Cloud Computing: On Cloud Nine?

A classmate of mine, during my ‘Masters’ days, always had the habit of storing his resume, his project work, and anything that is important in a separate folder of his email. He thought it made lot of sense, as he had the flexibility to use it whenever and wherever he wanted. Also, it was free. Replace my friend with a company, and his stuff with software, applications, and data, stored in the Internet accessible through a web browser. It’s called cloud computing. In this case, however, the company pays a rent to the vendor who provides this service.

Going 'Ga ga' over the cloud
Cloud, a metaphor for the Internet, with its terminology borrowed from the telephony, is an inspiration from the symbol that represents Internet in flow charts, and a depiction for work done behind the scene. Some experts call this as 'virtual servers' over the Internet, while others opine that anything that we use outside the firewall should be considered as cloud computing. No matter what the definition is, it seems to be a quintessential CFO's delight. Especially, during a downturn. After all not all companies shut their business during the bad times. With zero upfront costs, little working capital and even lesser management overhead, firms get access to the needed infrastructure and software within minutes. The 'pay-as-you-go' (Microsoft’s Azure charges $0.15 per GB stored per month) feature, no long-term commitment, the service levels (for instance, Amazon's EC2 offers 99.95% uptime) coupled with financial penalties, makes it even more attractive. With a slew of providers including Amazon, Google, Cisco, HP, IBM, and Microsoft, vying for the market share with their versions, and hoards of users including Washington Post, Virgin Atlantic, Harvard Medical School, 3M, VeriSign and Siemens , Cloud computing is here with a vengeance.

What it means to Financial Services Providers
Cloud computing is finally making its presence in the Wall Street, 50 years after John McCorthy wrote that ‘computation may someday be organized as public utility’. Nasdaq Stock Exchange, for instance, uses Amazon’s S3 (Simple Storage Service) to store time-series market data (historical stock prices, trade volumes etc). Several financial services providers are also testing the water with smaller pilots, even as the IT majors scramble to incorporate it as part of their offerings. Does that mean we will soon be seeing a mass scale adoption of Cloud computing in the capital markets? Perhaps not. Several deterrents stand in between:

· A firm may save capital expenditure by opting for this model. However, it will not make fiscal sense, if the savings gets offset by higher operating expenses, especially if the firm is growing rapidly.
· For a large organization with enough capital budgets, this model may not make economic sense. Ditto for a company with relatively small capex requirements. This, however, may change over time, if cloud computing evolves and gets even cheaper over time.
· There don’t seem to be clear guidelines or regulations on the data ownership, data security, privacy, the responsibilities of cloud providers etc. And a FS provider may not be interested in sharing a cloud with another, considering the sensitivity around the client and trading data involved.
· Enough concerns are already been raised by the security experts on the vulnerability of clouds. Last week, a leading cloud provider’s data center had a power outage resulting in clients losing connectivity for more than half hour. Instances, such as this may result in ‘cautiously optimistic’ approach towards public clouds or shift the direction towards the ‘private clouds’.
Gartner, a leading IT research and advisory firm, appears to be cognizant of these. It expects large organizations to continue to have an IT organization, till 2012, which manages and deploys IT resources internally, some of which will be ‘Private clouds’ – scalable and elastic IT enabled capabilities delivered by the company to its internal customers using Internet Technologies. However, it opines that they may also leverage IT sources from external providers for specific services.

My two cents
Most of the cloud providers only provide plain-vanilla standard operating systems (Linux, Windows etc) and software (Databases, web hosting, application development environments, application servers etc.). The financial services providers, however, would require more than just that. For instance, a typical asset manager may want an investment accounting system or a trading platform (without incurring capital costs) hosted in the cloud to lower its cost per transaction. In addition, the success of cloud computing in Wall Street, will hinge on the emergence of potential regulations, and well-addressed data security issues. Till then, this model will befit smaller players, be it bouquet investment banks or ‘Dark pools’ – new trading venues that are invisible even to regulators.

The author, Madhan Gopalan, based out of Hackensack, NJ, is an Associate Vice President with Ness Technologies. The views expressed here are his own and not necessarily that of his employer. He can be reached at madhan.gopalan@gmail.com

The Economics of Hurling a Shoe

What would you do when you are frustrated or angered by a leader’s action (or the lack of it)? You can spit, call names, shout, burn effigies, bite your lip and remain silent, or keep listening to your MP3 and pretend you never thought or heard about it. And, you can also throw a shoe. At least that’s how people seem to express their anguish in recent times. Throwing a shoe at leaders is globally becoming a synonym for expressing displeasure, a method for venting rage, a sign of extreme disrespect, and an act of ultimate insult.

