Cognitive - Content

Nano if successful is expected to define a new segment, a segment somewhere between the two/three wheeler user market and the current entry level passenger car market. Both these segments need to be absolutely convinced that Nano is going to benefit them to turn this venture a success. Whether this initial pricing is based on a penetrative pricing strategy to gain market share or if it is sustainable in the long run leading to long term market share and profits needs to be seen . To turn a cost leader profitable, Tata Motors will need to sustain and introduce variants at similar cost as initially promised. There is no doubt competition will soon follow suit. Renault-Nissan has already announced plans to introduce a $2500 car, Maruti would compete as well (or rather be forced to compete), rather than risk losing their strong hold in the current entry segment.

Can Tata Motors convince the two wheeler user to shift to Nano? See the production trends graph for two and three wheelers since 2002. Both Passenger car and two wheeler segments have been growing at a steady and almost similar pace, however the two wheelers have been outselling passenger cars 5 to one since 2002 A typical two wheeler user who makes the shift, will have to contend with about 30 – 40 Km less per litre of gas, and he has got a big decision to make there. If one argues that he is going to use it as a weekend vehicle, whether the insurance and maintenance for a vehicle /Asset whose value is rapidly decreasing every passing day is worth buying needs to be considered as opposed to using a Taxi or Auto.

If we consider that users of the current Entry level passenger car segment or for the sake of example the users Maruti 800, then one needs to think whether Tata Motors can do enough to convince a Maruti 800 user to shift to Nano. Few factors at least initially would strongly favour Maruti. The reliability and track record that a Maruti has got is a proof to the fact that Maruti has got its own set of loyalists. There are still many happy Maruti customers driving the same car out there even after 10, 15 and even 20 years. These loyalists, I would expect to go out strongly consider buying another Maruti when they decide to replace their first car. It is these loyalists and it is against this track record that Nano will have to fight. Nano is also expected to have basic features as a car and the presence/lack of regular and safety features will play an important part in the final decision made. Alternate uses for Nano as an auto rickshaw is also being considered by many and Tata Motors would probably not be happy to see this happen. This is a not a huge market and may lead to brand dilution.

Whatever strategy Tata Motors adopt, they will need to ensure that Nano sells in huge volumes. That seems to me as the only way they may be able to make this venture successful. The on road price, the customer ultimately ends up paying along with the ability of TM to maintain this price at their initial promised level is going to be a crucial factor. Ratan Tata has already announced that the promise made on pricing will be kept. If price is maintained in spite of growing raw material cost, inflation, credit rates etc, whether this is sustainable and whether Tata Motors will go short on profitability for volumes needs to be seen. Happy customers lead to happy shareholders in most cases; it may not be the same here. The prototype of Nano represents one mountain half scaled in the journey towards creation of Nano. Now Ratan Tata and Tata Motors have another bigger one left to scale, and they have competition to tackle. JRD Tata named it ‘Beyond the last blue mountain’; on a lighter note Ratan Tata may want to title it ‘Beyond the two Mountains’,

- Suresh
The author works for a Global IT consulting organisation as a IT consultant. He is currently based out of London. The views expressed in this article are his own. All copyrights and Trade Marks are duly acknowledged. He can be reached via the link on the right tab on this page.

Labels: Cheap car, Nano, Tata Motors

Will Nano be the dream car that the common man wants? Tata's credentials and ability to deliver this car has never been in question, the moot point though is the price tag that the car carries. With a tag of Rs 1 lakh Plus vat and ..., this car is roughly about twice as costly as the best selling motor bike in India. Will Price alone be good enough to woo these customers to buy Nano? Many questions remain unanswered, but the dream lives on. While it is true, these questions will only be answered when Nano actually comes for sale. What strategies Tata Motors would adopt going forward in the run up to the launch of Nano, promises to be exciting and defining.

The concept of Nano comes at an interesting stage in life of Tata Motors. Their first production Indica came out tagged as the first ever car to be designed and developed by an Indian company, and it was a runaway success going on to become the best selling car in it's market. Complaints from early adopters raised questions on the reliability of the car and on the credibility of TATA motors themselves. This was the first crucial test that Tata motors faced and they did handle that with aplomb, handling complaints efficiently and coming out with an improved version of Indica. Indica V2 resolved many of these initial problems that surfaced, and at the same time silenced the critics who questioned the indigenous technology..

