Tuesday, May 31, 2011

Power Thieves Keep 400 Million Indians in Dark

To run his fan, lamp and small television, Sikander strings a homemade wire hook over power cables outside his one-room New Delhi house, helping perpetrate the world’s biggest energy heist.
“The cables are right there, it’s really easy to take it,” said Sikander, 26, who uses only one name and earns less than $2 a day cleaning people’s ears on the streets of the Indian capital. “You have to be very careful when it rains because you can get electrocuted tying the wires together.”
About one-third of the 174 gigawatts of electricity generated in India annually is either stolen or dissipates in the conductors and transmission equipment that form the country’s distribution grid, Power Secretary P. Uma Shankar said in an interview. That’s more than any other nation, according to a 2010 report by Deloitte LLP analysts that also estimated India’s losses at 32 percent. In China the rate was 8 percent.
The pilfering of almost enough power to charge California for a year lowers the annual income of Indian distribution companies by $16 billion and cuts output by 1.2 percent in the $1.3 trillion economy, India’s Planning Commission says.
Losses hamper work to bring grid electricity to an estimated 400 million people living without it and contribute to what the Central Electricity Authority says is a 10 percent shortfall in meeting peak power demand.

Reliance, Tata

Now the government is asking companies, including Reliance Power Ltd. (RPWR) and Tata Power Ltd., to run more of the network that connects homes, offices and factories with substations. The goal, Shankar said, is to halve losses by 2013 in a country where blackouts leave Indians sweating in summer temperatures of up to 46 degrees Celsius (115 degrees Fahrenheit).
“Electricity theft drags down not just the power sector but the entire Indian economy,” said Michael Parker, a Hong Kong-based senior analyst at securities and research company Sanford C. Bernstein & Co. “Keeping the lights on is fundamental to economic growth. Failure to do that guarantees sub-par performance.”
Tata Power and Reliance Power subsidiaries have reduced by two-thirds the amount of power stolen in the New Delhi network that they have jointly run since 2002. That hasn’t made them profitable. BSES Rajdhani Power Ltd., the unit of Reliance Power that supplies western and southern parts of the capital, says it is losing $2 million a day due to theft and low government- imposed rates.

Shares Fall

Shares of Reliance Power, owned by billionaire Anil Ambani, have fallen 25 percent this year amid a probe by the Central Bureau of Investigation into the 2008 sale of mobile-phone permits. The CBI charged three companies, including one controlled by Ambani’s group. All three deny wrongdoing.
Tata Power’s 9.8 percent drop in the period matched the decline in India’s benchmark stock index.
“If state electricity boards or private distribution companies are not able to recover the money, it will result in them having to default on loans,” Gopal Saxena, BSES Rajdhani’s chief executive officer, said in an interview. “The credibility of the entire sector comes into question and new power projects will not be approved.”
Enforcement officers have stepped up raids across the capital and cheaters have been offered amnesty if they agree to install new meters that are harder to tamper with. Still, illegal cables remain coiled around pylons providing power to shacks in Sikander’s East Patel Nagar neighborhood, competing for space with open sewage channels and piles of trash.
“In a government-owned company there can be corruption, which interferes with the task of reducing theft” as officials take bribes not to report thieves, power secretary Shankar said. “Private companies tend to have much better governance and have very clear targets.”

City Grids

State-run electricity boards deliver 85 percent of India’s power 19 years after the first private supplier, a subsidiary of now-defunct Enron Corp., took over distribution in western Maharashtra state, home to Mumbai. Grids in cities including Gurgaon, outside Delhi, and Nagpur may be handed to private companies in the next year, according to Shankar.
“Delhi clearly demonstrates that privatization is the only way to arrest losses and bring companies into a stage of financial viability,” said Saxena.
Companies such as Lanco Infratech Ltd. (LANCI) and Torrent Power Ltd. (TPW) say they want to bid on lease contracts, which enable them to operate distribution systems without having to buy land and infrastructure. That model is already used in the city of Agra, 200 kilometers (125 miles) south of New Delhi.

Growth Threat

Prime Minister Manmohan Singh is seeking to secure $400 billion of investment in the power sector in the next five years as he targets an additional 120,000 megawatts in generation by 2017. India has missed every annual target to add electricity- production capacity since 1951.
Failure to supply enough power could curb expansion in India’s economy, Asia’s third-largest, which the International Monetary Fund estimates may grow 8.2 percent in 2011 from 10.4 percent in the prior 12 months.
Electricity shortages mean the work of BSES Rajdhani’s Akbar Basha, a 30-year-old enforcement officer who patrols parts of western Delhi, is needed to help keep lights burning and air- conditioning units humming.
Basha uses computer software that detects irregular patterns of power use. For example, a nighttime surge may indicate a factory operating illegally in a residential area.
It’s dangerous work. In the last three years, he says he has been accused of sexual assault by a woman whose house he attempted to inspect and had his car keys stolen and clothes ripped while confronting power thieves.
On April 29 Basha’s team visited an apartment owned by Abhay Dev, 57, a hospital technician, where wires and a lump of metal had been used to bypass the meter. Dev will be fined $340, twice his annual bill, unless the company accepts his claim this was done by earlier tenants, Basha said.
“No one ever admits that they were stealing, there’s always an excuse,” Basha said on the street outside Dev’s apartment. “People are very smart and always come up with new technology. It’s a constant game of cat and mouse.”
(Source: Bloomberg)

World’s Wealthy Rose by 12%: Boston Consulting

The ranks of millionaires expanded by 12 percent in 2010, led by Singapore, as gains in financial markets lifted global wealth for a second straight year, the Boston Consulting Group said.
The number of millionaire households increased to about 12.5 million, the Boston-based firm said in a study released today. Singapore millionaires rose by almost 33 percent after jumping about 40 percent a year earlier. The U.S. had the most $1 million-plus households, with 5.2 million, followed by Japan and China.
“We have seen a growth from 2008 to 2010 that matches the growth from 2005 to 2007,” Peter Damisch, a partner based in the firm’s Zurich office and head of the wealth-management practice in Europe, said in a telephone interview. “But the growth from 2008 to 2010 was driven by the recovery of equity markets and much less by the generation of new wealth.”
Global assets under management rose by 8 percent to $121.8 trillion in 2010, beating the study’s previous peak of $111.8 trillion in 2007. The U.S. and Canada had the greatest absolute gain, climbing $3.6 trillion to $38.2 trillion and replacing Europe as the richest region. Assets in Asia-Pacific, excluding Japan, rose 17 percent, the fastest among regions.
The study looked at 62 countries representing more than 98 percent of global gross domestic product. Some numbers may differ from those in last year’s report because of currency fluctuations and the availability of newer data, said Damisch, a co-author of the report.

More Equities Owned

The increase in wealth last year was mostly a result of strong performance by financial markets, the report said. The MSCI AC World Index, which tracks stocks in developed and emerging markets, returned 13 percent last year, including dividends. North America continued to have the highest proportion of wealth held in stocks, at 44 percent.
Less than 1 percent of households globally were considered millionaires, which is defined as investable assets of more than $1 million, excluding real estate and property such as art. Wealth became more concentrated, with millionaire households controlling 39 percent of the world’s assets, up from 37 percent a year earlier, the study said.
Singapore also had the highest proportion of millionaire households at 15.5 percent, followed by Switzerland and Qatar. Saudi Arabia had the highest concentration of ultra-high-net- worth households, which are those with more than $100 million in assets, at 18 per 100,000. Switzerland was second, and Hong Kong was third.

Offshore Wealth

The amount of offshore wealth, defined as assets housed in a country other than the investor’s legal residence or tax domicile, increased by $300 billion to $7.8 trillion because of market performance and asset inflows, primarily from emerging markets. The proportion of wealth held offshore declined to 6.4 percent from 6.6 percent in part because of stricter regulations in Europe and North America.
Global wealth will increase at a compound annual rate of almost 6 percent from year-end 2010 through 2015 to about $162 trillion, the study said. Wealth in the Asia-Pacific region, excluding Japan, is expected to rise at almost double the global rate, which will result in the region’s share of global wealth increasing to 23 percent in 2015.