Jarnail Singh, a journalist with the Hindi news daily, Dainik Jagran, who flung a shoe at the Indian Home Minister, P. Chidambaram today, is not first of his kinds. He has several Indian and foreign predecessors. In December last year, Muntadhar al-Zaidi, an Iraqi Journalist, called the then American President, George Bush, a ‘dog’ and threw a pair of size 10 footwear. Though Bush carefully dodged it, the assailant became an overnight celebrity and a hero among the Iraqi general public. The act also inspired several tech-savvy Internet game designers. Result: tossing shoe at George Bush became the favorite pass time of several Internet users. Muntadhar is currently languishing in an Iraqi prison serving a three-year sentence.

In February 2009, the Chinese Premier Wen Jiabo, met with almost similar insult while he was giving a speech on Global Economy at the University of Cambridge, London. A young member of the hand-picked audience blew a whistle, screamed ‘how can you listen to these lies’, and hurled his shoe, which missed Mr. Wen by a few feet. A message in a board that was discussing this incident said, ‘He got lucky. He didn’t do it in China’. The current state of assailant is not known.

If tossing shoe is ‘The’ way expressing anger at Leaders, shoe manufacturers will never be susceptible to recession, one of my colleagues quipped. I beg to differ. It’s a simple case of supply and demand. You will soon find several retail shoe chains all over India. And they may give you ‘throw one, get two free’ offers. You may also soon find ‘used shoes’ market, selling a pair with a tag ‘Rs. 99 - Thrown at the Prime Minister’. Politicians may conduct ‘Shoe throwing’ rallies or processions. The famous New York based Christie’s may try to auction ‘Only shoe thrown at Michael Jackson’.

Keeping the banter aside, next time, Journalists in India and elsewhere may be asked to take their shoes off before attending a press conference. But I bet no one can stop a journalist from spitting at the leader or worse, writing a stinker in their column the next day. To sum it up, I would like to quote Al Pacino’s words to Russell Crowe in the 1999 movie ‘Insider’. ‘Ordinary people under extraordinary pressure, Mike. What the hell do you expect? Grace and consistency?’

Madhan Gopalan, the author, is a Consultant with Ness Technologies. The views expressed here are his own and not necessarily that of his Employer. He can be reached at gmadhan72@yahoo.com

The Forex Reserves Conundrum

Part of my job description demands me to teach, my fellow colleagues, about various types of securities including the US Treasury Securities. And, I try hard to justify my paycheck. Treasury Securities, be it a T-bill, T-note or a T-bond, are issued by a country’s central government to raise capital. The general perception is that Treasury securities issued by US Government are virtually free of credit risk, as they have the full faith and credit of the Government. At least, that is what I have been teaching in my class. The emerging American economic scenario, however, may soon force me to change the way I teach about them.

Capitol Hill’s balancing act
Every country needs capital for its growth. US is not an exception. To meet its expenditure, it levies taxes. If tax revenues exceed expenditure, the government has a budget surplus. On the other hand, if tax revenues trail expenditure, the government has a budget deficit. US Government’s budget has been in deficit every year since 1970, barring four years (1998-2001). The government raises debt (by issuing treasury securities, taking loans etc) to bridge this deficit. To put things in perspective, as of March 2009, America has managed to accumulate $10.9 trillion (Source: http://www.brillig.com/debt_clock/) worth of debt. When a country such as India invests its forex reserves in US Treasury Securities, it helps the US Government to cover the budget deficits. In other words, we indirectly fund America’s economic stimulus package, support Corporate bail-outs such as Bear Sterns, Fannie Mae, Freddie Mac, and AIG, and finance its war on terrorism.

Worried Chinese
Off late, the Chinese appear a worried lot and rightly so. After all, about half of China’s $2 trillion foreign exchange (forex) reserves are lent (invested in Treasury Securities and securities issued by Government Sponsored Enterprises such as Fannie Mae and Freddie Mac) to the US Government. Last week, Wen Jiabo, the Chinese Prime Minister, said that he was ‘worried’ about the investments concurrently criticizing US Government’s unsustainable model of development driven by high consumption and low savings.