On one side TATA Motors are trying to establish themselves as a Global company by pushing to acquire revered brands such as Jaguar and Rover. On the other side they are making waves attempting to create the Nano. There are no points for guessing what Tata Motors is heavily betting on at the moment. Indica has been the most successful car that Tata Motors have launched so far. Indigo has been a moderate success and Sumo seems to be losing its own battle in the Utility vehicles segment. With ever increasing competition and no significant factors for differentiation in a segment, Tata Motors realise that they need a winner; they need a star to emerge sooner than later that eventually turns into a cash cow to fund their global ambitions.

To be continued...

Summary

Sensex  crashed 1500 points within 20 minutes of opening trade onWednesday, October 17, 2007.
Thanks to SEBI wanting to introduce restrictions on participatory notes ( P-Notes) .

What went wrong with P-Notes

Participatory notes are instruments issued by FIIs to entities that want to invest in the Indian stock market. Registered FIIs with SEBI can issue, hold or deal with P-Notes. Its a simple Derivative contract. FIIs issue these notes to investors abroad with details of scrips that can be bought and if the buyer agrees, they deposit the funds with the overseas branch of the FII.
FII will then close the transaction here by buying shares in India in its own account.So the details of the real investor is not known at any time.

FUNDS routed through participatory notes account for almost 42 per cent of the $8.3 billion invested by FIIs in the Indian securities market so far this year.

SEBI has proposed to curb Foreign Institutional Investors from issuing P-Notes for which it has sought public comments over the next four days. It has sent its draft proposal to major investment banks asking their opinion.
As part of the proposals, SEBI has suggested directing FIIs to wind up their current positions in P-Notes over the next year and a half, during which the regulator would review the position from time to time.

This has not been received well in the market.
Bad days are not over...It depends on SEBIs decisions.......

Suguna

Indian equity market has been on fire for the last couple of weeks.From the moment Big Ben had made his decision, there has been a unbound optimism on part of Equity investors. It was no wonder that the sensex made it's quickest 1000 points recently and looking at the way it is going, it might as well break that record. Is this optimism based just on faith or is there a sound foundation behind it? Only speculative reasoning can give the answer.

The way Energy and Power sector companies like Reliance Energy and Tata Power have moved is just amazing. If you had invested in one of those companies about 20 days back, you would be sitting with handsome profits by now. The Entire pack of reliance group companies have led the way followed by traditional banking and Financial sectors. To an extent this move has been based on fundamentals, Indian banking and Power sector has tremendous scope for growth and a part of that is being reflected in the way these stocks have moved. The Foreign fund houses have also helped by bringing in quite a lot of money into the market.

What do we do now is a pertinent question every investor would have to ask himself.It is a difficult and futile exercise to predict the market, hence it is always better to stay safe. The question of concern is short term rather than long term. Long term investor can rest in peace, it is the investors who are looking at shorter horizons that need to make decisions. Have you invested in a company or in a stock, answer to that question will help in making your decision. Investors who have invested in a company based on it's strong fundamentals and the management are in a relatively better position than those who have placed bets just based on market movements. It will be an exciting month going forward, no doubt about that.

Estimated to have impacted about two million American homeowners with spotty credits, the sub-prime mortgage crisis continue to chug along. With their homes at stake, these homeowners and their lenders are increasingly finding the going getting tougher. According to NewYork Times, which cites the data of Realtytrac, 1.2 million homeowners have been forced to opt for foreclosures in 2006, a 42% increase from the previous year. The US Government is trying to resolve this crisis through a package comprising tax breaks to homeowners whose loans have been written off by the lenders, a federal mortgage insurance program, and modernization of Federal Housing Administration. The outcome of this, however, remains to be seen. Meanwhile, what should an invididual American investor do if he/she is seriously considering buying a home?

Perhaps the suggestions made here might err on the conservative side. But it will certainly help you to hold on to your hard earned money. And, you will own your home and not your bank. If you can afford only a rented apartment and not a home, stay where you are until you save adequate money to pay the downpayment costs. If you still want to go ahead with your new home, consider this.

1) Check your credit score. If you don't have a good credit score, this perhaps is not the right time to take housing loans. A good credit history can help you raise money at lower interest rates.
2) Don't opt for a 4 bed-room home in a four acre land, if you can afford only a two-bedroom house in a half-acre land, because the financing rates are low. Your purchases should be based on your affordability and not the availability in the market.
3) Identify the right home you want to buy. A bit of scouting/search over the internet, will help you to narrow it down. Look for deals. You may easily find one now given the spate of homes available for sale.
4) Get your loans only from a genuine lender and not a loan shark. Try and speak with different banks and lenders. Find out from them the following, interest rate on your loan, installments you have to dole out monthly, and the foreclosure taxes you have to pay. Compare them. Also, speak to your friends on their experiences. You should be able to identify the right one.
5) Once you have decided the lender, read the fine print in the documents that you will be signing. It is worth an effort.
6) Lock your mortgage at a fixed interest rate and not on a variable (adjustable) rate. This may increase your interest rate by few percentage points, but you will know that your cash outflows are going to be constant, irrespective of changes in the prime rates.
7) Ideally pay a higher down payment. This will help to keep your monthly installments low and well within the manageable limits. You may also be able to bargain a lower interest rate from your lender in such cases.
8) Once you have bought your house and taken the loan, try and pay your monthly installments on time without default. Delay's, if any, can be costly, as many lenders levy penalties.

