Dell's woes continue

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.

Will SemIndia deliver?

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.

Lessons from China - 2

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.

A Free Pass for toxic ships

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.

Is it the ‘beginning of an end’ for Dell?

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.

Lessons from China - 1

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.

Will the message be delivered?

This is what most people be wondering as the government amends the post office bill. The First time that this bill is being amended after almost 100 years, is churning up a lot of unease and questions among consumers and courier industry alike. Indian courier industry with about 2300 players has had a free run so far, severe competition has made sure that the industry is self regulated and the prices remain affordable. By contrast, the Department of Post (DOP) has been a monopoly for many years and operates with an obligation to provide postal service to every Indian citizen. Will the proposed amendment curb a growing industry? Who will gain and who will lose with this amendment is the answer everyone is seeking.

There are a few things that have been the point of contention

1. The amendment regarding carrying articles less than 300gm

The Indian courier industry employs about 10 lakh people on full time equivalent jobs providing time bound services for industries and public. Lot of these organisations operate on a metropolitan/ state level offering point to point delivery of parcels and letters, while others operate at regional, national or International level. The USP of the industry has been to provide time bound, reliable delivery of parcels and letters at a marginally higher rate to customers who can afford it. There are many industries including banks, law firms etc, which depend on such services for delivering letters, negotiable instruments on a daily basis. It has been a very successful proposition and even the DOP realised that and came up with Speed post and Express delivery services. However DOP even with such massive operations could not compete with the local courier company that guaranteed next day delivery to most locations in the metros. This is the basic premise of the argument against the amendment. Unable to compete against the efficient courier operators, DoP now wants to monopolise carrying any "postal-article" the less than 300gm. So does this mean that DOP will guarantee services at the same speed that courier agencies deliver these articles? By monopolising this category, it is denying the industry and public a specific category of service that they have been using so far.

2. The setting up of a body that acts as a regulator of the Industry

Courier services in India started as early as 1977, but they haven't made an impact until recently. The industry is still young and has been operating on a environment where competition has served as a self regulator. The recent amendment proposes to set up a authority to be called the Mail Regulatory and Development Authority that will henceforth act as a regulator of the industry. The courier Industry argues that a regulator would be harmful, whereas the government has promised in their amendment that a regulator in the lines of TRAI which provides more independence to operators would be beneficial to the industry and will help resolve any issues that might arise between consumers and service operators. The answer to whether a regulator would be beneficial can only be a speculation. However a lot of ambiguity exists in the way the functions of the authority has been defined. For eg, some of the functions of this authority would be,

--measures to promote competition and efficiency in carrying on any service relating to carriage and delivery of postal articles and letters. But How? hasn't been defined.

-- standards and quality of service to be provided by the registered service providers and department of Posts; How would the compliance be monitored? is not clear

-- fix terms and conditions of inter-connectivity between the registered service 945 of 1860. providers and the department of Posts;

-- regulate arrangements amongst registered service providers of sharing with the Department of Posts their revenue derived from providing mail related services.

clarity in the functions of the regulator would make sure that a regulator functions more appropriately and ensure consumer interests. On overall, my take is that a

regulator would be beneficial to the industry and the consumers.


3. The fees for renewal and registration of agencies.

The amendment has also includes a one time registration and an annual renewal fee for operators. In addition the amendment also proposes that providers of courier service deposit ten percent of their annual revenues to the government for meeting Universal service obligation ( only for operators with revenues greater than 25 lakhs). There is no justification on the part of government for levying this fee for USO purpose. Given the scales of operation, this fee might eat into the profits of a lot of the operators and could very well lead to unethical practices for accounting. The DOP has to look for alternate sources of revenue rather than levying a renewal fee for operators and sharing the profits. For e.g., most of the courier operators center their operations around large and mid size cities. This leaves out a majority of the rural territory uncompeted. This is where the DOP should leverage their presence by engaging in sub contracting service agreements with the larger service providers. This is a very big market (and opportunity) where cost barriers and scale of economy would make sure that DOP could enjoy near monopoly without any regulation.

In the US, USPS (United states Postal service) operates on a similar model, competing with the local and international courier companies like FedEx, UPS, DHL etc. USPS has much bigger presence in US than any of these companies and compensate for some of the lost revenues in the cities by leveraging their presence in the rural. This is how it works, say if FedEx books a parcel to be delivered from City A to Village B. FedEx has no presence at Village B, but USPS has, So FedEx books the package with USPS for delivery and USPS delivers the package and shares a major portion of the revenue.

Amending a 100 year old bill is definitely going to bring up a lot of controversies, so it is also important that the bill is in line with the needs of the modern day industry and public. Certain changes are welcome, with proper implementation of the bill, the government can definitely deliver consumers a better message at the end of the day.

Share of throat

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.

Gaming

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.

Roads to Development - II

Changing Conditions

In recent times however a lot of emphasis is being placed on Road development, this can be verified from the fact that the National plan had listed Road development as a priority area for economic development. The Golden quadrilateral aimed to connect the four major cities in India Viz Bombay, Chennai, Delhi and Kolkatta is close to completion and in pipeline is also projects like the North- south and East- West Corridor, Port connectivity projects. Increasing Competition between states in attracting foreign investments has also been an impetus for development.

What more can be done

Highway projects in India are handled through a government engine in the form of National Highways authority of India (NHAI). NHAI is responsible for executing all National Highway projects, similarly there are road development corporations (RDC) which operate in certain states, but their work force is very small and hence their reach. RDC's also have very limited power and restricted capabilities to manage. Considering the expanse of road networks in each state, the work force that these RDC's have are grossly insufficient.Additionally, they usually do not have enough funds to do studies on traffic patterns to suggest road improvements, most of their information is borrowed from studies by other organisations. This means they do not have enough data to advocate the need to build more roads and how to utilise them optimally.