New Assets

The report’s authors also looked at the performance of 120 wealth management firms worldwide. Revenue increased by an average of 8.5 percent, and assets under management increased by 7.5 percent, down from 12.8 percent a year earlier.
Net new assets, which is the difference between asset inflows and outflows, increased to 2.3 percent of overall assets managed at the end of the previous year in 2010 from 1.3 percent in 2009, yet remained below pre-crisis levels, the study said. The 2009 number was reduced from 1.5 percent after the firm received more samples. There will continue to be “stronger flows” back to wealth management firms, according to Monish Kumar, a senior partner in the firm’s New York office.
“Wealth management has been a fabulous business and going forward it’s still going to be a very good business, but a little less attractive because of more demanding clients, pricing pressure and increased regulatory costs,” Damisch said.
(Source: Bloomberg)

China Millionaires Jump Past One Million

More than 1 million millionaires live in China, their ranks swollen last year by economic growth, savings and a strengthening currency, according to a Boston Consulting Group survey.
Millionaire households jumped 31 percent to 1.11 million in 2010 from the previous year, a BCG Global Wealth Survey released yesterday showed. That puts China in third place for millionaire households, behind the 5.22 million in the U.S. and Japan’s 1.53 million.
China ranks eighth globally for households with assets worth more than $100 million. Wealth in privately held businesses and property wasn’t accounted for in the survey, thereby missing a major chunk of economic assets in the mainland.
“This grossly underestimates true overall wealth in China,” said Tjun Tang, a partner at BCG in Hong Kong and one of the report’s authors. The survey also excludes works of art, fine wines and yachts, a growing class of assets among China’s well-heeled.
The Asian nation’s affluent class only holds about 5 percent of its wealth offshore, said Tang, and international wealth management companies are constrained by the number of products they can offer inside China.

Highest Concentration

Singapore had the highest concentration of millionaires, accounting for 15.5 percent of the population, the study showed, followed by Switzerland with 9.9 percent and Qatar with 8.9 percent.
Wealth in the Asia-Pacific region excluding Japan is expected to grow at a compound annual rate of 11.4 percent from 2010 to 2015, raising its share of global wealth from 18 percent to 23 percent. Global wealth is projected to grow at about half that pace, from $121.8 trillion to $162 trillion in the same period, according to the report.
India, which has 190,000 millionaires, ahead of 12th ranked Canada with 180,000, is expected to see wealth grow 14 percent annually over the next five years, while China will see 18 percent annual growth.
The measures of wealth are converted to U.S. dollars using the exchange rate at the end of each year, boosting the value of Asian wealth as the region’s currencies strengthened in 2010.
China ranks first among 22 emerging Asian economies as the country most likely to maintain steady and rapid growth over the next five years, according to the Bloomberg Economic Momentum Index for Developing Asia.
(Source: Bloomberg)

Monday, May 30, 2011

Australia's promise: The next Golden State

With a bit of self-belief, Australia could become a model nation.

IMAGINE a country of about 25m people, democratic, tolerant, welcoming to immigrants, socially harmonious, politically stable and economically successful; good beaches too. It sounds like California 30 years ago, but it is not: it is Australia today. Yet Australia could become a sort of California—and perhaps a still more successful version of the Golden State.
It already has a successful economy, which unlike California’s has avoided recession since 1991, and a political system that generally serves it well. It is benefiting from a resources bonanza that brings it quantities of money for doing no more than scraping up minerals and shipping them to Asia. It is the most pleasant rich country to live in, reports a survey this week by the OECD. And, since Asia’s appetite for iron ore, coal, natural gas and mutton shows no signs of abating, the bonanza seems set to continue for a while, even if it is downgraded to some lesser form of boom.  The country’s economic success owes much less to recent windfalls than to policies applied over the 20 years before 2003. Textbook economics and sound management have truly worked wonders.
Australians must now decide what sort of country they want their children to live in. They can enjoy their prosperity, squander what they do not consume and wait to see what the future brings; or they can actively set about creating the sort of society that other nations envy and want to emulate. California, for many people still the state of the future, may hold some lessons. Its history also includes a gold rush, an energy boom and the development of a thriving farm sector. It went on to reap the economic benefits of an excellent higher-education system and the knowledge industries this spawned. If Australia is to fulfil its promise, it too will have to unlock the full potential of its citizens’ brain power.
Australia cannot, of course, do exactly what California did (eg, create an aerospace industry and send the bill to the Pentagon). Nor would it want to: thanks to its addiction to ballot initiatives, Californian politics is a mess. But it could do more to develop the sort of open, dynamic and creative society that California has epitomised, drawing waves of energetic immigrants not just from other parts of America but from all over the world. Such societies, the ones in which young and enterprising people want to live, cannot be conjured up overnight by a single agent, least of all by government. They are created by the alchemy of artists, entrepreneurs, philanthropists, civic institutions and governments coming together in the right combination at the right moment. And for Australia, economically strong as never before, this is surely such a moment.
What then is needed to get the alchemy going? Though government should not seek to direct the chemistry, it should create the conditions for it. That means ensuring that the economy remains open, flexible and resilient, capable, in other words, of getting through harder times when the boom is over (a sovereign-wealth fund would help). It means maintaining a high rate of immigration (which started to fall two years ago). It means, above all, fostering a sense of self-confidence among the people at large to bring about the mix of civic pride, philanthropy and financial investment that so often underpins the success of places like California.
Many Australians do not seem to appreciate that they live in an unusually successful country. Accustomed to unbroken economic expansion—many are too young to remember recession—they are inclined to complain about house prices, 5% unemployment or the problems that a high exchange rate causes manufacturing and several other industries. Some Australians talk big but actually think small, and politicians may be the worst offenders. They are often reluctant to get out in front in policymaking—on climate change, for instance—preferring to follow what bigger countries do. In the quest for a carbon policy, both the main parties have chopped and changed their minds, and their leaders, leaving voters divided and bemused. There can be little doubt that if America could come to a decision on the topic, Australia would soon follow suit.
Its current political leaders, with notable exceptions, are perhaps the least impressive feature of today’s Australia. Just when their country has the chance to become influential in the world, they appear introverted and unable to see the big picture. Little legislation of consequence has been passed since 2003. A labour-market reform introduced by the Liberals was partly repealed by Labor. A proposed tax on the mining companies was badly mishandled (also by Labor), leading to a much feebler one. All attempts at a climate-change bill have failed. The prime minister, Labor’s Julia Gillard, admits she is unmoved by foreign policy. The leader of the opposition, Tony Abbott, takes his cue from America’s tea-party movement, by fighting a carbon tax with a “people’s revolt” in which little is heard apart from personal insults. Instead of pointing to the great benefits of immigration—population growth is responsible for about two-fifths of the increase in real GDP in the past 40 years—the two parties pander shamelessly to xenophobic fears about asylum-seekers washing up in boats.

…or a golden future?

None of this will get Australians to take pride in their achievements and build on them. Better themes for politicians would be their plans to develop first-class universities, nourish the arts, promote urban design and stimulate new industries in anything from alternative energy to desalinating water. All these are under way, but few are surging ahead. Though the country’s best-known building is an opera house, for example, the arts have yet to receive as much official patronage as they deserve. However, the most useful policy to pursue would be education, especially tertiary education. Australia’s universities, like its wine, are decent and dependable, but seldom excellent. Yet educated workers are essential for an economy competitive in services as well as minerals. First, however, Aussies need a bit more self-belief. After that perhaps will come the zest and confidence of an Antipodean California.
(Source: Economist)

Mexican cinemas in India: Once upon a time in the east

A Latin American giant plans to modernise India’s fleapits.