In all, buying a home is like buying any other thing. Do the required ground work, don't take risky bets, and stick to your committment. Enjoy your new home with a freedom that you really deserve.

Madhan Gopalan

The author, based at Louisville, Kentucky, is a Global Equity Research Manager with Ness IBS, USA. The views expressed in this article are his and not that of his employer's. He can be reached at gmadhan72@yahoo.com

Every now and then as bollywood goes into a slumber the Indian politicians put together exciting games that interests the country as a whole without any regional barrier. As the political parties in India start the president game, many players will come and go until they find the one who can play the president role to their liking.

The president Of India is given the Honour of being the country's first citizen, In Addition he/she also plays part as the supreme commander of the armed forces of the country. India has had many presidents in the past who had lived up to the role and been a Model citizen. India's first president Rajendra prasad is such a great man and remembered even today for his contributions.

In the recent bygone days many new names have been proposed. However the question is not which party's candidate will win, but it is rather how badly will the people lose. Without discrediting anyone proposed or the proposer, My thoughts are that the current president Dr Abdul kalam played the role of a Model citizen quite perfectly. He was not elected just because he had got the desired votes, rather he was voted because he had the desired credentials for the role and he elected himself to his role by his contributions to the country.

The current day political setup has shown that the presidential role is merely constitutional, and is more as a reflection of the party the elected belongs to. Do we need a president who act as a mere puppet to the ruling party, some one like that would be abusing one of the more important powers vested with the president, which is the power to intervene with policy decisions. A bill cannot be passed until it is signed by the president. Given that in our country laws are made for political gains, the winner of the presidential game would have much to benefit.

Who do you as a Indian citizen and a reader of this post think should be the president? Would you have some one from a political outfit or someone from other walks of life who have contributed significantly to the country's betterment?
Please leave your thoughts as a comment.

Labels: Abdul kalam, India, Politics, President, President of India

Sharp decline in home prices, increase in backlog/inventory of homebuilders, reduction in housing starts, leading listed players posing losses or reduction in profits. None of this is new, as this has been the case in the US housing market over the past three quarters. The question is, will this continue? And if yes, when will the prices reach the rock bottom? What can a typical retail investor expect in the near future?

First, let me try to explain what appears to have caused this. The growth in the new home markets between 2000 and 2005, were fuelled to a large extent by speculative buyers and to a lesser extent by baby-boomers buying their second houses. Driven by this demand, the average selling prices of leading homebuilders grew at a double digit rate over the past five years. Concurrently, sub-prime loans (high risk loans provided at a higher interest rate for people who have poor/relative less credit history) witnessed a sharp increase. According to Industry estimates, sub-prime loans accounted for a fifth of the 32 billion mortgage loan market in 2006. The availability of sub-prime loans also induced individuals with poor credit history to buy new homes. In the worst case scenario, these individuals were able to sell their homes and repay their debt. However, a steady increase in the interest rates (17 times in a row from 1% in June 2004 to 5.25% in August 2006) also in turn propelled the mortgage rates and the monthly installments. This slowly started increasing the defaults and delinquencies, as swelling mortgage payments hit the borrowers with spotty credit. In addition, the skyrocketing home prices slowly pushed the genuine homebuyers out of the market. By mid 2006, signs were pretty apparent that the homebuilding industry is going to witness a rough ride. And what followed suit is what we are seeing now – sub-prime fears sending the Dow spiraling down during the last few weeks, leading sub-prime home loan companies such as New Century Financial Corp. filing Chapter 11 (bankruptcy protection), and homebuilders missing earnings targets.

What's next?

Last week, the Federal Reserve lefts its benchmark short-term interest rate unchanged at 5.25%. In addition, Fed also indicated that it is not likely to lower the interest rates, given the ‘uncomfortably high’ core inflation (core inflation excludes volatile energy and food prices). If housing continues to remain week, Fed will be forced to ease the interest rates, as housing accounts for a sizeable portion of the GDP. Nonetheless, the probability of reduction in mortgage rates appears remote at the current juncture, given the Fed's stance. The sub-prime market crisis is expected to have a negative impact on the consumer spending and prolong the housing downturn. Further, home loan providers are also expected to tighten the loan standards, which in turn may result in a credit crunch for first time homebuyers.

