Thursday, May 30, 2013

Cavin's dairy goes north

The maker of Chik shampoo satchet, Fairever fairness cream, Spinz deo and Nyle herbal shampoo has a new brand ambassador on board. The Chennai-based FMCG company, CavinKare, has signed on the Indian cricketer, Ravichandran Ashwin. However, it is not for any of its personal care FMCG brands, which had seen innovations in the past that had given FMCG bigwigs a run for their money. Instead, Ashwin will endorse the dairy business of CavinKare.

Having launched the brand Cavin's, three years back, CavinKare wants to go pan-India with it in the next 18 months. The markets in south India were its testing grounds. To expand, it will venture into the national capital region (NCR) at first. Cavin's already contributes 20 per cent to the FMCG company's overall revenue, clocking Rs 250 crore in 2012-13.

The dairy market in the south is more brand-focused than other regions which are commoditised. "Private players have been the prime movers in south India with a strong retail presence in packed milk and curd," says Shiva Mudgil, assistant vice president, food & agribusiness research and advisory, Rabo India Finance.

C K Ranganathan, chairman and managing director at CavinKare and the one who launched shampoo satchets in India, among other FMCG innovations, says, "It (the dairy business) is an evergreen segment since it is a fundamental requirement. I am bullish about this business." According to Rabo India Finance, the market size of organised dairy is around $14 billion (Rs 78,700 crore), with various sub-categories growing at 15-30 per cent. According to other market estimates, the milk market in volumes in Tamil Nadu and Kerala is around 90 lakh litres a day, growing at 4 per cent, while the curd market in Tamil Nadu is estimated to be 1.6 lakh litres a day, growing at 33 per cent.

Ranganathan says, "We are not a pure-play dairy company, but an FMCG company with a good distribution network, combined with back-end strength in people, procurement, plants, and R&D, that allows us to innovate. Cavin's
Milkshake in special packs and Cavin's milk in UHT packs have long shelf-life which can last in areas with power-cuts".

Anand Halve, co-founder of Chlorophyll, the brand and communications consultancy, however, says, "The question is whether CavinKare can build a sustainable brand in a commoditised category. Not only do we have national players like Amul and Nestle, new entrants like Danone, but a host of local brands. Despite its personal care products with a difference, dairy will not an easy category to differentiate in. Indians are still wary about 6-months preserved dairy products."

Ranganathan will bank on value-added dairy products. The company started with milk and dahi, and diversified into ambience-stable products such as yogurt, paneer, UHT (ultra-high temperature-processed) milk and milk-based beverages like milk shakes from 2010.

These value-added products will first get marketed in the NCR. Balaji Prakash, general manager sales and marketing (dairy & beverage), CavinKare, says that the ambience-stable products would not require cold-chain infrastructure, and hence be more suited for an immediate launch.

While value-added dairy products hold the scope for high margins, they account for 10-15 per cent of the market, with pouch milk bringing in 60-65 per cent. Where basic dairy products allow only low single digits by way of margins, value-added dairy products can offer double digit margins on a large scale (could be three times more).

These bring in about 40 per cent of CavinKare's dairy revenue, and Ranganathan wants no less than 60 per cent from these when the business reaches the ambitious Rs 1,000-crore mark.

Having bought a Kanchipuram dairy farm to kickstart its diversification in 2009, CavinKare is nearly doubling its capacity at its Kanchipuram and Erode plants from 3.8 lakh litres per day to 6 lakh litres per day to produce more value-added products.

However, a national footprint will not be easy with a limited cold chain support. Afterall, dairy companies cannot ignore selling milk and curd since they account for a lion's share of the market. "We will invest around Rs 250-300 crore to set up a cold chain, R&D and our brand across the country," says Ranganathan, who is planning to fund it through debt and internal accruals. So far, 6 per cent of the segment's earnings have been ploughed back in brand-building. CavinKare is also looking at raising around Rs 350 crore from PEs, by diluting around 10 per cent, for its entire FMCG business.

Cavin's will tap groceries, general and departmental stores, modern trade (MT) and eating outlets. Mudgil says, "Modern trade provides an ideal platform to showcase value-added products like cheese, UHT milk, yogurts to targeted audience. However, general trade will still remain a major contributor to sales since MT penetration is low at around 8 per cent."

Milkshakes will be the first to get endorsed by Ashwin who fit in with associations of health, activity and energy - traits Cavin's wants to embody. While Ashwin will be the national ambassador for all its dairy products, the company will rope in regional celebrities to connect locally in different markets.
(Source: Business Standard)

Are quadricycles a four-wheel ride to success?

In Delhi, auto-rickshaws ferry over 20 lakh passengers every day, nearly as many as the city's swanky metro service does (around 2.2 million). Or about half the number of passengers that take the Delhi Transport Corporation buses every day (4.5 million). In smaller cities like Agra or Allahabad, say transport economists, nearly half of all the motorised trips are made on three-wheelers.

From these numbers, a large part of the burden of transporting people from one place to another seems to have fallen on the ubiquitous three-wheelers. Taxis are expensive and finding one is not easy. Buses are overcrowded and unpunctual and they are either racing to overtake their rivals or stopping frequently to take on as many passengers as possible. Autos, therefore, provide a relatively affordable option for travel.

However, last week, the government added a new alternative for commuters. It allowed quadricycles. an upgraded auto-rickshaw with four wheels and doors, for intra-city transportation, albeit with some riders. For now, quadricycles can be used only for commercial use within cities and cannot run on highways. Besides, they will have to meet stringent emission norms.

The idea, if it catches on, promises to fundamentally change the country's transport economy. The first quadricycle on the road is likely to be Bajaj Auto's RE60. The company has the product ready and had been fighting hard to get the vehicle approved by the government. It hopes to sell at least 5,000 quadricycles every month.

The new vehicle could provide commuters an option between the three-wheelers and the taxis. Experts say it will fill the requirement of those who want to upgrade to a taxi but are deterred by high fares. Taxi fares are generally double that of an auto. Besides, taxis are also in short supply in most cities. In Mumbai, for instance, the number of black-and-yellow taxis has dropped from 62,000 in 1997 to just 32,000 this year as new permits have been restricted. In comparison, there are around 100,000 autos in the city.
Rajiv Bajaj, managing director of Bajaj Auto, says the quadricycles will not cannibalise the three-wheelers. He believes the two could co-exist and expand the portfolio of affordable transportation.

Market size
How big is this an opportunity for Bajaj Auto? Under the new policy, quadricyles cannot become an alternative to passenger cars. Also, that would require considerable jazzing up of the model and more safety tests. But many experts say it could happen over the next four to five years.

Says Dinesh Mohan, Volvo Chair Professor Emeritus in the Transportation Research and Injury Prevention Program at IIT Delhi: "In the near future we could have two kinds of car models, one like the RE 60 which cannot go over an average 50 kmph but are safe vehicles for daily use, and two, vehicles that speed beyond 50 kmph which you will use on highways or for longer distances".

Such a change would bring in new buyers who cannot afford a car at present. It could also encourage families which already own a car to buy another vehicle for the daily commute of other family members. In India, average occupancy of a car is just 1.7 to 1.8. Assuming that a family has at least four members, the occupancy level leaves enough room for another vehicle for the household. For quadricycles, this could be a huge market.

Of course, a lot would depend on the price of the upgraded RE60 in comparison to other ultra-small cars like the Nano. Bajaj has not revealed the price but the buzz is that it would cost between Rs 1.3 lakh and Rs 1.5 lakh. Compared to the Nano's Rs 1.53 lakh ex-showroom tag currently, RE60 may not have much of an advantage, considering its engine capacity is nearly one-third of the Nano's.