NO COUNTRY is as addicted to the silver screen as India. Every year its cinemas shift more than 3 billion tickets, well over double the quantity sold in America, the next-biggest market. But despite its size, the cheap and cheerful Indian box office doesn’t make much money: takings are less than $2 billion per year, about the same as those in France, which handles one-twentieth as many admissions.
Tickets are cheap because Indian cinemas are often fleapits. Most have only one screen. Just over 1,000 screens out of about 12,000 are in modern, pricier multiplexes. Swanky new cinemas are going up, but slowly: no more than 300 new screens a year, compared with 2,500 in China.
Now, from the other side of the world, comes a plan to fast-forward India’s cinematic development. Cinépolis, a family firm from Michoacán, has gobbled up 60% of the Mexican market and marched into eight other countries in Latin America, making it the fourth-biggest cinema chain in the world. Multiplexes in shopping malls are its speciality: thanks in large part to Cinépolis, Mexico claims one of the world’s most modern cinema infrastructures, with eight out of ten screens in big multiplexes.
The men from Michoacán now aim to pull off the same trick in India. In the past 18 months Cinépolis has opened three multiplexes there, introducing gimmicks such as 3D to regions that had never seen such a thing. Another 43 screens are due to open this year, followed by nearly 100 next year and slightly more the year after. The plans include 14- and 15-screen “megaplexes” in Mumbai and Pune, which will be India’s largest. The company hopes to have 500 screens by 2016, which could make it the biggest player in the country’s fragmented market.
Putting those plans into action is easier said than done. “Everything takes about a year longer than they told you, or more,” says Alejandro Ramírez, a former World Bank economist who has inherited control of the family firm. Most of the 43 screens he is opening this year were supposed to open last year. Complex planning laws are partly to blame. So too is the lack of space in India’s jam-packed city centres, which means shopping malls grow tall and thin, limiting scope for giant multiplexes. Rents as a proportion of sales are 10 percentage points higher in India than in Latin America, Mr Ramírez says.
India’s cinema business is also fiendishly complex for outsiders. Non-English-language films account for 90% of takings, by far the highest proportion in the world (and the opposite of Mexico, where nine out of ten hits are from Hollywood). Even the local market is multilingual. Indian states levy their own entertainment taxes, which run as high as 60%, and some cap ticket prices. Many of the big cinema operators also produce films, something that is rare in Latin America (and illegal, on competition grounds, in the United States). The culture-shock is mutual: “As exotic as India is to us, a Mexican business is exotic to India,” Mr Ramírez says. Cinépolis has flown Indian mall developers to Mexico to see its cinemas in action.
But India and Mexico have more in common than a taste for spiced popcorn. India’s growing young middle class bears a close resemblance to the Mexican yuppies who pack Cinépolis’s range of “VIP” cinemas, which come with reclining seats and sushi-bearing waiters. (The VIP brand will open in Mangalore and Mumbai this year, as well as southern California, marking the firm’s first foray into the United States.) Indian vices such as loose contracts and flexible deadlines are not unknown in Latin America. Mr Ramírez says that Cinépolis’s experience in nine other emerging markets, including gigantic, Portuguese-speaking Brazil, has made it nimble at adapting to local differences.
If the Mexicans make good on their promises, “it could be a catalyst for the Indian market to grow in the way that people have been predicting for years,” says David Hancock, head of cinema at Screen Digest, a consultancy. He cautions that plenty of Indian companies have made similarly ambitious plans, only to get bogged down. Nonetheless, if just a fraction of those 3 billion ticket sales can be diverted from cheap fleapits into pricier multiplexes, blockbuster returns await.
(Source: Economist)

Sunday, May 29, 2011

Matching steps with the hausfrau

With women stepping out of the household a lot more, brands that help them outsource kitchen chores will emerge winners.

At the turn of the 21st century, Thomas Friedman wrote about the flatness of the world. “Bangalored” entered the lexicon and the task of outsourcing backend activities of Western businesses threw open a spanking new dollar-generating vertical — business process outsourcing.

Until the eighties, banks managed all banking activities themselves; advertising agencies handled all facets of their clients’ accounts; organisations had MIS, recruitment, payroll as departments. Increasing competition required organisations to focus on customer-facing activities and outsource backend operations. Organisations slowly standardised delivery formats and quality of backend activities and sourced them out to focus on the front end — that of serving and winning the consumer. These outsourced activities are not obvious to the consumer’s eyes as the brands retained indirect control so that the brand experience isn’t compromised.
Though less obvious, but mirroring a similar change are the events in our households. The housewife of yore has now emerged as the home manager, who has started to step out to focus on several priorities — career, family, social networking — and in the process has welcomed outsourcing in her kitchen yet manages “home-cooked food” as her own brand, much like banks and other corporations.

Guarding her bastion
Today she relies on an assortment of ready-cut fruits and vegetables, ready pastes, batters and so on, which are ready to use, either from the door to door (D2D) lady or the supermarket. While she guards her bastion, that is, the brand — home-cooked, tasty and healthy food to the family — with her personal touch, she acknowledges the contribution of the maid/D2D lady/supermarket for chipping in with product and service options in the pre-preparation stage.
She takes the responsibility of maintaining and continuously enhancing the brand experience of home-cooked food much like the bank or the telecom company which outsources the unseen customer interface — payroll, business infrastructure and so on — but maintains and continuously strives to enhance the end consumer’s brand experience.
While earlier having a maid was a luxury only a few could afford, with the evolution of the nuclear family, working couples, and erratic travel and office schedules, maids are a necessity in metros. Like the corporation, the housewife realises that evolving front-facing activities like kids’ education, their upbringing, her own “me” time and so on have started becoming more important.
The home manager first outsourced mundane household work like sweeping and cleaning of utensils. With priorities changing, kitchen work started getting outsourced. But the reins of the finished product remain firmly in her hands as the cooking is customised according to her family’s tastes and needs — which she guides, monitors and audits from time to time so it remains food cooked in “her” kitchen.

Kitchen’s backbone

Currently, the help providers multitasking and thereby adds more value at a lower cost. The way undersea broadband cables became the backbone on which back office operations were built, low-cost mobile telephony is the equivalent of what shaped domestic work outsourcing.
Metro households are already experiencing a shortage of household helps — with high wages and frequent dropouts. The 9 per cent GDP growth, rising aspirations and prosperity will lead to consumers continuously upgrading their status. So drivers will want to be chauffeurs and maids butlers, and every household will not be able to afford them.
The housewife wants to outsource most functions leading up to the frying pan — which then should merge seamlessly so that the end consumer, her family, deals with just one brand, home-cooked food. Brands should not attempt to take away credit from the household — as the food served hot on the table is blessed by her love. Credit for that should go to the housewife alone, because that is her brand promise to her family — maa ke haath ka khana. The family never worries about what has gone in the backend, that is, in the kitchen, before the food is served. The situation is just like a customer call to a company helpline that lands in a BPO but the consumer believes she is dealing with the brand.
A few examples where the homemaker actively seeks pre-preparation help are powdered mustard and mustard paste (the Bengali housewife), tamarind concentrate (Tamilian household), pre-cooked sarson-da-saag awaiting the final tadka (for the Punjabi family). Then there is garlic paste, bhuna masalas, tomato puree… you name it.
In this ever-changing economic scenario, brands that help the housewife put back quality time in her family allowing her to pursue her priorities will find takers. One thing is for sure: If the housewife has stepped out of the kitchen to multi-task, live her dreams and aspirations, she’s not going back full time into the kitchen. Outsourcing kitchen chores is here to stay or rather increase; brands just need to start matching her pace.
(Source: Business Standard)

Taxes and levies comprise nearly half your fuel price

Wonder why you are paying through your nose for petrol and diesel when they are considerably cheaper in Europe and the US?
Here's why. Petrol retails for Rs 63.37/litre in Delhi of which there is a hefty excise component of Rs 14.79 and sales tax/VAT of Rs 10.32. Add to this Rs 2.74 as customs duty and the dealer commission of Rs 1.22 and you will realise that the levies alone work out to nearly Rs 30/litre.
Ideally, it would be just perfect if all of us were to pay only the balance, Rs 33-34/litre except that the Finance Ministry will be left with nothing. Clearly not a pragmatic option when petrol contributes to a significant part of the Government's revenue, both at the Central and state levels.
The script is pretty much the same for diesel too where the levies account for nearly a third of the retail price of Rs 37.75/litre (in Delhi). Good money for a fuel whose consumption is growing by the minute except that it is costing its producers – IndianOil , Hindustan Petroleum Corporation and Bharat Petroleum Corporation – rather dearly with losses projected at Rs 116,000 crore in 2011-12.
The trio sells these auto fuels in the market at Government-dictated prices and then gets a partial compensation for not being able to realise the full price from the end-user. A little more comes from the upstream sector comprising ONGC, Oil India and GAIL (India). The refiners, in their turn, end up absorbing 10-12 per cent each year.

Good revenue

Simply put, the Government gets good revenue from the levies on diesel and petrol from which it gives back a slice of the pie to the refiners. The better option is to reduce these duties so that the Finance Ministry's compensation burden comes down too but this is unlikely given the revenue constraints.
In the process, oil refiners have been the worst hit especially with petrol which, like aviation turbine fuel, is a deregulated fuel but reality is something else. Even the recent Rs 5/litre hike was inadequate and IOC, HPCL and BPCL are projected to lose Rs 8,000 crore on petrol this fiscal.
For 2010-11, it is estimated that contribution to the Central exchequer from the petroleum sector would be Rs 135,433 crore, while the State (exchequer) would pocket a cool Rs 90,000 crore. In 2009-10, the corresponding figures were Rs 111,779 crore and Rs 72,082 crore.
The Empowered Group of Ministers meeting on June 9 is scheduled to review diesel prices. While a hike is inevitable, will this be followed by a reduction in levies which will help the customer and the oil companies? For the moment, this seems a remote possibility.

Royal Enfield gets set to step up a gear

Royal Enfield, the maker of the Bullet motorcycle, is on a roll today, but its Chief Executive, Dr Venki Padmanabhan, believes a lot more needs to be done.
“It is an amazing brand, but by the end of the day it is all about execution. The way we are going to become a real company is that we got to make and keep promises. For our customers, quality has to get better and we must ensure better bikes,” he told Business Line.

