Bubbles on the wall, which is the biggest of them all?

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After US housing & bonds, next bubble to burst could be excessive US consumption

Irrespective whether one looks at equities, commodities, real estate, art, any kind of useless collectibles or bonds, anywhere in the world, prices have soared over the last few years. We are truly in an asset bubble of unprecedented proportions and that these bubbles will eventually end badly, should be clear. So far we had US housing rolling over as well as more recently bonds around the world. But what about the next bubble to pop? I have explained before that in today’s liquidity- driven environment, US asset prices – in particular the housing and stock markets – are the primary engine of growth for the US consumer. It’s now, how assets drive the economy and not how the economy drives asset prices. Even Greenspan, chief architect of the global asset bubble, admitted two years ago that “the determination of global economic activity in recent years has been influenced importantly by capital gains on various types of assets, and the liabilities that finance them. Our forecasts, and hence, policy are becoming increasingly driven by asset price changes.” Therefore, it is likely that the next bubble to burst could be excessive US consumption, which would obviously have dire consequences for US economy and specifically for retailers and other consumer related discretionary spending sectors. In this respect, the following should be of interest. Same-store sales were down 2.4% year-over-year in April, according to the International Council of Shopping Centers – the biggest drop since the trade group began tracking the data in 1970. A record 80% of retailers missed their sales targets – double the norm of 42%. Also, had banks not eased lending standards for credit cards, it is likely that consumption in April would have been even worse. One really has to wonder about the sanity of easing credit conditions for credit cards at a time when the consumer is already badly stretched. The tightening of other consumer credit lending standards reflects harder to borrow conditions for home equity loans.

Since interest rates on credit card balances are the highest, we should conclude that a large number of consumers are in a financially rather desperate situation and that once they realize that home prices will not recover any time soon while food, energy prices and other prices continue to increase, their spending is likely to be curbed rather significantly. In fact, year todate, the United States Specialty Store Index has been one of the worst performers dropping 3.2%. Given specialty stores’ premium valuation compared to the S&P 500 and specialty stores’ elevated earnings, we would advise to avoid the sector as well as other retailers, which derive a high percentage of their sales from consumer discretionary items. Why drug and grocery store sales are rising at an annual rate of 7%, while discretionary sales are languishing?

I should like to emphasize that each investor must decide for himself how much risk he can take, given his particular financial condition and under consideration of his entire exposure to asset markets. Obviously, I cannot be each reader’s personal financial planner...

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Why Wal Mart will fail in India

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You could say he was the first ardent proponent of globalisation. More than 2,000 years ago, Alexander the Great conquered vast swathes of territory across much of the then ‘known’ world and reached the outer perimeters of India. He even defeated an Indian king, Porus, in territory that is now known as Afghanistan. And fearful of what lay within India and beyond that, Alexander withdrew. The world still holds this global warrior in awe. In this 21st century, Alexander has been replaced by multinational corporations that invade and capture new markets with as much zest as Alexander swallowed up territory. And there are many who inspire the kind of awe that Alexander inspired. Perhaps none more than the largest corporation in the world Wal-Mart, the big daddy of retail.

Unlike Alexander, Wal-Mart has decided to invade India with all guns blazing. It has tied up with the Bharti group (the people behind Airtel and India’s largest mobile phone services company) and promises to launch its first stores in a few months. Predictably, there has been an explosion of excitement and hype within India. Analysts are hyperventilating about how Wal-Mart will revolutionise Indian retail; about how it will stomp triumphantly and trample upon competition; and about how the entry of Wal-Mart (along with the launch of Reliance retail) signals the beginning of the end of mom and pop stores – just as it happened in the United States. Says S.P. Oswal, Chairman of the Textile Committee of CII, “Entry of Wal-Mart will mean a better service for the customer as the entire industry will become competitive and all the players have to give best service to the customer”.

Yet, scratch the hype and conduct a cold, sober and objective analysis and the hoopla over Wal-Mart starts looking like…well, simply hoopla. The reality is: there are even chances of the Wal-Mart invasion of India turning out to be a loser, a campaign that started with a bang and perhaps ended in a whimper.

