptions or switch to rivals’ cheaper offers, Alierta is increasingly relying on economic growth in Latin America, which accounts for 47 percent of sales.

“The main risks we are seeing in Telefonica are its high leverage and tough existing competition,” Marta Gomez, a Madrid-based analyst at Banesto Bolsa, wrote in a note today, cutting her share-price estimate by 13 percent to 18.33 euros.

Non-core Assets

Telefonica fell as much as 0.9 percent and was down 5 cents, or 0.4 percent, at 13.74 euros as of 9:53 a.m. in Madrid. Spain’s largest phone company has a market value of 62.7 billion euros ($84.5 billion).

Latin American assets remain vital to the company, investors said. In Spain, Telefonica holds a 22 percent stake in digital television provider DTS. Other Telefonica holdings include call-center Atento Inversiones & Teleservicios, a 13 percent stake in satellite company Hispasat and a 5.4 percent stake in Zon Multimedia SGPS SA, Portugal’s biggest cable-TV provider.

Telefonica shelved an initial public offering for Atento in June because of insufficient investor demand.

Along with Mediobanca SpA, Intesa Sanpaolo SpA and Assicurazioni Generali SpA, Telefonica indirectly controls about 22.4 percent of Italy’s former phone monopoly, Telecom Italia SpA (TIT), through holding company Telco SpA.

“Atento would be the number one asset up for sale but who’s going to be interested?” said Francisco Salvador, a Madrid-based strategist at FGA/MG Valores.

Dividend Target

“Ireland or Venezuela wouldn’t make much sense either,” Salvador said. “And they would now even sell Spain if they could as they try to portray itself as a Latin American telecoms company.”

Last week, Telefonica reiterated its full-year financial and dividend forecasts, including sales growth of 1 percent to 4 percent over three years from an adjusted base of 63.1 billion euros in 2010. The company aims to lower its debt to between 2 and 2.5 times operating income before depreciation and amortization.

Triple B

The operator would reconsider its dividend policy only if its debt rating, cut to BBB+ by Standard & Poor’s in August, leaves the triple B category, Vila said, adding that he is confident the company won’t face any more downgrades.

“We would not move beyond this BBB class territory unless there were unimaginable pressures that would put us beyond that,” he said. “If that was going to be the case we would have to react.”

Telefonica said in April that it plans to pay a 2012 dividend of at least 1.75 euros per share. The stock has a dividend yield of about 11 percent, one of the highest among European peers.

“The market is already betting on a dividend cut somewhat,” FGA/MG’s Salvador said. “Telefonica’s dividend policy is way too aggressive.”

To contact the reporters on this story: Cornelius Rahn in Barcelona via; Manuel Baigorri in Madrid at

To contact the editor responsible for this story: Kenneth Wong at


BSkyB Investors Back Re-Election of Chairman James Murdoch, CEO Says

By Jonathan Browning - Nov 17, 2011 3:26 PM GMT+0700

British Sky Broadcasting Group Plc (BSY) Chairman James Murdoch has the support of most shareholders even as some advisory groups have called for his resignation amid a phone-hacking scandal, its chief executive officer said.

In the run-up to a vote on Murdoch’s position at the annual meeting of Britain’s biggest pay-TV company, most shareholders understand “the huge contribution James has made,” Jeremy Darroch said in an interview yesterday at a conference organized by Morgan Stanley in Barcelona. Murdoch was grilled by U.K. lawmakers last week for a second time as phone-hacking and bribery allegations rocked the unit of News Corp.

Murdoch, who is also News Corp.’s deputy chief operating officer, has come under pressure because he didn’t look into allegations in 2009 when the Guardian newspaper reported that the News of the World tabloid hacked into the phones of celebrities and politician, or in 2010, when lawmakers raised questions. His failure to act triggered a scandal that engulfed News Corp. (NWSA) and thwarted a 7.8 billion-pound ($12.3 billion) bid to buy all of BSkyB. News Corp. currently owns 39 percent.

James Murdoch will face BSkyB investors at the annual general meeting on Nov. 29. At the shareholder meeting last year, he was re-elected with 98.2 percent of the vote.

The stock rose 0.4 percent to 718.5 pence as of 8:18 a.m. in London trading today. Before today, the stock had dropped 2.7 percent this year.


A group of U.K. pension funds, accounting for about 1 percent of BSkyB, on Nov. 11 advised members to oppose Murdoch’s re-election on concerns about his independence and the risk of “contagion.”

PIRC, an investment adviser, said on Nov. 15 that it does not support the appointment of a chairman linked to the controlling shareholder and that his involvement in the hacking inquiry raises concerns over whether he is fit to fulfil his role.

Murdoch’s re-election is also opposed by New York-based proxy advisory firm Glass Lewis & Co., which said his “powerful position” at News Corp. compromised his ability to act in BSkyB’s interest. Franklin Resources Mutual Series, which owns about 3 percent of BSkyB according to Bloomberg data, said in October that Murdoch should step down as chairman.

The position of most BSkyB investors is “very different,” Darroch said in Barcelona.

Protest Vote

Testifying for a second time before a U.K. parliamentary committee, Murdoch last week blamed executives at the News of the World tabloid for not telling him in 2008 that intercepting the phones of celebrities and politicians went beyond a single reporter.

Murdoch’s second testimony came after News Corp. investors lodged a protest vote at the annual meeting against Rupert Murdoch, the company’s chairman and CEO, and his sons. James received the highest percentage of votes against his election to the board, at 35 percent.

BSkyB’s board backed Murdoch on Nov. 11 and the company’s senior independent director Nicholas Ferguson said that Murdoch’s handling of the scandal at parent company News Corp. had “no effect on sales, customers or suppliers over the last five months.”

BSkyB on Oct. 19 reported a 16 percent increase in fiscal first-quarter operating profit, topping analyst estimates, as the pay-TV broadcaster sold more broadband products to its subscribers.

Murdered Schoolgirl

Since the revelations in July that the News of the World had intercepted the voicemail of a murdered schoolgirl, News Corp. has tried to limit the damage by closing the 168-year old News of the World tabloid, once Britain’s biggest-selling tabloid.

At least 17 people have been arrested by police investigating phonr hacking and bribing police officers at News Corp.’s U.K. newspapers. James Murdoch joined News Corp.’s U.K. publishing unit News International as chairman in December 2007, after the alleged incidents took place.

Bloomberg LP, the parent of Bloomberg News, competes with News Corp. units in providing financial news and information.

To contact the reporter on this story: Jonathan Browning in Barcelona via

To contact the editor responsible for this story: Kenneth Wong at


Sony With Stringer Era Waning Needs Hit as Payoff Year Escapes

By Bryan Gruley and Cliff Edwards - Nov 17, 2011 9:57 AM GMT+0700

Sir Howard Stringer remembers when 2011 was going to be wonderful.

“This was the first year of the payoff,” he said, “and next year was going to be the second.” As chairman, president, and chief executive officer of Sony Corp. (6758), Stringer had spent six years trying to return the Japanese icon to its former glory and open a new era of growth.

Sony expected an annual operating profit of at least $2 billion, its best in three years. A batch of new products was headed for store shelves, including its first tablet computers, a compact 24-megapixel camera and a portable PlayStation player. Sony also was preparing to launch a global network that would connect the company’s movies, music, and video games to all its televisions, tablets, PCs, and phones -- an iTunes-like digital platform, Bloomberg Businessweek reports in its Nov. 21 issue.

“I honestly and truly thought I was going to have a year to remember,” he said over breakfast in his 14th-floor apartment on New York’s Upper East Side. “And I did, but in the wrong way.”

The feeling of imminent triumph ended abruptly on March 11. Stringer was in New York, having flown in from Tokyo the night before for emergency back surgery. At about 4:30 a.m., he opened a text message: An earthquake followed by a tsunami had devastated eastern Japan.

$3.1 Billion Loss

He considered returning to Tokyo but decided against it. “They didn’t need me there,” he said now, taking a sip of tea in his Fifth Avenue pied-à-terre. Stringer doesn’t speak Japanese and concluded that he’d be more hindrance than help.