However, the RE60's key selling point will be its fuel efficiency. The vehicle claims to give 35 km to a litre compared to the Nano's 25.4 km to a litre. In other words, the RE60 will consume around 40 per cent less fuel for the same distance compared to the Nano. Experts say that the running cost of a small car like the Nano is Rs 3,000 to Rs 4,000 a month. For the RE60, this bill will be down by Rs 1,200 a month.

The quadricycle could also come in handy for moving goods within the city. Currently, the government has paid little thought in this direction, but goods transportation could open up new market for the vehicle. The opportunity here is massive: companies could use the vehicle to deliver goods to kirana stores, e-commerce sites to their customers, sellers of consumer goods such as TV sets and fridges could use it to ship their orders, and so on. As of now companies use an array of transport option-vans, tempos, cars, Matadors- to ferry goods. The RE60 could position itself as an attractive urban goods carrier with some modifications. Says Mohan: "The RE60 has to be customised and designed to meet the specific transportation needs for delivering TV sets, lifestyle products or pizzas. That would be the challenge. Of course, the government has to make clear rules and regulations on its usage". The vehicle could also function as a mini ambulance for cases where a patient does not need to be carried on a stretcher.

Safety issues
However, many have their reservations about the vehicle's safety and environment-friendliness. Tata Motors Managing Director Karl Slym, who is struggling to sell the Nano, says that allowing quadricycles is a regressive step. "The government and industry have been accelerating efforts in traffic safety and environment, now we consider a quadricycle. Why go backwards?" he had tweeted. However, he has not ruled out the possibility of entering the segment in the future.

Most of the concerns over the safety are based on a European Safety Council report which says that quadricycles have a fatality risk 10 to 14 times higher than other cars.

Bajaj Auto brushes aside these doubts. As for the RE60's green credentials, it claims the emissions from the RE60 at 60 grams of Co2 per km is substantially lower than pollution norms of most available cars in the market. The Nano emits 92.7 gram of Co2 per km, auto-rickshaws 85.6 grams and the Maruti Alto 103 gram.

Also, some say slower vehicles are less likely to be involved in road accidents. A study undertaken in six Indian cities by Mohan's team at IIT shows that three-wheelers are no less safe nor more accident-prone than cars. According to government data, the share of auto rickshaws in the total road accidents in India is only 7.3 per cent compared to 21. 8 per cent for cars and over 23 per cent for two wheelers. The quadricycle has a weight closer to that of an auto (autos weigh 350 kg, while RE60 has a weight of 400 kg).

There are other areas where quadricycles score over cars. For one, they require less space than a car on the road, and two, with a mass weight which is one-third that of an average car, there is less wear and tear of the road. With these advantages to boot, the quadricycle could create a substantial market for itself in the country's transportation system.
(Source: Business Standard)

Pacific threat looms for textiles

A preferential trade pact in textiles between US and Pacific nations will hurt China and India.
With all the brouhaha over China-India border issues and election in Pakistan, one issue that has received little attention in the Indian media is the proposed US-led Trans-Pacific Trade Pact (TPP).
This is understandable, as India is not party to the proposed trade pact involving Australia, Brunei Darussalam, Canada, Chile, Japan, Malaysia, Mexico, New Zealand, Peru, Singapore, Vietnam, and the US. However, it has serious implications for India’s textile and clothing sector.
Textile and clothing accounts for roughly five per cent of India’s GDP, 15 per cent of its industrial output and export earnings and provides livelihood support to 55 -60 million people directly or indirectly.

Trade diversion

It is important to analyse the effect of TPP on India’s textile and clothing sector, as the US is an important export destination. When it comes to the export of readymade garments and made-ups, the US alone accounts for 30 per cent of India’s total exports. TPP will affect India’s textile and clothing sector (and of all non-TPP member countries like Brazil or China) in two ways.
First, exporters from TPP member countries will get preferential access in the US market vis-à-vis exporters from non-TPP member countries, such as India. This will put India’s garment exports (to the US) at a disadvantage as US import duties on readymade garments are quite high with average duty at around 7.9 per cent; duties on some clothing items are as high as 32 per cent according to WTO tariff profile database.
Second, a key feature of the TPP – ‘yarn forward rule’ --- makes it mandatory to source yarn, fabric and other inputs from any or a combination of TPP partner countries to avail ‘duty preference’. This is likely to disrupt the well-integrated global supply chain in textile and clothing.

Implications for India

It will induce garment manufacturers in the TPP countries to source their inputs from TPP countries at the cost of non-TPP countries, even if the suppliers in TPP regions are not the least cost. This will be a clear case of trade diversion – moving trade away from more efficient producers to less efficient producers.
Though this rule is ‘primarily’ aimed at restricting the benefits accruing to Chinese manufacturers of yarn and fabrics from further opening of the lucrative US markets for clothing, it will create a comparative disadvantage for all non-TPP member countries, including India.
India’s textile and clothing sector is under severe pressure from slowing demand in key export markets, and backdoor entry of Chinese goods via Bangladesh under South Asian Free Trade Area that allows duty-free import of garments from Bangladesh into India.

Clothing retailers hit

The likely exclusion from US’ GSP benefits is another headache for the sector. If this were not enough, to comply with its commitments to WTO, India will have to phase out its export incentives in textiles and clothing.
Export competitiveness is deemed to be achieved if a country’s global export share of a specific product group (defined as a section heading of the ITC-HS) is 3.25 per cent or more in two (consecutive calendar) years. India’s share in world export of textile and clothing (falling under section heading XI of the HS) already crossed this limit in 2007. As a result, India will have to phase out its export sops for the sector by 2015. Only 17 per cent of the textile and clothing exports under NAFTA and Central American Free Trade (CAFTA) have gone through the ‘yarn forward rule’. Yet, US trade negotiators are pushing it in the proposed TPP. Clearly, the move seems to be protectionist, aimed at reviving indigenous textiles industry at the cost of the foreign, but it will limit the freedom of clothing retailers to choose their suppliers. In the process, it will also disrupt the global textile supply chain of which India is a part.

The way forward

That explains the strong opposition of clothing retailers (e.g. JC Penny, Levis and Gap) and their associations (e.g. TPP Apparel Coalition) to the yarn forward rule. To deal with this, the US trade negotiators have come up with the idea of ‘short supply list’ – that will give some flexibility to clothing retailers in sourcing their inputs (which are not available in TPP region) from non-TPP countries.
India’s best bet can be the conclusion of WTO Doha round at next Ministerial in Bali, which will deflate the interest of TPP member countries in the trade pact. Unfortunately, that seems unlikely, given the American disinterest in the round. Joining TPP can help India’s textile and clothing sector, but accepting US-promoted WTO-plus proposals on IPR, investment protection, services and state-owned enterprises will not find favour with policymakers or India Inc. Getting India’s vulnerable products in TPP’s ‘short supply list’ is yet another option that can be explored.
India’s market for premium apparel is growing at 10-12 per cent a year. India can consider sponsoring its own yarn forward rule in the Regional Comprehensive Economic Partnership (of which it is a party) that will find support from China, the biggest loser of the rule.
Going forward, India can leverage it to negotiate with the US for dilution of the TPP’s yarn forward rule.
The likely loss in export of textile items to TPP countries will have to be compensated by gains in other markets. Here, tweaking the rules of origin to stipulate utilisation of yarns and fabrics of Indian origin as a pre-condition for allowing duty free import of garments from Bangladesh will help India’s fabrics export. It will also check backdoor entry of Chinese fabrics into India via Bangladesh.
India needs to continue pushing its exports to non-traditional emerging markets of Africa, Asia CIS and Latin America. The textile and clothing sector is heavily protected in Mercosur countries with import duties as high as 35 per cent on many items.
Expediting the conclusion of India-Mercosur Comprehensive Economic Cooperation Agreement will help counter the impending trade diversion because of the yarn forward rule under TPP.
Some kind of product differentiation (e.g. voluntary carbon labelling) will protect our textile and clothing exports in the US despite the impeding post TPP comparative cost disadvantage vis-à-vis TPP partner countries like Vietnam.
(Source: Business Line)