China’s reliance on US dollar started coming down when it re-pegged its currency to a basket of currencies from the US dollar, a few years ago. The emergence of a strong Euro also supported this view. However, the mutual dependency between these two countries is forcing the Chinese to keep purchasing American bonds; China, in order to keep its factories running, should keep exporting to America, while a quintessential American is happy shopping a low-priced ‘Made in China’ product at Wal-Mart. The probability of US Government defaulting, though fairly limited, seems to be troubling China. The reassurances made by Secretary of State, Hillary Clinton, during her last month’s visit to China on the reliability of their Investments don’t seem to have allayed their concerns.

Should India be concerned too?
Perhaps yes, given that India is the fifth largest lender, behind China, Japan, Euro zone, and Russia. A sizeable portion of its $249.3 billion (for the week-ended March 6) forex reserves are invested in US Treasury securities. For years, several Indian economists were arguing that keeping money of such magnitude in forex reserves is highly risky and costly; a sharp decline in the value of dollar can result in losses. Also, they opine that these reserves can be reinvested in the domestic economy to drive growth. However, the Indian Government has learned its lesson the hard way; in 1991, it pledged its gold to Bank of England to tide over a ‘balance of payments’ crisis. Also, they know that large foreign currency can not only enable them to meet the debt obligations with ease, but also help them to play with exchange rates and in turn provide a favorable economic scenario. I am sure Indian economic experts will be closely watching to see how these turn of events play out.

My two cents
The stimulus package (we may also see another set of packages coming later this year) will require Obama’s administration to issue lot of sovereign paper. This may drive up the interest rates, concurrently lowering the prices of Treasury bonds held by countries like Japan and India and in turn reduce the value of their forex holdings.

Also, if these countries (particularly China) decide to alter their investment strategies (lets say, reinvesting in their own economy instead of lending it to US) it could spell disaster to the treasury securities market. In such a scenario, American consumers will face unprecedented increase in interest rates further delaying the economic recovery. The probability of this happening is though limited, America cannot ignore this risk; China is also going through a slowdown and has announced a stimulus package late last year, while India is not for behind in priming its economy. The need for capital has not abated in both these economies. After all, together they need to feed over two billion mouths.

Madhan Gopalan, the author, is a Consultant with Ness Technologies. The views expressed here are his own and not necessarily that of his Employer. He can be reached at gmadhan72@yahoo.com

Is it curtains for the Indian software Industry?

The ban slapped by the World Bank on Wipro and Megasoft following the Satyam saga seems to have raised more than just eyebrows. And rightly so. After all, the Indian software industry – perennially in the media limelight for the right reasons – is the centre of our sterling economic growth. Several Indian software companies have been showcased in the international markets as benchmark companies. However, the string of events that have taken place since December 2008 seems to have created a blot on Indian software companies re-emphasizing the negative opinions that arose from certain quarters every now and then. These incidents also raise serious questions on the systems, regulatory norms and disclosure practices of India Inc. Not to mention that this gives an opportunity to staunch anti-offshorer’s to walk with ‘I-told-you-so’ smirk in their face.

Are these notions justified?

It appears that we are looking at these isolated incidents with a magnifying glass. In April 2001, The New York Times published a story, accusing New York-based Computer Associates (CA) for malpractices, and inflating profits and earnings by using `pro forma, pro rata’ method. How is the Satyam incident any different from the ‘aggressive earnings management’ performed by CA at the broad level?

Also, Frauds, scams and allegations are not quite uncommon for the Indian outsourcing Industry. For instance, in 2005, Australian media alleged illegal sale of customer data by a BPO based at Noida, India. I am not sure how successful National Association of Software and Service Companies (Nasscom) was in bringing in the alleged perpetrators, if any, to justice. In 2002, the Chief of the software company Polaris was arrested (and later released) by the Indonesian police, after the company’s Banking customer, Artha Graha, filed a complaint alleging deficient performance in the software deployed by the Polaris. During the same year, the Department of Company Affairs cracked the whip by prosecuting several companies including Cyberspace, DSQ Software, Pentamedia Graphics, Nakshatra Software and Goldfish Computers. Some of the charges that were levied on these companies included placing incorrect statements in the prospectus and fraudulently inducing individuals to invest money. A year priot to that, Silverline Technologies was charged with insider trading.