Given this scenario, a genuine homebuyer should expect the housing prices to fall further in the next two quarters, as homebuilders will try to reduce their inventory levels. With home prices dropping 25% to 40% in the last three quarters, the reduction in housing prices may not be substantial, but can anywhere range between 5 to 10%. Additionally, he/she can also expect to get additional goodies such as kitchen upgrades. A typical retail level investor in homes should take advantage of the reduction in interest rates, if any, and lock themselves up at a fixed mortgage rate, instead of a variable (adjustable) rate. This will also help him/her to plan the finances betters, as the cash outflows will remain constant in this case.

The Indian Scenario – Prices will continue to surge

The Indian housing sector, unlike the American homebuilders industry, is fragmented, with unorganized segment accounting for over 90% of the industry. The supply-demand gap in the Indian housing industry is estimated at about 20 million homes. To a large extent, this is fueled by a young population (demographically), a steady surge in the per capita income levels, availability of financing, and attractive interest rates (despite a 3-4 percentage point increase in the interest rates over the past two years). This in turn continues to propel the property prices across India, particularly in the metropolitan cities such as Chennai, Mumbai and Delhi. Cities such as Hyderabad witnessed ballooning property prices (over 100% increases) during the past two years. The relaxation in FDI norms for the real estate segment also appears to have aided this growth, to an extent. Given the scenario, the probability of reduction in home prices in India, except in pockets (if there are any), appears to be remote at least for the next few years.

Madhan Gopalan

The author, based at Louisville, Kentucky, is a Global Equity Research Manager with Ness IBS, USA. The views expressed in this article are his and not that of his employer's. He can be reached at gmadhan72@yahoo.com

In our earlier post 'Is it the beggining of an end for Dell?', during May 2006, we had thrown light on the various challenges faced by Dell Inc. The latest quarter (second quarter of FY07) results indicate that the company has no respite from its woes, even as it struggled to gain traction against its competitors - HP, Lenovo and Acer. Despite its aggressive pricing strategies, the company's revenue grew a modest 5% to $14.1 billion year-over-year, while net profits plummeted 51% to $502 million. In contrast, the net profits of its key competitor HP grew 89% to $1.38 billion during the same period. Dell's modest revenue growth is attributed to the lower single digit growth of PCs in the US market, where it sells bulk of its PCs.

To compound its woes, two days ago the company recalled 4.1 million notebook computer batteries (manufactured by Sony) after they found out a flaw in its batteries. The safety recall, said to be the largest in the history of consumer electronics industry, is to cost over $300 million (Sony will be sharing the costs). Adding to the woes, the U.S. Securities and Exchange Commission (S.E.C) , the capital markets watch dog, is currently doing a formal inquiry on the Dell's accounting practices.

To ward off these challenges, the management indicated a series of intiatives. These include increasing investments in customer support and services by $50 million to $150 million for the year, cost-cutting initiatives, and better pricing management (perhaps another round of price cuts is in the offing). In addition, Dell also appears to have realized that it cannot ignore AMD for long, as it started offering its PCs with AMD chips unlike in the past. Nonetheless, the effectiveness of these measures can be seen only over a period of time.

Madhan Gopalan

The author is the Head of Investment Research and Advisory Services of Ness Innovative Business Services (Ness IBS). The views expressed are his own and not that of Ness IBS.

A few months ago, when SemIndia decided to locate its semiconductor fabrication plant in Hyderabad, India at a cost of $3 billion, the media went ‘ga ga’ about it saying that it signals India’s entry into the manufacturing league, a stronghold of select few countries such as China, Taiwan and Singapore till recently. Yes. One cannot refute the fact this is the first time India has been considered as manufacturing location for chips. However, this is not the first time a chip company is setting up its operations in India. Companies such as Texas Instruments and Cadence Systems set up their development centers in India as early as 1980s to make the most of talent pool available here. Besides, if the argument truly holds water, Intel, the worlds largest integrated chip manufacturer, would have located its fab (28) at an estimated cost $3.5 billion in India, instead of Israel.