The Asian housing bubble-burst

Residential property prices in many countries of developing Asia shot up after the global financial crisis, but recent trends suggest that they may be declining.
Everyone knows the role played by housing bubbles in the pre-crisis booms that ended in spectacular crashes in the United States in 2008, as well as in other countries like the UK and Ireland, and then Spain. But many commentators still persist in seeing this as more of a developed economy problem, which is less likely to become a concern in developing countries where excess demand for housing remains an issue.
In fact, however, it is just as possible for debt-driven private consumption bubbles to burst in developing countries – and several developing country financial crises have resulted from precisely that in the past. The experience of the Asian financial crisis in 1997-98, in which excess private indebtedness played a big role in causing the crisis in South Korea and Thailand, had provided a salutary lesson to most of developing Asia in the subsequent decade.
So it could have been expected that allowing excessive private credit expansion, especially for private retail credit for housing, automobiles and other consumption, is something that would be anathema to Asian countries, especially those that had already gone through one round of devastating financial crises. Yet, in the aftermath of the Great Recession of 2008, many Asian developing countries actually encouraged the growth of consumer credit bubbles as a means to more rapid recovery, accentuating a process that had already been eased by financial liberalisation from 1999 onwards.

Heavy explosion

The result has been an explosion in heavily leveraged consumption as well as in residential real estate activity, even in economies where wage incomes have not increased that much, such as the Republic of Korea. And the impact has been most strongly felt in the housing market. From early 2009, as Charts 1 and 2 show, residential prices in several Asian economies soared dramatically for at least two years.
This has been most evident in Hong Kong, where house prices have more than doubled since early 2009. In 2012, when global residential real estate prices increased by around 4 per cent, prices in Hong Kong rose by 24 per cent. It is now the most expensive place on earth, with property prices significantly higher than in New York, London or Shanghai. Of course, Hong Kong house prices are substantially affected by non-resident purchases (by mainland Chinese as well as expatriate westerners), so they do not reflect the same internal factors that are shaping real estate markets elsewhere in the region. That may be why house prices here have continued to increase even when the rest of the East Asian region shows signs of slowing down and why it has remained impervious to various policy measures designed to cool the overheated market.
By contrast, the authorities in China have been working to quell the frothy housing market ever since early 2010, and to some extent they seem to have succeeded, as average house prices have remained largely flat for the past two years.

Tapering off effect

In some other countries in East Asia, house prices have tapered off or even started declining, independent of any policy nudging, but simply because the bubble has finally burst. This is clearly evident for Taipei China and Malaysia (Chart 2), but even in South Korea and Indonesia, the rate of increase has come down significantly. As Chart 3 suggests, only in Hong Kong did the rate of increase further accelerate. Elsewhere, even in places where the prices continued to increase, they did so at a slower rate, including in India's Mumbai, where the rate of increase was still quite high.
In fact, in the past year (as indicated in Chart 4) house prices in Shanghai and Singapore increased less than the general rate of inflation, so they declined in real terms. In other places like Taipei, they barely increased in real terms. The indicators for the first quarter of 2013 are that housing continues to increase in prices across much of Asia, but at significantly slower rates, and in some countries they have started declining.
But while the rapid increase in residential real estate prices clearly suggested housing bubbles in many Asian countries, the bursting of the bubble need not be good news, and can have painful consequences. As in the US housing market before 2007, most of the increase in real estate prices in these Asian economies was debt-driven, resulting from the rapid expansion of retail credit to households, which in turn dominated in total personal debt. As Chart 5 shows, credit to the private sector increased dramatically in many of these economies.

Substantial increase

The most substantial increase has been in Hong Kong, which is also home to the frothiest property market of them all. But all the countries shown in Chart 5 have private credit to GDP ratios in excess of 100 per cent, which has usually meant an inevitable day of reckoning at some point, usually with unpleasant implications. Indeed, the household sector is already facing personal debt crises in several countries, notably South Korea, Malaysia and Thailand. And this is turn is already acting as a drag on the economy, as households that increasingly find it difficult to service their debts are forced to deleverage and cut consumption.
Chart 6 shows that household debt has very clearly reached crisis levels in some economies. In Malaysia, total household debt in 2012 amounted to more than 80 per cent of GDP and a shocking 140 per cent of personal disposable income – clearly, therefore an unsustainable level that will have to be reduced sooner or later. In South Korea and Singapore, the corresponding ratios in 2012 were around 90 per cent and more than 100 per cent – once again suggesting that this state of affairs is not likely to be able to persist for long. In South Korea, total indebtedness of the government, companies and households is currently 283 per cent – significantly more than the 227 per cent that existed just prior to the Asian Financial Crisis in 2007.
So this is a bubble – or rather, a set of bubbles – waiting to burst. Indeed, some are already in the process of bursting. Debt levels across the economy are rising beyond the ability of the various debtors to service them. Housing debt is just one of the problem areas. In the case of other forms of personal debt – such as credit card debt, debt to finance purchases of vehicles and student debt – there are similar and growing concerns about the capacity of borrowers to repay.
As these factors cause consumer spending to slow down, this is already affecting companies, and causing their debt to become more difficult to service. The corporate bond market, which had become incredibly buoyant in emerging Asia in the recent past, is also becoming a cause for worry.
All this makes the East Asian region's economies ever more vulnerable to external shocks. But with these levels of indebtedness, the shocks that cause the next round of damage may even come from within.
(Source: Business Line)

NSAID painkillers increase risk of heart attacks by a third

The painkillers most commonly prescribed for arthritis patients significantly increase their risk of heart attacks, according to a large international study published in The Lancet on Thursday.
The cardiac side-effects from high doses of long-established, non-steroidal anti-inflammatory drugs (NSAIDs) such as ibuprofen and diclofenac are similar to those from Vioxx, the newer painkiller withdrawn from sale by Merck in 2004, said Colin Baigent of Oxford university, the study leader.
Treatment with NSAIDs at the levels taken by many arthritis patients worldwide increases the chance of a heart attack or stroke by about a third on average. The extra risk is higher for people who are more vulnerable to heart disease.
Ibuprofen (sold under the brand names Nurofen, Advil and others) and diclofenac (Cataflam, Voltarol) cause about three extra heart attacks – one fatal – for every 1,000 patients treated. In addition, high-dose NSAIDs double the risk of heart failure and increase the risk of gastrointestinal bleeding by between two and fourfold.
“We would emphasise that the risks are mainly relevant to people with arthritis who need to take high doses over a long period,” Prof Baigent said. “A short course of lower-dose tablets purchased without a prescription, for example for a muscle sprain, is not likely to be hazardous.”
The study team, funded by the UK Medical Research Council and British Heart Foundation, brought together the results of 639 clinical trials involving more than 350,000 people and reanalysed the data in order to predict the likely adverse effects of common painkillers in particular types of patient.
Prof Baigent said: “I am concerned that we should not portray these drugs as ‘dangerous’ but that patients and their doctors should know the risks and weigh them against the benefits.
“Many patients, because they take these drugs, will be able to go about their daily lives and be able to function normally as a human beings,” he added. In exchange for relief from pain and swollen joints, they would readily accept raising the risk of suffering a heart attack from 0.8 per cent per year to 1.1 per cent per year.
The study showed that just one NSAID – naproxen – did not cause heart attacks because it had an additional mechanism of action not shared by the other drugs, which makes the blood less likely to clot and therefore has a protective effect similar to aspirin. But naproxen does increase the risk of stomach bleeding and heart failure.
The researchers said some people might want to switch to naproxen (sold as Aleve) because its cardiovascular profile was safer but this would not suit everyone. “The benefits of NSAIDs can be quite individualised,” said Catherine Elliott, MRC head of clinical research support. “Some patients will get profound pain relief from diclofenac but not from naproxen.”