What it means to Indian software companies?

‘Pooh pooh’ing the sequence of events in the name of isolated incidents doesn’t seem right either. Considering the Global financial crisis, the recent set of events is a double whammy. The acts of Satyam, considering the size and the reputation it held in the past, and the Whiplash of World Bank certainly seem to have certainly dented the image of the Indian software Vendors. Several Industry players experts opine that these events are a blot on the Indian software industry.

Globally clients will be reluctant to move new engagement offshore. Indian offshore vendors should also expect accentuated levels of scrutiny from global clients prior to off-shoring. A greater emphasis on Governance at the Program/Project level will be expected by the Clients as well. The impact is likely to bigger on the European front, considering their level of risk-averseness. Indian software companies may lose the small advantage (of penetrating the European market) they got after years of long and hard fought battles.

What needs be done?

Software companies needs to first address the immediate concerns of the clients, by delivering the existing projects on time without cost and time over-run. This will enhance their confidence in the vendors. Also, India Inc. needs amended Acts that plug the holes, ensure better disclosures, and bring-in greater transparency. Else, scams such as these will keep popping every now and then over time.

Madhan Gopalan, the author, is a Consultant with Ness Technologies. The views expressed here are his own and not necessarily that of his Employer. He can be reached at gmadhan72@yahoo.com

Is it the tip of the ice-berg?

The Chapter 11 (Bankruptcy Protection) filed by the 158-year old Lehman Brothers, the $50-billion sale of Mother Merrill to Bank of America, and the ratings downgrade of AIG seems to have sent shiver down the spine of investors in both mature and emerging markets. A reflection of the same was seen in Wall Street, as it posed its worst losses since September 11, 2001. Fears that other big Investment Banks can belly-up also seems to be haunting the investors. It may be pertinent to note that Two weeks ago, U.S. Government bailed out two of its Mortgage agencies – the Fannie Mae and Freddie Mac. A few months ago, it also bailed out Bear Sterns. However, this time it was unwilling to commit tax payers money to bail out Lehman. Understandably, this is a cause for concern for several software and IT companies in India given their dependence on BFSI (Banking, Financial Services and Insurance) segment.

Likely outcome

Albeit a good year into sub-mortgage crisis, several Investment Bankers are still reeling under losses. Case in point is UBS, one of the largest Investment Banks based out of Switzerland, which has posted pre-tax losses to the tune of US$21 billion in the first six months of 2008. Arguably, this just appears as the tip of the iceberg, as the crisis is slowly moving towards the ‘prime mortgage’ segment. To a large extent, this is due to steady increase in job losses, which is forcing even genuine EMI payers to default. Adding to the woes is the steady increase in the mortgage rates, despite the rate cuts initiated by the Federal Reserve. This may further result in a drop in the home prices, as Job losses will deepen. Fed may opt for some more rate cuts, given the liquidity crunch the market is facing currently.

What it means to Software companies

Companies such as Wipro and Satyam claimed (in a Television Channel) that the Lehman’s bankruptcy may not impact them as their exposure to the company is low. Infosys, on the other hand, claimed that the acquisition of Merrill Lynch to add to their revenue, given BOA is their key customer. Taking a broader perspective the scenario does look gloomy, though there seem to some light at the end of the tunnel.

It is pertinent to note that Indian software companies get over 90% of their revenues from US and European Customers, even as $600 billion worth of Investments are made on IT budgets every year globally. But, only a miniscule of it is generally outsourced. However, given the looming crisis several fortune 500 companies may tighten their IT budgets. In other words, several projects on the anvil (on the verge of being outsourced) may get shelved. IT services providers may also be forced to cut their prices (and in turn their margins) while bidding for projects, as the market pie grows smaller. Software companies will be forced to part with their employees to survive this shakeout over the next one year. Companies such as Satyam have started paring its employee count, even as they put several employees under ‘performance improvement’ programs. This crisis, however, will also enable the software companies to source better candidates in the market, at modest price levels.

A closer introspection of results of Investment Banking companies, for the quarter-ended September, may reveal some more interesting insights. Till then, let us keep our fingers crossed.

Madhan Gopalan, the author, is a Consultant with Ness Technologies. The views expressed here are his own and not necessarily that of his Employer. He can be reached at gmadhan72@yahoo.com

Wealth creation for Dummies

Is it the economy that is behaving badly or is it us? Any article you read these days has references to the rising crude prices, Inflation problems, high interest rate regimes, mortgage problems and eventually some larger problems that with economy that a common man cannot understand. To not deviate from the trend, I have mentioned them here as well. Creating wealth may be easy when you follow some simple rules.