On the phone with deputies, he learned that nobody from Sony was hurt and that employees had dived into rescue efforts. Workers at the company’s technology center in Sendai fashioned boats from foam shipping containers and used them to save victims and ferry supplies.

Stringer was so moved that he wrote an essay in the Wall Street Journal extolling the Japanese spirit of “fukutsu no seishin,” or “never give up.”

The earthquake and tsunami forced Sony to temporarily shutter 10 plants, disrupting the flow of Blu-ray discs, batteries, and other items. The disaster also meant a big charge against earnings -- and that $2 billion in operating profit Stringer looked forward to announcing turned into a net loss of $3.1 billion, the company’s largest deficit in 16 years.

24-Year Low

A hacking attack then forced the shutdown of the PlayStation Network. The strong yen battered profits, the sluggish global economy hurt sales, a CD and DVD warehouse burned in London riots and floods in Thailand shut component plants.

By fall, Kazuo Hirai, Sony’s executive deputy president and Stringer’s heir apparent, was speaking publicly of “a sense of crisis” at the company. Sony predicted a $1.2 billion loss for the fiscal year ending March 31. Its share price hit a 24-year low, and its $17 billion market cap is half of what it was when Stringer became CEO.

There is more to Sony’s problems than acts of God and currency traders. The maker of the Walkman and the Trinitron hasn’t driven pop culture for years.

Sony thrived in an era of stand-alone electronics. When the Internet arose and “digital” began to mean “connected,” iPods became the center of people’s entertainment lives, then smartphones and tablets -- which Sony was late to produce. Even the quintessential Sony product -- the TV set -- has become a millstone.

Samsung, Vizio

Sony may lose as much as 675 billion yen ($8.8 billion) on TVs in the eight years through March and expects to keep losing at least into 2013. Samsung Electronics Co. and Vizio Inc., based in Irvine, California, have driven prices so low that one Sony executive said the company charges less for some TVs than it cost to ship them a few years ago.

Sony has been trying to adapt to the Internet Age for at least a decade, yet remains a gargantuan and unwieldy manufacturer, with 168,200 employees, 41 factories and more than 2,000 products, including headphones, medical printers and Hollywood-grade, 3-D movie production equipment.

Jeff Loff, a senior analyst with Macquarie Capital Securities in Tokyo, said Sony sells nine 46-inch TV models in the U.S., and its mobile-phone joint venture with Ericsson AB offers more than 40 handsets.

“Can you imagine how dilutive that is to your R&D?” he said.

‘Made a Commitment’

Jim Kennedy, a Sony spokesman in New York, said the number of phones is being reduced, and notes that Suwon, South Korea-based Samsung has 15 different 46-inch TVs.

Stringer’s time as CEO is running out. He’s 69 and his latest three-year turnaround plan ends in March 2013, at which point Hirai probably will take over, according to several people interviewed for this story.

Stringer acknowledged that change has never come easily at Sony. Japanese laws and the country’s lingering culture of lifetime employment limit companies’ ability to close Japanese plants and shrink payrolls. And Sony’s very Japanese tradition of consensus building doesn’t always help it battle competitors who respond quickly to the orders of a strong leader.

“People mostly say to me, ‘You don’t need to do this. Why are you doing this?’” Stringer said between bites of cantaloupe.

“Because I made a commitment to put Sony on this road where the company would have a safe, secure future. It would be very hard to foresee a triumph at my age, but if we were actually able to take advantage of a combination of our assets, we would be a very powerful company.”

Innovation Questioned

CEOs of multinationals travel a lot, and there can’t be many who log as many miles as Stringer. One recent trip took him from Tokyo to Los Angeles to London -- his wife lives in England -- to Paris to London and back to Tokyo, all in one week. A stop in Beijing was canceled.

“I do take a lot of sleeping pills,” he said.

It’s not lack of sleep, though, that irritates him when it’s suggested that Sony is not considered the innovator it once was.

“Oh, f--k, we make so much more than we used to,” he said.

He ticked off some of the products coming out this year, including binoculars that can record video and goggles for watching 3-D video games and movies.

“Don’t tell me that Sony technology isn’t great,” he said.

Ibuka, Morita

Sony sprouted from the post-World War II rubble of Japan to become the embodiment of the country’s recovery and rise as a world economic power. The company was founded by two charismatic men who could get almost anything they wanted done.

Masaru Ibuka was the restless inventor who pushed Sony’s engineers to new heights of technical prowess. The equally gadget-happy Akio Morita supplied the vision of what consumers wanted -- sometimes before consumers themselves knew it -- and transformed audio and video devices into money printers.

Sony’s “Founding Prospectus,” handwritten by Ibuka in 1946, described “a stable workplace where engineers could work to their hearts’ content in full consciousness of their joy in technology and their social obligation.” It also established the primacy of engineers in the Sony culture, presaging the conflicts at the turn of the century when software became at least as important as hardware.

Those engineers doubted Morita when he insisted that they build a portable music player.

50 Million Walkmans

“Morita was immovable,” John Nathan wrote in “Sony: The Private Life.” “He had watched teenagers on vacation in Japan and the United States lug their radios with them to the beach or into the mountains. How could they resist the opportunity to immerse themselves in their music while they played, exercised, or simply walked down the street?”

In 1979, the Sony Walkman was born.

There were missteps -- among them, the Betamax loss in the VCR wars -- but the Sony brand grew to mean products of stylish design and the highest technical quality, attributes that frequently allowed the company to get away with charging higher prices than competitors.

Sony’s revenue was $3 billion the year the Walkman appeared. Eleven years and 50 million Walkmans later, Sony had $25 billion in revenue and owned CBS Records and Columbia Pictures.

Yet it clung to its Trinitron cathode-ray-tube TVs when Sharp Corp., Samsung, and others were making flat screens the new industry standard in the early 2000s.

Apple, Nintendo

Sony eventually responded, but today both Samsung and LG Electronics Inc. (066570), based in Seoul, sell more TVs than Sony worldwide. Likewise, the company yawned when Nintendo Co., based in Kyoto, Japan, came out with its motion-sensing Wii game in 2006.

Bloomberg News later quoted Stringer as saying he saw it as a “niche game device” and not a competitor. The Wii became a smash hit and remains the best-selling game console today. The PlayStation 3 is third.

No product haunts Sony more than Apple Inc. (AAPL)’s iPod. Before Cupertino, California-based Apple introduced it in 2001, followed by the iTunes Music Store in 2003, Sony was working with other companies on devices that would download music, Stringer said.

Steve Jobs figured it out, we figured it out, we didn’t execute,” he said. “The music guys didn’t want to see the CD go away.”

In his biography of Jobs released last month, Walter Isaacson writes that Sony had “all of the assets,” including a record company, to create its own iPod.

9,000 Layoffs

“Why did it fail?” he writes. “Partly because it was a company … organized into divisions (that word itself was ominous) with their own bottom lines; the goal of achieving synergy in such companies by prodding the divisions to work together was usually elusive.”

By 2004, Sony was looking for a new leader. Net income had fallen to $851 million from $1.51 billion in 1999, and Samsung was about to surpass Sony for the first time as the most- recognizable name in consumer electronics, according to a BusinessWeek-Interbrand survey.

Stringer was running most of the company’s U.S. operations. He’d restored the movie business to profitability with the help of the Spider-Man franchise and had overseen a restructuring that involved laying off 9,000 workers.

He wasn’t eager to leave that post and, as a tall Welshman with a tuft of reddish-gray curls atop his head, he hardly looked like the CEO of a Japanese company.

“I was content to stay in America,” he said.

Burt Reynolds

Sony worldwide, however, needed big changes. Its core business, consumer electronics, was losing money. The job required “someone who was very gifted in his interpersonal skills,” said Peter G. Peterson, then-senior chairman of Blackstone Group, who was advising Sony on its CEO search.

As president of CBS Broadcast Group earlier in his career, Stringer had gained a reputation as an “affable hatchet man” for meeting individually with people he fired, according to a report by the Asia Case Research Centre in Hong Kong. Friends and acquaintances described him as charming and intelligent, with a self-effacing sense of humor.

At his apartment, he said he’s reluctant to boast of his view of the reservoir at Central Park because it might suggest he’s rich. Later, in his corner office at Sony’s U.S. headquarters in midtown Manhattan, he points out nine of the 11 Emmy trophies he shared as a CBS journalist, then grins and said he doesn’t count the others because those “were for lifetime achievement, and that just means it’s the end.”