Alcoa Cut to Junk by Moody’s as Aluminum Price Declines

Alcoa Inc. (AA), the largest U.S. aluminum producer, had its credit rating cut to one level below investment grade by Moody’s Investors Service after the metal’s price fell amid a global oversupply.
The long-term rating on Alcoa’s $8.6 billion of debt was lowered by one step to Ba1 from Baa3, Moody’s said in a statement yesterday. The outlook is stable, indicating the rating won’t be reduced again soon.
“The aluminum price has been in a downward decline since reaching post-recession highs in 2011,” Moody’s said in the statement. Strength in the automotive and aerospace industries isn’t sufficient for a “significant” recovery in profitability and Alcoa won’t achieve investment-grade metrics within Moody’s rating horizon, Moody’s said.
While Alcoa has shuttered high-cost smelting capacity, expanded profitable segments and reduced costs, slowing economic growth in China and rising global production have caused aluminum prices to fall.
“We believe Moody’s decision is a greater reflection of macroeconomic conditions and the volatility of metal prices than a true statement of the financial and operating strength of Alcoa,” Alcoa said in a separate statement.
Moody’s rating of Alcoa’s senior unsecured debt has slipped six levels since 2002. In that time, New York-based Alcoa has lost its position as the world’s most valuable materials company to Australia’s BHP Billiton Ltd. (BHP), while Rio Tinto Group and Russian and Chinese aluminum producers took a greater share of the aluminum market.

Output Cuts

Aluminum is the third-worst performer on the UBS Bloomberg CMCI index of commodities in the past five years, with a negative return of 47 percent. Global production has exceeded demand for the past eight years, according to data compiled by Bloomberg.
In order to meet Moody’s criteria for investment grade with $3 billion of annual earnings before interest, taxes, depreciation and amortization, Alcoa would need to reduce debt by $2.8 billion, the rating company said. Alcoa may generate $2.71 of Ebitda this year, according to the average of 14 analysts’ estimates compiled by Bloomberg.
Alcoa is working to pay off debt and reduce costs by closing smelters, expanding profitable segments and finding ways to operate more efficiently. The company’s debt has fallen to $8.83 billion, its lowest since 2008, when debt surged 32 percent to $10.6 billion, according to data compiled by Bloomberg.

Closing Smelters

Alcoa plans to pay off $422 million in notes due in July and may be helped by the conversion into equity of its $575 million of 5.25 percent notes due March 2014. Those securities can be swapped for stock at about $6.43 per share.
Alcoa fell 0.1 percent to $8.589 at the close in New York yesterday. The shares have dropped 3.5 percent in the past 12 months.
Alcoa has responded to falling prices and the supply glut by paring costs at its least efficient plants. Earlier this month, the company said it will shut two production lines at its Baie-Comeau smelter in Quebec and postpone construction of a new line at the plant until 2019. The company said May 1 it’s evaluating 460,000 metric tons, or about 11 percent, of annual smelting capacity for curtailment or permanent closure by the end of next year. Alcoa reduced smelting capacity by 13 percent in 2012 with cutbacks in Tennessee, Texas, Italy and Spain.
Chairman and Chief Executive Officer Klaus Kleinfeld is looking to add lower-cost capacity with a new 740,000-ton smelter that’s part of a joint venture with Saudi Arabian Mining Co. (MAADEN)

Boosting Sales

Alcoa is also boosting sales at its engineered- and rolled-products divisions, which sell aluminum and aluminum alloys to the automotive, aerospace and energy industries. Kleinfeld is betting that record backlogs at aircraft manufacturers replacing aging jets and carmakers using more aluminum will shift Alcoa’s product mix to complex, higher-profit products.
On April 8, the company reported a 59 percent increase in first-quarter net income, exceeding analysts’ expectations, after it cut $247 million in costs through productivity gains and increased sales at its engineered-products division.
(Source: Bloomberg)

Euro-Area Economic Confidence Climbs Amid Recession

Economic confidence in the euro area increased in May, adding to signs the region is beginning to emerge from the longest recession in the single-currency era.
An index of executive and consumer sentiment rose to 89.4 from 88.6 in April, the European Commission in Brussels said today. That’s in line with the median estimate in a Bloomberg News survey of 33 economists.
The 17-nation economy’s contraction has left the European Central Bank to try to mitigate the damage by cutting interest rates and exploring unconventional ways of channeling money to needy companies, especially in the south. The ECB this month cut its benchmark rate to a record low of 0.5 percent.
“Our measures gave breathing space from markets driven by panic, which were forcing the economy into a position where inappropriately high interest rates would make default a self-fulfilling prophecy,” ECB President Mario Draghi said earlier this month. “Today we are seeing some encouraging signs of tangible improvements in financial conditions. Spreads in sovereign and corporate debt markets have narrowed considerably.”
A gauge of sentiment among European manufacturers increased to minus 13 from minus 13.8 in April, today’s report showed. An indicator of services confidence climbed to minus 9.3 from minus 11.1, while consumer confidence improved to minus 21.9 from minus 22.3.

End of Recession

The euro area’s 18-month recession will end in the second quarter, as the economy stagnates before returning to growth in the following three months, according to a separate Bloomberg survey. The economy contracted 0.2 percent in the first quarter.
Today’s economic-confidence report followed a May 16 trade report that showed euro-area exports rose rose 2.8 percent in March and the trade surplus widened to 18.7 billion euros ($24 billion). European Union car sales rose in April for the first time since September 2011.
PSA Peugeot Citroen, Europe’s second-biggest carmaker, said demand for new vehicles in the region has started to stabilize at a “very low level,” after European Union car sales rose 1.8 percent in April, the first gain since September 2011.
Even so, the auto market is near a two-decade low. Maxime Picat, head of the manufacturer’s Peugeot brand, said May 22 that industry sales in Europe will fall 5 percent this year in the sixth consecutive annual decline, and that it’s too early to predict a rebound.
The encouraging confidence data from Europe followed a May 28 report in the U.S. that showed consumer confidence in the world’s largest economy climbed in May to the highest level in more than five years as views on the economy and labor market improved.
In China, the second-largest economy, Premier Li Keqiang told German business leaders on May 28 that his country is confronted by “huge challenges” as it seeks 7 percent annual growth this decade, down from more than 10 percent in the previous 10 years.
(Source: Bloomberg)

Wednesday, May 29, 2013

From Logan to Duster: Renault's road to becoming India's premier auto-maker

By the end of a loss making joint venture with Mahindra in 2010, Renault did not have much to show for its first outing in the Indian market. Except the dubious distinction of its logo, the diamond, plastered across Logan, a functional boxy looking car that soon became a favourite with fleet taxis. Sure, these were air conditioned premium cabs and not the rust buckets that most of urban India had come to associate with the word 'taxi', but not a particularly rousing endorsement for an auto brand.

Two years later, the French car manufacturer is heralded as a comeback kid of sorts.
Sumit Sawhney, executive director, marketing and sales, says Renault is now the 8th largest auto manufacturer in India in less than 18 months. Thus making it one of the fastest growing companies in its sector, beating competition that's been in the market for decades. Its Duster model has been a runaway success, selling 60,000 units in 10 months. Renault is hoping some of the magic will rub off on its recently launched premium sedan Scala. It's particularly impressive given the auto industry has been in a slump for a while now.

