Tuesday, February 21, 2012

S&P 500 Cheapest to Bonds as Zero Fed Rates Boost Spending

The Standard & Poor’s 500 Index is approaching the cheapest level ever compared with bonds as Federal Reserve Chairman Ben S. Bernanke’s zero-percent interest rates drive investors and companies from cash.
Profits that doubled since 2009 pushed the index’s so- called earnings yield to 7.1 percent, close to the highest on record when compared with the 10-year Treasury rate, according to data compiled by Bloomberg since 1962. American companies have boosted capital spending 35 percent over six quarters, the most since 2006.
“Conditions are almost ideal for equity investors relative to all other investments,” Keith Wirtz, who oversees $14.6 billion as chief investment officer for Fifth Third Asset Management in Cincinnati, said in a Feb. 14 telephone interview. “The Fed’s keeping rates low for the foreseeable future to try to stimulate the environment for employee hiring and business activity. What does that mean for capital markets? Savers are not being rewarded.”
The U.S. government and the Fed lent, spent or guaranteed as much as $12.8 trillion to end the worst recession since the 1930s. That and Bernanke’s three-year effort to drive down interest rates are paying off with rising consumer confidence and expanding factory output. The S&P 500 (SPX) is off to its best annual start since 1997 as riskier assets lure money from savings accounts offering some of the lowest yields on record.

Bailed Out

Individuals are responding with indifference amid the slowest economic recovery in at least six decades. New York Stock Exchange volume fell to the lowest level in 13 years last month. While unemployment slipped to 8.3 percent in January from 9 percent in September, joblessness remains more than two percentage points above its average level since 1990, according to data compiled by Bloomberg. Existing home sales reached an annual rate of 4.6 million in December, 23 percent below the average between 1999 and 2006.
The S&P 500 climbed 1.4 percent to 1,361.23 last week, within three points of a three-year high. Reports showed housing starts increased more than forecast and claims for U.S. jobless benefits slipped to a four-year low. Applied Materials Inc. (AMAT), the biggest maker of equipment for semiconductor plants, increased as much as 5.5 percent after saying sales this quarter may be 20 percent above analysts’ estimates.
Futures on the S&P 500 rose 0.3 percent to 1,364 at 8:26 a.m. in London today.

Cash Return

Investors who kept money as cash have missed out. A balance of $10,000 would have earned $184.60 in interest since December 2008, based on the average monthly savings rate compiled by Bankrate.com. For Treasuries, the return was $1,644. U.S. equities generated $5,690 including dividends.
Fed policy makers highlighted concern about the rate of capital spending when they pledged to keep interest rates low for at least two more years on Jan. 25. “Growth in business fixed investment has slowed,” they said, altering the last statement from “business fixed investment appears to be increasing less rapidly.” Factories in the U.S. boosted production 0.7 percent in January for the biggest back-to-back increases in more than two years, the Fed said Feb. 15.
“The real target for the low rates is indeed businesses,” John Canally, who helps oversee about $330 billion as an economist and investment strategist at LPL Financial Corp. in Boston, said in a Feb. 14 phone interview. “They want to push money out on the risk spectrum. They want that to be put to use buying a new piece of equipment or expanding a plant or adding a third assembly line.”

Labor Market

One of the Fed’s two mandates is restoring employment. Of the 8.8 million jobs lost in the U.S. due to the recession, about 3.2 million have been recovered, figures from the Labor Department show. On Feb. 7, Bernanke cited Labor Department data released Feb. 3 showing the share of working-age people in the labor force had declined to the lowest level in 29 years.
S&P 500 companies increased capital expenditures 35 percent from June 2010 through the end of 2011, the fastest rate since June 2006, when stocks were in the middle of a five-year bull market, data compiled by Bloomberg show.
Earnings in the S&P 500 have more than doubled to $96.58 since 2009 and are projected to reach a record $104.28 this year, more than 11,000 analyst estimates compiled by Bloomberg show. The earnings yield, or annual profits divided by price, climbed to 7.1 percent, 5.1 percentage points more than the rate on 10-year Treasuries. That’s wider than in 97 percent of months in 50 years of Bloomberg data.

Bullish Precedent

The spread was last this wide in the four months before the S&P 500 reached a 12-year low in March 2009, data compiled by Bloomberg show. The benchmark gauge for American equities has increased 101 percent since then, including an 8.2 percent increase in 2012, the best start to a year since 1997.
Low valuations and signs of recovery have failed to lure individuals back to equities. Stocks are trading at a 14 percent discount to their average price-earnings ratio over the past five decades. The multiple has been stuck below the mean of 16.4 times earnings since May 2010, the longest stretch below the average since the 13 years beginning in 1973, data compiled by Bloomberg show.
U.S. gross domestic product expanded an average 2.4 percent a quarter in the 2 1/2 years since the recession ended in 2009, data compiled by Bloomberg show. The world’s largest economy hasn’t had a smaller post-recession recovery rate since at least the 1940s, the data show. In the 2003 bull market, GDP rose 2.7 percent on average, before the S&P 500 surged 102 percent. For the 1982 rally, the rate was 5.7 percent. Equities more than tripled in that cycle.

‘Very Sluggish’

“The old story was that the steeper the recession, the stronger the bounce back,” Nick Sargen, chief investment officer at Fort Washington Investment Advisors in Cincinnati, said in a Feb. 16 phone interview. The firm oversees $40 billion. “This is the worst recession since the Great Depression, and yet despite all that the Fed has done, despite huge stimulus from the federal government, the economy is just growing at this very sluggish 2 percent pace.”
Even as the S&P 500 doubled, investors pulled money from mutual funds that buy U.S. stocks for a fifth year in 2011, the longest streak in data going back to 1984, according to the Investment Company Institute in Washington. Withdrawals were $135 billion last year, the second-highest total after 2008. Net inflows have amounted to almost $1 billion in 2012.

Debt to Equity

Capital investments surged in 2006 as the total debt-to- assets ratio in the S&P 500 was climbing to 38.8 in the third quarter of 2007, the highest point since at least 1998, data compiled by Bloomberg show. The ratio is about 32 percent lower now. Companies spent the past three years paying down debt and cutting costs, boosting the S&P 500 profit margin to 13.8 percent, compared with 8.3 percent in 2009, the data show.
S&P 500 companies increased cash and equivalents for 12 straight quarters to $998.6 billion in the third quarter, 60 percent more than in September 2007, just before the index reached an all-time high of 1,565.15, according to S&P. The total excludes financial, utility and transportation companies.
Applied Materials’ second-quarter profit and sales forecast topped estimates on Feb. 16, signaling semiconductor makers are pulling out of a spending slump. Customers such as Samsung Electronics Co. and Taiwan Semiconductor Manufacturing Co. are stepping up spending, according to Patrick Ho, an analyst at Stifel Nicolaus & Co. in Dallas.

Disney, Apple

Walt Disney Co. (DIS) boosted capital investments by more than 10 percent each fiscal year since 2009, increasing them by 69 percent last year. The largest U.S. entertainment company by market value put the first of two new cruise ships into service last year and is expanding Disneyland Hong Kong, while designing a theme park in Shanghai.
The company also announced a $16 billion buyback plan in May. The stock trades at 15.7 times reported earnings, compared with the average of 26 in the five years before the financial crisis, Bloomberg data show.
Apple Inc. (AAPL), the world’s largest company by market capitalization, boosted its capital investments 60 percent each year, on average, since 2008, helping raise the return to 39 percent last year from 20 percent in 2006, according to data compiled by Bloomberg. The Cupertino, California-based company’s earnings are expanding so fast that even with a 24 percent rally this year, the stock is trading at less than half its average valuation since 1990, data compiled by Bloomberg show.
“Companies have a lot of cash, and it’s not prudent for investors to pay up for cash,” LPL’s Canally said. “Doing a little bit of capital spending has a pretty high multiplier effect on the economy, where cash on the balance sheet doesn’t have any. That’s what the Fed’s trying to drive at.”
(Source: Bloomberg)

Sunday, February 19, 2012

Easing of accounting norms helps India Inc deflect forex loss

Taking advantage of the recent relaxation in accounting norms, several companies in India Inc have shielded their profits from the steep depreciation in the rupee last quarter.
Accounting Standard – 11 deals with the effect of changes in foreign exchange rates on financial statements. An amendment to this standard was made earlier and extended in December 2011. This allowed companies to adjust exchange-rate related losses on long-term foreign currency loans directly in their balance-sheets (instead of in the profit and loss accounts) up to 2020.
It also allowed companies that had not availed themselves of this option earlier to do so.
Results for the December quarter reveal that quite a few companies have used this change to keep forex-related losses off their profit and loss account. This delivered a boost to their profits.

