Thursday, May 31, 2012

The Greek crisis: a cautionary tale from Argentina

Policymakers in Europe seem to be surprised at the ongoing bank run in Greece (and the nascent run in Spain). They should not be. Anyone familiar with emerging-market meltdowns knows that a financial crisis nearly always follows a fiscal crisis.
Argentina's default in 2001 is but one useful example. In the Argentine crisis, the economy contracted by 18% and unemployment soared to 22% of the labour force. Greece is already close to these levels.
Argentina went through a complete and chaotic default on its public debt. In Greece, the "haircut" imposed on creditors so far has been managed by the EU and the International Monetary Fund. But, with debt still unsustainable, the next round of Greek default could well make Argentina's look positively Teutonic in its orderliness.
In Argentina, the banking system came close to collapse, causing the government to ban bank withdrawals – introducing the so-called corralito, or bullpen, for deposits – and establishing capital controls. That could be the stage that Greece is entering now. So, if the precedent of the Argentine and other emerging-market crises is a useful guide, what could be in store for Greece next?
To answer that question, it helps to recall the feedback loops that link fiscal and financial crises. Banks hold government and corporate loans as assets. Fiscal crisis and default reduce the value of the former, while the ensuing recession undermines the value of the latter.
That is the link running from budget to bank problems. But there is a link going in the opposite direction as well: as banks deleverage to offset losses, they cut credit and the economy slows, causing government revenue to fall. If and when banks require a capital injection from public sources, the additional expenditure – which can be large – weakens public finances still further.
These mutually reinforcing forces can work themselves out in a lengthy process of recession and deleveraging. Or they can prompt a sudden run on the banks, causing the financial system to implode. The outcome depends on confidence.
Economists have long understood that, in the absence of a credible lender of last resort, banks are vulnerable to self-fulfilling confidence crises. That lender can be monetary or fiscal, and in Greece both types are in doubt.
If Greece's agreement with the EU and the IMF unravels, the European Central Bank will no longer accept Greek bonds as collateral. And the Greek state does not have the wherewithal to stand behind its banks. In these circumstances, it would be more surprising if depositors were not rushing to pull their funds out of Greek banks.
The Argentine experience suggests that, after the run on bank deposits, the saga's next instalment is monetary collapse. With revenues plummeting and credit cut off, the Argentine provinces had to resort to printing scrip to pay salaries and pensions. At one point, more than a dozen quasi-currencies were in circulation.
What happens if Greece is cut off from EU and IMF credit? Optimists point out that the country is supposed to eliminate its primary deficit (the budget balance minus interest payments) by 2013, which implies that it could pay its non debt-related bills with its own resources after a default.
But that view overestimates the state's capacity to collect revenues in the midst of a panic. With the economy in free fall and uncertainty pervasive, many households and firms simply stop paying taxes. So, even if the Greek government defaults on all of its debt, it might have no option but to print pieces of paper in order to meet its obligations.
That would not constitute official abandonment of the euro, but, over time, the difference could become more formal than real. The newly issued scrip – call it the neo-drachma – would be tradable and highly liquid. Even if it traded at a deep discount, as it surely would, sooner rather than later it would likely be used for settling all kinds of transactions.
Here, the Argentine story suggests, the mechanism loops back to the banks: firms soon start complaining that their income is now denominated in neo-drachmas while their loans remain in euros. They begin to demand loudly that the loans be neo-drachmatised ("pesified" in Argentine parlance). A parliament anxious for public approval is eager to meet these demands. But this only accelerates the run on the banks, as households and firms realise that no solid assets are backing their deposits.
Paying public sector workers with depreciated neo-drachmas implies a cut in the real wages that they receive. The final step in the process comes with the neo-drachmatisation of private-sector wages. Firms again demand it, claiming that otherwise they cannot export. Unions initially oppose it, but eventually give in, spooked by the spectre of even greater unemployment. The promise of selective price controls sweetens the deal.
How large will the devaluation of the neo-drachma be? In Argentina, the number of pesos needed to buy one dollar rose by more than 300%. Greece posted a current account deficit of nearly 10% of GDP in 2011, despite the domestic depression. The real devaluation necessary to restore external balance will be enormous, perhaps larger than that in Argentina.
Greece now has its third government in less than a year, and a fourth is not far off. Argentina ran through four presidents in less than two years, before the political and economic situation stabilised. Greece, too, will eventually stabilise. At this point, that is just about the only hopeful precedent that the Argentine story holds.
(Source: The Guardian)

Investors may be stoking the volatility they fear

Long-term investors fearful of another global financial storm may be better prepared than they were before Lehman Brothers went bust in 2008, but their increasingly nervous disposition could itself be making markets more fragile.
The Lehman collapse and hyper-correlated decline in risky assets everywhere challenged a key long-standing investment tenet that broad diversification of portfolios was sufficient to protect overall savings over time.
In the dark six-month period after September 2008, there were few if any havens from a synchronised slump in equity, commodities, emerging markets, high-yield debt, hedge funds and the like.
Cash, top-rated government bonds and more esoteric "tail risk" hedges such as volatility indices were the only places to hide.
And for many long-term players, pension funds and insurers with 20- or 30-year horizons, that shock may still amount to just a short-term hiatus that fundamentals will correct over time.
But less than four years later, the still-smouldering banking crisis now threatens a fracturing of the euro zone, with some comparing a possible Greek exit from the single currency to a Lehman-style moment and another systemic market shock.
The question for many funds is whether you close your eyes and hope greater diversification will be enough to see through another meltdown, or whether you deliberately build in plans to head for the bunkers quickly to avoid the worst when it happens.
Both seem to be going on in parallel.
Surveys of pension funds show them in the midst of significant and seemingly secular retreat from equity, in part due to dire near-zero returns over the past decade and in part due to demographics, liability management and regulation.
But with yields on the plain vanilla alternative of top-rated bonds now so low as to almost guarantee negative real returns over time, the retreat from equity is leading to "alternative" assets such as hedge funds, private equity, high-yield and emerging debt, property or infrastructure.
A survey of 1,200 European pension funds representing 650 billion euros of assets released this week by consultant Mercer, shows no let-up in the equity exit over the past year and more than a third planning further cuts over the next 12 months.
For traditionally equity-loving UK pension plans, the shift is most eye-catching. Their 2012 equity allocations were down to just 43 percent from 58 percent in 2008 and as high as 68 percent in 2003. But the exit is mirrored across the poll.
Europe-wide, the larger funds - those managing 2.5 billion euros or more of assets - cut allocations to equity to as low as 24 percent and now have just 6 percent in home stock markets.
But rather than stack up further on now super-low-yielding government bonds, so-called alternatives are now as high as 15 percent of portfolios - up from just 4 percent in 2008.
Reinforcing the trend to get beyond both straight equity and top-rated debt, a survey of 99 UK pension funds released by Barings this month showed most managers upping alternatives with the specific aim of reducing portfolio volatility and also reviewing their investment portfolios more regularly.
Yet if another Lehman-style market shock were to undermine diversification at least temporarily by sinking all risky assets across borders again, what else is being done?
BNP Paribas Investment Partners, for example, reckon a majority of their clients are now seeking some form of protection from these storms by fixing safety triggers or allowing managers greater flexibility to "de-risk" portfolios in major systemic crises.
So instead of giving fund managers a narrow 10 percent leeway to overweight or underweight a portfolio against a pre-determined benchmark, investors are increasingly willing to allow a dash for cash to protect capital in extreme circumstances.
"Client guidelines are increasingly taking an asymmetric approach and are much more focused on the downside risk than the upside - less with formal triggers than with manager discretion," said Georgina Wilton, investment specialist with BNPIP's Global Balanced Solutions arm.
However, a potential problem with all these behavioral shifts is that the one segment of the marketplace that, because of its longer horizon, acted as a stabilising force in times of short-term market spikes and swoons now risks adding to the very volatility it's seeking to avoid.
Plans to "de-risk" entire portfolios, more regular reviews of strategies and greater inclusion of explicitly active absolute return or hedge funds within wider portfolios all potentially create more churn in the underlying markets even if that activity is still at the margins for these investors.
The problem is that marginal shifts in a $35 trillion global industry is very big money indeed.
"Many investors are discovering that they are not as long-term as they'd once thought," said Patrick Rudden, fund manager Dynamic Diversified Portfolio at AllianceBernstein.
(Source: Reuters)