According to a report from
ICRABSE 0.36 %, domestic passenger vehicle sales declined 8.2% year on year this April, marking the fifth consecutive month of negative growth. Renault began its re-entry in 2011 with a top down strategy. Its previous experience gave it an opportunity to study India and get a stronger understanding of product mix. According to Praveen Kenneth, co-chairman and managing director at Renault's agency Law & Kenneth, "The task was to make people understand the diamond is Renault and not Logan." He suspects the agency was hired partly due to its performance on Skoda; transforming a European taxi brand into a luxury offering in India. In spite of Renault not being the most well recognised name, the agency was clear that it wasn't going to recommend a celebrity ambassador. It tied in well with Renault's own philosophy of consumer as ultimate brand endorser.
Renault launched the executive sedan Fluence, followed by luxury sports utility vehicle (SUV) Koleos in 2011, neither of which made an immediate impact. This was fairly typical of the auto category where success is hard won. Arun Agarwal, auto analyst, Kotak Securities, believes three critical elements determine a purchase of a passenger vehicle: initial value, cost of running and finally resale. "Getting this right is not something that happens overnight. You need presence across segments, aggression and patience as well," he says. However, an effecitve short cut is by coming up with a vehicle that suddenly becomes a runaway hit. Renault found that in Duster, introduced in July 2012. The UV tapped into consumer research that revealed a change in behaviour.

While even five years ago, Indians were not used to travelling over weekends, with road infrastructure improving, people had started taking short breaks with families. Says Sawhney, "They wanted a vehicle they can take to office and at the same time double up for the family getaway." The Duster was heavily Indianised, going through a total of 34 specific changes in areas like ride, handling, emission and driveability. And then, of course, there was the styling, a far cry from the modest looking Logan. Says Kenneth, "I drive a
Jaguar and feel extremely comfortable being seen in a Duster."

Larger trends playing out in the Indian auto sector increased the odds of the Duster doing well. With a sharp difference between diesel and petrol prices, many customers were opting for cars powered by the cheaper fuel. There were comparatively few diesel offerings available among cars at lower price points — typically the largest segment in India. Besides, consumers for cheaper cars were worse hit by
inflation and higher interest rates. Against this backdrop, the Duster has got Renault 60,000 customers. Ask Sawhney, an ex GM marketing man, about what's worked for Renault and he repeats, "the right product at the right time and price" like it's a mantra of sorts. All of this is backed by a few lessons he picked up at his last assignment.

Lessons in building and retaining consumer trust after the car rolls out of the dealership. That's when programs like Renault Care kick in. It offers four years warranty and there's a 24 hour helpline for consumer complaints. An independent survey from TNS nine months after the launch of the vehicle ranks it No 1 in post purchase customer satisfaction. More importantly for Renault, Duster has given it the visibility it needed. Scala is next to Duster in terms of volumes, hovering around the 1000 per month mark in sales and has a segment share of 8 per cent as of December 2012, says Sawhney. All the while, Renault has been expanding its distribution network, having started with 11 dealers. Today, it has over 100 outlets.

Kenneth and Sawhney attribute brand Renault's success to a number of factors: its much publicised association with F1 that draws in younger consumers, a sharp focus on digital engagement that includes a healthy after sales relationship, and identifying products that are the most appropriate. Even in terms of communication, Sawhney says, "We went vernacular to make sure we were able to connect with people." However, both agency and marketer believe there's still some time for self congratulation. Sawhney says, "Our position is like a plane taking off. Till the time we find altitude and begin to cruise, we cannot bring down our efforts."
(Source: Economic Times)

Arvind: Licence to sell more

An entire wall in the 8th-floor office of Arvind Lifestyle Brands, in Bangalore, has been used to display the latest brand it has licensed. Arvind Lifestyle Brands (Arvind) is set to launch the American brand Ed Hardy, that is on display, in January, next year.

Arvind has signed agreements with half a dozen international brands in the last nine months (refer box), going neck to neck with Reliance Brands, a unit of
Reliance Industries, which added five apparel brands to its portfolio in the last financial year.

Reliance Brands has a stated intent of building a portfolio of brands in apparels. What has made Arvind, which has built on the business model of licensing apparel brands since 1993, go on its recent spree? "We want to take a lead in menswear, kidswear and speciality retail" says Suresh J, managing director of Arvind Lifestyle Brands and Arvind Retail, by way of an explanation. Speciality retailers are single-category retail chains, different from multi-category hypermarket chains.

The new brands, along with
Arrow, Nautica, US Polo, GANT and IZOD, will make for a strong portfolio in menswear, according to Suresh. "It (Arvind) did not make money in Arrow for the first ten years but the brand minted money in the last three-four year," points out Prashant Agarwal, joint managing director at the retail consultancy, Wazir Advisors.

Even though Arvind and Aditya Birla Nuvo's Madura Fashion & Lifestyle are close competitors in menswear, Agarwal says the former is more aggressive with its more international brand launches. Arvind's brands such as Arrow and Nautica compete with some of Madura's brands such as Van Heusen and Allen Solly.

Whereas Madura has mostly focused on makeovers of its existing brands such as Van Heusen, Allen Solly and Peter England with renewed marketing focus. For others such as Louis Philippe, it has introduced new extensions.

Even though Reliance Brands has higher-end brands in its kitty, Arvind has got it on its crosshairs. In one of its recent quarterly presentations for investors, it had said that its menswear brands could go on to compete with Brooks Brothers and Pink and Kenneth Cole of Reliance Brands.

Arvind will tweak its new licensed brands for the Indian market. It will reduce the price of Ed Hardy to make it a "super premium/premium brand rather than a luxury brand," says Suresh. The merchandise of the brand will include accessories and jeans, besides

T-shirts, allowing Arvind to compete with the likes of Levis and Calvin Klein with a pair of jeans priced at Rs 2,500-3,000.

With menswear sorted, Suresh says the company wants to be the number one player and straddle different price points in kidswear. Popular kidswear brands in India have been in rough waters of late. Brands such as Liliput and Catmoss got embroiled in tiffs with their investors and Giny & Jony had troubled relations with its lenders.

"The segment occupied by Liliput and Catmoss is mid-value, which has a lot of potential and where Arvind does not have any brands. It should look at it," Agarwal says. Arvind has lined up Cherokee Kids for the value segment. By way of premium brands, it will offer Elle Kids and US Polo Juniors, and in the super-premium segment, it will sell GANT Kids and Nautica Kids.

"Whatever brands we launch, we aim to make them Rs 100-crore in the next three to four years," Suresh says. It wants to take the contribution of its brands and retail segment to revenue from 27 per cent in 2012-13 to 36 per cent in 2015-16. Arvind gets 68 per cent from textiles and 3 per cent from other businesses.

Analysts sound a warning at Arvind's many launches. "Its return on capital (RoC) will be under pressure. It has to spend a lot of capex for growing the brands," says Jignesh Kamani, research analyst with Nirmal Bang Securities.

The RoC from brands and retail was 11.4 per cent in 2011-12, "which was lower than its cost of capital", Kamani adds. In 2012-13, the RoC was 10.4 per cent. Madura's RoC, by contrast, was 21 per cent in 2011-12. Kamani says it is better to focus on any one segment in apparels for better cashflows.

Suresh refutes by pointing out, "We are moving towards an RoC of 20 per cent in the next three years. We have invested so much in new brands in recent years that the RoC has been low."

While its own apparel brands such as Ruggers are in the mass segment, most of its licensed brands are either premium or super-premium, that are not affected much by shrinking discretionary income.

New brands due for launch through this year and next

* Debenhams (UK-based departmental chain)
* Next (UK-based speciality chain)
* Billabong (Australian surfwear)
* Ed Hardy (US-based fashionwear)
* Hanes (a brand of US-based HanesBrands)
* Wonderbra (a brand of US-based HanesBrands)


* Arrow
* Flying Machine
* US Polo
(Source: Business Standard)

Private defence companies get new playing field

The ongoing saga of India's artillery procurement highlights the difficulties that the defence ministry's ad hoc equipment acquisition process presents for private sector companies in the defence sector. As Defence R&D Organisation (DRDO) chief V K Saraswat points out, India should have begun developing today's generation of guns in the 1990s, when the Bofors FH-77B field howitzer had just entered service. That would have provided Indian scientists, engineers and companies with the lead time needed for developing an indigenous artillery system.