The cost arbitrage

So, what is new this time, one may ask. The apparent reason to locate a fab is India must be the cost arbitrage. This holds good particularly in the wake of appreciation of the Chinese currency, Yuan, by 3.3% since it got pegged to the basket of currencies last year. Hence, importing wafers from fabs is China may not be a viable option for fabless manufacturers such as Freescale, Broadcom, Altera and nVidia, on the long run. This is because, the appreciation in the currency will offset the cost advantage. Consequently, the wafer manufacturers will be forced to keep a mark-up on the product prices. This in turn will have a bearing on the operating margins of the fabless manufacturers.

Secondly, a huge fabrication facility also lowers the time-to-market for pure design firms that operate out of India and enable them to stay ahead in the competition. Thirdly, the technical expertise that India has gained over a period, bridging the perceived gap in technology adoption, also appears to have aided the decision. The other possible reason could be the decision to strike a geo-political balance and diversifying the risk by setting up a base in a market-driven economy instead of purely relying on select China-based large manufacturers such as United Microelectronics (UMC) and Taiwan Semiconductor Manufacturing (TSM).

Driven by volumes

Semiconductors (particularly digital chips) generally have a short product life cycle, rapid technological obsolescence and a steady markdown in selling prices. This calls for large capital expenditures by wafer manufacturers on a regular basis to roll out products in line with market requirements. Hence, economies of scale become the single most critical success factor to cover up all the fixed costs a wafer manufacturer incurs. The question at this point of time is do we have a large domestic market to achieve the economies of scale. The answer is a big no. Nonetheless, according to a leading market research firm, the market for electronic equipments is expected to grow by 35% annually for the next five years driven by a surge in sales of set-top boxes, DVDs, cell phones and other electronic appliances. This in turn is expected to drive the demand for chips.

However, it is pertinent to note that the market for PCs, which account for over 50% of the chip demand globally, is growing at a single digit rate. Adding to the risks, the chip industry has been historically cyclical in nature. For instance, during the downturn in 2001 the top and the bottom line of most of the semiconductors witnessed a nose-dive. Consequently, wafer manufacturers such as UMC and Chartered Semiconductor Manufacturing (CHRT) also reported operating losses during the period. These Industry manage to witness a recovery only in 2004, and post revenues of over $200 billion in 2005, the first time since 2000.

What is in store for SemIndia?

According to SIA, the trade association that represents the U.S. semiconductor industry, the global sales of chips are expected to grow at about 10% annually. This augurs well for all the chips and wafer manufacturers. However, the success of SemIndia will depend on its ability to ward of all these challenges and risks. Further, its strategy should be flexible enough to focus not only on the domestic market, but also on the international markets, if the anticipated growth in the domestic market does not emerge. In such case, SemIndia should also be ready on its toes to take on the biggies such as TSM, UMC and CHRT.

Madhan Gopalan

The author is the Head of Investment Research and Advisory Services of Ness Innovative Business Services (Ness IBS). The views expressed are his own and not that of Ness IBS.

In my previous post (Lessons from China - 1), i had promised that i will try to answer a few questions that i had raised. In this i have made an attempt to do the same.

How successful is China in running its show? Can India emulate what it did? Where is India scoring ahead?

One should look at multiple parameters to evaluate this. Looking at GDP alone will not suffice the requirements. This is because though China is growing at a rapid 10% every year, almost all of its growth has been funded by the Government. On the other hand, India is growing at 8% and is doing a very creditable job on this count, as very little Government money is driving this growth. Secondly, the growth in India is propelled by a slew of entrepreneurs such as Infosys, Wipro and Tata. In China, entrepreneurism is almost a non-existant word.

In Manufacturing

Yes! agreed China is far ahead of India in manufacturing. For instance, two chinese semiconductor manufacturers, Taiwan Semiconductor Manufacturing and United Microelectronics, account for over 50% of all the wafers manufactured throughout the world. The number is only set to go up further. However, India is quickly catching up. For instance, the investment ($3.5 billion) made by SemIndia in to set up a wafer manufacturing plant in Hyderabad is a case in point. We also have several success stories in the name of Indian auto ancillary companies.

However, not all manufacturing setups in China are benchmark standards. For instance, China's oil refining capacity is limited, as most of them cannot refine oil with high sulfur air-polluting content. Hence, the oil that it imports (China is net oil importer. It imports 35% of its oil requirements) from the middle east (or far east as the case may be) is sent to Singapore or South Korea for refining before being consumed in China. Further the entire oil industry is dominated by three large players, CNOOC, CNPC and Sinopec. Lack of synergy between these companies has resulted in lot of inefficiencies and duplication of technology and processes.