The following changes have been made in the model portfolios consequent to the end of the result season and changes in currency:

Blue-chip Model Portfolio:

Sales: Kewal Kiran Clothing full qty @ 600
           Castrol full qty @ 492

Buys: Colgate Palmolive 2% @ 1175
           Ranbaxy Labs 2% @ 516

Hi-growth Model Portfolio:

Sales: Kewal Kiran Clothing full qty @ 600
           Opto Circuits full qty @ 165
           SKS Microfinance full qty @62
           Reliance Commn @ 64

Buys: KPIT Cummins 2% @ 118
           Cadila Healthcare 2% @ 730
           CEBBCO 2% @69
           Apollo Hospital 2% @ 655


Wednesday, May 30, 2012

M&M sees growth picking up in second half

Projecting an optimistic outlook, Mahindra and Mahindra expects growth to pick up in the second half of this fiscal.
Announcing its results on Wednesday, the company said its medium to long term outlook on the Indian economy was positive.
After a rapid recovery following the global financial crisis, the country's economic performance faltered in FY12. While the agricultural and services sectors displayed resilience, the unsettled global outlook and weak domestic economic environment, took a heavy toll on industrial activity and growth.
On performance, M&M said the growth in the profits of the company, despite the relentless increase in material costs, was due to good sales of both vehicles and tractors, besides tight control on expenses.


In the passenger utility vehicle segment, the company sold 2,02,217 vehicles, a rise of 19.5 per cent over the previous year. In the cars segment, it sold 17,839 Verito cars. Exports totalled 29,176 vehicles. Tractor sales were up 10. 4 per cent at 2,36,666 against 2,14,325 sold last year. Exports totalled 13,722 tractors.
The Board of Directors recommended a dividend of Rs 12.50 (250 per cent) a share.
M&M said that on the day of the AGM scheduled for August, Mr Keshub Mahindra will retire as Chairman and assume the role of Chairman Emeritus, and Mr Anand Mahindra will become the Chairman and Managing Director.
The consolidated gross revenues and other income for FY12 was up 60 per cent to Rs 63357.8 crore (Rs 39864.4 crore) and consolidated profit Rs 3126.7 crore (Rs 3079.7 crore).
The growth in group revenues during the year was due to the inclusion of the turnover of Ssangyong Motor Company during the year. The group at the end of the year comprised 114 subsidiaries, six joint ventures and 11 associates, the company said.
(Source: Business Line)

Wheels India hopes for a good roll in export markets

Barring the passenger car segment, Wheels India expects muted growth from the domestic automobile market.
“We are concerned about commercial vehicles and tractors and expect a slowdown in the current year. However, we see a single digit growth in passenger cars, as we are present in a number of new models,” said Mr Srivats Ram, Managing Director, Wheels India.
Last year, the domestic auto market – under inflationary pressure and high interest rates – “did not see tremendous growth”, said Mr Ram. Continuing inflation and high power tariff will continue to haunt the industry this year too, he said.
Revenues for the financial year 2011-12 rose 22 per cent to Rs 2,078 crore. Net profit grew 39 per cent to Rs 34.35 crore.
For the fourth quarter, revenues were Rs 578 crore, at a 22 per cent growth. Net profit, however, dipped 37 per cent to Rs 7.05 crore, on the back of a high tax “burden”.
While exports growth last year was 34 per cent at Rs 320 crore, the domestic market grew only 15 per cent. This year too, Wheels India expects exports to be strong.
The company exports wheels for off-road construction and mining equipment to Japan, Korea, the US, Brazil, China, Indonesia and Europe. Wheels India has a 20 per cent global share in this market.
Despite strong exports, the rupee volatility is a cause for concern, “since we also have imports”. “Plus packing credit when you export is also a cost,” said Mr Ram. The impact of the rupee fall was 1.2 per cent of the turnover last year.

Non-wheel businesses

Given the subdued automobile scenario, the company is placing its bets on non-wheel businesses in the domestic market. Wheels India supplies air suspensions to buses. It also makes steel structural components for thermal power plants and wind mill manufacturers.
The power sector business is “profitable” in the second year of operations. Air suspensions have also done “reasonably well”. These are still in the nascent stage with good growth potential, said Mr Ram.
This year, the company's capex will be Rs 80 crore. This will mainly go into exports and domestic passenger cars.
Wheels India has recommended a final dividend for the year Rs 6 (60 per cent) per equity share of Rs 10 each. With the interim dividend of Rs 4 per share paid in March 2012, the total dividend for the year comes to Rs 10 per share.
(Source: Business Line)

Mahindra & Mahindra's tractors, automobiles integration trickling benefits now

Two years ago, a team led by Bishwambhar Mishra, chief executive of Mahindra & Mahindra's (M&M's) tractor & farm mechanisation division, was scouting around for a location in the south to set up a manufacturing plant. A group member suggested using the site of the auto factory in Zaheerabad in Andhra Pradesh to make tractors as well.

The unit, set up in 1985, makes three- and fourwheel transportation vehicles like the Gio and the Alfa, Navistar light commercial vehicles and M&M's best-selling utility vehicle (UV), the Bolero. In a few months, the first tractor will roll out from that plant.

For the first time in the history of M&M, UVs and tractors will be produced in one plant (the company does make tractors and UVs in Kandivali in Mumbai, but in two independent plants). "We are utilising the location to create a robust supplier park-which is justified now because of increased volumes-to benefit both the businesses," says Pravin Shah, chief executive of M&M's automotive division.

The blueprint for Zaheerabad was one of the early initiatives by M&M towards an unlikely integration of two pretty diverse businesses. True, they both run on wheels and are powered by engines, but tractors and automobiles are dissimilar lines addressing different sets of customers, which, in turn, call for different positioning and go-to-market strategies.

At the back end, though, it's a different story, with synergies available for the taking across multiple fronts, from procurement to inventory management. The benefits are wideranging, including more efficient management of working capital and logistics; improvements in quality (lighter tractors, for instance); and even gains in talent management, as two teams collapse into each other.


It all began in April-2010 when M&M, the only manufacturer in the world that makes both farm equipment and passenger vehicles under one company, decided to explore the potential gains of having both manufacturing lines under one roof.

The M&M brass, including then vice-chairman & MD Anand Mahindra, president HR Rajeev Dubey, group CFO Bharat Doshi and Pawan Goenka-then president of auto sector and now president of auto and farm equipment-got into a huddle to see if an integration was indeed worth the effort.

Mahindra felt the time had come for the next big step-up. Both businesses have had long solo rides. M&M's first UV was made in 1947, and tractor production began in the early-60s. Mahindra, who on May 30 was designated chairman & managing director of M&M, recalls when he joined in 1991 the company was steeped in a license-raj culture.

This, he says, created "enormous unsatisfied demand for our products. So, there was no marketing and customer-centric mindset. Post-liberalisation, that was a serious liability."

Over the next few years, the Harvardreturned scion went about verticalising the two arms, each with its own leadership team and focused on the market it knew best. "We knew that such separate verticals would involve duplication of some functions and, hence higher costs, but it was a conscious trade-off," explains Mahindra. Eighteen years after it was put in place, Mahindra felt that structure was overstaying its welcome, now that the marketing and customer mindset had been embedded in M&M.

Over the years, M&M too had transformed into the world's largest tractor company by volumes, and into India's number one maker of utility vehicles that span the price spectrum and are sold in continents from South America to Australia. "Today, the need of the hour in increasingly competitive global markets is to become ruthlessly efficient in driving down costs and deriving synergies," says Mahindra.

Agrees Vijay Govindarajan, professor at Tuck School of Business at Dartmouth College: "M&M has global ambitions. You need size and scale to compete globally against automobile giants like Toyota, General Motors, Ford and agricultural tractor powerhouse John Deere. A combined sector gives M&M the global clout," says the author of books like 'Reverse Innovation' and 'The Other Side of Innovation'.