"Complex modern weapons systems do not get created by waving a jaadu-ki-chhari (magic wand)," explains Saraswat caustically. "They take planning, funding and, most importantly, time."

But none of this was forthcoming, recounts the DRDO chief. Over the years, the army blocked several proposals to develop a futuristic 155-mm gun, arguing that Bofors AG had handed over the technology to build howitzers in India, and that it would meet Indian requirements for decades to come. But the Ordnance Factory Board, which received the technology, never built the gun in India. As a result, there was no choice but to buy a successor to the Bofors FH-77B. But a decade of attempts to buy the weapon have come to naught, with potential suppliers like Denel, Rheinmetall, Soltam and
Israel Military Industries (IMI) being blacklisted by the defence ministry for alleged corruption.

Today, worryingly short of artillery (guns, artillery and howitzers are used interchangeably), a panic-stricken defence ministry is acquiring 155-mm guns on several simultaneous tracks. A global tender has been issued for ultralight 155-mm, 39-calibre howitzers; at the same time, the Ordnance Factory Board has been charged with building a heavier 45-calibre version of the 39-calibre Bofors FH-77B gun; and DRDO is leading another programme to develop a futuristic 155-mm, 52-calibre howitzer. (While all these guns fire shells that are 155 mm in diameter, the term calibre points to the length of the gun's barrel. A higher calibre indicates a longer barrel, which provides longer range.)

India's private sector defence companies are also in the fray. Having scrapped an international tender for buying a 155-mm, 52-calibre gun, the defence ministry wants the Indian industry to develop a gun through the "Buy & Make" (Indian) category. This would mean a domestic company would head the consortium set up for the project.

Changing the game
The "Buy & Make" (Indian) acquisition category, and the "Make" category, are now touted as key routes for the private sector to build real defence capabilities, which include R&D, prototype development, testing and manufacture. Until 2001, when the private sector was permitted into defence (subject to licencing and with no more than 26 per cent foreign holding), "indigenisation" had long meant licenced production in India of equipment already in service in foreign armies. Experience had shown that global vendors were unwilling to transfer high-end technology.

"The Indian experience of licenced manufacture consisted of building low-and-middle-tech components and sub-systems in India while importing key components and sub-systems," says Rahul Chaudhry, chief executive of
Tata Power (strategic electronics division).

To break out of this corner and to catalyse the entire development cycle in India, including R&D, prototype development, testing and manufacture, successive Defence Procurement Policies (DPPs), including DPP-2005, 2006, 2008 and 2011, created procurement categories like "Make" and "Buy and Make (Indian)."

The "Make" category, which was promulgated in DPP-2006, harnesses Indian industry for developing complex, high-tech systems like combat vehicles, communications networks, etc. The defence ministry undertakes to pay 80 per cent of the cost of development in order to minimise financial risks, but the lead integrator company is left free to enter into technological partnerships with foreign vendors.

The "Make" category was to "energise the industrial base" of the country. Speaking at Defexpo, an exhibition of internal security systems, last year, the defence ministry's top procurement official at that time, Director General of Acquisitions Vivek Rae, had promised an eager audience of private sector chief executives that a list of 150-180 "Make" category projects would be put up on the ministry's website for companies to start developing those products.

"The process of design and development, and sharing of risks and costs on an 80:20 basis will galvanise the Indian industry and help develop capabilities," Rae had said.

But, the "Make" category has been languishing for some time now. In fact, it has not yielded a single product in seven years. Just two projects have been tendered-the Future Infantry Combat Vehicle, and the Tactical Communications System-but neither has led to a development contract. Meanwhile, the allocation of funds for "Make" projects has been cut to Rs 1 crore in 2013-14 from Rs 89 crore last year.

However, some recent amendments to DPP-2011 announced by the defence ministry last month give a glimmer of hope to the private sector. A detailed policy is still awaited, but the defence ministry has committed to sharing a public version of the military's Long Term Integrated Perspective Plan (LTIPP), covering the 15-year period from 2012 to 2027, with the industry. Termed the "Technology Perspective and Capability Roadmap," this document would spell out the broad outlines of weaponry and systems that the army would require in the coming 15 years. The idea is to give the private sector the lead-time needed for developing the systems.

The new policy expressly mandates that the military will buy foreign weapons only if every other option for developing the system in India has been explored and found non-feasible. This shifts the onus for pursuing indigenisation onto the military.

The new defence ministry procedure specifies "a preferred order of categorisation, with global cases being a choice of last resort. The order of preference, in decreasing order, shall be: "Buy (Indian)", "Buy & Make (Indian)"; "Make"; "Buy & Make with technology transfers"; and "Buy (global)".

To ensure that any deviation from this order of preference is properly scrutinised, the new rules require the military to provide a detailed written justification for the "reasons for excluding the higher preferred category/categories."

"This should give a fillip to domestic industry and enable technology tie-ups with global vendors. But, since the devil is in the details, we are waiting to see the detailed policy," says Rajinder Bhatia, who heads the defence business of Bharat Forge.

Chinks in the armour
Laxman Behera, an analyst at the Institute for Defence Studies and Analyses, fears that the military could still find ways to buy abroad by producing a file noting to justify overseas procurement. What is needed, therefore, is a mind shift within the military in favour of indigenisation, he says.

The recent amendments to DPP, however, will provide the private sector with a level-playing field against the government-owned companies. For instance, now maintenance transfer of technology from foreign vendors will not go to an ordnance factory nominated by the defence ministry; instead, the foreign vendor can choose the Indian partner that it believes will best discharge the maintenance responsibility that the contract specifies. So far maintenance, repairs and overhaul contracts have largely been the preserve of ordnance factories and defence public sector undertaking (DPSUs) .

Micro, small and medium scale enterprises (MSMEs) will also be able to obtain funds more easily for developing defence equipment. The new policy says, "SIDBI has decided to earmark an amount of Rs 500 crore for providing loans (to defence MSMEs), and further, a fund of Rs 50 crore for equity support out of 'India Opportunities Fund' managed by its subsidiary, namely, SIDBI Venture Capital."

Several other positive steps are in the offing, such as the simplification of licencing for defence production. As this newspaper reported, (May 18, 2013, "Defence ministry comes to private firms' aid"), the defence ministry has asked the finance ministry to give private sector companies exchange rate protection, much as it does with DPSUs and ordnance factories. The defence ministry has also promised to quickly clear "Make" and "Buy & Make (Indian)" procurement contracts worth Rs 1,20,000 crore that are in limbo.

Private defence company chief executives admit that most of their key demands have been conceded by the defence ministry. If the private sector proves better than the discredited DPSUs in delivering equipment without time and cost overruns, the Indian military may finally rid itself from the humiliating tag of being the "world's biggest importer of defence equipment".


* The onus for indigenisation is now equally with the military as with equipment makers

* The military will have to provide a detailed written justification for placing orders abroad

* The defence ministry will indicate what equipment it would require in the coming 15 years

* MSMEs will have easier access to funds for developing defence equipment

* Foreign vendors can choose Indian partners for transferring maintenance technology
(Source: Business Standard)

The game changes for Marico

Harsh C Mariwala, the chairman of Mumbai-based consumer goods company Marico, has change on his mind. For decades, he had been focussed on niche categories. His strategy was to launch differentiated products in segments where there was no real competition. And it paid off. Marico's hair oil brand, Parachute, and anti-lice treatment, Mediker, have been leaders in the market for over 20 years.

However, now, he wants to introduce products in segments where competition is cutthroat. The change has been forced by the growing market for grooming products such as hair gel, deodorants and body lotion, and breakfast cereals such as oats, where multinationals rule the roost. The move has also been prompted by increased competition and a plateauing growth in Marico's traditional strongholds such as hair oil and cooking oil. For instance, its edible oil brand,
Saffola, is now facing aggressive competition from Adani Wilmar's cooking oil brand, Fortune, which is being marketed as a heart-healthy product.