According to the China Association of International Engineering, the average light crude production yield in China's refineries is at 58%, as compared to 80% for all of Asia. It is pertinent to note that Chinese cars consume 20%-30% more fuel than its foreign counterparts. According to China's Energy Research Institute, by pegging up the industry energy efficiency levels to international standards, China can reduce its energy requirements by 40%-50%. An interesting point to be noted here is The Chinese manufacturing sector is growing at a faster clip only because it is supported primarily by multinational companies. For instance, the Chinese auto sector is dominated by foreign players such as Volkswagen, General Motors, Toyota and Hyundai. Together, Volkswagen and General Motors, accounted for over 40% of the market.

Keep watching this space for Lessons from China - 3.

Madhan Gopalan

The author is the Head of Investment Research and Advisory Services of Ness Innovative Business Services (Ness IBS). The views expressed are his own and not that of Ness IBS.

Too often in recent times we have heard the news of ships with Toxic materials heading India's way for ship breaking, and the government doing nothing until the Supreme court intervening. Inspite of being aware of the pollution that a Toxic ship might introduce to the eco system, the government has been sitting tight lipped on the issue. It has been left to organisations like Green peace to protect the Indian waters from the poisoning that a toxic ship like Blue lady could do when being broken down.

There is no denying that ship breaking industry is big in Alang, Gujrat where it has helped improve social status of quite a few workers. India alone has 60% of the worlds ship breaking business and all of that is done in Alang, which is also the worlds largest scrapping site.
Officially, India does not allow toxic ships to be broken in its sites. This is in accordance to the Basel convention, an UN environmental program treaty that places onus on exporting nations rather than importers. However we have seen in the past few months atleast a couple of incidents (as with Le Clemenceau and Blue lady) that proved otherwise. The French ship 'Le Clemenceau', an aircraft carrier was turned back only after Green Peace created awareness of the Toxic nature of the ship and organised demonstrations against letting the ship and finally when the supreme court intervened.Even though the onus was on France to make sure the ship was toxic free, Indian Government should have acted given that we were to be the ones being affected.

The Silence of the government is puzzling. What measures is the government going to take to make sure that this saga is not repeated. Inspite of having a 'Ministry of Environment and Forest', and a Pollution control board in Gujrat and every other state, which is supposed to be the watch dog for such activites, how was the ship given a clearance? If it wasnt for the sustained efforts of Green peace, and the intervention of the supreme court, these ships would be in the scrapping yards already. What is the need to pollute our environment and risk lives by accepting to let these toxic ships. On whose greater intrests is the Ministry of Environment acting? This story is only getting intresting with many unanswered questions.

When Michael Dell founded Dell Computer Corporation, his philosophy was quite simple – small margins but large volumes. In short, he tried and succeeded in commoditizing the computer. He sold the PCs directly to the customers and pared the overhead costs. However, when Dell Inc., currently the world’s largest PC maker, announced a few days ago that it might miss its first quarter earnings target, it read something straight out of a marketing text book – a company cannot get a sustainable competitive advantage over the long-run if it merely competes on price. The logic is quite simple. Competitors with superior processes, leaner operations, and lesser overhead costs will soon emulate what the price leader has done. And this is exactly what happened in this case as well.

Competitors – Hewlett Packard, Lenovo, Acer – are giving a run for the money for Dell.
For instance, HP has been steadily eating into Dell’s share of PC market, though Dell continues to remain a market leader in the PC segment. HP, which once used to have huge operating costs, has made itself a leaner machine now. Its trailing twelve months operating margins now currently is at 6%, while Dell’s margins hover slightly higher at about 8%. HP also has opted a slew of measures to strengthened its presence in the PC market and enhance its market share. For instance, to attract corporate customers the company not only offers PCs with Intel chips, but also with AMD chips. Recently, it also emerged on a marketing campaign to promote that computers is personal and not a commodity.

Triggered by these events, Dell’s stock has lost about 40% over the past one-year. To counter this, Dell reacted in a much more predictable way. It lowered its prices again on its offerings including Inspirion and Dimension, very similar to that of what it did in 2000. However, this time around analysts opine that this move may not necessarily work, as their cost overheads where not the same, unlike five years ago. As the battle for the PC market unfolds, it will be interesting to see who will be the last man standing.

Madhan Gopalan

The author is the Head of Investment Research and Advisory Services of Ness Innovative Business Services (Ness IBS). The views expressed are his own and not that of Ness IBS.

Assume that you were born in a rural town and you want to migrate to a city to make a living. But the government restricts the rural-urban migration. Assume that you want to invest your money in safer options, but all you will get is 1.5-1.75% in returns for a 30 year long-term bond. Assume that the Government owns all the lands and is willing to lend it to you at a nominal rate. What would you do? A logical person would come to this simple conclusion - I will try to invest in myself and grow wherever I am. This is what happened in China, even as it grows at a rapid 10% a year over a decade.

