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.