"The identification of portfolio has been the biggest shift at our end," says Mariwala. "Clearly we realised that if we had to be on the right margin or get the right size, we had to enter into categories which are on a growth path," he says.

In line with this new thinking, Marico has rolled out several products in the last two years. The company entered the breakfast cereal segment with the launch of Saffola Oats, and the body lotion market with Parachute Advansed. The nearly Rs 250-crore oats market in India is currently dominated by
PepsiCo's Quaker Oats. The category is growing at over 35 per cent annually with more and more urban Indian families taking to western breakfast habits. Marico has been quick to make inroads. According to an Edelweiss Securities report, it is the second largest player in the market with 13 to 14 per cent share by value.

Packaging it right
The success in cereals is to a large extent owing to insight into what the consumers wanted. Similarly, stretching the Parachute brand to a body- lotion product has worked well for Marico. In less than two years, Parachute Advansed has become the third largest player in the segment with over 7 per cent share, after Hindustan Unilever's Vaseline and Ponds.

The shift in portfolio choice is evident in both its organic and inorganic growth efforts. Earlier, the acquisitions were mostly in segments where Marico already had a leadership position or in categories that were so niche that it didn't have any competition at all. For instance, in January 2006, the company acquired Nihar brand of coconut oil from erstwhile Hindustan Lever for Rs 240 crore. The idea was to bolster its already strong position in the hair oil market. Over the years, Marico has developed Nihar into a Rs 500- crore brand in terms of turnover from Rs 120 crore at the time of acquisition. However, with the acquisition of the personal-care portfolio of the erstwhile Paras Pharmaceutical from its owner, Reckitt Benckiser, last year for about Rs 700 crore, it got into competitive categories such as deodorants (Zatak), hair gel (Setwet) and hair serum (Livon).
"In the past we never competed with any multinational companies; our choice of portfolio was such that it was largely insulated from competition," says Mariwala. "Now since we are getting into newer categories where competition is tough, organisation responsiveness has to be different," he says. So the company has redesigned its overall capability starting from product formulations, packaging development, manufacturing and quality assurance to marketing investments.

As a first step, Marico has consolidated its domestic and international business under one chief executive officer, Saugata Gupta. Till now the company's overseas business, which is spread across 25 countries in Asia and Africa, was largely focussed on personal-care products and the domestic business on hair care and health food. In 2012-13, the international business and the domestic business reported Rs 1,007 crore and Rs 4,596 crore in turnover, respectively.

With the consolidation, the product portfolios of domestic and international businesses now mirror each other. The move is likely to create more synergy in operations across the globe.

At the same time, Marico has decided to go slow on product launches. "We have realised that when we are chasing too many things, it becomes a challenge given the threshold level of investment and management bandwidth," says Gupta, chief executive officer. From three to four new products in a year, Marico may now launch only one product a year and grow it to a respectable size before moving on to the next product. The idea is to chase fewer, but bigger bets. "Once you improve innovation capability, your confidence level of getting into more competitive categories improves," adds Gupta.

The company's effort to seek growth from new categories is understandable. The market for its exiting portfolio is stagnating. Its brands Parachute and Nihar together have a 57.6 per cent market share in the Rs 2,800-crore branded coconut oil. For some time now, it has been driving business by pushing rigid packs instead of pouch packs. In terms of volume, rigid packs grew 10 per cent in 2012-13, but the scope for more growth is limited.

Streamlining business
Its other major product, Saffola refined edible oil saw only 7 per cent growth in the last financial year owing to shoppers cutting back on discretionary spending. Reducing the price has gone only so far in boosting demand, while competition from Fortune has intensified.

Streamlining its business, therefore, has become even more important for the company. Marico has decided to demerge its loss-making skin-care services business, Kaya, which recorded a Rs 18.5-crore loss in 2012-13 on revenue of Rs 336 crore. Kaya will be demerged and listed separately as Marico Kaya Enterprise to give it the focus it requires.

These structural shifts have been received well by investors. "We maintain our structurally positive view on Marico given the steady growth outlook in the core portfolio and its increasing ability to create additional growth in the categories of tomorrow such as skin care, personal care and foods," said Nikhil Vora, analyst at IDFC Securities, in a recent note after the company's annual result.

However, the success of its plans will depend on how well it is able to defend its market share in its existing businesses. The company has cut back prices to boost demand for Saffola, but making headway against Fortune won't be easy. Adani Wilmar claims Fortune is healthier than Saffola, a claim that has been disputed by Marico.
(Source: Business Standard)

Indian pharma's generic challenge

The following two quotes from the United States Food and Drug Administration (FDA) news releases may help put the Ranbaxy controversy in perspective. The first sums up what it is that drives the FDA and the second is typical of the challenge the pharmaceutical industry faces.

(1) "The consent decree shows that FDA is serious about enforcing the manufacturing standards essential for safe and effective prescription drugs," said John Taylor, Associate Commissioner for Regulatory Affairs at the FDA. "It should also reassure the American people that we are doing everything we can to preserve the integrity of the American drug supply."

(2) "FDA's last inspection found Paxil CR tablets, approved to treat depression and panic disorder, could split apart. This deficiency could cause patients to receive a portion of the tablets that lacks any active ingredients, or alternatively a portion that contains an active ingredient and does not have the intended controlled-release effect. Additionally, FDA found that some Avandamet tablets, used to treat Type II diabetes, did not have an accurate dose of rosiglitazone, an active ingredient in this product."

Incidentally, both these quotes pertain to a consent decree signed by GlaxoSmithKline (GSK) in 2005.

The message is loud and clear. The
USFDA has zero tolerance for manufacturing deficiencies. Compliance is a challenge for any company, whether Indian or American, generic or innovator.

The challenge is greater for an Indian company because the country for decades has lived and grown up in a regime with high levels of tolerance, whether it is drinking water, personal hygiene, food or medicine. Hence, when an Indian company decides to operate under different and challenging standards, the entire organisation - from top to bottom - has to change its attitude to compliance. This change demands compliance with not only technical standards but also ethical standards; it cannot be limited to one section of the organisation, for example manufacturing, but should be implemented across the organisation.

The attitudinal change requires time, patience and commitment from top management. Those companies that entered the US market early initiated these changes and are ahead of others. Even early movers, however, have not yet been able to spread these changes across the entire organisation. They are still in learning mode. They have done well so far; being driven by business ambitions, they will do better. The Ranbaxy episode has underlined the loss of potential business opportunities if pharmaceutical firms do not change. Hence, one impact of this episode will be greater focus on attitudinal changes to build quality organisations.

And building a quality organisation happens by design, not accident. It must be manifest in everything that one does - the plant layout, the equipment, the standard operating procedure, office ambience, and so on.

The improvement in the company's standards and quality is not enough. It has to percolate through all its vendors and service providers. This brings into the picture the "application integrity" issue. Any company seeking USFDA permission to sell a
generic drug is required to submit certain data with the application. The data prove that the generic version is equivalent to the innovator's product. Such data should not be compromised - a charge that Ranbaxy faces. The generation of such data is mostly outsourced. However, the company submitting the application has to ensure its integrity. Unless the service provider also has equally stringent standards, the integrity of data could come into question. Hence, the third impact will be on improving quality and standard of data generation and its integrity.

These are some of the major internal impacts on Indian drug manufacturers as a result of the controversy. There would also be the external impact. The first would be doubts about reliability. Regulators, doctors and patients may wonder if they can rely on generic drugs from India. The second would be exploitation of this doubt by the competitors to compromise, if not destroy, India's image as a supplier of safe and quality medicines at affordable prices.

The third would be its influence on the drug regulatory agencies. They would be more circumspect in approving generic drugs from India and also subject service providers to scrutiny. The frequency of inspections may increase. The scrutiny may be deeper. The Indian drug regulatory agency, the Central Drugs Standard Control Organisation (CDSCO), will also come under the scanner for its role. Finally, till such time as the industry's image is restored, there could be some setback to exports on two counts: delays in approvals/registrations and switch to alternate sources.