Such a global vision called for a new structure that retained the market focus-with two CEOs for two sectors-but created a third head who combines the R&D and purchase functions of the two sectors, paving the way for synergies in these high-spend functions.

Goenka, as president of both the auto and farm sectors, now oversees the CEOs, ensuring that synergies are driven right from the top, explains Mahindra.

"We have now become a formidable force when it comes to procurement, manufacturing, supply chain, brand spends, among other benefits," adds Goenka. The more visible-although not necessarily most useful-signs of the integration are at the front end.
For instance, tractor dealers in rural markets-some 1,100 of such outlets-also sell transportation three- and four-wheelers.

Yet, the integration efforts are more pronounced at the back end in areas like sourcing, engineering and product development.

As Goenka says, expectations of an auto consumer are different from that of a tractor buyer, so integrating the front end is not an imperative.
Jagdish Khattar, former MD of Maruti, points out that M&M's auto and tractor integration works as a big tool in sourcing and HR retention.

"The integration will largely benefit the business, but the front end should be kept independent," adds the founder of Carnation Auto, a multi-brand auto solutions network.


Economies of scale began to kick in on the increased volumes of the combined entity- 450,000 units of auto (UVs, cars, trucks and transportation vehicles) and 250,000 units of tractors in 2011-12-on various fronts like working capital management, logistics and just-in-time inventory.

As Pravin Shah, chief executive of the automotive division, puts it: "A game plan of 700,000 is far better than one of 450,000."

Both auto and tractors source material and components as one entity, thereby deriving more bargaining power.

For example, Mishra says, with joint sourcing, he saves Rs 4,000 per Swaraj tractor. The benefits for both sectors are mutual, though tractors would seem to be gaining more.

For instance, automotives has a robust product development process called the 'gateway' process: a product or a process will not move to the next 'gate'-or stage-unless it meets certain parameters of quality and performance.

The tractor sector has absorbed the gateway process and two new product platforms are benefiting from it (See graphic for more synergies).

Automotives too stands to gain from the robust quality processes in tractors, which helped reduce defects per 1,000 by around a fifth.

"I am not saying defects would have not reduced without the synergy, but it would perhaps have reduced by only a tenth," says Shah.

Tractors also follow a seeding process through which they are tested in different terrains under various climatic conditions; now, M&M's passenger and commercial vehicles too go through this exercise.

On the HR front, the assimilation throws up possibilities for career rotation and succession planning. "Movement of talent has become easier and roles have been enhanced," explains Rajeev Dubey, president, group HR. "Earlier, there was no commonality, so it was difficult to move people from one sector to another."


There were apprehensions to deal with. For instance, the farm equipment guys felt that auto would play big brother. After all, auto is larger and growing faster, though margins in farm equipment are higher (See graphic).

Also, hierarchical conflicts, particularly on the tech front-auto employees would see themselves as 'higher-tech' workers than those in tractors-were inevitable. Goenka spent six months explaining the benefits of the exercise to employees in farm equipment via town-hall meetings and discussions.

"We spoke one language, portrayed one market scenario," says Rajan Wadhera, chief executivetechnology, product development & sourcing. "Since change is difficult, the endeavour has been to pick out best practices (from both sectors) and deploy them without affecting cultural sentiments." Putting all managers and workers into one melting pot has helped M&M identify more candidates for critical positions.

"We have identified 73% successors for critical positions as against 55% before the sectors were integrated," explains Rajeshwar Tripathi, chief people officerautomotive & farm equipment sectors. Two years after the process began, Mahindra and Goenka can ill-afford to rest on their oars. Synergies in areas like the field force and manufacturing have yet to be fully exploited-and that is an imperative if the integration has to qualify as a resounding success.

Also, talent retention is one of the biggest challenges M&M faces, and rivals point out that the integration may be the culprit. Goenka acknowledges the challenge of assimilation and compares the integration to a big-ticket acquisition in which two organisations with different cultures, expectations and approaches to business come together.

Tractors and automotives may have been two big pieces of one legal entity, but culturally they were different businesses, he stresses. Yet, the end game in any big acquisition is to make one plus one equal three, and it's no different within M&M as Mahindra and Goenka pull out all stops to squeeze out more from the sum of the company's two workhorses.
(Source: Economic Times)

Dunkin' Donuts eyes 30% higher sales in India

 US baked food and coffee chain Dunkin' Donuts is seeing 20-30% higher sales in India than what it envisaged while entering the country earlier this month, a top official said.

"India is a very important market and when people talk about slowing growth in India it's still 7% and is among the very few countries that is growing at this rate," Dunkin' Donuts CEO Nigel Travis said.

Dunkin' Donuts, which has an alliance with Jubilant Foodworks in India, has opened three stores in the country so far. It plans to open more than 500 stores over the next 15 years. "We see India as one of the fastest growing countries in the world with a fast-growing middle class. It's got a population which is clearly urbanising and is becoming more and more familiar with quick-service restaurants," Travis said.

While India's entire food-service market is estimated at $64 billion, the quick-service restaurant, or QSR, market is around $13 billion, growing roughly 25-30% annually.

Several international fast-food and cafe chains such as KFC, McDonalds and Pizza Hut have already established their presence in the country while others such as Dunkin' Donuts' rival Starbucks, the world's largest coffee retail chain, will come in soon.

At the end of 2011, the Dunkin' Brands system included more than 10,000 Dunkin' Donuts restaurants and over 6,700 Baskin-Robbins restaurants. The company had franchisee-reported sales of about $8.3 billion in 2011.
(Source: Economic Times)

Bata to launch 'Footin' stores for young adults

Bata, the country's largest footwear retailer, is setting up a new retail format to sell affordable fashion footwear and accessories targeted at young adults under 'Footin' brand. Bata plans to open 100 Footin stores by 2015 at an investment of about 45 crore, Bata India Managing Director Rajeev Gopalakrishnan said at a press conference on Wednesday.

"We currently have four Footin stores under trial stage. The response is encouraging with sales of 700-800 pairs on a weekly basis," he said.

Footin stores are set up over 1,000 sq ft and sell products at price points of 399 and 599. These stores will have a different layout and design and will don a youthful look as compared to the Bata stores.

And they will not carry Bata name. Bata says the new retail format will allow it to grow its sales among consumers in the age group of 15-25 who are one of the largest buyers of fashion shoes and accessories. The company also plans to set up 130-140 new Bata stores this year.Bata India currently operates 1,250 retail stores across India.

Bata expects to complete it store relocation exercise this year. "We have seen relocation of stores to larger format increases sales three times," Gopalakrishnan said.

Bata India plans to invest 45 crore over the next three years to expand and modernise its manufacturing plants in India. The company is also moving towards contract manufacturing, particularly for stylish products. Bata said almost 50% of its production in India will be contract manufactured.
(Source: Economic Times)

A bitter pill to better telecom: Expensive spectrum could trigger consolidation

TRAI has pegged the reserve price for spectrum to be auctioned and renewed over the next five years at $100 billion. This is about three times the telecom industry's annual revenue. Though the immediate impact of the proposed auction seems negative, there may be positive benefits for the sector over the longer term. We see four important fall outs of this spectrum pricing.

Firstly, capital intensity in the sector will increase manifold. Gradually but surely, higher capex will result in higher pricing for the end consumer. The third likely implication would be a collapse of the CDMA ecosystem. Together these factors will drive much needed consolidation in the sector.

On the basis of TRAI's recommendation, leading private sector incumbents will pay $5 billion for spectrum renewal in 2014-16. Even after this, they will need to migrate their networks from 900 Mhz to 1800 Mhz band at an additional capex of $ 5 billion. This $10 billion capex is about four times their net profits in FY12. The picture is as grim for the challengers. The cost of a 5 Mhz block of spectrum nationally at 1800 Mhz will be in excess of $ 3.5 billion.

Telecos in mature markets have capex averaging 12% of revenues. Capex to revenue may be three times as high for India telecom in 2010-2015. Going forward, investors will migrate to new ways of calibrating the India telecom opportunity. A new vocabulary will emerge to define success, and metrics going forward may be focused on capital efficiency and customer base quality as opposed to historical measures of growth and average revenue per user (ARPU).