Providing cushion

Choosing the relaxed norms has helped companies such as Jet Airways, Rural Electrification Corporation and Power Finance Corporation avoid a repeat of the September quarter.
The 9.6 per cent depreciation in the rupee against the dollar that quarter had caused mark-to-market losses on these companies' foreign loans to spike.
The further depreciation of 8.4 per cent in the rupee in the December quarter would have meant additional losses, but for the adoption of the new norms.
For instance, REC's profits would have been lower by around Rs 198 crore in the December quarter (more than a quarter of its reported profits) while PFC benefited to the tune of around Rs 599 crore (around 54 per cent of reported profits). Jet Airways was able to show foreign exchange related write-backs of Rs 179 crore, excluding which its reported losses of Rs 101 crore would have more than doubled.
The list of beneficiaries also includes firms such as Nestle India, Sintex Industries, and Pidilite Industries. Even companies such as Essar Oil, Tata Chemicals and Tata Motors, which were earlier amortising exchange losses on foreign loans till 2012, have benefited.
The extension of the option up to 2020 (or maturity of the loan, whichever is earlier) allows write-offs over a longer period.
While adopting the eased norms has benefited companies in the December quarter, it may prove to be a double-edged sword if the recent strengthening in the rupee continues.
Forex-related gains that could have boosted profits will now have to be adjusted in the balance-sheet too.

Adoption of IFRS

Also, it remains to be seen how adoption of International Financial Reporting Standards (IFRS), if and when that happens, will impact these companies.
IFRS does not allow leeway in adjusting foreign exchange related losses and requires them to be charged to the profit and loss account.
(Source: Business Line)

Biking enthusiasts power sales of super bikes

The sale of superbikes/mini supers in the 250 cc-650 range is set to see an explosive growth in the next two years with their volume zooming to nearly two lakh units a year, according to a senior executive of Garware Motors which has tied up with South Korean company S&T Motors, manufacturer of Hyosung motorcycles, for importing them as CKD kits.
The company says the love for high powered superbikes is not limited to the twenty somethings who want to flaunt the raw power of their bikes but even some men in their 1970s are hooked to it as they are trying to catch up with their lost youthful days.
Speaking to Business Line here recently on the sidelines of the opening of a new dealership by Garware Motors Ltd for its Hyosung bikes, Mr Shivapada Ray, GM-Sales & Marketing, GML, Pune, said in less than a year since launch, the company has sold 500 superbikes in the 650 CC plus category in the country. These vehicles were in the price range of Rs 3.90-5.70 lakh and he claimed that Hyosung's were the largest superbike models sold in the country in a year.
Explaining the reasons for this, he said the South Korean superbikes were powered by twin cylinder engines (V twin) that gave it high power. It was estimated that the market for superbikes — bikes in the 650 plus category — was around 2,000-2,500 units a year in India and by selling 500 units in less than a year, GML has emerged as the largest seller of superbikes in the country.
Mr Ray said Coimbatore was the 16th centre where his company has opened a dealership. He said by May, the company would launch its 250 CC models too and in Coimbatore he was confident of selling 40-45 superbikes and 100-150 units of mini superbikes annually.
Explaining the growth of the superbike and mini-superbike segments, he said the 150 cc up to 200 cc bike range is estimated to have a market of about 1.7 million units a year in the country. But in the next two years, the market share of the mini-super bikes is expected to explode to about 1.7 lakh units. These are in the price range of Rs 1.2 lakh to Rs 2.7 lakh. The market has attracted several players like Bajaj, Kawasaki, Honda, Suzuki etc but he was confident of Hyosung holding its dominance.
Mr Ray said as in the case of the car market where the bigger hatchbacks are nudging 800 cc cars as entry level models, in the bike segment too, the dominance of 100 cc bikes is being shaken and in two to three years, 250 cc models will come to grab significant market share as entry level models.
(Source: Business Line)

With capacity peaking, we are looking at many greenfield plants: Tube Investments

Next year, we will expand in tubes with a new plant in Chennai at an investment of Rs 200 crore. This will cater to the hydraulic cylinder segment used in excavators. This is to take a step out from auto so that we are not heavily dependent on it.— Mr L. Ramkumar, Managing Director, Tube Investments of India.
Murugappa group company Tube Investments of India is looking for a big breakthrough in battery technology, as it hopes to crack the electric vehicle conundrum (for its BSA electric bikes). “We know what consumers want in electric scooters. They want the same experience as petrol scooters – (which means) better battery, fast charging, speed and good pick-up. But we don't know how to achieve it. We are exploring long-term plans by talking to people on the technology side. We are taking a long-term view to get somebody to work with us, even if it takes time,” said Mr L. Ramkumar, Managing Director, in an interview to Business Line. Excerpts:

Your net profits were down 47 per cent in the last quarter. What do you attribute it to?

Last year, there was an exceptional income due to sale of a building. The metal forming business did badly partly due to the auto sector and largely due to the Railways. We did not have any turnover in Railways, which releases orders on wagon sections and frames. This has come only now – in January.
Our engineering division did better than last year in absolute terms due to the growth in the two-wheeler industry; if the cars situation had been better, we would have had much better sales. We also did well in chains, again due to two-wheelers. We have been increasing our chain capacity – from 2010-11 to end of next year, we will increase capacities by nearly 60-70 per cent across greenfield and existing facilities. As for bicycles, we started the year slowly; second quarter was better and the third even better. But the pressure on margins continues. We have not been able to fully pass on the price increases because the market is not growing and everybody is holding on to prices. We have increased prices to an extent over the last nine months, across categories. There has been a growth in volumes in the third quarter. We continue to see a growth in bicycles. But margin pressure will continue.
We have some import content in the kids bicycle segment and here we got affected by the currency. We have not been able to pass on the prices in this category as it is a price sensitive market. We also cannot pass on prices at the entry level. But in the high-end segment, we are able to pass on the increase. The focus is to have product design and development which is so differentiated that price is not such a consideration – the percentage of bicycles in this category should increase. We should also look at internal cost controls.

How are electric scooters doing?

They are chugging along slowly. The problem is endemic with the industry. People want the same experience as they have with petrol scooters. There are also some attendant issues like where do you charge the battery. We have restricted our distribution to a few States so that we can concentrate better.
People want a better battery, good pickup, fast charging, less cost, good speed at 65 km per hour… then we have a winner. We know what customers want, but nobody has figured that out yet. Lithium ion batteries are used in Europe, but then the cost goes up tremendously.
The Government subsidy helps to some extent – there was an initial improvement in sales, but it has plateaued now. But we are not basing our strategy on subsidy. We are exploring long-term plans – we are talking to people on the technology side. We are looking for a breakthrough in battery and motor controller. The company is taking a long-term view to get somebody to work with us, even if it takes time.
In China, electric vehicles are working because of legislation that says one cannot bring fossil fuel two-wheelers into the cities – 22 million electric scooters are sold every year.
We are selling 600 scooters a month, maximum we reached was 900. We would ideally like to do 2,000 a month. There was a spike when petrol prices went up in April to June.

What is your outlook for the next year?

Most of our plants are reaching peak capacity, prompting us to go for several greenfield plants. Next year, we will expand in tubes with a new plant in Chennai at an investment of Rs 200 crore. This will cater to the hydraulic cylinder segment used in excavators. This is to take a step out from auto so that we are not heavily dependent on it. We will also expand our automotive tubes with a Rs 250-crore plant, most likely in Punjab, to cater to Maruti, Honda, Hero MotoCorp, Suzuki, Yamaha and Bajaj.
We are investing Rs 50-60 crore for expanding industrial chains. We are looking at a plant in Chennai. On the automotive side, we will do higher value chains for higher CC motorcycles, which is going to be the future. TI will also set up a plant in the East for cycles – Orissa or Bihar.
One thing is land has not been easy to get these days.

How will the investments be funded?

