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.
Saturday, May 27, 2006
Wednesday, May 17, 2006
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.
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.
Sunday, May 14, 2006
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.
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.
Sunday, April 30, 2006
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.
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.
Thursday, April 27, 2006
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.
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.
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