Telcos will fund higher capex by raising prices for the end consumers. Some have already initiated raising prices by as much as 20% in select segments. The industry today operates at two price bands, incumbents at 43 - 45 paise per minute vis-a-vis challengers at 35 - 40 paise per minute. Over the past 2-3 quarters, incumbents have pushed price increases of 2-4 paise per minute.

These hikes, while small, represent a departure from declining trends of the past. Pricing increases, though, may not result in commensurate revenue increase. Consumers are likely to adjust usage so their overall spend on telecom remains constant or marginally increases. The incumbent telcos' ARPUs over the past 2-3 quarters have held constant or declined despite per minute price increases.

Similar trends unfolded in markets such as Indonesia and Malaysia, where traffic decline adjusted for pricing increase. Though impact on revenue will be limited, rising prices will be a positive for operator profitability. Operators can bill lower but more profitable minutes, focusing on network efficiency and providing quality coverage.

Another effect of spectrum pricing could be the accelerated demise of CDMA. Share of CDMA subscribers has fallen from 30% to below 12% over the last five years. Most CDMA players are already operating dual technology networks. Against this backdrop, players bidding for fresh spectrum are unlikely to deploy or continue CDMA networks. Some argue that CDMA can continue as the 'data technology'.

We see this argument being flawed for three reasons. As the CDMA ecosystem collapses, device innovation, especially with regard to smart phones, will be severely challenged. Based on our analysis, deploying a CDMA network, using EVDO, for large screen data on a standalone basis is unprofitable. The small screen data opportunity too cannot be decoupled from voice.

Perhaps the most important ramification will be industry consolidation. Struggling players are likely to use licence cancellation as an opportunity to exit. In the long term, there may not be room for more than 5-6 players in India. Consolidation will be shaped by the regulatory landscape for M&A and partnerships between players. Current caps on subscriber and revenue market share of consolidated entities are limiting to this objective.

The regulator must revaluate these limits in the light of the revised spectrum pricing to provide an exit option to struggling entities. Once these norms have been clarified, players need to evaluate their positions and envisage an end game, taking into account who they may potentially merge with, sell to or acquire. Players should formulate a bidding strategy for spectrum contingent on this end game.

Spectrum pricing may turn out to be the bitter pill that brings a long term improvement in the health of the industry. A consolidated market is less likely to see the price wars that have eroded value in the past. The industry will see basis for competitive advantage shifting from lowest cost to heightened network efficiency and better customer experience.

Consolidation could also give rise to the emergence of MVNOs. India could see a replication of mature market models where some players choose to focus on running lean 'network factories' and partner with MVNOs that bring in service capabilities. Industry consolidation may herald higher and more sustainable profitability for survivors.
(Source: Economic Times)

Oracle aims to dethrone IBM in business hardware

 Oracle boss Larry Ellison said Wednesday that he is out to dethrone IBM in the realm of business network hardware, including high-end computer servers.

"Our biggest competitor is IBM," Ellison said during an on-stage chat with Kara Swisher at the prestigious All Things Digital conference hosted by the Rupert Murdoch-owned technology news website.

"IBM was number one in databases. Now we are number one," he said.

"And they were number one in middleware (programs that help different elements of a computer system communicate), now it's us; they were number one in high-end servers, and we will be number one in the high-end servers."

Oracle's high-end offerings, such as Exadata and Exalogic, are well placed to "beat" IBM pSeries systems, according to Ellison.

However, he said that California-based Oracle was not a competitor to IBM in services, which has been a priority for the century-old New York-based technology pioneer.

The servers are a relatively new business for Oracle, which was founded in 1977 and specializes in business software and databases.

Ellison has been head of engineering at the company since it was founded. Oracle got into the hardware business when it bought server-maker Sun Microsystems in 2010.

According to figures released Wednesday by IDC, Oracle is currently ranked fourth in worldwide server market revenue, with its share declining to 6.1 per cent, behind Hewlett-Packard (29.3 per cent), IBM ( 27.3 per cent) and Dell (15.6 per cent).

But Ellison said tracking market share was misleading, since Oracle was sacrificing sales of entry-level systems to focus on more profitable high-end gear with fat profit margins.

"Our margins are probably higher in the server industry," Ellison said.

He explained that Oracle was emulating the model set by Apple in the consumer electronics market by providing fully integrated systems designed to be simple for users.

"We found that data centers were unnecessarily complex", Ellison said.

That led to the decision to bring together hard disks, data storage, networks, and rich databases, because "if we do all we can do it is much more reliable, much lower cost."

"This is the Apple model," he said, before paying tribute to the iPad, iPhone, iPod and Macintosh computer maker's legendary co-founder and boss Steve Jobs, who died last year.

Mr. Ellison also announced that on June 6 all Oracle software will be accessible online in the Internet "cloud" and that he will mark the occasion with his first "tweet" on the micro-blogging website Twitter.

All Oracle applications have been "rewritten" to be offered online, which he said had given the company a wide edge over its biggest competitor in software, Germany-based SAP.
(Source: Economic Times)

Gold Poised for Worst Monthly Run in 13 Years on European Crisis

Gold is poised for the worst run of monthly losses in almost 13 years as concern that Europe’s fiscal crisis is escalating drove investors to seek the dollar as a haven over the precious metal.
Spot gold was little changed at $1,562.63 an ounce at 10:31 a.m. in Singapore, after climbing 0.5 percent yesterday. Bullion is 6.1 percent lower in May for its biggest drop this year as the dollar rallied 5.4 percent against a six-currency basket including the euro. A fourth monthly decline would be the metal’s longest run of losses since the period to August 1999.

Italy failed to meet its maximum target at a debt sale yesterday, Spain struggled to bolster its banks and a Greek poll showed gains for parties opposed to austerity that came with an international bailout, driving the euro to a two-year low against the dollar. Data showed Japan’s industrial production rose less than forecast in April, while the number of Americans buying previously owned homes fell in April by the most in a year, helping Asian stocks and commodities including oil and copper extend declines today.
“There’s definitely been a flight to the dollar rather than gold as a shelter from the crisis in Europe, which doesn’t look like it will abate soon,” said Wang Xiaoli, chief investment strategist at CITICS Futures Co., a unit of China’s biggest listed brokerage. “We’re encouraged by the gains made by gold yesterday even as the dollar strengthened.”
The daily correlation coefficient between gold and the dollar is at minus 0.301, compared with minus 0.169 in October, data compiled by Bloomberg show. A figure of minus 1 means the two tend to move in opposite directions, and 1 means they move in lockstep. Holdings in the SPDR Gold Trust, the biggest bullion-backed exchange-traded fund, are set for a third monthly decline, according to data on the company’s website.

Gold Volumes

August-delivery bullion fell as much as 0.3 percent to $1,561.40 an ounce on Comex in New York and was last at $1,564. Trading volumes set a record of 484,721 contracts on May 29, which included electronic trading while the floor was closed on May 28 for Memorial Day, according to the exchange.
Cash platinum rose for the first day in three, gaining as much as 0.6 percent to $1,409 an ounce, before trading at $1,401.75. One ounce of platinum bought as little as 0.8932 ounce of gold today, the least since Jan. 11, according to data compiled by Bloomberg. The metal, which fell to the lowest level this year yesterday, is on course for a third monthly drop, the longest period of decline since 2008.
Spot silver fell as much as 0.5 percent to $27.7625 an ounce, and was last at $27.85. It’s set for a third monthly loss, also the worst run since 2008. Palladium slid as much as 0.3 percent to $605 an ounce, before trading at $607, down 11 percent for the worst monthly performance since September.
(Source: Bloomberg)

India growth slows to 5.3%, lowest in 8 years

India’s economy expanded at the weakest pace in at least eight years last quarter, hurt by a slowdown in investment that has undermined the rupee and set back Prime Minister Manmohan Singh’s development agenda.
Gross domestic product rose 5.3 percent in the three months ended March from a year earlier, compared with 6.1 percent in the previous quarter, the Central Statistical Office said in a statement in New Delhi today. The median of 31 estimates in a Bloomberg News survey was for a 6.1 percent gain. GDP climbed 6.5 percent in the year to March, the office said.