It will be through internal generation and loans. We have still not stretched our debt equity limit. It is less than 1. Up to 1.2 is fine – so we still have room to expand.
What kind of potential does export hold?
A large percentage of chains turnover is exported. We will do Rs 100 crore this year from industrial chains. With the Sedis acquisition, we are trying to expand further, leveraging its brand. We are also looking at certain markets where both of us are not present like the US. There are certain types of chains either of us can make. Together we can give a better package.
There is also an export opportunity in tubes. This year, we will do Rs 85 crore. We used to concentrate on the passenger car segment for Europe and America. Now, we are focusing on the critical parts (front forks, shock absorbers) of two-wheelers in South East Asia – Indonesia, Vietnam …

How do you manage to attract and retain talent? Is manufacturing regaining its lost charm?

Engineers should be taken in R&D, production and planning – where there is more cerebral work. We have had people who have gone to IT and come back and they are happy.
The idea is to give engineers a challenging engineering or technology or academic job rather than just routine supervision. Shop floor supervision can be done by experienced operators. The first 3-5 years of their career, people want challenging and interesting work.
We are strengthening our team in manufacturing engineering. We are making them more visible – we are sending them to plants abroad so that our new plants have new processes and ideas.
We are also encouraging people at the shop floor to tell us what we should do.
(Source: Business Line)

A brand new configuration

As the big players tweak their strategies, low-cost offerings have queered the pitch in the category. So where is the tablet PC market in India headed?

With a series of high-decibel launches in the last one year, the most recent one being the government supported Aakash, tablet computers were expected to obliterate the netbook market in India sooner than later. Yet, after the initial ballyhoo, manufacturers are suddenly in a wait and watch mode, with many of them revisiting their strategies for a fresh onslaught into the Indian market.
The initial sales numbers have been small. India sold close to 2 lakh units in 2011, compared to 65 million units globally. With a range of big and small players, the market has become extremely competitive, but no clear leader is in sight. While various estimates indicate Samsung, Apple and RIM (Research in Motion) lead the pack, followed by IT companies like DELL and Acer, the entry of low-cost manufacturers like Beetel that jumped into the fray to ride the anticipated boom, has fragmented the market (the last count being 70 different models) blurring product differentiation.
While players are trying to grapple with the clear value proposition that they can offer a consumer, their experiences offer some interesting lessons.
For Dell and Acer, the biggest learning from the Indian market has been that the tablet PC will continue to be the secondary or tertiary device in the consumer. Thus the initial euphoria, which was driven by the belief that tablet PCs might eat into the sales of notebooks, has given way to soul searching.
In fact, both players are reconciled to the idea that unlike in the West, where tablet PC sales to a certain extent have eaten into the sales of notebooks, in India the two will co-exist. Remember, when it comes to PC penetration, India lags far behind the West. “In India, people are yet to own their first laptop or notebook, let alone a tablet,” says P Krishnakumar, executive director (marketing), CSMB, Dell India. And many would much rather opt for a combination of a smart phone and a notebook (instead of a tablet) because of the purpose it serves. “In the West, where more people are technology savvy, consumers own multiple devices at home. This trend will only be reflected in the five per cent of the IT savvy population in the country,” says Krishnakumar.
While Dell claims its 5-inch-screen Streak and the Dell Latitude (meant for enterprises) had a good run, it is silently reworking on a new range of tablets for the Indian market. Refusing to divulge details about its new products, Krishnakumar says in their current form, tablets will continue to be a niche segment, unless technology brings in “a form factor where there is higher convergence of the laptop and the tablet.”
Acer, on its part, has a two pronged strategy for the Indian market in terms of driving sales. It is pushing hard its Windows 7 tablet which has found acceptance in large enterprises because it can be integrated with the Windows operating system (OS) which is widespread in most enterprises. To push sales further, the Windows 7 tablet is also equipped with a docking keyboard allowing consumers to create content on a tablet, which has been one of the peeves in tablet adoption.
Within enterprises, believes S Rajendran, chief marketing officer, Acer India, sectors such as hospitality, automobile and pharma hold promise. “In many applications in these industries, you do not need to create content but employees can use a tablet as sales catalogues,” he says. In fact, Rajendran also sees a potential in the education space. “Look at the coaching class culture which is so unique to India and a parallel economy by itself,” says Rajendran. Many of these institutions have shown interest and could be potential targets for the future. Likewise, Samsung too thinks the education segment holds promise and will take off in a big way this year. “We are exploring the idea of providing customised digital content for students and our discussion with some universities are in the final stages,” says a Samsung spokesperson.
Coming back to Acer, for its other two tablets based on the Android platform, Rajendran sees that the overall Android ecosystem has to evolve to meet the needs of the enterprise space. This would also mean issues regarding to manageability, security, and compatibility with legacy systems. In the West, the culture of BYOD (bring your own device) is more pervasive and enterprises have started scaling up to address these issues.
RIM’s Playbook is pinning its hopes on the soon to-be-unveiled OS which will allow users to enable a feature, Blackberry Balance, which RIM predicts will be a hit with the new-age consumer. With the BlackBerry Balance feature in play consumers will no longer need to sync their BlackBerry smart phones to access corporate mails. “With consumerisation of IT devices, employees today want to bring their own devices to work. The BlackBerry Balance allows us to partition their device into personal and corporate, thus allowing flexibility of personal use and security of corporate data,” says Sunil Lalvani, director (enterprise sales), Research in Motion.
The app ecoystem
RIM is also looking to build its app ecosystem on the BlackBerry 10 OS to catalyse sales. This was a strategy that Apple had used to wow consumers with innovative applications. “We have 30,000 app developers working on apps that will be useful for the enterprise space in sectors like healthcare, FMCG and pharma,” says Lalvani. “In the consumer space, we are differentiating by focusing on the browsing experience. What has worked for us is the multi-tasking between apps and hi-resolution flash enabled software that improves user experience.”
HCL Infosystems too hopes to create differentiation for its tablet PC by developing specific applications for different verticals like BFSI (banking, financial services and insurance), education, FMCG and hospitality to push sales. In fact, HCL is strengthening its marketplace (HCL Me Smart App Store), which will be an eco-system of apps for both consumers and enterprise users. Samsung too believes the application universe will go a long way in catapulting tablet sales. Thus, to break into the enterprise and education space, the company is working on developing customised applications at its R&D facility in India.
‘Content readiness’, as Lenovo calls it, is also the top priority for the PC maker. “We believe local content in vernacular languages will also help the market grow,” says Rajesh Thadani, director (consumer business segment), Lenovo India.
Price versus value
Now as the big players tweak their strategies, low-cost tablets from Reliance, Taiwanese brand MSI, Beetel Teletech, LACS, OlivePad, Spice and now the Aakash have queered the pitch in this category. So where is the market headed?
“The market will have three segments based on price: iPad, the sub Rs 25,000 tablet and then Rs 10,000-Rs 15,000 range tablet. The market for these low-cost tablets will not move the same way as the smart phone market, as unlike smart phones, the market is still niche and there is no clear cut usage pattern defined for this device,” says Vishal Tripathi, analyst, Gartner.
So getting the right price-specification mix is a critical factor for tablet manufacturers. As Gautam Advani, business head (mobility), HCL Infosystems, points out, “The tablet market, though nascent is extremely commoditised. Unlike the journey of any new category which allows space to breathe for the first few years, this category has evolved differently with a plethora of brands jumping into the market, hawking different functions and forms.” Analysts argue this might be one reason why Aakash in its current avatar (though at an attractive price) might not sell like hotcakes. “Indians are very conscious of both value and price,” says Naveen Mishra, lead analyst (telecom practice), CyberMedia Research.
Alex Huang, country head (systems business group), Taiwan-based Asus, agrees. “We have seen two price points emerging. One is the premium segment, which is clearly led by Apple and second, the Rs 15,000-Rs 20,000 price range, where there are a whole host of players.” This is the reason many brands which had initially priced their tablets higher were forced to reduce prices as consumers in the premium price point were loyal to Apple. In order to escape this price war, Asus has added an important feature. “Our tablet PCs offer a unique docking solution, that allows users to use the tablet as a laptop, but we will not undercut our price,” says Huang.
Display in modern trade is also a challenge for this category. As a Convergence Catalyst report on tablet PCs indicates, “Some OEMs (original equipment manufacturers) are confused whether to position the tablet as an IT or telecom product, leading to different stores displaying it differently. Also, telecom organised channel chains like Mobile Store and Univercell which have recently started selling tablets are struggling with sales as they are unable to provide the necessary retail experience.” The other challenge, as Thadani of Lenovo points out is the wi-fi ecosystem in-store. Many Lenovo stores, for example are not wi-fi enabled making it difficult for sales staff to extoll the tablet PC’s true value. Thus, sprucing up the retail ecosystem, which includes investing in infrastracture and the right kind of people to sell a tablet is top priority for Lenovo this year.
Consumer education is also critical and Acer is investing heavily in live demonstrations at its IT specialty stores to drive sales. Krishnakumar of Dell explains why consumer interfacing is crucial. “Consumers need constant reminder about the category as the demand is still push-based rather than pull based,” he adds.
Of course, a better internet ecosystem (like that in the West) will go a long way in improving tablet sales. As Forrester analyst (mobility) Katyayan Gupta says, “3G connectivity in the West is robust whereas in India it is not the case. None of the telecom operators have a pan India support in India. The underlying utility of having a tablet is mobility and content consumption and if you are restricted by the fact that you are not connected to the internet, it does not make a good business case to buy a tablet.”
Analysts claim device manufacturers also need to devise bundling offers to help push their devices. “For example Reliance 3G was the first tablet to bundle with 3G and this made a huge impact on sales.” Samsung too is working with operators to ensure consumers have a better experience. “The idea is to allow consumers to spend more timedownloading content to understand the full potential of tablets,” says a Samsung spokesperson.
There’s rumour in the market that Reliance is preparing to launch a 4G tablet PC at Rs 4,000. If that happens, things will only get more interesting from here.
(Source: Business Standard)