Nearby, a sculpture of a cowboy on a bucking bronco bears an inscription from Burt Reynolds calling Stringer “the only network president I can hang out with and still love.”

President Chubachi

Stringer became chairman and CEO of Sony in June 2005. He didn’t get the title of president. That turned out to be a problem. The company he took over had too many product fiefdoms that weren’t being held accountable or even talking to each other. Most important was Sony’s electronics business, comprised of eight groups with leaders who answered to Ryoji Chubachi, whom the board named Sony president and electronics CEO when Stringer came on.

Stringer drew up a plan to streamline Sony by creating marketing, software and other platforms common to all the businesses. Progress was slow. He finally determined it was because he wasn’t really in charge of electronics; Chubachi, the president, was.

“President” can be a powerful title in Japan, connoting the day-to-day authority typically commanded by a chief operating officer in the West.

A ‘Content Guy’

“I didn’t know I wasn’t (in control),” Stringer said, a hint of sheepishness in his voice. “I just thought it was a natural part of Japanese companies to be consensus-driven and I had to spend a lot of time trying to achieve consensus.”

He lost a year.

Stringer also encountered a hardware-worshipping culture that mistrusted him because he wasn’t an engineer. He was a “content guy” who supposedly cared less about making devices than pushing movies and music.

“Whenever I mentioned content,” he said, “people would roll their eyes because, ‘This is an electronics company, and content is secondary.’”

That resulted partly from longtime rivalries between engineers in Japan and generally better-paid movie and music people in California. Sony’s consumer electronics unit sometimes declined to send products for use in Sony movies even as Samsung was generating buzz with placements of its phones in blockbusters like “The Matrix.”

PlayStation Popularity

Stringer was alarmed to learn there were software developers working on different product lines who had never met. He threw them a cocktail party so they could exchange business cards and ideas.

At Sony’s annual management conference at Tokyo’s Grand Prince Hotel New Takanawa in 2006, he set aside prominent seats for software developers to stress their importance to the company’s future.

Perhaps the most walled-off of Sony’s product silos was Sony Computer Entertainment, the unit that produced the PlayStation video game system. PlayStation debuted in 1994, the bastard child of a joint Sony-Nintendo project that didn’t work out. Executive Ken Kutaragi, an engineer and rabid gamer, urged his bosses to go ahead without Nintendo. They reluctantly agreed.

By 2000, the PlayStation unit was accounting for a third of Sony’s operating profit. When PlayStation 2 came out that year, Sony had to shut down a website taking pre-orders when the number of visitors soared past 100,000 a minute.

Record Share Price

The company’s stock leaped past $300 per share, an all-time high. Sony was on a roll. There was talk that Kutaragi might be the next CEO.

Sony’s spending on PlayStation marketing events became the stuff of legend. For the annual Electronic Entertainment Expo, the company rented Dodger Stadium in Los Angeles and set up giant tents designed to maximize views of Chavez Ravine and the downtown skyline. Gorging on sushi, mini hot dogs, Chinese food, and alcohol, gamers and Hollywood celebrities wandered around watching El Circo fire dancers and performances by Incubus and the Black Eyed Peas, while Kutaragi and his key U.S. lieutenant, Hirai, chain-smoked in a VIP area.

In retrospect, the PlayStation system, with its elegant blending of hardware and software, might have provided Sony an early platform for competing with iTunes. Stringer himself called Kutaragi “the epitome of convergence,” and Kutaragi said he had aspired to create “a fusion of computers and entertainment.”

Renegade Image

Yet he cordoned the business off from other parts of Sony, mostly ignoring entreaties from executives at other units who wanted to work with his talented engineers. Kutaragi cultivated a renegade image within the company, telling BusinessWeek in 1999 that Sony suffered from “big-company disease.” The bosses tolerated him until the troubled launch of PlayStation 3.

Redmond, Washington-based Microsoft Corp. (MSFT)’s Xbox 360 had been out for a year when the PS3 debuted in 2006. Hirai said, “The next generation doesn’t start until we say it does.”

The new system, loaded with a Blu-ray player and other pricey gear, initially lost between $240 and $307 for each unit sold, even though it was priced at least $100 higher than the Xbox 360, researcher iSuppli noted. Stringer put Hirai in charge of PlayStation. Kutaragi retired from Sony.

Reached by phone in Japan, he said he’s working on a “totally cool” project and declined to comment further. “Many of the Sony old boys may be better to speak to.”

$3.3 Billion Profit

Stringer’s moves appeared to pay off in 2008 when Sony posted an operating profit of $3.3 billion, a hair short of the goal Stringer had set when he began. By then he’d found more than $2 billion in savings through job cuts, plant closings, and supplier reductions.

A year later, Sony was back where it started, reporting a net loss of almost $1 billion. There were rumors that Stringer would step down. Instead, he consolidated his power, finally adding the title of president, laying plans for more cuts and handing control of TVs, PlayStation and other electronics to a group of executives, including Hirai, he called the “four musketeers.”

Two years later, Stringer said the losing year, too, would have been a winner had it not been for the “Lehman shock,” his shorthand for the 2008 global financial crisis. He chuckled about a public remark he recently made about Sony being spared “toads and pestilence.” Still, he looked uncomfortable about what many people -- and certainly Wall Street -- may see as excuse-making.

Staying in TVs

“You can’t keep on saying that, ‘I had this and I had that,’” he said. “When the Thailand floods hit, I thought, well, wait a minute. If you add to that the yen, you don’t feel sorry for yourself, but you do occasionally say, if some of my competition had the same experience...”

Stringer and Hirai vowed that Sony will stay in the TV business even though there are calls for the company to consider dumping it. Stringer talks about Sony’s profusion of products as if it were a badge of honor or a competitive advantage.

“Why don’t you sell?” Stringer asked himself, rhetorically. “Because that’s the Sony legacy, I can’t do that. Everybody at Sony is very proud of the hardware they create.”

Hirai said Sony lowered TV sales targets and will continue shedding assets, cutting staff and factory capacity as it outsources more production. Echoing Stringer’s view that Sony needs to produce a “different kind of TV,” he said Sony is working on prototypes that replace commodity LCD and plasma TVs.

“We’re going to move onto these new technologies sooner rather than later,” Hirai said.

Sony Entertainment Network

Sony hopes to get its cool back with ultralow-power, glasses-free, 3-D sets that double today’s resolution, though they’re not expected to be mainstream until at least 2013.

In October, Sony bought Stockholm-based Ericsson’s share in the companies’ mobile-phone joint venture. The rapidly growing smartphone market presents ample opportunity since Sony is far behind Samsung and Apple with virtually no presence in the U.S. Sony must rely on Google to continue to improve the Android operating system that underpins Sony’s tablets, smartphones and some TV efforts.

Consumers should expect to hear more about Sony Entertainment Network, the company’s most ambitious effort yet to connect all of its devices with all of its content. In addition to movies and music delivered through the disaggregated magic of the cloud, Hirai, who’s overseeing the project, is pushing his team to create additional services and exclusive content. That could include everything from Sony-produced TV shows to extended scenes from movies, including “The Amazing Spider-Man” and “Arthur Christmas.”

Rowing Together

“The plan is to bring everything under the Sony Entertainment Network umbrella,” Hirai said, including the PlayStation Network and its 45 million unique users. He added that only now has hardware become powerful enough to deliver Sony content across all four screens of TVs, smartphones, tablets and computers.

As Stringer’s probable replacement, Hirai is crucial to Sony’s future. A tall native of Japan, the 50-year-old speaks perfect English, sounding like a man in a hurry, and commutes between Tokyo and California, where his family lives. His experience running the PlayStation business and early years working with Sony Music Entertainment give him an “understanding of how hardware and software need to be in lockstep,” he said.

He and Stringer say everyone at Sony is now rowing together. Last year, Hirai moved hundreds of PlayStation employees from the hip Aoyama section in Tokyo to Sony headquarters in grittier Shinagawa. The move was symbolic -- breaking down the old PlayStation isolation -- as well as practical, saving money and making it easier for everyone to work together. Hirai said it made him briefly unpopular.