Singh faces a struggle to bolster expansion as Europe’s debt crisis dims the global outlook and elevated inflation and a record trade deficit limit room for more interest-rate cuts to boost spending at home. Discord within the ruling coalition and claims of graft have impeded his push to open up the economy, deterring investment and sending the rupee to its lowest level.
“India is at risk of a protracted slowdown unless it quickly enacts reforms, especially since the scope to lower rates is limited,” Shubhada Rao, chief economist at Yes Bank Ltd. in Mumbai, said before the report. “The nation urgently needs to create the conditions for faster growth to cut poverty and sustain the story of India as a developing power.”
The rupee weakened 0.3 percent to 56.39 per dollar as of 11:21 a.m. local time. It has slumped 20 percent in the past year, the most in a basket of 11 Asian currencies tracked by Bloomberg. The BSE India Sensitive Index (SENSEX) fell 1.1 percent. The yield on the 8.79 percent note due November 2021 fell nine basis points, or 0.09 percentage point, to 8.44 percent.

Government’s Target

The rise in full-year GDP compares with the 6.7 percent median estimate in a Bloomberg survey and 8.4 percent in 2010- 2011. India’s goal is 9 percent annual expansion in a nation where about two-thirds of the population still lives on less than $2 a day, according to World Bank data.
Policy gridlock has contributed to slower investment, which Morgan Staley estimates fell to 34.4 percent of GDP last fiscal year from 38.1 percent in 2007-2008. Industrial production declined 3.5 percent in March from a year earlier.
Growth has also slowed in emerging nations from China to Brazil because of Europe’s crisis, which has damped demand for exports and reduced appetite for developing-nation assets.
India’s weaknesses include “loose fiscal policy, inflation, subsidies and regulatory uncertainties,” said Atsi Sheth, a credit analyst in New York at Moody’s Investors Service. The rupee’s decline will hurt companies with large foreign-currency repayments due this year, she said.

Rupee Slide

The rupee reached an unprecedented low of 56.515 per dollar today. Reserve Bank of India Governor Duvvuri Subbarao pledged last week to take steps as needed to curb swings in the currency.
Its weakness threatens to stoke inflation by raising import costs. The pace of price increases climbed to 7.23 percent in April, the fastest among the largest emerging economies.
The trade deficit in Asia’s third-largest economy widened to a record $184.9 billion in 2011-2012, fanning concern about whether India can attract enough foreign capital to fund the excess of imports.
Finance Minister Pranab Mukherjee is also trying to narrow the budget deficit to 5.1 percent of GDP in the year that began April 1, from 5.9 percent, in part by limiting subsidies.
The central bank has signaled government spending, the rupee’s slide and energy costs may curb scope for rate cuts.
It lowered the benchmark rate to 8 percent from 8.5 percent on April 17, the first cut since 2009, after increasing it by a record 3.75 percentage points from mid-March 2010 to October last year to try and contain inflation.

‘Unfavorable’ Politics

Standard & Poor’s cut India’s credit outlook to negative from stable last month, imperiling its investment grade status and saying the political environment is “unfavorable.”
The government’s setbacks include the suspension in December of plans to allow foreign companies to open supermarkets in India after a coalition partner objected.
The prime minister defended India’s record this month, saying its GDP rose at one of the fastest paces in the world last fiscal year. Singh added he is “confident” of proving wrong skeptics who doubt India can sustain economic momentum.
The Reserve Bank projects 7.3 percent growth in 2012-2013, driven by the spending power of 1.2 billion people.
“The current problems facing the economy aren’t insurmountable,” said Prashant Jain, who oversees the equivalent of about $16 billion as chief investment officer at HDFC Asset Management Co. in Mumbai. “With a few difficult steps, it should be possible to put it back on the rails fairly quickly.”

Forecasts Downgraded

Goldman Sachs Group Inc. downgraded its growth projection for the country on May 25, predicting a 6.6 percent GDP increase this fiscal year, down from 7.2 percent. It pared its outlook for further rate cuts to 50 basis points in 2012 from 75 points.
Some companies have been affected by slower expansion. Tata Steel Ltd., India’s biggest producer of the alloy, reported a 90 percent drop in profit in the three months through March.
India may face a difficult year, said Hemindra Hazari, Mumbai-based head of research at Nirmal Bang Securities Pvt.. A period of depressed growth and elevated price increases known as “stagflation” is likely, he said.
(Source: Bloomberg)

Honda eyes car exports from India

Just two months into office, Honda Siel’s new President and CEO, Mr Hironori Kanayama, has embarked on an ambitious plan for the company.
While export of models such as the Brio hatch is under consideration to utilise vacant capacity, the Japanese carmaker is looking to touch the one million domestic sales milestone by 2015-16.
Car focus
This would mean addition of 5 lakh more customers in the next four years – a tough task given that it took the company about 15 years (since 1997) to reach a similar number.
“We have a very ambitious plan ahead. We will see significant changes over the next two years. We want to become a household name, just as in the motorcycle business,” Mr Kanayama said, while referring to the success story of sister company, Honda Motorcycle & Scooter.
The sharp focus of Honda in its India car business is underlined by the decision to appointment Mr Kanayama, a company veteran with experience over 19 global markets. He has served as the President of one of Honda’s two Chinese joint ventures and most recently headed the Taiwan subsidiary.
Slowdown, a passing phase
“The vision is to make Honda the best car brand in India in the next five years. We will re-orient our strategies,” Mr Kanayama said, without elaborating on the new plans.
“We’re confident of growth, but we will face some challenges on the way. The industry seems to slowing down, but I’m sure this is just a passing phase,” he added.
Insiders say that a major restructuring within the company’s management may be in the works as well.
To achieve the new targets, Mr Kanayama would need to speed up plans to launch diesel variants, apart from expanding Honda’s portfolio in the mass car segment beyond the Brio hatch.
Asked if Honda would look to increase its model portfolio into new growth segments such as entry sedans or compact SUVs, Mr Kanayama said, “A lot of things are being considered.”
No row with Usha Intl
Mr Kanayama also quelled rumours of a discord with joint venture partner Usha International, calling it like a “marriage” where disputes get resolved on discussions between partners.
Honda Siel would also need to complete utilisation of the 1.2 lakh units a year capacity at its Greater Noida plant. This will help it expand to its second plant at Tapukara, which is lying in wait and where it is incurring expenses on depreciation and maintenance.
Industry analysts see the move as timely, given that Honda Siel has been floundering in the world’s second fastest growing car market – its sales were down 8.5 per cent at 54,427 units in 2011-12.
Apart form a lack of diesel variants, the company’s growth has also been restrained on a severe production constraint on component shortages following the natural disasters in Japan and Thailand last year. With production back on track since February this year, sales have improved with the Brio leading the way.
(Source: Business Line)

As China weakens, the West moves to revive manufacturing. Why won't India?