Apollo Hospitals to adopt retail model to expand healthcare

The healthcare major Apollo Hospitals is planning to take retail model to expand offerings. The Chennai-based hospital chain said a detail strategy is being worked out. Besides, as part of the expansion of beds, the hospital is planning to invest Rs 1,650 crore.
While addressing the analysts on Sunday, Suneeta Reddy, joint managing director, Apollo Hospitals Enterprise Ltd, said, “Currently, we are working on formulating the strategy on how to take the healthcare through retail format, which includes shopping malls and setting up of dental clinics on leased basis.”
Before March 2012, the strategy will be ready, she said, while adding that the hospital chain will not look at any franchise model to expand Apollo Clinic. It may be noted, the hospital chain already into the retail space, through its pharmacy business, which turned around during the quarter ended December 31, 2011, by posting a Rs 2.2 crore Ebit profit as compared to loss of Rs 90 lakh a year ago. The hospital chain said it is waiting for a clear note on FDI policy to rope in a strategic partner in its pharmacy business, said K Padmanabhan, group president, Apollo Hospitals.
Commenting on the capex lined up, Krishnan Akhileswaran, chief financial officer, Apollo Hospitals Ltd, said total capex lined up was Rs 1,860 crore, of which Rs 225 crore was already invested. The proposed investments will take up the number of beds owned by Apollo to 8,500 by 2017 from the current 5,888 and number of owned hospitals to 49 from 37.
The chain has reported a drop in occupancy rate to 70 per cent from 73 per cent, this was due to addition in new beds. The average revenue per occupied bed in (Rs a day) was increased by 11.2 per cent to Rs 20,147 crore from Rs 18,125.
“We have cash in hand of around Rs 400 crore, which was raised through QIP and through promoter infusion and another Rs 1,000 crore will be funded through debt and internal accruals,” he said.
Suneeta Reddy ruled out any possibility of further dilution by Apollo.

If the two large engines in Asia are forecasting good growth, then I believe we'll do well: Jerry Hsu, DHL Express

Jerry Hsu is CEO, DHL Express Asia Pacific and a member of the DHL Express Global Management Board. Based in Hong Kong, he is responsible for China, Japan, Korea, Hong Kong, Taiwan, South East Asia, India and South Asia, Oceania and other markets in the region. Under his stewardship DHL Express became the No. 1 player in the area’s key markets of Hong Kong and Taiwan, as well as in China, the company's fastest-growing market. With Europe seemingly heading back into recession and the US still to convince that its economy is improving, the company is looking at Asia as its growth driver. Hsu spoke about DHL’s plans for the Indian market in a recent visit to India. Excerpts.

The fortunes of the logistics industry are closely linked to the economic cycle. How has DHL been affected by the current economic scenario?
I keep telling people, we are exceptions. We are not the regular mom-and-pop stores; we are the market-dominant force. Yes, there are a lot of problems, especially in Europe and in the US. But in Asia we are growing as fast as the market and doing way better than competition. There is a very optimistic view in my team that this year we’ll surpass the growth of the market.
What makes you so optimistic?
Our brand is stronger; our investments are paying off better. Our people are well trained and capable of meeting any challenge they may come their way. I don’t think there is any big threat to the Asian market. India is forecasting 7.2 per cent GDP growth and China aims for 8.5 per cent. These numbers are heavenly when compared to Europe. So if the two large engines in Asia are forecasting good growth, then I believe we’ll do well.
I’m optimistic and confident, and that’s because we have great infrastructure and reach. Our employees are extremely dedicated and talented. This did not come naturally, but through proper investment.
In fact, they were trained last year through the International Specialists programme. It is a wonderful alignment between management and workers that give us an edge over the rest and help us build a strong team.
How has the International Specialists campaign (Speed of Yellow) helped in all this?
We are proud of that campaign. We wanted to reach out to people across the world. We wanted our employees working in remote corners of the world to realise that they are an important part of our network. If you are a customer service agent, you need to know that your efforts and services are invaluable in helping us perform. You can imagine how these campaigns enhance the pride among our teams, and gives them a boost. We plan to apply to the Guinness Book of World Records for training 1,00,000 employees in such a short time. We want to share our story with our customers, show them how we perform.
You said you don’t think there is any big threat to the Asian market. Specifically, how do you feel about India as a logistics market?
I’m hopeful of the Indian market. If China can achieve such a tremendous growth in 20 years, India ought to do it faster. You must appreciate how much more informed your people are. And that is an edge over China, which restricts free flow of information. China has very good GDP, great investments, foreign reserves, but they suffer from issues like poor social justice, rural-urban disparity, uneven wealth distribution. There is more acceptance and less conflict in India. I go around the world, I’ve seen the Arab spring and I can’t even compare India to that. If you look at governments of Greece or Ireland, you will realise what a fine job your government is doing.
We’ve the best team here in India. Our employees are eager to innovate and perform. I’m optimistic not only about our industry but also of India. I believe in looking at the long term. And when it comes to long term success, I see a lot of promise in India.
Logistics is a backstage role. One normally checks out products in a showroom or receives parcels and letters but don’t seem to care about how the things actually get there. In such a scenario how important is brand-building in the logistics industry?
Brand-building is crucial especially in this age of e-commerce. People need to understand our capabilities and reliability. Only then will they trust us with their shipments. To that end, we will do lot more advertising this year on TV, print, digital and radio. There will be some India-specific ads as well. We might be a little expensive, but we do it best.
You entered into quite a few strategic brand tie-ups and sponsorships in 2011. What’s in store in 2012?
That’s right. We have tied up with fashion weeks across the world. We are the official logistics partner of Manchester United, Volvo Ocean Race, the Rugby World Cup and The Leipzig Gewandhaus Orchestra. In fact, we are beginning the DHL Champions Trophy Tour 2012 from New Delhi. This is an effort to showcase DHL’s behind-the-scene operations and provide fans in over 27 global destinations a chance to see the Premier League trophy. We are also involved with the Formula 1 as we believe in speed. These tie ups help us showcase our brand. If you think carefully, all these events involve huge complexity. In Formula 1, the kit has to move from one circuit to another within a very short duration. And it is DHL which makes that possible. These tie-ups are intended to demonstrate our role in helping some important global events.
The social media space has seen phenomenal growth in India. How do you plan to use that to your benefit?
Social media is here to stay. One has to understand what our customers are doing there, what they are saying and be ready to respond accordingly. We are using it to reach our customers and listen to what they have to share. We use the net promoter approach to listen to our customers in real time and understand what they think of our services.
The social media can also be used to reach out to inform customers about our services and offers. We have strong presence on Facebook. We have a service for students called University Express to assist students applying for higher studies overseas. This service has gained great popularity through the social media. Last year we had a corporate social responsibility programme in New Delhi, where we collected used books and toys and distributed these among underprivileged children through local NGOs.
Most logistics companies talk of simplifying operations and providing more value to customers in their communication. What is DHL doing on this front?
We are simplifying operations to reduce costs and make our customers live easy. There are a lot of issues regarding aviation, billing, courier and custom clearance. We try to strengthen our framework so that we can sort out these issues and keep our customers happy. That is our plan.
Having said that, one must keep in mind that we cannot haphazardly grow our business or develop more services. We need to be careful of the direction in which we grow. Our business is driven by shipments, couriers, overnight expresses. It is this service that lies at the core of our business and not how many products we offer, and how we promote them. We are not Apple; we don’t come out with new iPads every two or three months. But we deliver our packages on time. We can make our customers happy by delivering faster and better. It is the kind of service that we provide that makes us international specialists and a great company. And in order to ensure that we stay this way, we have a focused framework in place.
Talking about quality and value addition, let me also add, last year we delivered 96 per cent of our shipments on time. This year, we already have an internal programme targeted at achieving 97 per cent success. If you consider the size of our business even a three to four per cent failure is a big number and we want to reduce that. We are growing at a good pace and we want to keep that alive. We have around 118 key performance indicators and we monitor them on a regular basis. We believe there is no limit to perfection. Our objective is to reach the Six Sigma level of perfection. We have a global programme called First Choice, equivalent of the six sigma level.
Through this group-wide service improvement programme we aim to become the number one choice for our customers. This is one of the core elements of our corporate strategy.
(Source: Business Standard)