The RDC's have no fixed way of income generation, and have to primarily depend on government allocations for funds. There is no transparency in the way that these RDC's handle their finance, since there is no form of accounting being done, hence there is no way to ascertain the returns on the investments made by these corporations. This puts them at a disadvantage when they go for borrowing, leading to higher rates.This also puts them at a disadvantage when showcasing their plans the common public since they cannot clearly establish a revenue model and cannot explain to tax payers as to why they are being charged acertain toll to cover for the costs of these roads. These are things that can be looked at the state level RDC's.

Another area of improvement is in involving more Private sector participation. Throughout the world the private sector financing model has been succesfully used to build road networks. A national level policy on Private sector participation should be created and a suitable regulatory and legal environment should be created. It would be very important to make sure that we do not have another incident like Dabhol when involving foreign and private participation.

And finally it is important to make sure politicians and politics don't hamper improvements. Anew government should not stop a good initiative started earlier or change policy matters introduced by previous governments. Road transport and road infrastructure are vital for accelerating the rate of economic growth in India, Unless major reforms as well as investment are made, India’s road infrastructure will be an impediment to economic growth and social development.

Roads to Development

How Important are Roads to us?, On any given day, I travel atleast 15 km on roads, small and big ones all included, probably everyone uses them in their day to day life. Roads have been and will be an integral part of a individual's life for years to come until we devise a way to travel in cable cars like people(and robots) did in Asimov's novels or until someone is succesfull with his Teleporting experiment.

India's road network at 3.5 million km of roads is only a little shy of the distance between earth and Moon. India is vast, and most developed countries are comparable in size only to a small region of India. So the problems we have are much different and in bigger magnitude when compared to what they faced building their road networks. For our sake of ease lets classify the road network in India into the following four categories

1. National Highways (NH Roads)
2. State Highways (SH Roads)
3. City/District Roads (Both Arterial and Non Arterial)
4. Urban Roads (75%)

Issues we face

Inspite of our greater dependence on roads, we still treat them very shabbily and do not give them the importance they deserve. A look at roads today would reveal different kinds of problems. Some of the the common issues we face with most of these roads are similar and can be classified under these major heads,

i Existing Roads that are narrow or substandard.
ii Existing Roads that are badly maintained
iii Non Existent Roads.

lets cover some of these issues here,

Substandard roads -
Most NH and SH roads in India are two laned, causing slow speeds and congestion issues( A census shows that only only 2 to 3% of the primary network in India is 4 laned). Most of our NH roads pass through the cities,adding to the city traffic and causing more congestion. By routing NH roads through cities,the traffic flow in smaller roads is being increased to a magnitude that are not capable of taking. This causes more wear and tear on the smaller city roads and thereby increasing maintenance costs. A common solution for this issue, is to build NH roads such that they by pass cities hence reducing the traffic flow into state and city roads.
A look at city roads reveal that enroachments are a major issue. A typical 100 feet road in India only has a carriage way of 70 feet. The rest 30 feet is lost due to enroachments by street hawkers and other haphazard drivers who park their vehicles on the roads. Just making sure that the enroachments are being removed regularly, would ensure that we have enough space available to the road users.
The urbans face a different kind of issue, most of their roads are of the Kutcha type and therefore are not suitable for vehicular traffic, the only solution here would be to make sure that we increase the coverage of pucca roads in villages.

Bad Roads - Next major issue with most roads are related to poor maintenance of roads. This is very common in cities and villages alike. A cursory look would reveal that the roads in India haven't grown in the same pace as the number of vehicles have, this means these roads are bearing capacities many times more than they were built for.

Non existent Roads - Many regions of India are still unconnected to the mainland country. This problem is severe in NE states like Meghalaya, Assam etc. which has very poor connectivity to the rest of the country.

A look at the issues would reveal that road development in India has been neglected for quite some time now. The only major development that we saw was the Golden quadrilateral project initiated by BJP a few years back. Reasons for this neglect included among many things Red tapism in the government bodies in awarding contracts and non conducive environment for private partnerships. The end sufferer were the common folks who was left to break his spine traveling on the bad roads. The road conditions and network are a major factor of consideration for most MNC's when they decide to set up shop at a particular location. Even Indian majors have started assigning a importance to the availability of good road network before they make a decision on locating their facilities. The recent decisions by companies like Infosys and Wipro to expand in other cities were due to reason that Bangalore had not focused on improving their Infrastructure (Particular refernces were made by NR Murthy to the bad state of road network) leading to poor connectivities and duels between India Inc and state governments.

The problems we face in maintaining and building new networks are related to the investments they need. One study estimates that Maintaining India’s present highway network to full maintenance standards will require annual funding of about Rs. 70 billion, and that is not including the investments to build new roads. Given that India is developing and facing many other issues including poverty, power etc , It would be unfair to expect all the investment to be focusedd on developing road network. Given the scenario, we have quite a few tried and trusted methods that we can use to garner that kind of money including

Toll/ cess on the road users
Annual vehicle fee
Fuel Cess ( Fuel cess in India is among the lowest in the world)
Private Funding
Return more road related revenue back to the sector and more

Some of these methods like Toll/ cess, Private participation are already of revenue generation are already in vogue, but still the methodology is not mature to be adopted widely. for eg, There are quite a lot of impediments in the current policies that do not allow for a smooth Private sector funding, like the legal environment for dispute resolution, toll determination, contract monitoring processes etc.


Article will continue

China heading north???

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.

The infrastructure drive of India Inc.

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.