‘Believe in the Vision’

Loff, the Macquarie analyst, wondered why Sony doesn’t take bolder steps to right its TV business -- perhaps a huge round of layoffs.

“I don’t think they know what to do,” he said.

Loff started covering Sony earlier this year, about the time of Japan’s earthquake. His early assessments of the company were kind. After he ranked Sony as an “outperform” stock, Macquarie sales staff asked him if he was nuts.

“They said this company always overpromises and underdelivers,” Loff said.

As summer went on, the 34-year-old analyst became more inclined to agree with the sales staff. His reports got crankier. In an Aug. 30 report titled “Pushing Reset,” he downgraded his rating to “neutral” and noted something remarkable. For the past nine years, the business that has accumulated more profit than the rest of Sony combined is financial services, mostly life insurance, with some auto insurance and banking.

“Sony is a life insurance company with a money-losing TV business,” Loff said.

Informed of this analysis, Stringer shrugged and said, “Yeah, it’s been a big moneymaker.”

Breakfast over, Stringer is headed to a memorial service for former “60 Minutes” commentator Andy Rooney, then to the Sony offices in Midtown Manhattan. Rumors have again floated that his resignation might be imminent.

Not true, Stringer said.

“I’m still here because I love the place,” he said. “I completely believe in the vision and I think we’re getting there. But you can’t expect people to be patient.”

To contact the reporters on this story: Bryan Gruley in Chicago at; Cliff Edwards in San Francisco at

To contact the editor responsible for this story: Jim Aley at


Spanish Yields Rise to Euro-Era Record

By Emma Ross-Thomas - Nov 17, 2011 5:02 PM GMT+0700
Enlarge image Spain Pays Almost 7% to Sell 10-Year Bonds as Demand Drops

Spain’s current 10-year benchmark bond yield rose to 6.708 percent after the auction from 6.69 percent before. Photographer: Denis Doyle/Bloomberg

Nov. 17 (Bloomberg) -- Vicky Pryce, senior managing director at FTI Consulting Inc., talks about the European Central Bank's purchase of Italian bonds. She speaks with Maryam Nemazee on Bloomberg Television's "The Pulse." (Source: Bloomberg)

Spain sold 3.56 billion euros ($4.8 billion) of a new 10-year benchmark at an average yield of almost 7 percent, the most since the euro’s creation, as demand for the securities dropped.

The Madrid-based Treasury said it sold the bond due in January 2022 at an average yield of 6.975 percent, compared with 6.69 percent for similar securities on the secondary market before the auction and 5.433 percent when it sold bonds due in April 2021 last month. The bank had set a maximum target of 4 billion euros for today’s sale.

“Tensions are increasing on Spain for sure even as rates remain sustainable for the moment,” Laurence Boone, chief European economist at Bank of America Merrill Lynch in London, said by phone. “This is not necessarily due to Spain itself, but more to the lack of a solution at the European level.”

Rising bond yields from the Netherlands to Finland and Austria indicate European officials are struggling to convince investors they can stem the debt crisis that began in Greece and assure the survival of the 17-nation currency. Spanish bond yields rose today to the highest since the start of the euro, breaching the level that prompted the European Central Bank to start buying Spanish and Italian debt in August.

Demand at today’s auction was 1.54 times the amount sold, compared with 1.76 when 10-year securities were sold in October. That’s the lowest since 2008, according to data compiled by Bloomberg.

Spain’s current 10-year benchmark bond yield rose to 6.708 percent after the auction from 6.69 percent before. The extra yield on Spanish debt over German equivalents was 495 basis points, compared with 460 basis points yesterday.

To contact the reporter on this story: Emma Ross-Thomas in Madrid at

To contact the editor responsible for this story: Craig Stirling at


Fiat 500 Fails Marchionne on Showroom Miss

By Tim Higgins - Nov 17, 2011 6:01 AM GMT+0700
Enlarge image Chrysler Group Chief Executive Officer Sergio Marchionne

Chrysler Group Chief Executive Officer Sergio Marchionne. Photographer: Jeff Kowalsky/Bloomberg

Chrysler Group LLC hired Jennifer Lopez and built new showrooms to reintroduce Americans to the Fiat brand. So far, that has not worked out.

North America sales of the Fiat 500 through October totaled 21,380, short of Chief Executive Officer Sergio Marchionne’s forecast of 50,000 deliveries. The rollout was held back by Chrysler’s decision to create new stores for Fiat instead of using space within Chrysler dealerships.

Chrysler said it plans to open about 30 more U.S. dealerships to sell the Italian brand by the end of the first quarter next year. There are about 120 now. The slow start meant Fiat missed a chance to take advantage of limited supplies of Toyota Motor Corp. (7203) and Honda Motor Co. models after the tsunami in March disrupted the supply of parts from Japan.

“We need to continue to work on distribution,” Marchionne told reporters yesterday in Toledo, Ohio. “We’ve had 50 dealers, 60 dealers trying to sell the car. I think Ferrari has more dealers than that.”

While Chrysler executives were working to add dealers, Hyundai Motor Co. (005380)’s Elantra, General Motors Co. (GM)’s Chevrolet Cruze and Bayerische Motoren Werke’s Mini brand -- small cars that compete with the Fiat 500 for customers -- saw sales soar this year.

“The development of the Fiat dealer network was a mistake and now it’s failing,” Scott Hogle, a former manager for Chrysler in the western U.S., said in an e-mail. Reintroducing a brand while GM and Ford Motor Co. (F) are eliminating lines required “new products and advertising that Chrysler/Fiat is not in a position to provide.”

May Pay Off

The strategy may pay off over time, said Jeremy Anwyl, chief executive officer of, which tracks vehicle sales and pricing.

“They were trying to create some element of uniqueness for the Fiat retail experience,” he said. “It might have hurt them in terms of some individual month sales, but from the bigger picture, when you look at over the span of years, it makes more sense.”

Chrysler’s strategy was to commit separate space for Fiat so the small cars wouldn’t get lost in showrooms with much larger vehicles, such as the Jeep Grand Cherokee and Ram pickups. The additional outlets will complement the marketing efforts of Olivier Francois, the brand’s worldwide chief, who began a U.S. campaign starring Lopez, the singer and actress, in September.

Francois is overseeing the introduction of the high- performance Abarth version of the 500, unveiled yesterday at the Los Angeles auto show. It will reach showrooms early next year.

‘Takes Time’

“The process of launching a new brand with three models, the 500, Cabrio and Abarth, is a process that takes time,” he said in a telephone interview in advance of the auto show. “We continue to increase our customer awareness.”

While Chrysler, majority owned by Fiat SpA (F), increased its profit forecast to as much as $600 million this year, excluding expenses for paying off U.S. and Canadian government loans, its global sales aren’t growing at the pace set by Marchionne. He has called for Chrysler’s sales to grow 32 percent to 2 million while the rate of growth through three quarters was 21 percent.

Chrysler began selling the 500 in March, nearly 30 years after the Italian brand pulled out of the U.S. market. The company had earlier aimed to have 165 outlets in 119 U.S. markets, with the first stores open by February. Gualberto Ranieri, a Chrysler spokesman, said about 130 stores in the U.S. will be open by year’s end and Francois said the number will rise to 150 -- “a good level” -- by the end of March.

No ‘Blockbuster’

“They’ve done a great job in building the hype” for the Fiat 500, said Jesse Toprak, an industry analyst with, a Santa Monica, California-based website that tracks auto sales. “But I don’t think that it has been the blockbuster intro.”

The Auburn Hills, Michigan-based automaker ran into delays opening retail outlets, such as issues with local government building permits required for construction, Laura Soave, head of the Fiat brand in North America, has said. When he was asked yesterday if Soave would continue in that role, Marchionne replied, “For the time being.”

The subcompact market in the U.S. will probably expand to 1.1 million in 2016 from 450,000 in 2010, according to IHS Automotive’s estimates. Fiat will try to get more attention in that space by offering special editions, such as a Gucci version that reaches dealers this month, and a battery-powered 500 next year, Francois said.

“There’s a lot of potential to grow,” he said.