Why the Internet of the near future will be radically different

A week before flamboyant Megaupload founder Kim Dotcom's arrest in New Zealand, a court in the United Kingdom passed judgement on an extradition case that was far less reported on, at least here in India. This was inevitable. A guy with a surname of 'Dotcom' was far more interesting to the local media than someone called Richard O'Dwyer.

Plus, Dotcom was the very cliche of the rich millionaire, luxury cars (18 of them), huge houses, beautiful models in tow. O'Dwyer was a 23-year-old student of software programming from drab Sheffield, in the north of England.

Dotcom looked (literally) larger-than-life and seemed to make a conscious effort to behave that way, one memorable photograph shows him on a beach with a bikini-clad beauty and pointing to a huge yacht in the background (presumably in case you missed it).

In photographs and videos, O'Dwyer, clad in jeans and wearing either a grey sweatshirt or an orange hoodie, looked pretty much the average college student. He was often seen with his mom as they made their way from court to TV studio trying to drum up support.

Both, however, face roughly the same fate, extradition to the US on charges of criminal copyright infringement. The Megaupload case is well known. O'Dwyer was running a site called TVShack that provided links to what US prosecutors claimed was infringing content (there was no illegal content on the site itself).

For this, he was charged in the US, and an extradition case brought against him. In January, a judge allowed the extradition to go ahead, though the decision is being appealed. Kim Dotcom too faces extradition to the US, from New Zealand where he was arrested.

These cases come at the tail end of a series of seemingly unrelated events such as the hearings against Google, Facebook, Yahoo and other big internet companies pending in the Indian courts for hosting objectionable content. Also note: in 2011, the government brought in new rules which dramatically restricted the ambit of what it is acceptable to say online.

Anything Goes? Nope

In an article in 2006, tech columnist John C Dvorak asked: "How many people realise that we're living in a golden age, the Golden Age of the Internet? It won't last; golden ages never do. Some of it will remain, but there's evidence that much of it is headed for the trash heap of history."

That's an overstatement of course. All golden ages (if that is indeed what we are living through) have their dark sides. In the internet's case, that dark side meant spam, phishing scams, child pornography, and more. But those are not driving the big change in internet. 
The big change is this: the internet as a place where one could say, read and download anything, even if none of it is shockingly bad, will not be with us forever. Those freedoms are unlikely to remain unrestricted. Controls and curbs on what users can do, and the content users have access to, will only increase.

The tech-savvy among us will always find ways to get around such curbs. But it will get progressively more difficult, or even illegal, to do so. There are two forces driving this change. First, there are the shifts in the way we use the internet now, as compared to how we did a decade ago.

Second, regulators who wanted to close the arbitrage gap between online and offline worlds, ripping off content, or posting objectionable content is easier online, are getting more determined. So is Big Content (the entertainment industry, media), which has bled from the explosion in illegal downloading. Their attempt to gain control over online content may finally be succeeding, at least to an extent.

The Business Shift

Ask yourself this question: how did you spend your time on the internet today? Mailing and social networking?
Alexa.com tracks internet traffic according to visitors and pageviews. For data generated by web visits of Indian users, the list of top 15 sites, which include indiatimes.com, form a varied list. The top sites for Indian users were (in order): Google, Facebook, YouTube, Yahoo and Wikipedia.

Big 5 websites

And in these top 5 rankings there's an interesting story. First, the top 5 list is roughly the same for all users worldwide, with a few exceptions. The Chinese spend a lot more time on Baidu, the Chinese search engine. Craigslist is a hugely popular site for Americans. And these five sites are squarely in the focus of content generators, courts, and government regulators.

Now ask yourself this: how has your internet use changed from a decade earlier? Statistics for Indian users are patchy at best for even a few years back, but they do exist for American users. Compete, an online marketing consultancy, compiled the list of top 10 sites according to time spent in 2006 and the list is a bit different but not very much so, Myspace and Yahoo were more important and Facebook less so. But go even further back to 2001, and it's a bit like taking a walk through history. Who even uses Hotmail anymore?

But Compete's main point is this: "The top 10 sites are garnering more and more of a user's entire time spent online." The top 10 sites accounted for 36% of a users' time online in 2011, up slightly compared with 35% in 2006, but quite a bit compared with 30% in 2001. The biggest sites garner a far greater share of user attention now than ever before.

Its supporters made much of the internet's supposedly 'anarchic' quality, millions of sites, hundreds of servers across the world, and all without any central authority which made regulation or control seemingly impossible. But as users, we aren't really that anarchic. We have a regular, dependable list of favourites. We will, of course, venture off the beaten track, but not that often. And that opens up a window of opportunity for the regulator.

Just Intermediaries?

Decentralised the internet maybe, but we still access it through certain channels. To get to that obscure website, with its server located in Poland, you still have to go through your internet service provider. There are other types of intermediaries more well-known to us.

Facebook for instance. It doesn't produce any content of its own but is an intermediary. Everything on Facebook is provided by its users. It's the same with Google and Twitter and even YouTube (owned by Google). And Megaupload. These sites are merely placeholders for the information uploaded by users, or so these companies tell us.
    
Gap between online and offline
It is these 'neutral' intermediaries which have become the new targets in the battle for internet regulation. For much of the early years of the internet, Big Content spent its time on a bizarre, often ridiculous attempt at cracking down on individual users. All these cases did was to add to legal bills. What they didn't do was bring down internet piracy.

So Big Content came up with a different strategy: go after the intermediaries. Since 1999, the principle behind most internet regulation has been the 'safe harbour' rule, intermediaries can't be held responsible for their users' content, as long as they respond quickly to 'takedown' requests or notices complaining about illegal or objectionable content. The Stop Online Piracy Act (SOPA) controversy was partly over this, it would have brought the intermediaries much more directly in the firing line and that was the reason intermediaries like Google opposed it.

In the middle of last year, a ruling by the Delhi High Court, blew a gigantic hole through that principle in India. In 2008, the record company T-Series filed a case against Myspace, claiming that users on the social networking site had illegally uploaded a number of songs and clips under the T-series banner, including copies of the Imran Khan-Genelia D'Souza starrer Jaane Tu Ya Jaane Na, a number of other Hindi and Punjabi music albums, as well as a Bhojpuri film.

The judge ruled that Myspace could hardly claim to be a neutral intermediary, for one, it added advertisements to clips and songs, thus 'modifying' them, something intermediaries are not supposed to do if they want to be covered by safe harbour rules. But more important, the copyright law in India didn't really allow intermediaries to remain neutral if pirated clips were actually uploaded onto a website, and even if they were taken down.

'Twitter is a Publisher'

The judge pointed to the case of a music library or a movie library. Owners of the library could claim that holding hundreds of films or CDs made it impossible for them to check for pirated content. But under Indian law they would certainly be liable even if they removed the offending title when told to do so. So Myspace couldn't escape merely by virtue of being a website.

Catching the net
In another case, Reliance Entertainment obtained a 'John Doe' order from the courts preventing websites, cable operators and ISPs from violating Reliance's copyright on the film Don 2, which had then just been released. The impact?