Two pronged Advantage

The Chinese started operating and growing through a concept called 'TVE' - Township and Village Enterprises. The government lent the land and encouraged the people to produce goods and sell. As the cost of capital was very low, (Please note that i am talking about History. Two days ago, the Central Bank hiked its lending rate by 27 basis points to 5.85% inorder to garner a soft landing in a few over-heated sectors. However, the one-year deposit rates still remains the same at about 2.5%) companies managed to manufacture the products at a substantially lower cost. In addition, till July 2005, the Government kept the currency, Yuan, under tight control (RMB8.3-US$1) for almost a decade. (However, Yuan has appreciated 3.3% till date ever since it got pegged to the basket of currencies of last year). This created adequate trade surpluses for the country and enabled it to sustain its comeptitives on the export front.

The Government's stand

The Government realized that, for growth, it would require lot of investments. Hence, it opened its economcy in 1979, a decade earlier to Manmohan Singh's new industrial policy. This enabled it to attract sizeable FDI and FII investments (at present its forex reserves are about six times more than that of what India holds). Concurrently, the Government is doing a multitude of things. This include breathing life into its moribund stock market (some financial casinos really manage to pass on as bourses there), nursing sick banks (NPA levels in Chinese banks are worser than India's) by allowing foreign institutions to take stake in them, and enhance the quality of life in the fields (China accounts for 20% of increased global agricultural output over 25 years). The recent one was to address the energy crisis. China is planning to accumulate and keep a six month oil reserve, over a period of next ten years, to keep its power hungry industries going unabated. China currently uses 6.6 million barrels of oil a day (U.S. guzzles closer to 20 million barrel a day). Besides, they can't ask a third of a humanity to go back to the bicycles because there is an oil crisis.

I am sure you must be having several questions in your mind. For instance, how successful is China in running its show? Can India emulate what it did? Where is India scoring ahead? For answers, just keep watching this space.

Madhan Gopalan

The author is the Head of Investment Research and Advisory Services of Ness Innovative Business Services (Ness IBS). The views expressed are his own and not that of Ness IBS.

Summer has come and all the beverage giants involved in crunching the thirst is back in roll again. So who is going to take what share of your thirsty throat? As the awareness among people regarding the bad effects of soft drinks is on the rise, Pepsi and Coke has already planned out their different strategies. With their bottled water brands Kinley and Aquafina being a success story, what more are they doing? Pepsi is trying to catch in on its Tropicana brand of fruit juices while coke is eying on its Mango drink Maaza. Maaza has already been introduced in two more variants pineapple and orange. Even though these giants aimed at improving their core brands of Pepsi and Coke by introducing the Rs.5 per bottle, it seems not to be working great for these players. The pesticide story still seems to be stirring.
I personally feel this is a healthy sign for the consumer. If I can just tell you my share of throat in my house, I am amazed at the number of brands that is ready to occupy the pie chart and my throat being my graph sheet. Nescafe in the morning, sometimes Tajmahal Tea , Amul flavoured milk, Tropicana orange juice, Bottled water ( a local brand ) , Lipton lemon tea, sometimes knorr soup……….. So the share of throat seems to be big and growing. I used to consume seabuck thorn juice marketed by a popular brand- seabuck thorn is a berry found in Kashmir and other hilly regions with plenty of vitamins and other goodies But cant find these goodies anymore in the racks of the departmental stores. This is just an example. This situation should change and consumers should start indulging in these health drinks and promote them. Our good old butter milk or a lassi is anyday better than westernized pepsies and cokes that chokes. Amul has come up with its milk drinks and I find it pretty impressive.So do let me know your views on your share of throat. Those who are in high spirit shall have more choices and thanks to Mr fisher the king.