I am no analyst when it comes to an area like this, but my portfolio has consistently out-performed those of experts and for that reason, I feel obliged to share my wisdom and relieve the common folk of their miseries. Most message boards/ Q&A sessions that I participate, have very simple questions for which the analysts and experts give complex undecipherable answers with a lot ofjargon's that leave the questioner even more confused. The problem as I see with many investors, is that they are not sure why they went in for a particular investment be it stocks or Mutual Funds (MF) or other types.If you are blindly following a recommendation of your friend or a broker, then that could be your problem. If you need a washing machine that can wash and rinse on one touch, then would you buy a semi automatic one just because the sales man recommended that to be the best deal.

In many cases, If you have done your research, it wouldn't matter what kind of investment you make and what the cost price of your investment is. I am going to list a few cliches below that would stand in good stead for equity investors in the long run. Some of these can be generically applied to other kinds of investment.

• Patience is a virtue - Companies take time to grow and they evolve as they grow there by increasing value to share holders. At difficult times, they test your patience and question your judgement. At these times, review your decision and see if somethingfundamental has changed. Base your decisions on your review.

• Identify your investment style - Are you a aggressive investor looking for 50 % returns in a year or are you a passive investor looking for a moderate 15% return and so on. Place your bets based on what you are expectations are. Small companies may grow fasteras compared to the bigger ones and may suit an aggressive investor Traditionally Large caps give you a moderate return as compared to small and mid ones. The risks are always in directproportion to your returns, so choose wisely.

• Have a plan in place - When you invest in an asset, decide how long you may want to hold it, and review periodically. If you have decided to hold a stock for 5 years, then identify your return goals and review the same periodically. If you purchased a stock 'x' for 100 in 2005 and expect it to grow to 1000 by 2010, then do not look at it's share price everyday, but review it periodically to ensure that it will become 1000 by 2010. Reinvest if required and do not get stuck with the stock, for the sake of it. A wrong judgement when corrected early can prevent bigger losses.

• Invest systematically - Very self explanatory, make sure you set aside some part of your money every month for investments,Do not delay investments for the sake of expenses. Discipline with investment is what will create wealth.
  

• Start early - The power of compounding is something that will astonish you. Invest regularly, and over time your investments will grow in multiples. A one year delay on your start could push you behind the race for wealth.In fact have a retirement plan in place so you know when you need to start investing and how much you need to invest every month.

There are quite a few others, but i don't want to dwell into all of them. Whether you invest by yourself (in stocks) or want to leave things with a portfolio manager, make sure you set your expectations clearly. The principles of wealth creation are simple enough but as you see with Kya Aap Panchavati Pass Se Tez Hai? (Are You Smarter Than a 5th Grader?), not many are as smart as they think they are and King khan's show proves that very well.
- 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.

Sensex and Nifty: What Next? - Part 2

My two cents

Predicting the direction of market is like driving a car blindfolded taking directions from a man who is looking out of the rear window. Nevertheless, I am willing to stick my neck out and say that the chances of Sensex touching 20,000 again in 2008 is limited. I also expect the markets to remain volatile through the remaining part of the year, even as crude wreaks havoc on the earnings card of index stocks. The rationale:

Earnings may remain under pressure

Investors value a stock (and in turn the index) based on future earning expectations and not the trailing earnings growth. An analysis of Sensex companies indicate that the top-line and bottom-line growth of these stocks may decelerate over the next few quarters:

• Revenue of software firms, Infosys, Satyam, TCS and Wipro, are likely to take a hit as US economy is struggling with a slew of things including a housing slump, a mortgage crisis, job losses and a possible downturn. The recent change in the rupee-dollar parity (Rupee has lost about 7-8% against the dollar in the last few weeks and is currently trading at Rs 42.8 per dollar) may offset this a bit
• The possibility of an increase in interest rate and Cash Reserve Ratio, on the back of higher inflation that is set to touch 9%, also don’t augur well for banks; credit disbursements, and in turn the revenue, of SBI, ICICI Bank and HDFC Bank may get impacted. Higher interest rates also don’t bode well for realty companies such as DLF, as homebuyers in India predominantly buy through housing loans. It is worth noting that interest rate on housing loans has climbed 4 to 5 percentage points in four years
• Higher input costs will also be a cause for concern for several corporates. With crude marching its way towards $150 a barrel (it is currently trading at $135 a barrel), the margins and in turn the earnings may come under pressure. The demand for crude and the subsequent price surge may not abate in the near term, as China may consume more to rebuild itself from its worst natural disaster in the recent times. The recent hike in gasoline price is likely to act as a dampener on the sales of automobile manufacturers, Tata Motors, Mahindra & Mahindra and Maruti Suzuki.
• The price of coal, the key input for cement, steel and power companies, also has more than doubled in the last one-year. Jaiprakash Associates, ACC, Ambuja Cement and Tata Steel, may find it difficult to pass on these increase costs to the customers as the Government has requested not to hike the price of key commodities such as Cement and Steel

FII flows may diminish

WL Ross, a FII, recently told a television channel that they are net buyers in the Indian equity market. Exceptions such as these are very rare, as FII’s remain net sellers in 2008. According to SEBI, FIIs have sold (net) $4.5 billion worth of securities as of 9^th June. Ben Bernanke, the chairman of the Federal Reserve, recently said that the risk of a substantial economic downturn has diminished. This perhaps is an indication that further rate cuts are limited. In turn, this may also lower purchases by FIIs in the Indian markets.

Conclusion

As negative global cues continue to depress investors’ sentiment, markets are likely to remain volatile. It would be interesting to see the next two quarters earnings card as they would determine the course of the market. If Sensex touches 20,000 again in 2008 without a clear visibility or a strong earnings support, it would be another case of irrational exuberance.

Madhan Gopalan

The author, who is currently based at Chennai, India, is an independent Investment Management consultant. The views expressed here are his own. He can be reached at gmadhan72@yahoo.com

Sensex and Nifty: What Next? - Part 1

With key Indian benchmark indices, the 30-stock BSE Sensex and the 50-stock S&P CNX Nifty, moving like a swing over a broad range, some interesting questions emerge. Will Sensex touch 20,000 again in 2008? Will the volatility in the markets abate? Would the cost of imported commodities, such as crude oil, play a key factor in earnings growth and in turn on the value of index? Before attempting to answer these questions, let me give you a prelude on why the markets are where they are.

Markets were over-valued in January

It is hard to predict the accurate value of any market or index, as it is dependent on multitude of factors including Investor’s confidence, economic growth, political stability, expected earnings growth of key companies and so on. However, for comparison purposes the relative value of an index - one year trailing Price-to-Earnings multiple (PE) - is a reasonable measure to assess the value of a market.

During January this year, when Sensex scaled its life time peak of 21,206, it was valued at a whopping (PE) 26; Nifty was valued at about 28. In contrast, several leading emerging market indices were priced relatively lower (PE of 15 to 20) during the same time frame, an indication that Indian markets were relatively over-valued. Comparing the value of index with prior period peaks (see table) also indicated that our markets were relatively over valued in January. In the last nine years, Nifty was priced at its peak value of 28 only twice - in February 2000 and in January 2008; index witnessed a sharp nosedive subsequent to these peak periods. PE values were lower during all the other Index peaks.

Corporate India’s Earnings growth decelerated

A surge in the PE multiple was not only because investors valued the market higher, but also due to the steady deceleration of earnings growth of Corporate India over the last three quarters. An article, recently published by one of the leading financial news dailies The Hindu Business Line, which had analyzed the March quarter results of 800 companies also substantiates this trend; Revenue, on an average, grew at about 21%, while profit after taxes grew at about 17% respectively. In comparison, growth in revenue and profits in the year-ago period were at 30% and 35% respectively.

Key FIIs walked away

Driven by a sharp reduction in the interest rates by the Federal Reserve, starting September, Foreign Institutional Investors (FIIs) made a net investment of $17 billion (about Rs 71,000 crores) in Indian equity markets during last year. In contrast, FIIs had invested only about $8 billion in 2006. However, in January, in the wake of higher valuation and a steady decline in earnings growth, key FIIs sold a sizeable portion of their investment and walked away triggering a sharp correction in the markets. Subsequently, the markets have managed to stage a recovery but have managed to remain volatile over a broad range. FIIs, though continue to buy Indian stocks, have remained net sellers in 2008; FIIs have sold (net) $3.8 billion worth of securities as of 2^nd June.