Some ISPs played safe, blocking access to file sharing websites altogether for a brief period, notwithstanding the fact that blocking a website is something that can be done only by the government. "In a sense this is a return to the pre-2003 days when VSNL and MTNL would just block a website without any proper process," says Pranesh Prakash, of the Centre for Internet and Society a Bangalore-based internet advocacy group. The court order did not mandate the blocking of any websites.

The Myspace case is on appeal, but here's another example, this time from Australia. Twitter has been sued by a man who was wrongfully accused by a celebrity, via a tweet, of stalking her. The two people reached a legal settlement, but Twitter itself has been sued for what one of its users tweeted. And following the principle that in the offline world, a newspaper's publisher can be sued for what one of its columnists writes, the lawyer for the complainant told a tech website: "Twitter is a publisher like any other."

GoI's New Rules

The attempt to bridge the difference between offline and online worlds took a dramatic, if relatively less noticed, turn last year, when the government here introduced new rules.

The rules mandated intermediaries had to sign new agreements with users that prohibited the latter from publishing anything online that (among others things) was 'grossly harmful', 'harassing', 'disparaging', or 'hateful'. With these new rules, curbs on what is allowed to be said online are now actually more restrictive than curbs offline.

As a brief on the new rules by PRS Legislative Research, a non-profit research initiative, points out the rules prohibit certain content on the internet which may be permissible in other mediums. Consider the example of a book which may publish a controversial essay. Under the new rules, the same essay may not be reproduced on the internet. That could be one of the fallouts of the new government rules.

There is another fallout. "The impact of the IT rules is that they effectively make the intermediary a censor of content," says intellectual property lawyer Shwetasree Majumder.

To test the rules, the Centre for Internet and Society conducted a 'sting' operation last year. It sent
'takedown' notices to seven major websites, asking them to remove content from their sites and quoting liberally from the rules. The notices were largely nonsensical, but despite this, six of the seven websites immediately complied.

Interestingly, the recent court cases filed against large intermediaries like Google, Facebook and Yahoo weren't preceded by issuing takedown notices. Even more interestingly, the counsel for the complainant in one of the two cases reportedly cited the Myspace case as a precedent to argue that intermediaries could be held liable, even if it was users who put up objectionable content. 

Content by Country

"We have not been subject to local laws thus far," said the representative of one of the foreign internet intermediaries to ET on Sunday. "We have a global policy on what content our users can put up." The commercial and business strategies, and the huge databases maintained by the intermediaries, will increasingly make such a position difficult to sustain.

Indeed, as these companies grow in size, profitability and increase their share of user time spent online, they will increasingly be under pressure from regulators and Big Content. Claims of being a neutral intermediary may not wash.

Already the government has demanded readier access to Gmail and other online accounts as part of criminal investigations. In the first six months of 2011, Google received requests from the Indian government to hand over data on a total of 2,439 user accounts. That's the highest number of user data requests made by any country, except the United States (11,057).

There are other examples. A few weeks ago Twitter announced it will filter out tweets according to country, thus a tweet visible to American users may not be visible to Indian users if Twitter has been told to take it down by a court or if, as is more likely to be the case, Twitter is responding to someone outraged by what the tweet said.

Visited a blog on blogspot.com (owned by Google) recently? If you're in India, it redirects you to blogspot.in. Many have interpreted this as Google's move to do the same, create country-specific websites for the same content so that filtering and removal of objectionable content by country is made easier.

Where will this lead to? Several separate 'national internets' with differing and more regulated-than-before content, and where regulations differ across countries, is very much a possibility.

The Age of Big Data

While checking your Gmail account, have you ever noticed the uncanny (and sometimes slightly eerie) accuracy of the ads that appear on the side? If you've been having an email exchange with a friend over the best MBA schools for instance, you might get an ad for a coaching institute on the side. If you're discussing wedding arrangements with your fiance, you might suddenly see ads for wedding planning or catering services.

You've Got Ads

Google was an early pioneer of what is now one the most lucrative businesses in Silicon Valley in the age of Internet 2.0, 'Big Data'. Facebook is free to use, and for individual users, most of Google's services (Gmail or Docs) is free as well. The most valuable commodity these companies hold is their data on users and their habits, which sites we go to, how long we spend there, what we search for, which friends we network with and what we talk about. 
'Big Data' is all about storing, managing and processing this data across millions of users, to find the hidden patterns of behaviour which even we may not be aware of. It is this data which Google or Facebook can use to target ads (most of Google's revenue comes from advertising), to make them 'relevant' to users and making it more likely that they 'click through'.

Surfing in Choppy Waters

What information does Google collect from you? Here's just a small sample: your phone number (which you provide when signing up to a Google account), search queries, location information, the sites you visit and the device that you use to surf the Net, such as your phone, each of which carries a unique identification number.

Google's new privacy policy, which has come in for criticism, aims to integrate the information they have on users across all the services they use, such as Gmail or Gtalk or Search. According to Google, the aim is to enhance user experience, but the policy also states clearly that they may hand over the information they have on you to a third party (not just the government) if required by law or a court order.
(Source: Economic Times)

LG, Samsung, Sony, Panasonic expect robust smart TV sales this year

Television makers such as LG, Samsung, Sony and Panasonic expect sales of smart TV-think a television equivalent of smart phone-to more than double this year and account for 10% of overall flat-panel television market.

A smart TV, or a 'connected TV', is basically an integrated multimedia television with a memory drive that allows users to surf the web, download content, stream video and run apps and games, among others besides functioning as a normal television.

Although it's priced at a high 30%-50% premium over regular flat-panel televisions, marketers expect increasing availability of local content and apps, emergence of new technology and rising spending power and aspirations of Indian consumers will boost demand for smart TV in 2012.

"We are expecting the smart TV market to double this year based on the increasing consumer familiarity with applications and their desire to do more on their own time," says Raj Kumar Rishi, vice-president for audiovisual business at Samsung India.

But companies don't expect smart TV prices to fall any time soon with the entry of more advanced products or increased competition.

Manish Sharma, director for sales and marketing at Panasonic India, says, "Costs are already under pressure due to increase in commodity prices and appreciation of the US dollar. So going ahead we do not anticipate a fall in prices in this segment."

Smart TV prices currently start at around Rs 49,000, going up to Rs 5 lakh for bigger screens. Companies expect launch of new generation display panels like OLED and 3D, and local content to attract more buyers to smart TV.

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And they bet on exclusive local content and apps to differentiate their products from competition.

Samsung, for example, plans to develop localised apps to meet Indian tastes, in terms of movies, games or news at their R&D centres in Bangalore and Delhi as well as through their content partners. Smart TV is one of the most exciting technologies in the world. Samsung last week rolled out ES8000 smart TV with voice and motion control and ability to recognise faces.

Technology experts feel that such technologies may make gaming consoles such as Sony PlayStation, Microsoft Xbox and Nintendo Wii obsolete with smart TV taking their space. It would also open up new avenues for advertisers and marketers. Retailers such as Marks & Spencer already making apps for shopping on smart TV.

With estimated sales of 130,000-150,000 units last year, smart televisions currently account for less than 5% of India's flat-panel TV market of about 3.8 million. Companies expect this share to rise to 10% this year. Panasonic eyes 150% growth this year and LG targets 300% growth in smart TV 3D segment.

Like Samsung, LG plans to adopt local premium content, besides developing special apps for enhancing 3D effects, says LG India MD and South West Asia Region President Soon Kwon.

Sony, which markets its innovation television as Internet TV, expects this segment to contribute 30% to the total sales of its Bravia flat panel television sets for the year ending March 2012.

"With TV and internet being the biggest source of entertainment and with the Net connectivity picking up in India, the market for internet television is only expected to increase," says Sunil Nayyar, senior GM, Sales, Sony India.
(Source: Economic Times)

World has changed, so has Indian IT sector: Vineet Nayar, CEO, HCL Technologies

The world has changed, whether you like it or not. The faster you accept it and faster you convert the threat to opportunity, the better it is, says HCL Technologies CEO Vineet Nayar . In an interview, the head of India's fourth largest locally-listed software exporter talks about the Indian IT industry and what ails it. Edited excerpts:

What ails Indian IT today?

I'll summarise it in one word. Nostalgia. The world has changed, and there are significant threats and significant amounts of opportunities. The old rules, the old ways are not going to apply and, therefore, if we keep on waiting for the golden old days to come back, we'll keep on waiting.