Domestic pharmaceutical companies are capable of facing both the internal and external impacts. The internal impact is within their control and would be the sole responsibility of their promoters and CEOs. They could decide the pace of change. Some bigger companies have already progressed on this path and changed their organisation cultures. Many others have to initiate this change.

When it comes to external impact, however, the industry alone cannot resolve it. All stakeholders, including the USFDA and other foreign regulatory agencies, will have to work together to restore faith in affordable generic medicines from India.

The media, too, has a role to play. It must be mature enough to move away from alarmist reporting and accept that a
zero tolerance policy will invariably result in recalls and import alerts. This has happened to many companies from developed countries. The numbers of import alerts by country as reported by the USFDA are: China 75, Canada 63, Mexico 63, Hong Kong 48, Thailand 47, India 46, UK 42, Japan 40, Germany 35, and South Korea 35. So it is incorrect to think that India is being targeted. The USFDA has as much interest in accessing affordable generic drugs as in ensuring the safety, efficacy and quality of medicines. India's health ministry in particular has to focus on restoring the CDSCO's image, since manufacturers are often judged by the quality of the country's drug regulator. India has neglected building a robust CDSCO. Several expert committees' recommendations since 1999 have remained in cold storage. A Bill for the creation of a Central Drugs Authority has been languishing in Parliament for several years. We need someone to pilot this Bill, quickly.
(Source: Business Standard)

Tuesday, May 28, 2013

Samsung, Sony Court Indians as Subsidies Fund Factories

Global technology companies such as Samsung Electronics Co. (005930), Apple Inc. (AAPL) and Sony Corp. (6758) are poised to see surging sales in India as the country’s anemic tech manufacturing sector can’t fulfill booming demand for TVs and smartphones.
The world’s fastest-growing market for consumer electronics has few homegrown makers of flat-panel TVs and no producers of mobile phones or the semiconductors and displays used in the devices. Last year, the nation of 1.2 billion people spent $14.2 billion importing screens and smartphones, accounting for 90 percent of demand, government data show.
India’s technology manufacturers haven’t kept pace with its software industry, which last year contributed 4.7 percent of the country’s $1.8 trillion gross domestic product. While the government is trying to support local output with subsidies, only foreign companies have the technology needed to benefit from incentives, according to India’s Department of Electronics and Information Technology.
“India got carried away with the success of software,” said Suresh Khanna, secretary general of India’s Consumer Electronics and Appliances Manufacturers Association. “We never developed newer, smarter technologies and largely ignored hardware.”
Assuming India’s economy grows at a 6.5 percent annual rate, the foreigners may be fighting for share of a market totaling 27 million flat-screen TVs by 2017, up from about 7.2 million this year, Khanna said in an interview.
Just a quarter of the TVs sold in India are assembled locally, by companies including Samsung and LG (066570) Electronics Inc., and none of the core components are manufactured in the country, Khanna said. No smartphones are made in India, he said.

Chinese Smartphones

“India’s situation reminds me of China 15 years ago,” said Roger Sheng, a research director at Gartner Inc. “It hasn’t taken the necessary steps to develop the technology.”
Chinese companies such as Hisense Electric Co. and Lenovo Group Ltd. (992) have built strong brands that rival the foreigners. Consumers in China bought a combined 365 million smartphones and TVs in 2013, according to Gartner, about half as many as were made in the country. Some of the extras were exported to India - - bearing the brands of domestic companies such as Micromax Informatics Ltd. (MICRO) and Videocon Industries Ltd. (VCLF), Khanna said.
Samsung and Apple (AAPL) are already adjusting to India’s high-volume, low-margin market by increasing advertising, dropping prices and creating interest-free payment plans. Smartphone shipments in the country may surge to 156 million by 2017 from 28 million in fiscal 2013, according to researcher IDC.

Indian Galaxy

Apple’s shipments of iPhones in India rose to a record 254,000 units in the fourth quarter of 2012 from 52,000 in the third quarter, according to IDC, after it opened the iTunes store in the country in December and cut prices for older models.
Samsung, the world’s biggest maker of smartphones, said April 28 it’s planning to manufacture Galaxy S4 handsets in India, without elaborating. The Korean company already assembles some home appliances, mobile devices and TVs in the country.
“The big advantage of local manufacturing is faster response to the market and customer needs,” Ruchika Batra, a New Delhi-based Samsung spokeswoman, said in an e-mail.
Sony has no plans to move assembly to India, Sony India’s Managing Director Kenichiro Hibi said in an e-mail. India is the fourth-largest market for the Tokyo-based company, which ranks fifth in Indian smartphone sales, according to the company and IDC. Sony earned 3 percent of its total smartphone value from India in fiscal 2013, the same percentage as Samsung, according to IDC.

Panasonic TVs

Sony rose 3.2 percent to 2,078 yen at the 3 p.m. close of trade in Tokyo, while Samsung fell 0.3 percent to 1,484,000 won in Seoul. Apple advanced 0.7 percent to $445.15 in New York on May 24.
Panasonic Corp. (6752) has the capacity to produce flat-panel TVs in India to help make Japan’s No. 2 television business profitable by March 2016, Panasonic President Kazuhiro Tsuga said in Mumbai April 30.
The company is building a factory in the northern state of Haryana, where it has the capacity to make flat-screens although there are no plans to do so. The company may use semiconductors imported from Japan to meet a target of tripling Indian sales by 2016, Tsuga said. The company plans to start making chips in India after 2015, helping feed a market that consumed $8 billion in semiconductors in 2012 -- a 7.4 percent increase over 2011, Gartner estimates.

India Subsidy

Panasonic will expand local manufacturing of appliances and plans to spend about $250 million on marketing in its push into India, Tsuga said.
Products “should be specially customized for Indian consumers, keeping local needs in mind,” he said.
India’s government is offering a 25 percent subsidy on capital costs to set up technology plants. Samsung, LG, Panasonic and Toshiba Corp. are planning to take the offer, and the government has also received proposals from Hitachi Ltd., SanDisk Corp. (SNDK) and NEC Corp. (6701), said J. Satyanarayana, secretary to the Department of Electronics and Information Technology.
India plans to approve as much as 250 billion rupees ($4.5 billion) in foreign investment for facilities to assemble electronics, Satyanarayana said in an interview. The government already has eight proposals worth 10 billion rupees close to approval and another 10 proposals for 20 billion rupees in the pipeline, he said. None are from Indian companies.

Harman Expansion

Harman International Industries Ltd. (HAR), the audio equipment-maker, plans to spend $100 million on manufacturing, research and marketing in India by 2017, Harman India’s Managing Director Lakshminarayan said today in an interview. The Stamford, Connecticut-based company plans to increase local sales to $250 million by 2016 to tap rising spending on home entertainment and as the country adds about 2,000 movie theaters with new audio systems, he said.
Without a manufacturing sector in India “we will lose control of our balance of payments,” Satyanarayana said. “And we’ll lose track of all the foreign equipment in our country, which can be a major security risk.”
Samsung is in the final stages of the approval process, he said. The company plans to partially manufacture the Galaxy S4 at its factory in Noida, northern India, making it the first smartphone assembled in the nation, Satyanarayana said.
The government plans to approve bids to open the country’s first wafer manufacturing factories by May, with production starting in 2014, Information Technology Minister Kapil Sibal said in April.
Still, Indian factories will only account for about 25 percent of manufacturing of high-end consumer electronics, using imported components and putting the finishing touches on partially assembled devices, Khanna said.
“Samsung and LG weren’t even here five or six years ago,” said Ganesh Ramamoorthy, a Gartner analyst in Mumbai. “Now they’ve swept the market away.”
(Source: Bloomberg)