To contact the reporter on this story: Tim Higgins in Los Angeles at

To contact the editor responsible for this story: Jamie Butters at


Jobless Claims at 388,000; Slow Move Lower Continues

By: Reuters
Published: Thursday, 17 Nov 2011 | 8:38 AM ET
New U.S. claims for unemployment benefits dropped to a seven-month low last week, a government report showed on Thursday, suggesting the labor market was continuing its gradual improvement.


Initial claims for state unemployment benefits fell 5,000 to a seasonally adjusted 388,000, the Labor Department said, from an upwardly revised 393,000 the prior week.

Economists polled by Reuters had forecast claims rising to 395,000 from the previously reported 390,000.

The claims data covered the survey period for Novembers nonfarm payrolls. Claims dropped 16,000 between the October and November survey weeks, implying an improvement in nonfarm 1701671020

After wobbling in the second quarter, the labor market is regaining momentum, but not enough to cut into a 9 percent unemployment rate and promote faster economic growth.

The unexpected decline in claims last week was the latest sign that the economy maintained speed in the fourth quarter, further reducing the risk of a new recession.

But the crisis in Europe, which has caused bond market turmoil across the region, could derail the recovery.

A Labor Department official described the report as straightforward.

Initial claims have now held below the 400,000 mark that is normally associated with some healing in the jobs market for a second straight week.

The four-week moving average of claims, considered a better measure of labor market trends, fell 4,000 to 396,750 -- the lowest since April.

The number of people still receiving benefits under regular state programs after an initial week of aid dropped 57,000 to 3.61 million in the week ended Nov. 5

Economists forecast so-called continuing claims rising to 3.64 million from a previously reported 3.62 million.

The number of Americans on emergency unemployment benefits slipped 18,358 to 2.94 million in the week ended Oct. 29, the latest week for which data is available.

A total of 6.77 million people were claiming unemployment benefits during that period under all programs, down 62,278 from the prior week.


Apple Launches Audit of Chinese Suppliers

By: Kathrin Hille in Beijing and Joseph Menn in San Francisco

(CNBC NEWS) Apple has hired an outside specialist firm to help audit the environmental practices of its suppliers in China following a series of critical reports by activists.

Assembly line workers at Foxconn
AFP | Getty Images
Chinese workers assemble electronic components at the Taiwanese technology giant Foxconn's factory in Shenzhen. Foxconn is a major supplier to Apple.

The maker of iPhones and iPads met a coalition of environmental groups in China on Tuesday and told them the firm was engaged in audits of suppliers with which they had found fault. The audits of 11 suppliers so far followed a meeting in August as the coalition prepared to release a sharply critical report.

Ma Jun, director of the Institute of Public and Environmental Affairs and leader of the coalition, said the audits represented “progress” but more could be done. “This is just the beginning and not the end of it,” he said.

The unprecedented dialogue comes as Apple tries to find a new balance between the secrecy with which it guards its processes and the potential public relations fallout from being targeted by activists on the environment, labor policy or other areas.

The groups want multinationals in the technology sector to address environmental and health problems in factories that make parts or all of their products.

They focused on Apple early this year after the US company, said Mr. Ma, refused to respond to their inquiries and address problems at supplier plants raised by the groups.

In an annual update on its website, Apple discloses how many suppliers are faulted for violating Apple’s environmental policies. But it does not name them or spell out the violations.

In January, Mr. Ma’s report first put Apple at the bottom of a list of 29 companies including Hewlett-Packard, Samsung, Sharp and Nokia.

In late August, the groups prepared another report in which Apple was accused of using suppliers with public records of environmental violations and taking “advantage of the loopholes in developing countries’ environmental management systems”.

It listed a vast array of factories in different parts of China with different kinds and levels of pollution problems.

In one case, local people were quoted as saying they believed that the water in a ditch had been polluted by two factories and this had led to rising rates of cancer. In another case, researchers from the groups found illegally high levels of heavy metal contamination in water taken from a culvert leading from the factory in question to a lake.

Some of the companies cited in the report have been listed by analysts as suppliers of components for Apple products. Apple told the activists that some of the companies were not their suppliers.

On Wednesday, Apple declined to discuss the meeting.

A recent report card from Greenpeace that grades electronics companies on issues including manufacturing practices, their own energy consumption and the materials in their products ranked Apple behind HP, Dell and Nokia but ahead of Sony, Samsung and others.


U.S. Stock-Index Futures Fall After Spain Auction

By Rita Nazareth - Nov 17, 2011 8:12 PM GMT+0700

U.S. stock futures fell, indicating the Standard & Poor’s 500 Index will decline a second straight day, as an increase in Spanish and French borrowing costs bolstered concern the European debt crisis is worsening.

Citigroup Inc. (C) and Wells Fargo & Co. (WFC) lost at least 1 percent. Freeport-McMoRan Copper & Gold Inc. (FCX) dropped 1.2 percent, pacing declines in commodity producers, after China’s central bank said prices haven’t stabilized enough to loosen monetary policy. Applied Materials Inc. (AMAT), the largest producer of chipmaking equipment, decreased 2.5 percent after forecasting sales and profit that fell short of analysts’ estimates.

S&P 500 futures expiring in December dropped 0.4 percent to 1,226.60 at 8:11 a.m. New York time. The benchmark gauge fell 1.7 percent yesterday. Dow Jones Industrial Average futures declined 30 points, or 0.3 percent, to 11,815 today.

The cost of insuring against default on Spanish and French sovereign debt rose to records after the nations’ borrowing costs increased at bond auctions today. German Chancellor Angela Merkel said that neither joint euro-area bonds nor using the European Central Bank as a lender of last resort offer solutions to the debt crisis at present.

In the U.S., builders probably began work on fewer homes in October, a sign housing will remain a laggard in the third year of the U.S. recovery, economists said before a report today. The Federal Reserve Bank of Philadelphia may report at 10 a.m. that its general economic index was little changed at 9 in November from 8.7 the previous month, according to the Bloomberg survey median. Readings greater than zero indicate expansion.

Risk to Banks

Financial stocks drove the S&P 500 lower yesterday after Fitch Ratings said further contagion from Europe’s debt crisis will pose a risk to American banks. The group was down 6.1 percent this month through yesterday, compared with a 1.3 percent decline for the benchmark measure.

Banks fell again today. Citigroup slumped 1.2 percent to $26.55. The shares declined 4.1 percent yesterday. Wells Fargo retreated 1 percent to $24.70.

Energy and raw material producers declined as commodities fell. Freeport-McMoRan, the world’s largest publicly traded copper miner, slid 1.2 percent to $37.76. Schlumberger Ltd. (SLB) erased 0.7 percent to $74.25.

Applied Materials dropped 2.5 percent to $12.16. Profit before certain costs will be 8 cents to 16 cents a share, the company said. Revenue will decline as much as 15 percent from the prior quarter, Applied said, indicating sales of as little as $1.85 billion. Analysts on average predicted profit of 18 cents on sales of $2.07 billion, according to Bloomberg data.

‘Triangle’ Pattern

The S&P 500 has formed a “triangle” pattern, a sign to analysts who study charts that the rally is about to resume after the benchmark gauge for U.S. stocks rose as much as 20 percent last month. The index’s trading range has narrowed since October, as the index stalled after rising to its average level over the past 200 days. Based on the size of this triangle pattern, the index may climb as high as 1,430, said Craig W. Johnson, a technical market strategist with Piper Jaffray Cos.

“A triangle or a pennant formation forms during the middle part of a move, and typically these patterns resolve themselves in the direction of the preceding trend,” Johnson, based in Minneapolis, said in a telephone interview yesterday. “That would suggest that this is ‘the pause that refreshes’ before we get the next leg up.”

To contact the reporter on this story: Rita Nazareth in New York at

To contact the editor responsible for this story: Nick Baker at


Stocks Drop for Fourth Day After European Bond Sales; U.S. Futures Decline

By Stephen Kirkland - Nov 17, 2011 8:17 PM GMT+0700
Enlarge image Stocks Fall Before Europe Bond Sales

Traders monitor stock price movements on electronic screens inside the Bolsas y Mercados stock exchange in Madrid. Photographer: Denis Doyle/Bloomberg

Nov. 17 (Bloomberg) -- Marino Valensise, chief investment officer at Baring Asset Management Ltd., talks about euro-zone bond markets, Chinese monetary policy and the outlook for equities. He speaks from London with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)

Stocks fell for a fourth day, the longest stretch of losses in two months, while U.S. index futures and commodities declined as Spanish and French borrowing costs rose and China’s central bank said it’s not ready to loosen inflation controls.