Singapore – So if you had somebody visiting you from this part of the world 20 years back, they would for sure have a Nintendo video game in their baggage. My father had got me a Nintendo and I still have that in my house with the edges bandaged and carefully kept inside the cupboard of my mom. 5 years back, you could get the very popular Brick video game for Rs.200.The industry is rocking today.
Video games technically noted as “interactive entertainment” is “the” thing today. The sales last year was close to about $7 billion which is so close to the $9 billion film industry of the US. The entire culture and the entertainment industry of the world are reaching new heights. According to an article that I read, there is one gaming machine for every two houses, and 23% of the households own 3 gaming machines in the USA.
Even the movie makers create interactive games simultaneously these days. Movies as well as the games are being launched together. "Spider-Man" and "Star Wars" is a good example.
Gaming Stations, PC, Console, Pocket PC, Mobile Phone, ………………the market potential is tremendous.
Apart from the video games that are played with other gadgets like a mobile or a PC, the giant thing that is growing is the Consoles. Big players and big products and brands are battling now. Sony's Playstation , Nintendo's Game Cube and Microsoft's Xbox are huge hits in the market.
A typical game takes roughly about 24 months to go live and developing these games is already a big industry of its own. The Indian gaming market is roughly sized about $60-$70 million. In terms of companies involved in developing these, Indiagames, Dhruva Interactive, Paradox and Mobile2Win are names that are getting big in this industry.
As far as the Indian market is concerned mobile gaming is the fastest growing segment as of today. As the cellular subscription is on a heavy high, the gaming market is set to outgrow in its womb – the mobile industry. There are more than 1.25 million GPRS consumers. The number of paid downloads for GSM handsets is around 600,000 a month. Apart from the paid downloads there are also free downloads that are available. The revenue is expected to touch $400 million in another couple of years. Entertainment industry , the next big thing. So go home and play. If not go home and create one.

Some editor of a Magazine compared the unique features of India and China. Just answer these following questions. Who invented gun powder? Who invented paper? Etc….. and the answer would be China. See these questions now. Who invented zero? Who invented geometry ? and the answer would be India. So that’s the logical reason that the author gives to say why China is leading the manufacturing sector as they were always good at it and why India is leading the software sector as they were also good at it.


Ok. Now China is heading North in its manufacturing capabilities. But at what cost? Its at the expense of its environment. The most serious problem that’s facing China today is its severe air pollution and inadequate water supply, rising of volumes of waste and land consumption. Not only this, the country also faces some traditional environmental problems that has been prevalent for centuries like drought, flooding, desertification and erosion. When it comes to matters of money, the cost of environmental pollution is around 8 – 12 % of China’s GDP. Also China stands as the second biggest petroleum importer.

The most serious problem in China today is its air pollution. Metro cities permanently suffer from smog. Of the 20 cities featuring worst quality of air in the whole world, you wouldn’t believe but 16 are in China alone. The loss in Agriculture is estimated around 20bn USD because of acid rain. Not only the water from the rivers are contaminated ( around 75%) but also the ground water levels suffer from serious contamination and its witnessing steady drop in its ground water table.
Coal-mine related fires are very common in china and the loss of lives last year due to this is roughly around 6000 and even this is on an increase every year.
China at this rate would be curtailing its growth potential in the future years if it does not take measures to restore its already lost natural resources in a big way. If “India Shining” was for us then I think we should say “China Breathing” for them.

Advantage India

Commenced in 1998-99, the Indian infrastructure drive spelt a lot of good for the Indians. Ostensible ones are faster, comfortable journeys, safer travel, and lower maitenance, fuel, and logistic costs. But there were lot of intangibles that were tagged along. These include the increase in employment rate and in turn increase in the per capita income, augmentation to the GDP (construction industry alone accounts for about 7% of the GDP) and a steady increase in FDI and FII investments.

Company's benefit too

Construction companies had a lot to cheer as well. Picture this. Two years ago, a spate of leading companies such as Nagarjuna Construction, IVRCL Infrastructures were trading at a PE (price as a proportion of earnings) multiple of about 3 to 4. Now, almost all the construction companies are trading at a PE multiple of over 20; valuations that were only garnered by the behemoths like Larsen & Toubro. One may argue that this across the board revaluation is due to the buoyancy in the stock markets. A closer picture, however, reveals a different story. In the past, construction companies were plagued with issues related corporate governance and window dressing. Now, driven by the investments made by agencies such as the World Bank and ADB in the Indian infrastructure, particularly the roads, the order book of these companies have swollen substantially. Some of these companies have strong order books to beget stable revenues for the next two years even if they don’t get any more orders.

Will it sustain?

The question is will these companies continue to sustain such superior valuations? The answer is yes. At least for the next one year, in the wake of the recent budget proposals. However, given that most of the road projects will come to an end by 2007-08, these companies will soon should start to seek their fortunes elsewhere. Perhaps, the probable second phase of the infrastructure drive, (Development of ports, Airports, Irrigation, interlinking of rivers etc) should help their cause. However, most of these proposals are still in the conception stage and nothing concrete has emerged so far.

Madhan Gopalan

The author is the Head of Investment Research and Advisory Services of Ness Innovative Business Services (Ness IBS). The views expressed are his own and not that of Ness IBS.