Concerns

At one point, Royal Enfield primarily dealt with diehard Bullet customers, but things have changed with the Classic. The company now wants to make its bike portfolio ‘worthy of the market's love' by putting an end to niggling issues such as paint rust and mechanical squeaks.
“The good thing about the brand is that people want a relationship with it and are tolerant to the extent that we are responsive,” Dr Padmanabhan said.
The other issue concerns the long waiting period, and this will be solved once the new plant starts churning out bikes by mid-2012. Indications are that it will be located in Tamil Nadu, not too far from the present facility near Chennai.
Royal Enfield has targeted production of 70,000 bikes this calendar, up from 52,000 units in 2010.
The new plant will have a capacity of 1.5 lakh units, which will help overcome the present supply-demand mismatch.
In the interim period, there is some out-of the-box thinking already in process. For instance, to overcome the paint-shop constraints, TI Cycles is helping out Royal Enfield by painting mudguards. Likewise, the old Kinetic plant in Ahmednagar is painting other key parts.
“Act 1 is to make the brand worthy of customers' love. Act 2 is making the product worthy of the brand. When you fix the brand and quality, you give them what they want which is Act 3. At the moment, we are somewhere in the middle of Act 2 and getting ready for Act 3,” Dr Padmanabhan said.
Once the job is done, the company is confident that customers will vouch for its bikes as ‘an extremely good value on par on quality' with others in the business.
The next step of building a plant/paint shop will be followed by scale across the world in those 30 countries where the bikes are exported.

International markets

“The purpose of the company was to cater to the Indian market, but the bikes are international, and the faster we do that, the better it is. We have been constrained by our own initiative and need to be more engaged with international markets,” Dr Padmanabhan said.
What is bizarre yet true is that Royal Enfield manages its global business with just a handful of people in Chennai who place and take orders. Not too long ago, there was an enquiry from Argentina which was unattended to.
“The lady and her father then came down to Chennai to meet the guys, and today there is a store in Cordoba which is one of our most beautiful retail outlets,” he said.
However, the ‘really hard part' lies in attracting likeminded leaders and the right talent to Royal Enfield. Dr Padmanabhan believes that a sea-change has to occur in the mindset.
“The secret is not getting brand new people but to find the guys who have an open mind and mix them with those from outside to create a new reality,” he said.
(Source: Business Line)

FMCG players cut back ad spends as input costs hurt


Boxed into a corner by rising input costs, fast-moving consumer goods (FMCG) companies have begun to trim the one item of expense over which they have some control – their spends on advertising and promotion.
Listed FMCG companies set aside just 12 per cent of their sales towards advertising and promotional expenses in the January-March 2011 quarter, which is a good two percentage points lower than the ad budget from the 14 per cent in the nine months to December 2010.

Lower splurge

Six leading listed FMCG companies spent Rs 1,043 crore on advertising in the latest March quarter, a sum that barely changed from a year ago. That is a marked shift from the splurging on advertisements seen in the nine months to December 2010, where such spends shot up by 21 per cent.
Take the consumer goods behemoth Hindustan Unilever (HUL), which not only dwarfs other advertisers but also has been one of the most aggressive spenders on advertising in the past two years. The company spent Rs 623 crore towards advertising and promotions in the recent March quarter, actually economising on last year's figure of Rs 627 crore for the same quarter.

Selective pruning

The proportion of sales that the company set aside towards ad spend plummeted from nearly 15 per cent of sales in the first nine months of 2010-11 to 12.7 per cent in this quarter.
This move allowed its operating profits to grow by 8 per cent, even as raw material costs zoomed 20 per cent year on year.
With the biggest spender of them all taking a breather, HUL's smaller rivals in the FMCG space too have opted to moderate their advertising expenses in the March quarter. The advertising expenses for Dabur India dropped from 13.7 per cent of sales in the first nine months of the year to 11.5 per cent in the March quarter.
Personal products maker Marico, malted drinks maker GlaxoSmithKline Consumer and Emami too saw a drop in the proportion of their sales that they set aside towards ad spends.
Companies generally cut back on advertising in categories that saw higher cost pressures. Some players deferred new product launches in the light of the inflationary scenario.
Explaining where exactly HUL effected those cuts, Mr Nitin Paranjpe, HUL's CEO, said in the company's earnings conference call: “We have seen a reduction in the intensity of spends both in soaps and detergents and in beverages wherein the commodity cost pressures have been the highest. And we have calibrated our spends appropriately to ensure that we remain competitive in the new scenario that we find ourselves in.” The company is also taking a more thorough look at the effectiveness of its advertising spends.
Economising on ad spends has helped companies report some profit growth this quarter, even as costs of raw materials from palm oil, to detergent chemicals, to plastic packaging, soared.
Though FMCG players did make price increases on their products, they were not enough to cover the higher costs.

Aberration?

However, players such as Dabur and Marico feel that competition being what it is, they will have to get back to higher spending once inflation normalises. Mr Sunil Duggal, CEO of Dabur, said, “We are pretty committed to keeping advertising and promotion spends in the 13 to 15 per cent (of sales) band. So, what you saw on the fourth quarter was a little bit of an aberration.
“We believe (13-15 per cent) is the baseline level which we need to protect our brand and to launch a reasonably high number of new products.”
Trends in advertising spends of FMCG companies have direct revenue implications for media companies. FMCG companies have the highest ad spends to sales ratio among consumer companies.
According to the FICCI-KPMG Media and Entertainment Report 2011, FMCG companies account for over 40 per cent of the ad volumes on television and less than 5 per cent of the volumes in print media.
(Source: Business Line)

Clothing brands likely to get costlier by 35% this Diwali

Apparel buyers will have to shell out 35% more when they begin their festival shopping this October. The price rise made regional brands such as Liverpool costlier by 40% and national brands such as Arrow by 25%.

Garment prices have already risen 20% since Diwali and a further 15% rise is expected after July. For consumers, the choice brands will cost a third more than what they did during the last festival season. "Buy apparel now if you must. Manufacturers may pass on the hike in raw material prices to the consumer by July," says Arvind Limited CFO Jayesh Shah. Mr Shah believes 5-6% hike could still be passed on by manufacturers.

"We would not like to outprice the wallet of Indian consumers. But, we had no option considering the steep hike in prices of cotton over the last few months. While the initial response to the hike has been satisfactory, I believe if we are able to sail through July with these prices, we should not look back," adds Arvind Ltd chairman Sanjay Lalbhai whose company has hiked prices between15-25% in last three months alone.

Arvind brands like Arrow and US Polo are 25% dearer, while the likes of Ruggers and Excalibur put up at the company's value retailing arm Megamart are 15% more expensive, notes Arvind Brands CEO J Suresh. It was inevitable due to spiraling cotton prices and imposition of excise duty, he adds. The industry blames volatile cotton prices, a 10% excise on readymade garments and other inflationary pressures from wages, diesel and petrol for the multiple rounds of price hikes that hit finished apparel.

Cotton touched a record high of 62,000 per candy (up 63% since the new cotton arrived in October) shooting prices of yarn up by 24% during the period. The prices later corrected to 42,000 levels. The fashion industry that seldom pushed on such hikes to the consumer, could not absorb such an unprecedented hike. Usually, garment labels raise prices by 5-7%, never beyond.

"All FMCG companies steadily hiked their prices by 20-25% over the last two years as prices of various commodities went through the roof. Even an automobile company does so whenever steel prices shoot up.

Although under pressure from cotton, the textile industry never passed on their share of burden to consumers as brands lack of courage to take a call. This time, however, the price hike was inevitable. Premium apparel went up by 25% while others shot up by 15-20%," notes Wazir Advisors' MD Harminder Sahni who consults on consumer products and services.

While cotton is currenlty down 44,000 per candy, the downstream would take time to soften prices. Price hikes, meanwhile, have happened across the spectrum -- from a pair of trousers to a skirt and even a denim jeans. While consumer has so far accepted the hikes, those at the bottom of the pyramid (in context of modern retailing - budgeting their apparel buys within 1,000), are anticipated to keep off shopping.

"For someone who plans his purchase, even a 100 rise in cost of shirt would keep him away from shopping," adds E&Y's partner and national leader (retail practice) Pinakiranjan Mishra. No wonder, the price hikes have made the supply chain nervous.

(Source: Economic Times)

Car discounts back at first signs of a slowdown

Automakers plan to step up discounts from June to reverse a slowdown in sales triggered by rising fuel prices and interest rates.

Retail sales of cars in May fell around 10% from the previous month, despite better discounts, narrowing down options for wooing customers.

"Going forward, better packaged discounts is the best strategy to increase footfalls," said Shashank Srivastava, chief general manager (marketing), Maruti Suzuki.

Return of discounts signals the re-emergence of a strategy that paid rich dividends in the period that preceded the auto boom in 2009 and 2010.