The Stoxx Europe 600 Index lost 1.4 percent at 8:10 a.m. in New York. Standard & Poor’s 500 Index futures sank 0.3 percent. The 10-year Spanish bonds trimmed earlier declines, with the yield rising 27 basis points to 6.67 percent. The price of default insurance on European government debt climbed to a record, while the cost for banks to fund in the dollar reached the highest since 2008. The Swiss franc weakened against its major peers. Oil fell 1.6 percent.

“The crisis is being driven by systemic causes and until that systemic weakness has been addressed, all euro government bonds aside from bunds will continue to come under pressure,” said Richard McGuire, a fixed-income strategist at Rabobank International in London.

Spain sold 3.56 billion euros ($4.8 billion) of 10-year bonds at 6.975 percent, while France sold 3.33 billion euros of 2016 notes yielding 2.82 percent. German Chancellor Angela Merkel said that neither joint euro-area bonds nor using the European Central Bank as a lender of last resort offer solutions to the debt crisis at present. The ECB bought Spanish and Italian bonds today, according to at least two people with knowledge of the transactions, who declined to be identified because the trades are private.

‘Difficult Environment’

More than 15 stocks fell for every one that gained in the Stoxx 600. Voestalpine AG sank 8.5 percent as Austria’s biggest steelmaker cut its profit outlook for the full year, citing a “difficult economic environment.” Christian Hansen Holding A/S slid 5.2 percent as a person familiar with the transaction said PAI Partners sold a 1.7 billion-krone ($308 million) stake in the Danish food-ingredients maker.

The S&P 500 dropped 1.7 percent yesterday. Applied Materials Inc. slid 2.5 percent in after-hours New York trading as the largest producer of chipmaking equipment forecast first- quarter sales and profit that missed analysts’ predictions.

A report at 10 a.m. New York time may show manufacturing in the Philadelphia region expanded at the fastest pace in seven months in November, a sign U.S. factories may provide more support for the recovery. The Federal Reserve Bank of Philadelphia’s general economic index increased to 9 from 8.7 last month, according to the median estimate of economists surveyed by Bloomberg.

Jobless Claims

Other data may show U.S. housing starts fell 7.3 percent in October, the biggest drop since April, and initial claims for jobless benefits were little changed last week, economists said.

Demand at Spain’s auction was 1.54 times the amount sold, the lowest since 2008, according to data compiled by Bloomberg. French five-year bonds rebounded, with the yield slipping three basis points. The extra yield investors demand to hold the nation’s 10-year debt instead of bunds increased to as much as 204 basis points, before trading 10 basis points lower at 179.

The Markit iTraxx SovX Western Europe Index of credit- default swaps on 15 governments rose eight basis points to 363. The cost for European banks to fund in the U.S. currency rose for a fourth day. The three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, increased to 131 basis points below the euro interbank offered rate, from 123 yesterday.

Franc Weakens

The Swiss franc slid 0.3 percent against the euro and depreciated 0.2 percent versus the dollar, falling for the fourth straight day. The euro depreciated less than 0.1 percent to $1.3451.

New York crude fell to $100.43 a barrel, after climbing 3.2 percent yesterday. Nickel, aluminum, zinc and copper fell more than 1.5 percent.

The MSCI Emerging Markets Index slipped 0.8 percent. The Hang Seng China Enterprises Index sank 1 percent in Hong Kong. Poland’s WIG20 Index lost 2 percent in Warsaw, led by KGHM Polska Miedz SA, the country’s only copper producer. Benchmark gauges in Russia and India lost at least 1.8 percent.

To contact the reporter on this story: Stephen Kirkland in London at

To contact the editor responsible for this story: Stuart Wallace at


France Clashes With Germany Over ECB’s Rescue Role

By Mark Deen and Tony Czuczka - Nov 17, 2011 5:33 PM GMT+0700

French Finance Minister Francois Baroin risked renewing a clash with Germany over using the European Central Bank as a backstop, saying that ECB support for Europe’s recue fund is the best way to counter the debt crisis.

Baroin’s comments underscore French unease as the debt crisis moves to the euro region’s second-largest economy. The extra yield demanded by investors to hold French 10-year bonds over German bunds widened to a euro-era high today.

“We consider that the best way to avoid contagion is to have a solid firewall” by giving the fund a bank license, Baroin said in a speech in Paris late yesterday. “We haven’t won the argument. We won’t make it a casus belli, but naturally we continue to think it would be the best way to bring stability to Europe.”

As global leaders step up calls on Europe to find a fix to the crisis now entering its third year, the French stance is again running into resistance from German Chancellor Angela Merkel’s government, which opposes enlisting further support from the ECB.

“If politicians believe the ECB can solve the problem of the euro’s weakness, then they’re trying to convince themselves of something that won’t happen,” Merkel said in a speech in Berlin today.

The Frankfurt-based ECB itself has also resisted calls to provide more support. Mario Draghi, the Italian who took over as president of the central bank this month, said Nov. 3 that backstopping government borrowing lies outside the ECB’s remit.

French Spread

The clash is intensifying as France, the second-biggest backer of the European Financial Stability Facility after Germany, is dragged more deeply into the crisis that began more than two years ago in Greece and has in the past week led to the ousting of Italy’s Silvio Berlusconi.

The premium France pays over Germany to borrow for 10 years jumped to 200 basis points today, the highest since 1990. Yields on Dutch, Finnish and Austrian debt also increased this week. Spain sold 3.56 billion euros ($4.8 billion) of a new 10-year benchmark at an average yield of almost 7 percent, the most since the euro’s creation, as demand for the securities dropped.

Panic Spreading

“Nothing spreads like fear,” Holger Schmieding, chief economist at Joh. Berenberg Gossler & Co. in London, said in a note. “If the European Central Bank does not intervene forcefully to stop the rot, the panic could spread even further and eventually put the very existence of the euro and the ECB at risk.”

France’s 10-year government bonds now yield about 3.7 percent, compared with 2.2 percent for U.K. gilts and 2 percent for U.S. Treasuries. Both the U.K. and the U.S. governments are benefiting from bond purchases of the Bank of England and the Federal Reserve and Baroin cited those programs as examples that Europe should follow.

President Barack Obama said financial-market turmoil will continue until European leaders persuade investors they have a convincing plan. Bank of England Governor Mervyn King and the U.K. Treasury said Europe’s woes are the biggest threat to the British economy.

“I’m deeply concerned, have been deeply concerned -- I suspect will be deeply concerned tomorrow and next week and the week after that,” Obama said yesterday during a visit to Canberra.

Rescue Efforts

The current market rout comes three weeks after European leaders completed an all-night summit to bolster their rescue efforts. They agreed to recapitalize banks and force bondholders to take a 50 percent writedown on Greek debt in what they called a comprehensive approach intended to end the crisis.

That effort is unlikely to be enough and requires further support from the ECB, according to Citigroup Chief Economist Willem Buiter.

“The only remaining show in town is the ECB,” Buiter said yesterday on Bloomberg Television’s “Surveillance Midday” with Tom Keene. “They may have to hold their noses, but they will have to do it,” he said. “The notion that they can’t do this because of their price mandate is nonsense.”

French President Nicolas Sarkozy had earlier backed down over the role the ECB should play in fire fighting, acknowledging Germany’s inter-war experience of hyperinflation, to help obtain the Oct. 27 accord among European leaders. “Germany has historic, almost sociological concern about central bank intervention,” Baroin said in Paris.

Buiter, a former member of the Bank of England’s monetary policy committee, suggested that Germany should look beyond that experience. “We’re not asking for Weimar,” he said.