In his new book, Time to Start Thinking, the Financial Times’ Ed Luce wanders Middle America, and delivers to us a story now familiar: of an industrial landscape in decline. Since Michael Moore’s Roger and Me in 1989, we have known that America’s industrial belt has rusted. Some blame globalisation, others technical change; neither is likely to reverse itself. And yet, manufacturing is suddenly central to America’s economic revival and to the debates in its presidential campaign.
The United States does not stand alone in reassessing how government interacts with manufacturing. Across the developed world, only Westminster’s Conservatives, the last lovers of finance, continue to be without an industrial policy. This trend was first noted in the aftermath of the vastly increased state intervention that marked the response to the 2008 financial crisis. Governments began to distrust finance-heavy economies, and were pressured by voters to somehow “create” middle-class jobs. The countries that survived were those, like Germany and China, that still made actual things. The obvious lessons were drawn.
Yet we stayed in the realm of policy pronouncements and election speeches till recently. As always, it takes a push from the real economy to actually put ideas to work. Suddenly, growing US manufacturing – especially chemicals – is a reason for Washington to impose an unprecedented bar on energy exports. And China – battered by its export markets’ weaknesses, facing union revolts across the Pearl River delta, struggling to increase consumption demand – is beginning to realise its coasts may not stay forever the workshops of the world. The energy component of Chinese exports is higher than for most economies, and will only increase relative costs. Earlier this year, China hiked its minimum wages by 13.6 per cent in response to sustained labour unrest. This takes China’s minimum wage to three times Vietnam’s.
But the most important reason is this: the glorious high-water mark of the diffuse supply chain is behind us. Crude oil prices, over the past decade, have risen fivefold, and permanently. And the standard rule of thumb is that a dollar more for a barrel of oil increases the cost of freight transport by a percentage point. The cost of shipping a container across the Pacific has more than tripled in the past six years, and many major shipping lines have reduced their cruising speed, too, in order to save fuel. Meanwhile, the destination of those giant blue containers from Chinese ports, the United States, has discovered shale gas reserves that will ensure that, by most estimates, US gas prices just double in 40 years. Before the discoveries, it was expected that they would increase maybe six or seven times. PricewaterhouseCoopers expects the US will create a million jobs and save $11.6 billion in costs over the next three presidential terms.
The economic logic that led many to assume that networks had gotten simply too complicated and far-flung for national governments to manage will, now, begin to fray slightly. Across the world, governments are retooling their attitude to the manufacturing sector, stepping in to lend, to acquire land, to protect and to lobby internationally. In spite of its dismal record with industrial policy, India’s cannot be an exception.
Of course, the nostalgic West cannot expect a return to the comfortable suburban 1950s — not unless they’re willing to let go of their iPhones, that is. Wage expectations and workforce skills are just too different now in most places. Indeed, as the United States struggles to recapture its manufacturing soul, it’s clear there are long-term reasons why governments need to ensure a manufacturing base develops and survives. China’s current experience is, indeed, illustrative: a rise in costs isn’t enough to make it uncompetitive. The effects of a local economy geared towards manufacturing ensure that companies are thinking twice about moving — and even if they do, they’re more likely to move to inland China or to neighbouring countries. The fast-moving conception of the global economy, in which manufacturing moves from destination to destination in search of lower wages, founders on the rock of path-dependence. A manufacturing sector is not easy to set up. And it is even harder to set up twice.
That’s a particular problem for India. The state’s attitude to manufacturing has been a disorganised shambles throughout the reform years. Before 1991, inefficient attempts at import substitution priced both capital and imported inputs too cheaply; many units were rendered unprofitable when the inevitable crisis forced an end to government control of interest rates and the rupee. Yet this was not accompanied by robust industrial reform — of bankruptcy, or of labour law. (Ridiculously, we tried to sell our – perforce – services-led growth as a strength and a model.) India’s policy makers found they could afford to sit back, liberalise a few export norms, and ride the globalisation wave. The only numbers that industrial growth has been reduced to in this country, for far too long, are the number of MoUs signed and the (much lower) amount of foreign direct investment those MoUs become.
There is a great cost to allowing this lackadaisical attitude to persist; and there are good reasons why this is the moment that the change must come.
The first, most obvious point is that India needs jobs. The service sector is a sponge — it contains millions of jobs that people simply don’t want to do, but are being forced into because they don’t have any other options. Never in economic history has a country reached middle-class prosperity without a thriving manufacturing sector picking up people who can’t be employed by agriculture any more. India will not be an exception, however much we may claim it can be. As the much-talked about youth bulge hits us, there had better be jobs to fit their aspirations.
And this moment, when China’s great project to build everything for everybody stutters and slows, and when the rupee is 60 per cent cheaper against the yuan than it was in 2006, is precisely when we need to step up. For 10 years, there have been no Indian-made locks, toys, hairbrushes in our markets. That has to change. The numbers in the New Manufacturing Policy are incredibly ambitious; 100 million jobs, growth at three per cent faster than the rest of the economy. And yet it has been allowed to founder before it begins, on typically obdurate objections from the labour ministry and the environment ministry. India cannot afford to delay, or it will lose this crucial historical moment.
(Source: Business Standard)

As competition hots up, ice cream maker heads North

A company that has experienced stagnating profits over the past three quarters would have a few options before it to explore. One among those would be to try and figure out why it isn’t making more money; and, thereafter, buckle down, enhance productivity, improve efficiencies and squeeze a little more juice out of its margins.
But, this is not a strategy that Vadilal Industries —Ahmedabad-based purveyor of ice cream and frozen desserts — has decided to pursue. Instead, it has chosen to embark on a large expansion plan in North India to increase its market share, which currently stands at 20 per cent.
Already a force to reckon with in Gujarat and Rajasthan, the company has pumped Rs 120 crore into its operations to scale up the manufacturing capacity of its plant in Ahmedabad, as well as as the one in Bareilly, Uttar Pradesh. These plants will increase output from 225,000 litres per day (lpd) to 375,000 lpd. It’s impressive that the company has accomplished this mainly through internal accruals. Besides, it has also invested in the installation of extrusion technology at its Ahmedabad plant so that its ice creams improve both in taste and texture.
There are a few good reasons for Vadilal to do this. One, India’s ice-cream market, estimated at Rs 2,500 crore, is growing at an annual rate of 18 per cent. Of this, about Rs 1500 crore is controlled by organised players — Amul, with annual ice cream sales of close to Rs 400 crore, is the market leader; while Vadilal is second with Rs 300 crore of revenues. But, competition is getting fierce, with regional brands like Nagpur’s Dinshaws and Bhopal’s Top n Town trying to eat into their business. More worrisome for Vadilal are the significant expansion plans chalked out by national chains Amul and Mother Dairy, as well as fellow Ahmedabad-based ice-cream maker Havmor.
Among these players, Mother Dairy — a leader in the northern Indian market that is expanding its network to other areas like Mumbai and planning on opening a staggering 7,000 outlets across India over the next two years — poses a serious threat. “Our strategy for ice cream category would be to keep growing the market in both the impulse and take-home categories. We are aiming for a national footprint by the end of 2012-13,” a Mother Dairy spokesperson says.
Even Amul, owned and marketed by Gujarat Cooperative Milk Marketing Federation Ltd (GCMMF), is not to be trifled with. It has planned nine new processing plants for various dairy products over the next four years at a cost of Rs 3,000 crore. If that wasn’t enough, Havmor has already increased its retail sales points to 15,000 in Gujarat, Rajasthan, Madhya Pradesh and Maharashtra.
Making things worse is for Vadilal is its limited market access. A 20-year-old family separation restricts Ahmedabad-based Vadilal from selling its ice cream products in southern Indian states, including Mumbai and Goa. This is a major handicap, considering that 25-30 per cent of the country’s total ice cream sales come from these places. In essence, Sailesh Gandhi, the elder brother of Rajesh Gandhi (the managing director of Vadilal Industries and Vadilal Enterprises) went his own way in 1992, taking along with him the rights to sell the ice cream products of the family’s brand in the southern markets. Rajesh, on the other hand, was given the rights for the rest of India. Both the brothers sell their ice cream products under the family brand name.
So, it’s not surprising that Vadilal is going hell for leather cornering the northern market. It is looking to double the number of its exclusive ice-cream retail outlets — Happinezz Parlour — in Uttar Pradesh, Delhi-NCR, Uttarakhand, Punjab and Haryana over the next two years. The company currently has around 200 of those, mostly in Gujarat, Rajasthan, Uttar Pradesh and Delhi-NCR. It also plans to add 3,000 retail points-of-sale in Uttar Pradesh alone, in addition to the 10,000 such points across North India. “Regional players like Vadilal can succeed in northern markets with the right mix of cold chains, outlets, accessibility for consumers and affordable price,” says BM Vyas, a dairy market expert and former managing director of Gujarat Cooperative Milk Marketing Federation.
The company has also planned a Rs 15-crore advertising spend during 2012-13 to woo customers. “There is a need for appetite-branding for ice cream players, especially the regional ones. Vadilal has got it right by doing the right kind of appetite-branding, which gives a mouth-watering and tempting feeling to the viewer,” says Harish Bijoor, a brand consultant and marketing expert, adding that the company still needs to work on injecting a ‘fun’ factor into its campaign.
Another strategy: Launching a new range of ice creams under the brand ‘Ice-Trooper’, that targets children. “We realised that kids are the driving force behind ice-cream purchase decisions in a family. With this in mind, we launched six varieties in April under this brand. The colour, shape and flavours are appealing to them,” says Rajesh Gandhi. Last year, the ice-cream maker came out with three varieties — Badabite, Flingo and Gourmet — in the premium segment.
Can Vadilal, despite its geographic handicap, keep pace with its peers? Its advantage in handling large distribution networks, including cold chains and stock-keeping units (SKUs) of more than 300, gives it valuable experience in scaling. Also, according to Gandhi, Vadilal is the only ice-cream player in the country to have presence in all the three categories of ice creams — premium, regular and frozen dessert — which will be an asset. Plus, the company offers products for all age groups in the price range of Rs 5 to Rs 100, and above.
Yet, there are dos and don’ts that Vadilal would do well to adhere to. North India, primarily Uttar Pradesh, is often crippled by power problems — the stuff of nightmares for an ice-cream maker that doesn’t have reliable backups. “Supply chain is a major challenge ice cream players are facing at present. Ice cream is a product that requires constant cooling and proper handling,” says Piruz Khambatta, chairman and managing director, Rasna, who is also the chairman of the CII National Committee on Food Processing. Also, GCMMF’s Vyas says it would be sensible for the company to address the bottom of the pyramid rather than compete with multinationals in the high-price segment. This would bring volumes and visibility for the brand, he adds.
Overall, if Vadilal gets the important things right, it will have a lip-smacking opportunity ahead. India’s per-capita consumption of ice cream is estimated to be three scoops or 300 gms a person per year, against a mammoth 24 litres a person in several developed countries like the US, Japan and Germany. Says Khambatta: “The demand potential for ice cream is huge and Vadilal is able to control and manage supply costs better and more effectively than multinationals” — an endorsement that is sure to bolster the confidence of the Gujarat ice-cream maker.
(Source: Business Standard)