"Discounts serve best when times are hard. After two months of slower sales, we have been informed that discounts would go up in June with specific target to increase sales and reduce the inventories on certain models," said a Maruti dealer in Delhi.

Car companies are lining up cash benefits of up to Rs 60,000.

Maruti, Hyundai , Fiat , Ford , Tata and General Motors are among those that provided higher discounts in May. GM offers loyalty bonus of Rs 10,000 on its exchange scheme.

Honda Siel Cars, which has lost market share generated by its City model to Volkswagen's Vento over the last two months, has introduced free car insurance and gizmos.

"Dealers have come out with some incentive schemes for Honda City ," said Jnaneshwar Sen, vice-president (marketing), Honda Siel Cars.

Among luxury carmakers, Porsche is offering loans at 2.5% interest rate for sports cars like Cayman and 911. Audi and Mercedes-Benz are wooing with 0% interest rates on some models.

(Source: Economic Times)

No impact of rising rates, inflation on India Inc earnings

India Inc seems to be in the pink of health if one goes by the results of the quarter ended March. There appears to be no sign, so far, of inflation or rising interest rates biting into corporate earnings. But analysts say the future may not be as rosy.

Data compiled for 1,965 companies shows they earned higher net profits per rupee of sales during the March quarter, the best performance in almost three years. These firms exclude banking, finance and state-run petroleum companies. The operating profit margins of these firms, too, were better than the year-ago figures, indicating that rising borrowing costs have not pinched their profits yet.

Rising inflation, which is pushing up the cost of raw materials, also did not impact the profit margins, as was expected. The proportion of raw material costs to net sales did go up to 43.4%, the highest since the quarter ended September 2008. It was 110 basis points higher than the March 2010 quarter. This means India Inc was largely able to pass on the rising cost of raw materials to customers.

The year-on-year net sales growth was robust at 23.6% in the March quarter on the back of a high base. The year-ago quarter had recorded a 29.3% growth in sales.

This indicates that rising prices did not dampen domestic consumption. The companies continued to derive higher operational efficiency by cutting expenditure under other heads, such as employees, power and fuel. The expenditure under these heads showed a declining trend as a proportion to net sales.

In other words, for every rupee spent on these items, Indian companies derived higher net sales. This was the reason behind their safeguarding, and even improving, operating profit margins in the tough scenario.

As companies roll out their annual increments in the first or second quarters of FY12, this scenario could change. Interest cost jumped 33.6% against the year-ago period and accounted for 2.34% of the sales revenue during the March quarter.

Although higher year-on-year, this ratio was the lowest for FY11. The healthy sales growth seems to have taken the steam out of the rising interest cost burden. A steep 200-basis-point fall in the effective tax rate was another reason behind an improvement in the net profit margins in the March quarter.

This is surprising given the government's efforts at increasing the Minimum Alternate Tax rates and bringing down the number of tax exemptions in recent years.

However, this appears to be due to a combination of three factors - increase in the number of loss-making companies, MAT credits claimed by firms and a chunk of incremental profits coming from projects that still enjoy tax exemptions. Analysts, however, say the last quarter of FY11 did not provide much of an indication of the challenges ahead.
(Source: Economic Times)

Fit-again Bata set for rapid expansion

Shoe retailer to launch four designs every day, open 70-100 stores of atleast 5000 sq.ft., every year and push it’s online sales to target middle segment of the market and woo the Indian youth
After turning around an ageing giant that Bata India was when he took it over six years ago, Marcelo Villagran has started the second part of his unenviable mission - to rejuvenate the 80-year-old shoe brand to make the 20-25 olds, and even the teens, fall for it.

"If the last five years were all about consolidation, the next five years will be all about expansion," says the Bata India MD and CEO, who transformed the company from a point of bankruptcy when he took over six years ago to one of the most profitable operations of the Swiss multinational globally.

Bata will introduce almost four designs every day, open 70-100 stores of at least 5,000 sq ft every year, and push its online sales to shed its image as a low-cost functional footwear brand that appeals to the 40-plus age group.

It's an uphill task for a brand known for its sandals and entry-level shoes.

But going by how Villagran has changed the company since taking it over in early 2005, Bata has all the rights to believe in a rival's tagline: Impossible is nothing.

A soft-spoken astute Spanish in his late 60s, Villagran closed hundreds of unviable stores and spawned them into large-format outlets, overhauled product portfolio with the help of Bata's global design centre and refined manufacturing and sourcing strategies, to help Bata come out of three years of continuous losses that peaked at 62 crore in 2004 and steadily grow since then. In 2010, its net profit rose 42% year-on-year to 95 crore.

The company scrip too bounced from 31-35 in 2002 to 460.55 on the Bombay Stock Exchange at Friday's closing.

Villagran, who has spent almost four decades in Bata, led this transformation from the front. He is usually the first to enter office and the last to leave. And he travels extensively around the country to implement his agenda.

"Turnaround is just a financial word. What is more important is how the organisation has been completely able to reinvent itself," he says.

Experts believe Bata will need to do much more to win over the youth.

"The brand has already suffered a lot and still carries the old baggage of a low-cost, functional, daily-use ration shop imagery," says brand expert Harish Bijoor. "To shed this imagery, it will need to continue to do what it is doing with a greater thrust. Such changes in consumer perception requires sometime," he says.

Villagran, however, says the consumer perception towards the brand is already seeing a change and the youth interest is also making a comeback.

NEW RETAIL REALITY

So, how did Villagran, who had a successful stint in Chile before coming to India, change Bata here?

The first thing he did was to adapt the Bata stores in line with the changed retailing landscape with the arrival of malls and big retail chains.

Bata stores during the 2005-06 would remain closed on Sundays and most would down shutters by 6 in the evening. Manoj Chandra, a key member of Villagran's turnaround team, says 40% of Bata outlets were unviable and 90% of them were not renovated for a long time. "These stores were generating minimal sales that they were not even profitable," he says.
The company shut down all unviable stores and ensured the stores remain open every day for 12 hours.

Bata has shut down almost 400 small stores, which looked more like warehouses with hundreds of pairs of footwear staked in 1,000 sq ft or less, and opened 270 large-format stores at prime locations.

"In footwear, higher display tends to drive higher sales," says Chandra, who is the vice-president for marketing and customer service at Bata India.

The company now plans to increase the average store size to 5000 sq ft.

It plans franchisee route and online expansion to push sales.

Bata board is considering a proposal to start franchisee operations this year in smaller cities where setting up company-owned outlets may not be viable.

Villagran says Bata will decide the location and then choose the partner. "It is not that anybody with real estate space can open a Bata store and the stores have to be according to our specifications so that customers do not feel the difference,'' he says.

Meanwhile, its online sales are growing at 200% and the website has had some four lakh visitors since its launch a year back.

Bata is delivering to 315 towns across India, including tougher and difficult to operate markets like Jammu and Kashmir, Arunachal Pradesh and Andaman & Nicobar Islands.

MERCHANDISE OVERHAUL

Bata has also overhauled its merchandise strategy. It literally threw out its entire low-margin inventory in 2005. "We have fixed a certain operating margin and have decided not to sell any shoes whose margins are below this," says Chandra.

It has formed a team of 100 professionals for product design, procurement and merchandising. It will roll out new designs for each of its main brands such as North Star, Marie Claire, Bubblegummers, Hush Puppies, Weinbrenner, Ambassador, Mocassino, Power and Comfit every 15 days. The product design team meets its counterparts in Europe every quarter to improve its international designs.

Villagran says Bata customises the design for India. "For instance, Indian women still prefers small-sized heels and there is a growing demand for closed shoes," he says.

Bata would open 20-30 single-brand stores every year through a mix of standalone and shop-in-shops in retail chains like Lifestyle and Central. It also plans brand-licensing deals with global shoemakers to widen its portfolio.

Bata India has changed its sourcing strategy too. It would make each of its five plants in the country a specialist for a particular type of footwear. Bata, which had cut its factory staff strength through voluntary retirement schemes, also plans to source from China and domestic third-party manufacturers to drive cost efficiencies.

SCALE GAME

"The new Bata is all about quality, contemporary design and customer-centricity. It will be a brand consumers will be happy to wear rather than to show-off," says Chandra.

Of course it will be difficult for any rival to replicate its scale of operations.

But industry insiders say it will be equally tough for Bata to compete with established sports and fashionable brands such as Adidas, Reebok, Nike, Lee Cooper, Woodland and Puma in the youth market.

In fact, these companies don't expect much competition from Bata.

"Bata is almost a generic shoe brand in India with huge penetration. Its main brand strengths are quality shoes at value-for-money segment, which is its main core area and would generate much of the volume," says Delhi-based premium shoemaker Woodland's Managing Director Harkirat Singh.