To contact the reporters on this story: Mark Deen in Paris at; Tony Czuczka in Berlin at

To contact the editors responsible for this story: Craig Stirling at; James Hertling at


Biggest Oil Find in Decades Becomes $39B Caution

By Nariman Gizitdinov - Nov 17, 2011 4:01 PM GMT+0700

After 11 years and $39 billion of investment, Exxon Mobil Corp., Royal Dutch Shell Plc (RDSA) and their partners have yet to sell a drop of oil from what was touted as the world’s biggest discovery in four decades.

Centered on a man-made island 70 kilometers (44 miles) from Kazakhstan’s coast, the Kashagan project is just months away from completion, $15 billion over budget and 8 years behind schedule. As the milestone of first oil nears, the Kazakh government is pressuring the group for a commitment on an even- bigger second phase, a project the oil companies are undecided on and one analyst says may not make money.

“The biggest worry is whether the project can ever be profitable given the huge cost escalation and start-up delays,” said Julian Lee, a senior analyst for the Centre for Global Energy Studies in London. It may be “impossible for investors to earn a return on any investment in a second phase before their contract for the field expires” in 2041.

Kashagan, which may hold enough oil to supply the world for six months, has become a cautionary tale for oil companies worldwide as they spend an estimated $20 trillion through 2035 finding supplies in ever more difficult places. Expenses mounted as engineers underestimated the complexity of drilling under a region of the Caspian Sea that’s frozen almost half the year. The government accused the partners, which are allowed to recoup spending before sharing the oil, of inflating costs.

‘Colossal’ Work

Nursultan Nazarbayev, Kazakhstan’s leader-for-life, toured Kashagan in September and declared it a “colossal” work defining his 20-year rule since the Soviet Union’s collapse, which included building a new capital city in the middle of the country’s steppe. When the oil project starts production it will be a milestone for the Central Asian republic of 16.5 million that’s four times the size of Texas.

The project is vital to Nazarbayev because the country relies on oil for 18 percent of gross domestic product and is rebuilding the economy after a devastating banking crisis. Kazakhstan’s national oil company believes expansion can be achieved by 2017. The partners in the project aren’t so ready to rush in.

“We will finish phase one and then we will look at phase two afterwards,” Peter Voser, chief executive officer of The Hague-based Shell, said in an interview at the Group of 20 Summit in Cannes, France. “It’s not immediate.”

Christophe de Margerie, CEO of France’s Total SA (FP), echoed his sentiments, saying “let’s start Kashagan one” when asked about prospects for the second phase.

Lethal Concentration

Kashagan has proved potentially lethal as well as complicated. The crude oil, locked 4,200 meters (2.6 miles) below the seabed in a highly pressurized reservoir, has a high concentration of poisonous “sour gas,” according to North Caspian Operating Co., or NCOC, the venture formed to manage the project.

Gas sensors dot the island, scanning for any leaks of the vapor, which has a 15 percent concentration of flammable hydrogen sulfide. Weekly emergency drills are carried out with the 5,500 people living and working on the biggest of five islands. That number will drop to about 250 when the first phase becomes operational.

The project’s structures are wrapped in impermeable membranes to keep contamination from the Caspian, home to seals and caviar-bearing sturgeon, and surrounded by barriers to fend off ice. The water at the site is only 3 to 6 meters deep and with low salinity and winter temperatures below minus 30 degrees Celsius (minus 22 Fahrenheit), the northern Caspian Sea freezes for almost five months of the year.

Main Partners

The geology, islands and ice and have inflated costs for the first phase to $39 billion from $24 billion estimated by the government in 2008.

The prize for the five main partners is as much as 252,000 barrels of crude a day each from peak output once the second phase is running. That kind of production is growing harder to find worldwide as existing fields age and governments in the Middle East, Russia and Latin America reserve control for state companies.

Exxon, Shell, Total, Rome-based Eni SpA (ENI) and KazMunaiGaz National Co., the state oil company, hold 16.8 percent of NCOC each. Houston-based ConocoPhillips has 8.4 percent and Japan’s Inpex Corp. (1605) 7.6 percent.

‘Big Beasts’

“The fact you had big beasts with equal shares in the project who were thus able to slow down areas where they had different views shows the Kazakh model hasn’t been an optimal one,” Stuart Joyner, an oil industry analyst at Investec Securities Ltd. in London, said. “The cost, complexity and delays have significantly impacted the economics.”

The partners aim to find a “preferred” expansion plan by the end of this year that can be sent to the government for approval, according to NCOC.

“We don’t have clarity either about the time-frame and cost or about the planned production volumes at the second stage,” Kazakh Oil and Gas Minister Sauat Mynbayev said last month.

One option is building more islands, similar to the existing 1.9 square-kilometer (0.7 square mile) manned collection hub and four surrounding structures, NCOC said. The cluster was built from 7 million metric tons of rock carried 300 kilometers from an ice-free port to the south.

Makes Sense

Expanding Kashagan makes more sense economically than halting at the first phase, KazMunaiGaz’s former Chief Executive Officer Kairgeldy Kabyldin said on Oct. 4, before he stepped down from the post. Still, there are signs that some partners may be willing to cut their losses.

ConocoPhillips (COP) Chief Financial Officer Jeff Sheets said on an Oct. 26 conference call that Kashagan is in the “general category of looking around our portfolio in places where we have maybe not long-term strategic good opportunities.”

Oil & Natural Gas Corp., India’s largest energy explorer, and GAIL India Ltd., the nation’s biggest natural-gas distributor, have made a non-binding offer for Exxon Mobil’s 16.8 percent stake in Kashagan, two people with direct knowledge of the matter said in June.

The stake may cost $6 billion, the Financial Chronicle said Oct. 17, citing an unidentified official involved in talks. D.K. Sarraf, managing director of ONGC Videsh Ltd., ONGC’s overseas unit, declined to comment on Kashagan.

Exxon ‘Speculation’

Exxon plans to remain a major investor in Kazakhstan and reports of a Kashagan exit are “speculation,” Charlie Engelmann, a Houston-based spokesman for the Irving, Texas-based company said in a statement.

There are no talks about any partners leaving the project, Andrey Sukhov, Shell’s regional head of taxation in Russia and the Caspian region, said Oct. 21.

Kashagan’s delays already forced one reorganization of the project. In 2008, Rome-based Eni gave up operatorship of the project to the newly formed NCOC, which agreed to pay higher royalties to Kazakhstan.

“After many difficulties and setbacks, and in the face of ballooning costs and much acrimony and debate, the companies had to start over and reallocate roles,” oil industry historian Daniel Yergin said in his book The Quest, published in September. “All of this has infuriated the Kazakh government, which is having to wait years longer that anticipated for Kashagan revenues to flow.”

Double Production

Kashagan may initially produce 370,000 barrels a day, which will rise to 450,000 barrels a day by 2016, Kazakhstan’s Mynbayev said Oct. 4. The expansion would more than triple that to 1.5 million barrels a day, according to President Nazarbayev. That’s almost double Kazakhstan’s current production of about 1.6 million barrels a day, about the same as Libya produced before the revolt against Muammar Qaddafi.

Completing the expansion as early as 2017 is only possible if the partners choose a plan by early next year, KazMunaiGaz National CEO Bolat Akchulakov said in an interview in Astana, the capital, on Oct. 25.

“Phase two won’t move ahead simply, it will be later than people anticipate,” Investec’s Joyner said. “Kashagan will be a million-barrel-a-day field, but from a value perspective it’s been disappointing.”

To contact the reporter on this story: Nariman Gizitdinov in Almaty at

To contact the editor responsible for this story: Will Kennedy at


European Stocks Decline as Lower Spanish Bond Demand Fuels Crisis Concern

By Sarah Jones - Nov 17, 2011 8:10 PM GMT+0700
Enlarge image Europe Stocks Decline Before Bond Auctions

A trading board displays the day's volume on the WIG20 index, at the Warsaw stock exchange in Warsaw, Poland. The Stoxx 600 declined 0.4 percent at 236.14. Photographer: John Guillemin/Bloomberg

Nov. 17 (Bloomberg) -- Richard Corbett, adviser to European Council President Herman Van Rompuy, discusses the sovereign-debt crisis. He speaks from Brussels with Francine Lacqua on Bloomberg Television's "Countdown." (Source: Bloomberg)

European stocks fell after Spain’s borrowing costs surged to a euro-era record on waning demand at a bond sale, adding to concern the region’s debt crisis is deepening. U.S. futures fell and Asian shares were little changed.