The biggest threat and opportunity for us is that we've to give up hoping, take a step forward and launch into a completely new normal. The world has changed, whether you like it or not. The demand has changed, the employees have changed, the customers have changed, societies have changed. The measures have changed. The faster you accept it and faster you convert the threat into opportunity, the better it is.

So, what is the next big idea going to be?

Let's go back 10 years. I think the answer of the future is in the past. In 2000, application development was dominating Indian industry, after that three new ideas, each of them billion dollar plus ideas came up. One was engineering outsourcing, second was BPO led largely by small entrepreneurs outside IT and the third was remote infrastructure management. In the last decade out of three big ideas which came in our industry, HCL was leading in two.

We have to look at a decade at a time. Do I see one singular business idea that can potentially give a billion dollars? There are 7 or 8 such ideas in the anvil, but you do not know which one will succeed. Mobility, cloud, multiservice. But I'm not willing to bet any of them are going to be billion dollar ideas in 10 years. We don't know. We heard of all kinds of ideas - business consulting, products - come and go in the last decade. A product company is very obsessed with new ideas. A services company is obsessed with taking 3 or 4 of these to market.

Despite HCL's much publicised employee first policy, you still suffer as much from attrition and lack of talent as others.

Employee first is not about worrying about people who go, it is worrying about people who stay. If people are empowered and more productive, and produce faster growth than your competition, then the employee first policy works. Young people have aspirations. While people are there, we get better value out of them, and they are happy.
Do you feel respected? Can you tell your boss to back off? Does he ask for your opinion? Employee first is trying very hard to bring this kind of culture in. Do we have uniform implantation across 85,000 across 26 countries? No. So, we have pockets of excellence. But the whole philosophy and ethos, at least every single employee coming into HCL comes in with a belief that we are trying very hard to live a sentiment. Others are not even willing to live that sentiment. So, at least there is some hope here. The reason we are gaining market share, is because our employees are motivated. They work harder, they feel more loved.

So, where do you see HCL vis-A -vis the competition in India? How would you position yourself among the top players in Indian IT?

In 2005, when we started the journey of transformation, we were faced with choice of what we want to be. In India, fortunately we have some very fine IT companies. Some were fine, some are fine. But they're fine. We took a decision that that's not the space we want to be in. They have created a business model that worked extremely well for them, and if we compete with them, there's no point.

So, we sharply focused our eyes and energy on competing with the IBMs and Accentures of the world, on total IT outsourcing, whereas most of the others are focused on a different business model. Whenever I'm asked this question, I don't know how to answer. We don't compare ourselves with HP or IBM or Accenture, but we compete in that space. And we are obsessed about not competing with IOPs. We are dealing in a trillion dollar market. And collectively, Indian IT companies have less than 3% market share as IOPs. There is a huge market out there. At HCL, we don't have an obsession about comparing ourselves with rest of the IOPs, because our focus is on the 97% market and not the 3% market.

What's the business model of the future going to look like for Indian IT?

We're not a product company so you're not going to suddenly see an iPad or iPhone from us. And therefore it's going to be innovation around the edges. In a typical product company, you're going to see centre-based innovation. In a services company you see innovation on the edges. Charging mechanisms change. You could have charged per person, now you will see charging per application, or per device.

You worked in back office to increase efficiencies, now you will work in front office to increase revenues. You have an opportunity to charge on revenue share, as we do with Cisco and many others, rather than charging on cost reduction. I think you will start pricing in risk and reward. What has been said about the financial services community - that reward is much higher than the risk - the same will be asked of the IT industry. The reward to risk ratio for each customer has to be pretty balanced.
If you doing a T&M contract, you don't have to worry about risks, but the moment you move into more innovative contracts, you have to worry about managing risk.

The second big change will be the way we deal with our employees. Initially, building campuses and bringing them on buses, was our biggest lever for efficiency, tomorrow it will be something else. The world is really short of talented IT folks. The world wants more data analytics, more mobility, more new technologies, but where are the people? Initially coding was fine, but people now want people who can understand the business problem, architect a solution and implement a standard tool in response to their business problem.

The third level of change is about partnerships. So far, most of the work we've done has been from end to end. So far, we've done very few joint ventures; you saw that in consumer electronics, where a lot of companies came together to create a Sony Ericsson. Either joint ventures, or jointly going to market, where you collectively become bigger than you currently are, these are the 3 levels in which you will see business models emerge. But these are all innovations on the fringes.

There is currently a lot of angst among Indian businesses about the state of the nation and political will, and a gloomy outlook on India's prospects. What's your view?

We have had this debate every decade, and we have come out of it. Something will happen. A country with billion aspirations, something will happen. We are an optimistic society. Should the government do more? Yes, but no government anywhere in the world is doing any better.
(Source: Economic Times)

Friday, February 17, 2012

The Korea Discount: Minority report

Corporate governance explains South Korea’s low stockmarket ratings.

IT IS sometimes asserted that low South Korean equity valuations stem from the threat of instability in North Korea. That explanation looked a lot less convincing after the death of Kim Jong Il in December, when the KOSPI 200 index of leading shares and the won, the South Korean currency, both quickly shrugged off the news.
So what is the source of the “Korea discount”, which means that the KOSPI has a forward price-to-earnings ratio of under ten, below most other Asian stockmarkets (see chart)? There are a few possibilities. The national economic model is still built on exports, often in highly cyclical industries such as shipbuilding. The capital structure of South Korean firms has historically been debt-heavy.
The issue is now also getting more of an airing at home. A recent report by Tongyang Securities, a broker, drew an explicit link between Korea’s low equity valuations and the practices of “tunnelling” and “propping”, which benefit insiders at the expense of smaller investors.
Tunnelling is the awarding of contracts to firms owned by family members. Chaebol heads typically own only a small portion of their firms, but are able to maintain control through complex cross-holdings; tunnelling offers a means of exploiting that control to get richer, quicker. In 2007, for instance, the Fair Trade Commission, an official watchdog, fined Hyundai Motor for, among other things, giving 1.3 trillion won ($1.4 billion) of business to Glovis, a firm owned by the son of Hyundai’s chairman—without any tendering.
Propping is similar to tunnelling, and means that unviable units get financial support from sister companies. But it is no less damaging to small investors. If company insiders are able to misuse shareholders’ funds at will, would-be investors will reduce their expectations of future cash flows and thus attach lower valuations to stocks.
Other allegations are even more serious. On February 3rd Hanwha Group announced in a regulatory filing that its chairman, Kim Seung-yeon, was among several officials being investigated for alleged embezzlement. Chey Tae-won, the chairman of SK Group, was indicted in January over the disappearance of 99 billion won from company coffers, as part of a scheme allegedly planned by his brother to cover futures-trading losses. Mr Chey denies the charges. The Federation of Korean Industries, a chaebol pressure group, has urged prosecutors to go easy on Mr Chey. They say that punishing him would harm “entrepreneurial spirit”.
Mr Chey has had previous scrapes, having been convicted of a billion-dollar accounting fraud in 2003. He eventually received a full pardon from the president and was also chosen to represent the nation during the 2010 G20 summit, leading a meeting of international chief executives. Lee Kun-hee, the chairman of Samsung, received a similar pardon in 2009, having been found guilty of tax evasion, and was picked to front South Korea’s bid for the 2018 Winter Olympics. Yujeon mujwai, mujeon yujwai—an old expression meaning “money = innocence, no money = guilt”—is enjoying a resurgence in popularity.
The irony is that the largest chaebol are models of efficient production and are enjoying a golden period. Their success, say proponents, vindicates the family-run approach to business. Their ownership structure means they have no need to appease short-termist investors or to meet quarterly earnings targets; instead, they can invest for the long run. Smaller shareholders have reason to feel less thrilled.
(Source: The Economist)

Europe's car makers: Too many cars, too few buyers

Luxury cars are speeding ahead; lesser brands are stalled.