Italians recycle family gold

Italy, Europe’s biggest maker of gold jewellery, is set to be a leading global supplier of recycled bullion in the next few years as economic crisis and high metal prices push Italians to sell their family jewels.
Italy emerged in 2011 as the world’s third-largest source of gold scrap, with 116.5 tonnes of recycled gold, behind the US and China.  
In 2012, it is expected to supply a similar amount of gold scrap as its economy plunges deeper into recession, analysts said.
“Already Italy is playing a key role in terms of a balance between recycling and demand,” Marcus Grubb, managing director for investment at the industry-funded World Gold Council, told Reuters.
“In the longer run it is probable . . . its contribution will increase, provided the demand for gold remains strong, which we think it will,” Mr Grubb said.
Last year, gold supply from Italy, which has no mining production, topped that of Indonesia, the world’s seventh biggest producer, which mined 111 tonnes of gold in 2011, according to metals consultancy Thomson Reuters GFMS.
Rome’s long-term belt-tightening measures, including higher taxes, mean world markets can count on steady high supplies of recycled gold from Italy in the next few years.
“If the situation in Italy worsens and if prices rise a lot, the volume of scrap could even increase a bit,” said Ivana Ciabatti, head of Italpreziosi, the leading Italian precious metals trading and refining company.
That would help to check relentlessly ebullient gold prices because gold has become crucial to meet strong demand as mining output has only grown modestly.
“This is a market in deficit, not in surplus,” Mr Grubb said. “This is the only metal where the only way demand can be met is with a massive amount of recycling.”
Gold demand has risen about 11 per cent over the past 10 years to 4,486 tonnes in 2011, while mine output has grown at only 7 per cent since 2002 to 2,818 tonnes last year, GFMS data showed.
Over the same period, gold scrap supplies nearly doubled and at 1,661 tonnes last year accounted for 37 per cent of total gold supplies. Recycling is more environment-friendly and cheaper than mining which would require huge investment to boost output.
Gold prices, rose 10 per cent last year and hit a record high of $1,920.30 an ounce in September 2011, although they have only gained about one per cent in volatile trade so far this year.
A deeply rooted south European tradition of offering gold jewellery as presents from baptism throughout life means that Italians accumulated hundreds of tonnes of gold over the past 30 to 50 years, more than households in poorer Spain, Greece and Portugal, industry experts said.
“Since I was a child I remember that gold was given as a gift on various occasions and people used to say: ‘Put it aside’,” Mr Ciabatti said.
“We used to laugh at it, but they turned out to be right. Many families are surviving thanks to this gold.”
By contrast, in the traditional gold scrap markets of China and India, strong economies and growing incomes have reduced appetites to cash in gold jewellery, despite high metal prices.

Brazilian airlines merge to tap boom

Azul, Brazil’s third-biggest airline by market share, is to merge with regional operator Trip to tap a boom in travel among the country’s rising middle classes.
The new airline, Azul Trip, will have a 15 per cent combined share of Brazil’s domestic air travel market, which is among the world’s fastest growing. No figure was disclosed for the value of the deal.
“If approved, this association will give muscle to the ambition to Brazil’s third-largest aviation company to consolidate the market,” the new partners said in a statement.
The deal comes as Brazil’s biggest carriers, Tam and Gol, are engaged in a tough battle for market share while smaller carriers gradually chip away at their dominance.
The fierce competition has led to a growing number of mergers and acquisitions in the market, with Tam joining Chile’s Lan and Gol acquiring Brazilian domestic operator Webjet.
Started in late 2008 by Brazilian born, JetBlue founder David Neeleman to try to lure budget travellers from Brazil’s buses into the air, Azul Linhas Aéreas Brasileiras has since garnered 10 per cent of the market.
The combination with Trip will result in an airline with a 112 aircraft, a number that is expected to increase to 120 by the end of the year, and 8,700 employees.
Azul Trip will conduct 837 daily flights connecting 96 cities and is expected to report revenue of at least R$4bn in 2012 up from pro forma revenue of R$2.7bn a year earlier.
The deal will not prevent Mr Neeleman and his co-investors in Azul from eventually taking the airline public, people familiar with the matter said.
But Mr Neeleman and his investors, which include Gávea Investimentos, the Rio de Janeiro investment house controlled by JPMorgan Chase, and US private equity group TPG, will first want to consolidate Trip.
Mr Neeleman and his investor group will control an initial 73 per cent of the combined company, later falling to 67 per cent.
The two airlines grew a combined 50 per cent in 2011. In April this year, the growth of smaller airlines, including Colombia-based Avianca, helped erode the joint market leadership of Gol and Tam to 74.7 per cent from 81 per cent a year earlier.
“While Tam and Gol maintained their leading position by market share, it is clear that smaller airlines, such as Azul and Avianca, have been growing faster over the past year, which is reflected in their market share gains,” said Credit Suisse in a recent report.
Azul and Trip compete in largely different markets from the major airlines, however.
Mr Neeleman’s business model is to target smaller cities that previously did not have connections by using smaller regional jets and turboprops.
Itaú BBA advised Azul on the transaction.

World more resilient to oil price rises

The world economy has become more resilient to rising oil prices, according to the International Monetary Fund, although it warned that a supply shock could still derail global growth.
In new research published on its website, the IMF argued that the world had become less sensitive to a jump in oil prices thanks to more proactive monetary policy, increasing energy efficiency and greater diversity of energy sources among importing countries. 
 “During the current economic downturn, the price of oil hit over $100 a barrel and prices rose close to levels only seen in the 1970s [in real terms],” the IMF said. “But the increases have not triggered global recessions as they did in the 1970s and 80s.”
High oil prices have become a priority for global policy makers as they wrestle with weak economic growth and the possible disruption of supplies from Iran, the world’s third-largest exporter.
Leaders of the G8 nations this month agreed to release oil from their strategic reserves if there is further disruption to supply, saying that “increasing disruptions in the supply of oil to the global market over the past several months […] pose substantial risk to global economic growth”.
On Monday, oil prices rose for the third straight session as traders responded to the lack of progress in last week’s negotiations on Iran’s nuclear programme.
ICE July Brent crude oil rose 28 cents to $107.11 a barrel, although it remains 12.9 per cent lower than it was at the end of March.
The IMF conceded that “large, abrupt price changes remain difficult to absorb, particularly if they come from supply disruptions”.
But it noted that recent supply outages – such as the loss of Libya’s oil from the global market during last year’s civil war – have been small relative to the disruptions of the 1970s, such as the Arab oil embargo or the Iranian revolution.
Nonetheless, it argued that the global economy had demonstrated greater resilience to rising oil prices in the past few years than in the 1970s.
In part, this is because the rally in prices in recent years has been driven by global demand growth rather than supply shocks.
But the IMF also drew attention to the greater responsiveness of central banks in controlling inflation expectations when oil prices rise.
Moreover, it said, the world’s economies have become more efficient in their energy use and have diversified their energy sources.
For example, the US buys crude oil and gasoline from more than 40 countries, the IMF said.
Finally, the revenues from oil exports are being reinvested in oil-importing countries, the IMF said, lessening the negative impact of a rise in prices.