BNP Paribas SA and Societe Generale SA led a selloff in banks, both dropping at least 3 percent as dollar funding costs for European lenders climbed to a three-year high. Mining companies tumbled with metal prices.

The benchmark Stoxx Europe 600 Index lost 1.4 percent to 233.74 at 1:08 p.m. in London, extending the decline from this year’s high on Feb. 17 to 20 percent as the debt crisis spreads across the region’s core. Futures on the Standard & Poor’s 500 Index expiring in December dropped 0.3 percent today. The MSCI Asia Pacific Index slid 0.2 percent.

“You have a lot of pressure on yields, you have the structural issues, the liquidity issues, plus market fears -- it’s very bad,” said Patrick Legland, head of research at Societe Generale, on Bloomberg Television. “We are not very far from the point where the European Central Bank will need to intervene one way or another.”

Spanish bonds sank, driving 10-year yields to 6.75 percent, the highest since before the euro was introduced, as borrowing costs climbed to the most in at least seven years at an auction of securities.

Spanish Bond Auction

At today’s sale, Spain sold 3.56 billion euros ($4.8 billion) of new 10-year benchmark at an average yield of 6.975 percent as demand dropped. That’s up from 5.433 percent when it sold 10-year bonds on Oct. 20 and is the highest rate since at least September 2004.

In France, the extra yield, or spread, investors receive for holding 10-year French debt instead of benchmark German bunds reached 2 percentage points for the first time in the shared currency’s history as the country sold 6.98 billion euros of notes.

A gauge of European banks declined 2.6 percent as the three-month cross-currency basis swap, the rate banks pay to convert euro payments into dollars, reached 131 basis points below the euro interbank offered rate in London, the most expensive since December 2008.

BNP Paribas, France’s largest lender, fell 3.5 percent to 28.82 euros. Societe Generale slid 3 percent to 17.11 euros. Credit Agricole SA (ACA) lost 4.1 percent to 4.46 euros. Deutsche Bank AG (DBK), Germany’s largest bank, declined 2.8 percent to 27.57 euros.

Miners Decline

Antofagasta paced a selloff in mining shares, falling 4.3 percent to 1,124 pence, while Vedanta Resources Plc lost 5.1 percent to 1,034 pence and Xstrata Plc retreated 3.8 percent to 959.8 pence.

Copper tumbled the most in a week in London on concern Europe’s debt crisis may spread to other economies, potentially eroding demand for metals.

ASML Holding NV (ASML), Europe’s biggest semiconductor-equipment maker, dropped 2.5 percent to 28.87 euros after Applied Materials Inc., the world’s largest producer of semiconductor- making equipment, forecast earnings that missed analyst estimates.

Centrica retreated 2.1 percent to 288.7 pence after the U.K.’s largest residential gas and power supplier said 2011 earnings may be “marginally” lower than estimated because warmer-than-average weather has cut natural-gas demand.

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U.K. Consumer Confidence at Record Low

By Jennifer Ryan - Nov 17, 2011 5:20 PM GMT+0700

U.K. consumer confidence fell to a record low in October as Europe’s debt crisis and the unemployment outlook worsened, Nationwide Building Society said.

An index of sentiment dropped 9 points from the previous month to 36, the lowest since the index began in May 2004, the Swindon, England-based customer-owned lender said in an e-mailed report today. A gauge of consumers’ expectations fell 14 points to a record low of 48.

Bank of England Governor Mervyn King said yesterday the U.K. economy faces a “markedly weaker” outlook amid persistent danger from turmoil in the euro area. The bank’s forecasts show inflation is more likely than not to be below its 2 percent target in two years, suggesting policy makers may have to increase their bond-purchase plan again after a 75 billion-pound ($118 billion) expansion in October.

“A wave of disappointing economic news at home and ongoing uncertainty surrounding the euro crisis has dealt a heavy blow to sentiment,” Robert Gardner, chief economist at Nationwide, said in the report. The increase in bond purchases “should help to stimulate the economy in the months ahead.”

The pound was little changed against the dollar after the report, and traded at $1.5734 at 10:18 a.m. in London.

Household ‘Pressures’

A gauge of Britons’ assessment of their present situation fell 3 points to 18, Nationwide said. An index of shoppers’ views on whether it’s a good time to make a major purchase, such as a house or car, dropped 2 points to 75.

Data yesterday showed unemployment jumped in the third quarter as the number of young people looking for work climbed above 1 million for the first time in at least 19 years. In October, jobless claims rose 5,300 to 1.6 million. Inflation was 5 percent in October, according to a Nov. 15 report.

“Pressures on household budgets have also intensified, with underlying wage growth running at less than half the rate of inflation and the jobs market showing renewed signs of weakness,” Gardner said.

Still, households may benefit as the inflation rate drops. King said the central bank forecasts that consumer-price growth will ease “sharply” next year and take-home pay will “recover slowly,” easing pressure on consumers and helping support growth.

Waning Demand

U.K. retail sales unexpectedly rose 0.6 percent in October from the previous month, the Office for National Statistics said today in London. The median forecast in a Bloomberg News survey of 25 economists was for a 0.2 percent drop.

Sales defied forecasts as shops lured cash-strapped consumers with discounts. The gains may not last, as Britons struggle to shake off strains from labor-market slack, above- target inflation and the biggest fiscal squeeze since World War II.

The data “suggest that demand on the high street has continued to grow, despite the current intensity of the fiscal and inflation squeezes on consumers,” Samuel Tombs, economist at Capital Economics Ltd. in London, said in a research note. Still, given pressure on shoppers, “overall real consumer spending is likely to continue to fall sharply for some time to come.”

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China Indicator Shows Economy Maintaining Momentum, Conference Board Says

By Bloomberg News - Nov 17, 2011 12:44 PM GMT+0700

A Chinese leading indicator rose, suggesting the world’s second-biggest economy is weathering moderating export growth and a government campaign to curb consumer and property prices.

The index increased 0.4 percent to 160.2 in September, The Conference Board said on its website today, citing a preliminary reading. The gauge is designed to capture prospects over the coming six months. August’s index was revised to a 0.6 percent gain from a previous 0.5 percent increase.

The People’s Bank of China said yesterday growth is slowing as a result of the government’s macroeconomic policies and that the economy’s momentum remains “strong.” The comments indicate the central bank will implement “selective easing” such as cutting lenders’ reserve requirements rather than any “across- the-board” loosening, Credit Suisse AG said in a report today.

The leading index “is still expanding strongly,” confirming China’s “soft-landing story,” Andrew Polk, a Beijing-based economist at The Conference Board, said on Bloomberg Television. The European debt crisis remains the nation’s biggest risk, and “if that takes a drastic turn for the worse, then we’re looking at some pretty serious hit in China’s export market,” he said.

The benchmark Shanghai Composite Index rose 0.1 percent as of 1:17 p.m. local time today. The gauge has lost 12 percent this year amid government’s policy tightening and worsening global outlook.

Index Components

The leading index’s six components are loans by financial institutions, raw-material supplies, deliveries and new export orders information from the manufacturing purchasing managers’ index, consumer expectations, and total floor space started. The central bank publishes the first two components and the statistics bureau releases the other four.

The leading index, first published in May 2010, has successfully signaled turning points in China’s economic cycle if plotted back to 1986, the organization says.

The central bank yesterday said it can’t loosen control over prices and reiterated Premier Wen Jiabao’s pledge to “fine-tune” policies when needed. While inflation may continue to moderate, “the foundation for price stability is not yet solid,” the bank said in its third-quarter monetary policy report.

China posted the lowest inflation in five months in October after a year-long campaign to tame prices that included higher interest rates, lending curbs and restrictions on home purchases. Economic growth slowed to 9.1 percent last quarter, the least since 2009, government data show.

The government won’t adopt any “drastic” easing through the end of this year apart from aiding smaller companies and banks and loosening credit restrictions, according to Polk.

China’s growth may slow to around 8.5 percent this quarter with full-year growth at “just over 9 percent,” he said. Other risks facing the economy include a cooling real-estate market and a local government debt problem that could cause further credit crunch, he added.

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