Bata's Chandra says the company will not transgress into the boutique space as it will be a misfit with its scale of operations.

Bata has also decided to completely exit the low-end of the market where shoe selling has become commoditised. "It is the middle-segment, which is the fastest growing one, that we are placing our bet," he says.

(Source: Economic Times)

Tuesday, May 17, 2011

On leave

I am taking sometime off, until the 28th of May. Hope to resume my contributions to WealthWisdom from the 29th.

Best,

Paras

Monday, May 16, 2011

Global Demand for U.S. Assets Unexpectedly Weakens as China Trims Holdings

Global demand for U.S. long-term financial assets such as government bonds slowed in March as investors shifted into shorter-term securities and China trimmed its portfolio of Treasuries.
Net buying of long-term equities, notes and bonds totaled $24 billion during the month, compared with net buying of $27.2 billion in February, according to statistics issued today in Washington. Including short-term securities such as stock swaps, foreigners purchased a net $116 billion, compared with net buying of $95.6 billion the previous month.
The Treasury’s reporting on long-term securities helps gauge confidence in the U.S. economy as well as fiscal and monetary policy. The data capture international purchases of government notes and bonds, stocks, corporate debt and securities issued by U.S. agencies such as Fannie Mae and Freddie Mac, which buy home mortgages.
“Foreigners had a little more confidence in the recovery in March,” and they shifted into swaps, equities and riskier assets from Treasury securities, said Kevin Chau, a foreign exchange strategist at IDEAglobal in New York.
China remained the biggest foreign holder of U.S. Treasuries, after its holdings fell by $9.2 billion to $1.145 trillion in March from $1.154 trillion in February, according to the Treasury’s statistics.
Japan, the second-largest holder, increased its holdings by $17.6 billion to $907.9 billion in March from $890.3 billion in February. Hong Kong, counted separately from China, reduced its holdings by $2.5 billion to $122.1 billion in March from $124.6 billion in February.
Before today’s report was issued by the Treasury, economists in a Bloomberg News survey projected long-term U.S. financial assets would show net buying of $33 billion in March. Seven economists participated in the survey, and their estimates ranged from $10 billion to $45 billion.
Total foreign purchases of Treasury notes and bonds were $26.8 billion in March compared with purchases of $30.6 billion in February. Foreign demand for U.S. agency debt from companies such as Fannie Mae and Freddie Mac registered net buying of $9.49 billion in March after selling of $1.49 billion in February.
Net foreign purchases of equities were $14.7 billion in March after net purchases of $6.1 billion in February. Investors purchased a net $3.77 billion in U.S. corporate debt in March after selling $2.54 billion in February.

Slower Than Forecast

In the first quarter, the U.S. economy grew at a slower- than-forecast annual rate of 1.8 percent as government spending declined by the most since 1983, according to Commerce Department statistics released April 28. In the fourth quarter of last year, gross domestic product grew at a 3.1 percent annual rate.
In emerging European economies, public finances have “sharply deteriorated” and banks are burdened by “large numbers” of nonperforming loans, the International Monetary Fund said in a report May 12. The European Union and the IMF were forced to organize bailouts for Greece and Ireland last year and are preparing a rescue plan for Portugal.
China and the U.S. remain at odds over foreign exchange policy. After meetings last week in Washington, Chinese Deputy Finance Minister Zhu Guangyao said the U.S. and China agree that the yuan should be allowed to strengthen. However, “the view from the U.S. side is that the yuan should rise continuously at a faster appreciation pace,” Zhu said. “We have differences on the degree of appreciation.”
(Source: Bloomberg)

Saturday, May 14, 2011

When others are grabbing your land

Evidence is piling up against acquisitions of farmland in poor countries.

THE farmers of Makeni, in central Sierra Leone, signed the contract with their thumbs. In exchange for promises of 2,000 jobs, and reassurances that the bolis (swamps where rice is grown) would not be drained, they approved a deal granting a Swiss company a 50-year lease on 40,000 hectares of land to grow biofuels for Europe. Three years later 50 new jobs exist, irrigation has damaged the bolis and such development as there has been has come “at the social, environmental and economic expense of local communities”, says Elisa Da Vià of Cornell University.
When deals like this first came to international attention in 2009, it was unclear whether they were “land grabs or development opportunities”, to quote a study published that year. Supporters claimed they would bring seeds, technology and capital to some of the world’s poorest lands. Critics, such as the director of the UN’s Food and Agriculture Organisation, dubbed them “neo-colonialist”. But no one had hard evidence to back up their claims. Now they do. Two years on, a conference at the Institute of Development Studies (IDS) of the University of Sussex, the biggest of its kind so far, examined over 100 land deals. Most judgments are damning.*


Land grabs have been strikingly popular. Preliminary research by the International Land Coalition, a non-governmental organisation, reckons almost 80m hectares have been subject to some sort of negotiation with a foreign investor, more than half in Africa (see chart). This estimate is far higher than a previous one, by the World Bank, which last year said that foreign investors had expressed interest in 57m hectares. It is higher still than one by the International Food Policy Research Institute (IFPRI) which put the figure in a 2009 study at 15m-20m hectares. It would be wrong to draw a line between these numbers so as to conclude that land deals have grown fourfold. Since most are secret, knowing what to count is difficult, and the figures refer to different periods.
Yet each time someone has looked at the phenomenon, the result has been a figure roughly twice the earlier estimate. It is also clear that the overall scope is vast: 80m hectares is more than the area of farmland of Britain, France, Germany and Italy combined. And land deals are continuing, possibly even speeding up. Over a tenth of the farmland of South Sudan has been leased this year—even before the country has formally got its independence. GRAIN, an advocacy group, says it has seen proposals that would allow Saudi business groups to take control of 70% of the rice-growing area of Senegal.
It is not just the size of land deals that remains uncertain. Their contractual basis often is, too. Few contracts have been made public, so details are sketchy. But an investigation of 12 that have been, by Lorenzo Cotula of the International Institute for Environment and Development, declares many “not to be fit for purpose”. The rights and obligations of each side, Mr Cotula says, are usually extremely vague, while traditional land-use rights are frequently ignored. As one farmer asked when a British company acquired forestry rights in Tanzania: “How come others are selling our land?”
Even after the contract is signed, there is no guarantee a land deal will go ahead in accordance with it. A survey by the World Bank† showed that in the Amhara region of Ethiopia, only 16 of 46 projects were working as intended (the rest lay fallow or had been rented back to smallholders). In Mozambique only half the projects were working as planned.
Still, some conclusions seem warranted. When land deals were first proposed, they were said to offer the host countries four main benefits: more jobs, new technology, better infrastructure and extra tax revenues. None of these promises has been fulfilled.
Locals usually regard jobs as the most important of these. But so far they have been scarce, and only partly because many projects are not yet up and running. In Mozambique, the World Bank found, one project had promised 2,650 jobs and created a mere 35-40 full-time positions. A survey by Thea Hilhorst of 99 smaller projects in Benin, Burkina Faso and Niger reported “hardly any” rural job creation. Only one of the publicly available contracts studied by Mr Cotula even specifies a number of new jobs to be created. And when there are jobs, foreign investors often bring in outsiders to staff them, leading to “conflict or accusations of cheating”, according to the World Bank. The manager of one project was killed during an argument about jobs.
Evidence of the transfer of technology and skills is mixed. Ms Hilhorst found almost no impetus towards greater professionalism in farming, although she concedes that closer links with food processors and distributors might improve matters. The World Bank’s study argued that technological improvements in Ukraine and Mexico had helped reduce rural out-migration (though this was surprising: you might have expected new labour-saving technologies to encourage underemployed farmers to leave the land). Mr Cotula’s study of land-deal contracts found few examples in which the foreign investor was obliged to exchange materials or ideas with local farmers. At the moment, land-grabbing foreigners seem to be creating islands for themselves, cut off from the poverty-stricken countryside.
Grabbing sans giving
Some projects’ operators have done better in building new schools, clinics and other “social infrastructure”. Madagascar may be a surprising example as it witnessed what is perhaps the most notorious land grab of all: a South Korean company was offered half the country’s arable land—a proposal that fuelled protests which eventually toppled the government who approved the deal. Two years later Perrine Burnod of CIRAD, a French research organisation, found that the number of land deals on the island had fallen by two-thirds. And those that remained had begun to look more like aid projects, with investors committing themselves to building schools and clinics. Local mayors were welcoming them in to help finance projects no longer supported by the cash-strapped central government.
Yet this is atypical. Most land deals contribute little or nothing to the public purse. Because markets for land are so ill-developed in Africa and governments so weak, rents are piffling: $2 per hectare per year in Ethiopia; $5 in Liberia. Tax and rent holidays are common. Indeed, it is not unusual for foreign investors to pay less tax than local smallholders. And upfront compensation to local farmers for use of their land is derisory: often just a few months of income for agreeing to a 100-year lease.
“The risks associated with such investments are immense,” concludes the World Bank. “In many cases public institutions were unable to cope with the surge in demand…Land acquisitions often deprived local people, in particular the vulnerable, of their rights…Consultations, if conducted at all, were superficial…and environmental and social safeguards were widely neglected.”
So why are land deals popular? That is surprisingly easy to answer: strong demand and willing suppliers. The big investors tend to be capital-exporting countries with large worries about feeding their own people. Their confidence in world markets has been shaken by two food-price spikes in four years. So they have sought to guarantee food supplies by buying farmland abroad. China is by far the largest investor, buying or leasing twice as much as anyone else.
Local elites have also played a vital role in spreading land deals. In a Tanzanian project described by Martina Locher of the University of Zurich, “local people who refer to customary law have a very low level of knowledge [and cannot] defend their land rights.” In contrast, she writes, “state law is mainly represented by district officials, who…enjoy a high level of respect by local people.”
Then there is corruption. Many of the west African “land grabbers” described by Ms Hilhorst are local politicians, civil servants and other urban elites who bribe local chiefs with gifts of motorbikes. Madeleine Fairbairn of the University of Wisconsin, Madison, argues that in Mozambique, an informal division of the spoils has emerged. Local bigwigs use their influence to get “facilitation fees”, while national leaders manipulate the law and promote (or obstruct) projects to their own and their supporters’ advantage.
Many development projects work this way. What makes land grabs unusual is their combination of high levels of corruption with low levels of benefit. Ruth Meinzen-Dick, one of the authors of the IFPRI study, says that in 2009 the balance of costs and benefits was genuinely unclear. Now, she argues, the burden of evidence has shifted and it is up to the proponents of land deals to show that they work. At the moment, they have precious few examples to point to.
(Source: Economist)