Please read the Part – 2 of my opinion for more.

Madhan Gopalan

The author, who is currently based at Chennai, India, is an independent Investment Management consultant. The views expressed here are his own. He can be reached at gmadhan72@yahoo.com

Nano - Dream car or Dream - II

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.

Nano - Dream car or Dream

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...

Suresh
The author works for a Global IT consulting organisation as a IT consultant. He is currently based out of London.

FII Trends: Net investments Surge in India

Summary

*FIIs were net buyers in 2007

*Inflows have surged multifolds since Sep 2007; surge in inflows coincides with the reduction in short-term rates by the Fed

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Foreign Institutional Investors (FIIs) were net buyers in Indian markets in 2007. According to the data published by Securities Exchange Board of India, FIIs have made a net investment (in both Equity and Debt) to the tune of $36.2 billion ($33.1 billion in Equity and $3.1 billion in debt), for the first 11 months ending November 2007. This is substantially higher in comparison to the $8.9 billion invested in 2006.

Though net investments were positive over the past three years, a closer observation at the trend indicates a different picture. During the first 8 months of the current year, only a fourth of the $36.2 billion was invested, while the remaining was invested in the last three months (see chart). FIIs invested in both Equity and Debt markets during this period. Interestingly, this coincides with the reduction of short term interest rates by the Federal Reserve. Since September 2007, Fed has pared interest rates by one percentage point in order to protect the economy from falling into recession. Reduction in interest rate, appears to have induced investors to move money into the Indian markets.

Madhan Gopalan

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

Federal Reserve's Juggling Act

In my post dated April 4th (American New Home buyers can wait), I had indicated that the Federal Reserve will be forced to ease the interest rates if the housing market crisis continues. This is what appears to be happening in the US economy. Between September and now, driven by an economic slowdown in the wake of housing market crisis coupled with rising oil prices, Fed has lowered the short-term interest rates by 100 basis points (one percentage point).

The Outcome

When Fed lowers its interest rates, a string of things starts to unfold.

1) Investment and consumption expenditure increases – Propelled by lower lending rates offered by commercial banks, businesses get into the expansion mode by making sizeable investments. In addition, big ticket consumer items that are generally purchased through financing also surge, as retail loans (e.g. auto loans) becomes relatively cheaper

2) Dollar falls – When interest rate plummets (relative to other countries), Investors preferring higher returns move their funds to countries with a higher interest rate. When money moves out of the US, people sell dollars and buy other currencies say the Indian Rupee or the Chinese Yuan. With less dollars demanded, the value (price) of the dollar drops in the Forex market

3) Exports surge – A decline in the price of dollar means that foreigners only have to pay less (than before) to buy US made goods and services. Consequently, foreigners buy more goods produced in the US.

4) A multiplier process unfolds – Increase in expenditure results in an increase in income, which in turn augments the consumption expenditure. This enhances the aggregate demand, resulting in higher Real GDP and inflation rate.

The Juggling Act

Fed’s decision to increase the money supply (by paring the interest rates) to avoid an economic slowdown has a trade off, in the form of inflation. A cursory look at the CPI, an index that tracks the price level of key commodities, stands testimony to this. Inflation, since September 2007 has steadily increased both on a sequential basis and on a year-over-year basis (see table).

Now, Fed’s choices are caught between a rock and a hard place. Fed has limited incentives to pare the interest rates further, given the surge in inflation rate. Why? If Fed lowers the interest rate further, the rising inflation would pose a huge risk to growth. For instance, between 1975 to 1977, Fed continued to increase the quantity of money supply to accommodate increasing oil prices. This pushed the inflation stratospheric levels. However, when the OPEC cartels pegged up the price of Oil again in 1979, Fed didn’t react. Though this action curbed the inflation rate, the US economy went into a deep recession.

On the other hand, Fed will also find it hard to increase the interest rates, given the state of economy. Why? An increase in interest rate, at the current juncture, will prolong the economy’s recovery. Fed must be closely monitoring the supply-demand situation in the economy. It would be interesting to see how Fed nudges the economy into the growth path, concurrently keeping the inflation under control.

Madhan Gopalan

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

Where are the Markets going?

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.

Lessons from the sub-prime mortgage crisis

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

Who wants to be The President (of India)

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.

-Suresh

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.