GERMAN autobahns are unlike motorways elsewhere—on some you can drive as fast as you like. Germany’s car industry is also in a class of its own. Its three big premium brands, BMW, Mercedes-Benz and Audi (part of Volkswagen), are working flat-out to meet demand for their beautifully engineered, stylish motors. The emerging world’s new rich love them. Germany’s domestic car market is doing nicely, too: sales grew by 9% last year.
On February 15th Peugeot-Citroën’s parent, PSA, said its carmaking business had an operating loss of €92m ($121m) last year. Fiat’s boss, Sergio Marchionne, recently revealed that the Italian maker had lost €500m last year in Europe. As The Economist went to press, GM was expected to reveal heavy losses at Opel-Vauxhall, to add to the $14 billion that its European division is said to have lost since 1999.
Last year 13m new cars were registered in the European Union, 2.5m below the peak in 2007, taking the EU car market back to where it was in 1997. Sales will fall again this year, for the fifth successive year: Peugeot-Citroën predicts a 5% fall across Europe and a 10% drop in France.
In the wake of the 2008 financial crisis, many European governments propped up car sales with scrappage schemes that subsidised motorists to trade their old bangers for new models. But all they seem to have done is bring forward purchases that would have been made anyway, and overall they have not saved jobs, says Ferdinand Dudenhöffer, a car expert at the University of Duisburg-Essen. In January France’s car sales were 21% lower than a year earlier, when its scrappage scheme was still in force, with Peugeot-Citroën and Renault especially badly hit. Peugeot, the weaker of the two, wants to cut 6,000 jobs.

Per ardua ad Astra

The combination of falling sales, idled production lines, deep discounts and rising losses makes Europe’s weaker volume makers look rather like GM and Chrysler did before they were bailed out by the American government and pushed through bankruptcy proceedings. But unlike pre-crisis Detroit, Europe’s troubled makers are not turning out clunky, unreliable lemons. Fierce competition has forced them to improve greatly the quality of their cars, says Richard Bremner of Autocar magazine. Each will have some impressive new models to display at next month’s Geneva motor show. For example, Peugeot is pinning its hopes on the 208, a new “supermini”. Fiat will launch a larger version of its 500 minicar. Opel will launch a souped-up version of its Astra family car.
However, building good cars is not enough when rivals are doing better still. First, the troubled European volume makers have to contend with Volkswagen. The German firm’s huge scale, global spread and “slightly premium” image allow it to drive on ruthlessly down the outside lane of Europe’s price war. Max Warburton of Sanford C. Bernstein, an investment bank, notes that since 2000 VW’s European market share has risen relentlessly, from 16% to 24%. With its ability to match rivals’ discounts, it looks capable of pressing on until others start going bust, he reckons.
Peugeot, Fiat and Opel also face intense competition from Asian producers, especially South Korea’s Hyundai and Kia, which are continuing to build capacity in the Czech Republic and Slovakia respectively, as well as importing cheap, sharply styled cars from back home. Last but not least, they are seeing the top end of their market being nibbled away by the German premium makers, which have broadened their ranges of cheaper entry-level cars: BMW with the Mini and 1 Series, Mercedes’s A-Class and Audi’s A1. The premium carmakers have proved far more successful at getting motorists to identify with their brands, and at finding out what people will pay extra for.
One possible reason for this, muses Thierry Huon of Exane BNP Paribas, a stockbroker, is that the bosses of the German firms tend to be lifelong “car nuts”, whereas the French carmakers’ bosses tend to have parachuted in from other industries. Peugeot’s Philippe Varin came from Corus, a steelmaker; Carlos Ghosn of Renault from Michelin, a tyremaker.
Renault has had some success with the low-cost models produced by its Dacia subsidiary in Romania. But as far as investors are concerned its main asset is its shareholdings in Nissan of Japan, in Mercedes’s parent company, Daimler, and in Volvo Trucks. As a new report from HSBC notes, in 2007 Renault’s own carmaking operations were in effect valued at €11 billion; recently the market has given them a negative valuation of around €7 billion.
Peugeot-Citroën likewise has a stake in Faurecia, a successful maker of parts. But like Renault it is heavily dependent on the weak west European market. It is also worryingly dependent on selling cars in kit form to Iran, which account for 13% of Peugeot’s sales (compared with around 6% for Renault), and which would be vulnerable to any conflict over Iran’s nuclear programme. Renault has gone further than Peugeot in internationalising its production—this month it opened a new plant in Morocco. Peugeot wants to follow suit but seems to have doubts about whether it can afford a big planned expansion into India.
Fiat lux bad
Fiat has been suffering from a decision taken in the midst of the financial crisis: to hit the brakes on its investment in developing new cars. Given the resulting sales slump, it is fortunate that its decision to buy a controlling stake in Chrysler has turned out so well. In its bankruptcy Chrysler was shorn of much of its excess capacity in North America and various other liabilities. It has now bounced back to profitability. Without it, Fiat would be in dire straits.
However, Fiat cannot keep running up such huge losses in Europe. Mr Marchionne admits that it needs another partner to create a global carmaker with the scale to take on VW. In recent weeks speculation has centred on a marriage with Peugeot. But to work, this would require big production cuts in one or both companies’ home countries, which might be too politically controversial. Ditto a Fiat-Opel union. Given its near absence from booming Asian markets, Fiat’s ideal partner would be a firm like, say, Mazda, now seeking a new relationship after its divorce from Ford, or Suzuki, another Japanese maker which is trying to unwind a cross-shareholding with VW.
Likewise, Peugeot-Citroën might fare better with an Asian bride: Frédéric Saint-Geours, an executive close to the founding Peugeot family, insists that besides any suitor needing to have a compatible strategy and potential synergies with his firm, a condition of any alliance would be that his company remains independent. But it is intriguing that the big achievement of his boss, Mr Varin, at Corus was to sell it to Tata, an Indian giant (with a growing carmaking division).
GM dallied with selling Opel-Vauxhall in 2009 but changed its mind. Now, as its losses persist, there are signs that it is losing patience again. GM has recently put several new directors on Opel-Vauxhall’s board, including Thomas Sedran of AlixPartners, a consultancy which advised GM on its turnaround. On February 8th the Wall Street Journal quoted unnamed GM sources as talking of closing some of its European division’s plants.
The abortive sale has left the Opel brand even more “soiled” in continental Europe, says Autocar’s Mr Bremner. The Vauxhall brand, under which its cars are marketed in Britain, is still the country’s second-biggest seller, but it is believed that 80% of its sales go to fleet and company buyers, who expect even bigger discounts than individual motorists.
As the losses mount in European volume carmaking, it is becoming ever clearer that the continent is simply making too many cars in too many factories. Christoph Stürmer of IHS, a data provider, reckons that in Europe (including Russia and Turkey) there was capacity to make about 25.5m cars last year, but only 20m were actually made. This year he expects capacity utilisation to fall from 79% to 70%, as sales fall and the Koreans and German premium carmakers open new production lines.
Recent cost cuts may have reduced European carmakers’ break-even utilisation rate to perhaps 75%, says Mr Stürmer. But that still means capacity must fall by about 1.2m cars for the industry to break even. Closing Opel-Vauxhall’s Bochum plant in Germany and Ellesmere Port in Britain, as GM is reportedly contemplating, would cut only about a third of this.
There have been some cuts and cost savings: Opel and Fiat have closed a factory each; Saab, a Swedish carmaker, has recently gone out of business; and Mitsubishi of Japan is giving up a factory in the Netherlands. Several companies have struck deals with unions to cut labour costs, and with other carmakers to collaborate on developing new technologies. But this will probably not be enough.
Making cars in Europe is fearfully expensive. A Renault executive told a French Senate inquiry this month that it is €1,300 cheaper to make a Renault Clio in the company’s plant in Turkey than in the Flins factory in France. As new capacity is built at a rapid pace in emerging markets, such cost differences will get even harder to ignore.
Cutting capacity is costly, however. By Mr Warburton’s back-of-an-envelope calculation, if GM closed Opel-Vauxhall, laying off its 40,000 workers might cost, say, €200,000 each—a painful €8 billion.
Another obstacle is politics. When Peugeot announced its planned job cuts, its boss was summoned before President Nicolas Sarkozy, who has also grumbled about Renault’s délocalisation of jobs to foreign plants. Politicians are obsessed with assembly plants, which some see as a symbol of national virility. This is perverse. Renault argues that the value added in assembly is only 15% of the total. It and Peugeot-Citroën are most concerned to keep high-value engineering and design work, and the production of engines and transmissions, at home and would like to move more assembly work to cheaper places. It seems a reasonable survival strategy, if the politicians would let them.
Europe’s struggling volume makers have all been trying to move their brands upmarket, launching higher-priced small cars—such as Fiat’s new 500L minivan—in the hope of becoming as profitable as the German premium makers. This is another sensible idea. But moving upmarket takes decades, as Audi’s painstaking ascent since the 1980s has shown. Opel, Peugeot and Fiat don’t have that much time.
(Source: The Economist)