Friday, May 13, 2011

Multinational manufacturers: Moving back to America

The dwindling allure of building factories offshore.

“WHEN clients are considering opening another manufacturing plant in China, I’ve started to urge them to consider alternative locations,” says Hal Sirkin of the Boston Consulting Group (BCG). “Have they thought about Vietnam, say? Or maybe [they could] even try Made in USA?” When clients are American firms looking to build factories to serve American customers, Mr Sirkin is increasingly likely to suggest they stay at home, not for patriotic reasons but because the economics of globalisation are changing fast.
Labour arbitrage—taking advantage of lower wages abroad, especially in poor countries—has never been the only force pushing multinationals to locate offshore, but it has certainly played a big part. Now, however, as emerging economies boom, wages there are rising. Pay for factory workers in China, for example, soared by 69% between 2005 and 2010. So the gains from labour arbitrage are starting to shrink, in some cases to the point of irrelevance, according to a new study by BCG.
“Sometime around 2015, manufacturers will be indifferent between locating in America or China for production for consumption in America,” says Mr Sirkin. That calculation assumes that wage growth will continue at around 17% a year in China but remain relatively slow in America, and that productivity growth will continue on current trends in both countries. It also assumes a modest appreciation of the yuan against the dollar.
The year 2015 is not far off. Factories take time to build, and can carry on cranking out widgets for years. So firms planning today for production tomorrow are increasingly looking close to home. BCG lists several examples of companies that have already brought plants and jobs back to America. Caterpillar, a maker of vehicles that dig, pull or plough, is shifting some of its excavator production from abroad to Texas. Sauder, an American furniture-maker, is moving production back home from low-wage countries. NCR has returned production of cash machines to Georgia (the American state, not the country that is occasionally invaded by Russia). Wham-O last year restored half of its Frisbee and Hula Hoop production to America from China and Mexico.
BCG predicts a “manufacturing renaissance” in America. There are reasons to be sceptical. The surge of manufacturing output in the past year or so has largely been about recovering ground lost during the downturn. Moreover, some of the new factories in America have been wooed by subsidies that may soon dry up. But still, the new economics of labour arbitrage will make a difference.
Rather than a stampede of plants coming home, “higher wages in China may cause some firms that were going to scale back in the US to keep their options open by continuing to operate a plant in America,” says Gary Pisano of Harvard Business School. The announcement on May 10th by General Motors (GM) that it will invest $2 billion to add up to 4,000 jobs at 17 American plants supports Mr Pisano’s point. GM is probably not creating many new jobs but keeping in America jobs that it might otherwise have exported.
Even if wages in China explode, some multinationals will find it hard to bring many jobs back to America, argues Mr Pisano. In some areas, such as consumer electronics, America no longer has the necessary supplier base or infrastructure. Firms did not realise when they shifted operations to low-wage countries that some moves “would be almost irreversible”, says Mr Pisano.
Many multinationals will continue to build most of their new factories in emerging markets, not to export stuff back home but because that is where demand is growing fastest. And companies from other rich countries will probably continue to enjoy the opportunity for labour arbitrage for longer than American ones, says Mr Sirkin. Their labour costs are higher than America’s and will remain so unless the euro falls sharply against the yuan.

There’s no place like home

The opportunity for labour arbitrage is disappearing fastest in basic manufacturing and in China. Other sectors and countries are less affected. As Pankaj Ghemawat, the author of “World 3.0”, points out, despite rapidly rising wages in India, its software and back-office offshoring industry is likely to retain its cost advantage for the foreseeable future, not least because of its rapid productivity growth.
Nonetheless, a growing number of multinationals, especially from rich countries, are starting to see the benefits of keeping more of their operations close to home. For many products, labour is a small and diminishing fraction of total costs. And long, complex supply chains turn out to be riskier than many firms realised. When oil prices soar, transport grows dearer. When an epidemic such as SARS hits Asia or when an earthquake hits Japan, supply chains are disrupted. “There has been a definite shortening of supply chains, especially of those that had 30 or 40 processing steps,” says Mr Ghemawat.
Firms are also trying to reduce their inventory costs. Importing from China to the United States may require a company to hold 100 days of inventory. That burden can be handily reduced if the goods are made nearer home (though that could be in Mexico rather than in America).
Companies are thinking in more sophisticated ways about their supply chains. Bosses no longer assume that they should always make things in the country with the lowest wages. Increasingly, it makes sense to make things in a variety of places, including America.
(Source: Economist)

Internet business: Another digital gold rush

Internet companies are booming again. Does that mean it is time to buy or to sell?


PIER 38 is a vast, hangar-like structure, perched on San Francisco’s waterfront. Once a place where Chinese immigrants landed with picks and shovels, ready to build railways during California’s Gold Rush, the pier is now home to a host of entrepreneurs with smartphones and computers engaged in a race for internet riches. From their open-plan offices, the young people running start-ups with fashionably odd names such as NoiseToys, Adility and Trazzler can gaze at the fancy yachts moored nearby when they aren’t furiously tapping out lines of code.
“The speed of innovation is unlike anything we’ve seen before,” says Ryan Spoon, who runs Dogpatch Labs, an arm of a venture-capital firm that rents space to young companies at Pier 38. Like many other entrepreneurs, the tenants would love to follow firms such as Facebook and Zynga, a maker of hugely popular online games including Farmville, that have been thrust into the internet limelight in the space of a few short years.
Some of the most prominent start-ups are preparing for stockmarket listings or are being bought by big firms with deep pockets. On May 9th LinkedIn, a social network for professionals that took in revenue of $243m last year, set the terms of its imminent initial public offering (IPO) on the New York Stock Exchange (NYSE), which value it at up to $3.3 billion. The next day Microsoft said it was buying Skype, an internet calling and video service, for $8.5 billion .
Other firms such as Groupon, which provides online coupons to its subscribers, are likely to go public soon. The return of big internet IPOs, rarities since a bubble in telecoms and internet stocks burst in 2000, and the resurgence of large mergers and acquisitions among technology firms is dividing opinion in the industry. Some veterans see a new bubble forming in the valuations of start-ups and a handful of more mature firms such as Twitter, which is still hunting for a satisfactory business model five years after the first tweet. More sanguine voices retort that many young companies have exciting prospects and that there are plenty of corporate buyers, such as Microsoft, with the money and confidence to snap up older internet firms still in private hands.