The Big Mac Theory of Development

It’s a question richer people have about their poorer neighbors: Why are they poor? Is it circumstances, or is it some kind of moral or intellectual failing? Is it that they never had a chance to cross from the wrong side to the right side of the tracks, or that they never had the motivation to cross? The subject colors thinking about international development as well. Is poverty in Africa and Asia the result of something about individual Kenyans or Pakistanis, or is it instead something about Kenya or Pakistan? Is it about the people, or the place?
A new paper by Princeton Economist Orley Ashenfelter for the National Bureau of Economic Research sheds some light on this debate. It compares the wages earned by staff working at McDonald’s (MCD) franchises around the world. Ashenfelter studies what McDonald’s employees earn against the cost of a Big Mac in their local franchise. The Big Mac is a standard product, and the way it’s made worldwide is highly standardized. The skill level involved in making it (such as it is) is the same everywhere. And yet, depending on where they live, crew members from all parts of the world earn dramatically different amounts in terms of Big Macs per hour.
In the U.S. a McDonald’s crew member earns an average of $7.22 an hour, and a Big Mac costs an average of $3.04. So the employee earns 2.4 Big Macs per hour. In India a crew member earns 46 cents an hour while the average Big Mac costs just $1.29. Still, the employee earns just one-third of a Big Mac for each hour worked. Same job, same skills—yet Indian workers at McDonald’s earn one-seventh the real hourly wage of a U.S. worker. There’s a huge “place premium” to working in America rather than India.
The place premium is not limited to low-end service jobs. Economist Michael Clemens, a colleague of mine at the Center for Global Development, studied (PDF) a group of Indians working at an India-based international software firm doing the same job on the same projects for the same pay. All of them applied for a temporary work visa to the U.S. but were separated by one fact—some of them won the lottery by which the visas were issued; others lost. The workers—still employed by the same firm and still doing the same type of job on the same projects—suddenly became very different in terms of their pay. The ones who moved to the U.S. started earning double what their colleagues back in India were earning (adjusted for purchasing power). They earned more not because they were different from the colleagues they left behind—selection was random, not based on education, talent, or drive—but because they were in the U.S. rather than India. And once they returned to India they went back to earning pretty much the same as their colleagues who had never left.
Clemens concludes that location alone—the place premium—accounts for three-quarters of the difference in average pay levels between software workers in the U.S. and India. Differences in production technology, education levels, and levels of effort account for, at most, one-quarter of the difference in earnings between the two groups.
Why do people in the U.S. earn so much more doing the exact same jobs as people in India? One reason is infrastructure: physical infrastructure such as (comparatively) good road and electricity networks, alongside economic infrastructure including a (somewhat) robust banking system. Institutions such as a (passable) set of commercial laws and (not completely capricious) regulatory regimes are another factor. The higher quality of these public goods allows the same amount of effort by the same quality employee to create considerably more value in the U.S. than in India.
So the overwhelming explanation for who is rich and who is poor on a global scale isn’t about who you are; it’s about where you are. The same applies to quality-of-life measures from health to education. And that suggests something about international development efforts: If there’s one simple answer to the challenge of global poverty, it isn’t more aid or removing trade and investment barriers (though those can all help). It’s removing barriers to migration. Harvard economist Lant Pritchett estimates that increasing the labor force of the OECD club of rich countries by just 3 percent through migration from the rest of the world would benefit people in poor countries to the tune of $305 billion a year. Compare that with an $86 billion annual payoff from the removal of all remaining trade barriers or the $125 billion the rich world already spends on aid to developing countries. The fastest and most foolproof way to make poor people in poor countries richer and healthier is to let them move to a rich country.
Of course, there’s the concern that if rich countries are flooded with poor people, those countries will just become poor, too. But that’s based on a misunderstanding of what makes rich countries rich. It isn’t scarce labor that makes Americans wealthy. It’s those better-functioning institutions and networks which allow people with the same skills to get paid so much more here than in India. That’s why the evidence suggests even unskilled immigration to the U.S. actually increases overall domestic wages and employment—to say nothing of skilled immigration, where the benefits are even greater.
Unfortunately, politicians don’t seem to care about whether people born on the wrong side of the tracks have the motivation to cross over, or how much the planet benefits when they do. Instead we’ve erected a huge electrified fence to keep people out. The evidence on the place premium suggests immigration restrictions are probably the greatest preventable cause of global suffering known to man.
(Source: Bloomberg BusinessWeek)

The Surprising Global Shortage of Skilled Workers

Want to find a job? That’s not a problem if you are trained as a technician and looking for work in China or Brazil. Ditto for sales representatives, who are in hot demand in Taiwan and Hong Kong. In Japan, engineers won’t sit idle. Meanwhile, in Ireland, IT workers are needed. In the Netherlands, it’s laborers. Even with unemployment running at an historic high of 8.1 percent in the U.S., don’t worry if you are a plumber, welder, or electrician. There’s plenty of demand for your skills.
Even as economists and politicians fret about the problem of global unemployment, those with the right résumés are in hot demand. That’s leading to talent shortages around the world, according to a survey released on May 29 by Milwaukee-based ManpowerGroup (MAN), one of the world’s largest temporary workers agencies.
All told, over one-third of the 38,000 companies Manpower surveyed earlier this year in 41 countries and territories reported that they were unable to find the workers they needed. That is 4 percentage points higher than it was in 2009, during the global financial crisis. The figure is still well below the 41 percent that reported shortages in 2007, before the crisis.
“Companies have gotten sophisticated about who they need and when they need them. In today’s world, it’s ‘stretch out your workplace a bit more and [only] then hire,’” says Jeff Joerres, ManpowerGroup’s chairman and chief executive officer. “Even if we had a robust recovery, I don’t think you are going to see that change. Companies have had too many lessons about how you can get whipsawed the other way.”
Not surprisingly, the largest number of employers reported shortages in Asia, where economies have been relatively resilient to date. Some 45 percent of employers surveyed there cited difficulties in finding the right people to hire. That’s the same number as in 2011, and it’s 17 percentage points above the total when the first survey was carried out in 2006. In the Americas, 41 percent faced challenges getting the right workers, up from 37 percent last year and 34 percent in 2010.
In Europe, as well as the Middle East and Africa, only one-quarter of employers reported labor shortages, similar in number to last year and not much different from pre-crisis levels. That probably reflects the still-precarious nature of the European economy.
The reason companies said they face shortages? The largest share, or 33 percent, said they simply couldn’t find the workers they need. A key issue was a lack of such hard skills as IT knowledge or facility with a foreign language. Insufficient work experience, a dearth of soft skills, or what the survey called “employability”—meaning characteristics like motivation and interpersonal skills, wanting more money, and being unwilling to work part-time—were also factors, in descending order of importance.
Companies will continue to face challenges regarding talent shortages unless educational systems are changed, argues Joerres, who says a major problem is the skills mismatch—the gap between job-seekers’ abilities and what employers need. One way to fix this is to vastly expand the size and number of trade schools, he says.
“The honor of doing and going through a vocational technical program has diminished. Those who would have gone to that school are now going to a four-year university because parents and society say that is what you should do,” says Joerres. “There are not enough welders, plumbers, and draftsmen. We are seeing shortages in these areas. And the pendulum takes a while to swing back.
(Source: Bloomberg BusinessWeek)