Technology, finance and China

Yet both sides agree that the internet world is being transformed by a number of powerful forces, three of which stand out. First, technological progress has made it much simpler and cheaper to try out myriad bright ideas for online businesses. Second, a new breed of rich investors has been keen to back those ideas. And, third, this boom is much more global than the last one; Chinese internet firms are causing as much excitement as American ones.
Start with technology. Moore’s law, which holds that the number of transistors that can be put on a single computer chip doubles roughly every 18 months, has continued to work its magic, leading to the proliferation of ever more capable and affordable consumer devices. Some of today’s tablet computers and smartphones are more powerful than personal computers were a decade ago. IDC, a research firm, estimates that around 450m smartphones will be shipped worldwide this year, up from 303m in 2010.
Moore’s law also underpins the growth of “cloud” services, such as Apple’s iTunes music store, which can be reached from almost any device, almost anywhere. Such services are hosted in data centres, the factories of the cloud, which are crammed with hundreds of thousands of servers, whose price has plunged as their processing power has soared. Everything is connected ever faster, with ever fewer wires.
These technological trends have given rise to new “platforms”—computing bases on which other companies can build services. Examples include operating systems for smartphones and social networks such as Facebook and LinkedIn. Some of them are used by hundreds of millions of people. And the platforms are generating oceans of data from smartphones, sensors and other devices.
These platforms are vast spaces of digital opportunity. Perhaps the most striking example of the innovation they have sparked is the outpouring of downloadable software applications, or “apps”, for smartphones and computers. Apple’s App Store, a mere three years old, offers more than 300,000 of them. Users of Facebook are installing them at a rate of 20m a day. Services such as Skype have also benefited from the spread of smart devices and lightning-fast connectivity.
Some excited people have likened this technological upheaval to the Cambrian explosion 500m years ago, when evolution on Earth speeded up in part because the cell had been perfected and standardised. They may be exaggerating. Even so, creating a web firm has become much easier. By tapping into cheap cloud-computing capacity and by using platforms to reach millions of potential customers, a company can be up and running for thousands of dollars rather than the millions needed in the 1990s.

Guardian angels

Thanks to the boom’s second driving force, finance, these companies have no shortage of eager backers. Although too small to interest many venture-capital firms, they are being fought over by wealthy individual investors, or “angels” in the venture industry’s jargon. Many of these financiers made their fortunes during the 1990s bubble and are eager to put their know-how and cash behind today’s tiny companies.
Some “super angels”, such as Aydin Senkut, a former Google employee who runs Felicis Ventures, and Mike Maples, a software entrepreneur who oversees a firm called Floodgate, are occasionally making bets comparable to those of conventional venture funds, which gather and invest money from a wide range of institutional investors. Individual investments of up to $1m are not uncommon. Sometimes angels are clubbing together to provide young firms with even larger sums.
Their cumulative impact is staggering. According to the Centre for Venture Research at the University of New Hampshire, angel investors in America pumped about $20 billion into young firms last year, up from $17.6 billion in 2009. That is not far off the $22 billion that America’s National Venture Capital Association says its members invested in 2010. Much of the angels’ money has gone to consumer-internet firms and makers of software apps.
The financing of more mature tech start-ups has also changed. Elite venture-capital firms such as Andreessen Horowitz and Kleiner Perkins Caufield & Byers have raised billions of dollars in new funds in the past year or so. Some of this money has been pumped into “late-stage” investments (eg, in Twitter and Skype), allowing companies to remain private and independent for longer than used to be the norm.
Venture firms are not the only ones with internet companies in their sights. Some would argue that it was DST, a Russian holding company now renamed Mail.ru, and a related investment fund, DST Global, that set off the boom. In 2009, when most investors in America were sitting on their hands, both poured hundreds of millions of dollars into fast-growing prospects there such as Facebook and Groupon. Those investments seem likely to pay off handsomely.
American hedge funds, private-equity firms and even some mutual funds have followed, falling over one another in pursuit of the shares of popular internet companies. Investment banks including Goldman Sachs and JPMorgan Chase have also set up funds to help rich clients buy stakes.
Their task has been made easier by the advent of secondary markets in America, such as SharesPost and SecondMarket, that allow professional investors to trade the equity of private companies more efficiently. They have also made it simpler for employees and angel investors to offload some shares—and have enabled the world at large to observe a remarkable rise in valuations (see chart 1).
American consumer-internet companies have not been the only beneficiaries of this flood of cash. The boom’s third driving force is the rapid globalisation of the industry. Europe, which has at long last developed an entrepreneurial ecosystem worthy of the name, is home to several impressive firms. These include Spotify, an Anglo-Swedish music-streaming service with more than 10m registered users, and Vente Privée, a French clothing discounter with annual revenue of some $1 billion.
Much more striking, however, is that the latest round of euphoria involves emerging markets that were mere spectators during the last one, above all China. The country boasts not only the world’s biggest online population, but also its fastest-growing. The number of internet users there will rise from 457m last year to more than 700m in 2015, according to the Boston Consulting Group (BCG). And the Chinese are no longer mostly playing games, but are diving into lots of other online activities, notably shopping. Between 2010 and 2015, predicts BCG, China’s e-commerce market will more than quadruple, from $71 billion to $305 billion—which could make it the world’s largest.
Such forecasts have stimulated plenty of venture capital, both foreign and domestic. Albeit with a dip in 2009, the amount raised by Chinese venture funds has grown sharply, rising from nearly $4 billion in 2006 to more than $11 billion in 2010 according to Zero2IPO, a research firm. The sum invested increased from $1.8 billion to nearly $5.4 billion. Much of this went into internet start-ups.
Investors have also been desperate for shares in Chinese companies listed on American stock exchanges (see table). Since the start of the year the share prices of the biggest of these firms have risen by more than a third, according to iChina Stock, a website. Baidu, China’s largest search engine, has seen its share price climb from about $60 to $150 in the past 12 months, taking its market capitalisation to nearly $50 billion. Tencent, which makes most of its money from online games, is worth about the same. Both are among the world’s top five internet firms by stockmarket value. The ten biggest Chinese companies have a combined worth of $150 billion, not much less than Google’s.
They tend to sparkle on their debuts. When Youku, China’s largest online-video company, listed its shares on December 8th its stock jumped by 161%, the biggest gain by a newcomer to the NYSE for five years. The share price of Dangdang, an online retailer floated on the same day, almost doubled. And on May 4th Renren, a social network, saw its share price rise by 29% on the first day of trading, though it has fallen back almost to where it started.
The experience of Chinese firms in America has encouraged other emerging-market internet companies to consider IPOs there. On the day LinkedIn revealed the terms of its offering, Yandex, a Russian search engine, said it would soon raise $1.1 billion by listing its shares on the tech-heavy NASDAQ stockmarket.
Those who think that talk of a new tech bubble is misleading point out that firms such as LinkedIn and Renren have proven business models and healthy revenues. Many internet firms that went public in the late 1990s could not say the same. Moreover, the price-earnings multiples at which other public companies in the technology sector are trading are nowhere near as frothy as they were before the last bubble burst in 2000. That should limit excesses in valuing private firms.

Bubble in the making?

This has led some venture capitalists to argue that 2011 may be more like 1995 than 1999: if a bubble is inflating, it is a long way from popping. So investors who shun internet firms now may be missing a great chance to mint money. Jeffrey Bussgang of Flybridge Capital Partners, a venture firm, notes that venture funds raised between 1995 and 1997 enjoyed stellar returns.
Others point to signs of bubbliness. For instance, some start-up firms are dangling multi-million-dollar pay packages in order to tempt star programmers from Google, Microsoft and other big companies. They are chasing scarce skills when the broader technology industry is on a roll. The NASDAQ index may be far below the heights of March 2000, but it has bounced back from the global downturn; and the Federal Reserve Bank of San Francisco’s Tech Pulse Index, which measures the vibrancy of America’s tech industry, is near its peak of 11 years ago (see chart 2).
There are also signs of irrational exuberance among some investors. Color, a photo-sharing and social-networking start-up, has been reportedly valued at around $100m by venture firms, even though it has an untested product in a crowded market. Competition among angel investors has helped drive up valuations of social-media start-ups by more than 50% in the past 12 months. Financiers are sometimes skimping on due diligence in the scramble to win deals. In China, too, the purported worth of young firms has risen breathtakingly fast—to an average of $15m-20m in first-round venture financings, which is expensive even by Silicon Valley’s standards.
The danger in all this is that investors lose sight of the risks to the value of internet companies. These are greatest in China. Competition there is intense and users are fickle. Moreover, Chinese firms must wrestle with thorny regulatory and political issues. The government has yet to shut down a listed web company and firms are usually masters of self-censorship. But any move against them could have broad repercussions for all Chinese internet stocks.
European and American internet start-ups do not face a similar threat. But they are still vulnerable to inflated expectations. “Every bubble is a game of musical chairs,” says Steve Blank, a former serial entrepreneur who teaches at Stanford. The trick is to sell or float companies just before the music stops and the bubble bursts. If some of the hopefuls of Pier 38 can do just that, they may one day be able to afford a yacht or two of their own.
(Source: Economist)