Of course, there is the risk that some readers will think the editorial team at Business & Economy has gone a little wonky and is perhaps losing its marbles. Aft er all, Wal-Mart generates annual revenues that are equivalent to about 40% of India’s GDP; it has about 12,000 stores across the world; it has virtually perfected the art of discounting and selling cheap (something that should be music to the ears of price sensitive Indian consumers); it has wisely roped in Sunil Bharti Mittal, one of the most successful entrepreneurs in the last decade, as the local partner; and it has the financial clout that all companies in India Inc can only fantasise about!

Given these seemingly overwhelming odds, how on earth did Business & Economy arrive at the conclusion that there are very high chances of Wal-Mart failing in India?

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Nokia’s Road blocks

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There are plenty of reasons. The two most important ones are: A perception that while Nokia is all about connecting people, it is getting disconnected from upwardly mobile young consumers. Globally, Nokia seems to have paid a price for complacency when its market share dropped from 35% in 2003 to a little less than 30% by early 2005. Its initial reluctance to introduce clamshell (folding) models paved the way for LG and Samsung, who have cashed-in well on their popularity in the Asian continent. Long standing players like Motorola and new entrants like LG aggressively marketed themselves as brands that are funkier and technologically ‘with it’. “An even bigger problem confronting Nokia is the issue of after sales service”. Vijay Nair, a Senior Associate with a legal service firm has a scathing comment: “The only danger I see Nokia facing from rivals is at the level of after sales service. In Delhi, at least, the tie-up with HCL for after sales service is proving negative as the HCL employees are incompetent and discourteous to the customers”. Mr. Gogia, who has just ended his seven year association with Nokia as a Priority Dealer on a bitter note, shares the same view. His Nokia dealership is in the up market locality of South Extension, New Delhi has seen the Finnish giant in both its “gray and hay” days. According to him, Nokia has not been able to differentiate between a Priority Dealer and a roadside store that could also stock Nokia phones.

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The star was ‘struck’!

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It has always been a trend with Chandra – while other players are struggling to sustain their positions, Chandra has always magically looked into the future and caught both, competition & market watchers by surprise. There have been precious few years in Zee’s long run that have not witnessed one or the other pathbreaking venture. If one balmy October day in 1992 saw India’s first private satellite channel – Zee TV going on-air, subsequent years saw the launch of the first Hindi cinema channel (Zee Cinema), first 24-hour Hindi News Channel (Zee News), first Direct To home (Dish TV), et al. And 2007 marked the year when Chandra took upon himself the task to change the face of cricket in India. He launched a parallel cricket League called the Indian Cricket League soon after the shameful Caribbean debacle of the ‘Men in Blue’.

The Zee saga may seem awe-inspiring, but the journey has not been rosy at all. Despite being battered down by competition and lying low for many years, Chandra simply did not give up. He kept innovating and prepared his strategies silently for the future. And the financial year 2006-07 marked the year of the resurrection for this media conglomerate.

It was some time in May last year that the honchos at Star looked ruffled. After six long years of failure, Zee had managed to dislodge Star from the number one slot. Though it was just for one week and by a few points in the prime time band, it was reason enough for Zee to celebrate. For Star, which had become the undisputable king of the tele-tube, it came in as a rude shock. But it was far from being coincidental, for Zee had already moved past Sony, which was sitting pretty at number 2 for many years. However, Star Plus’ position was still largely undisputed until recently. Now that seems to be history!

According to the figures of TAM Media Research, last year, around the same time, Star Plus had a market share of a whopping 58%. Today, the share has dropped to a depressing 38.9% and Zee (at 25.6%) is not very far away. Add to that the recent turmoil in Star. With both their iconic CEOs – Sameer Nair and Peter Mukerjea – who were credited with turning around Star in India, bidding goodbye to the group, Zee’s chances look all the more bright now.

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Over the past few months, Satyam has Underperformed due to various issues, critical in nature...

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Well, it was in April last year that Satyam joined the billion-dollar club with other IT giants and also declared that it would become a $2 billion player very soon. Leave that aside, even its nearest competitor from the IT list, Wipro, has recorded net profits more than double in magnitude than that achieved by Satyam. And as though unaware of Satyam’s below-par annual performance, B. Ramalinga Raju, Founder & Chairman, Satyam exclaimed, “The strong performance in FY 07 is a culmination of strategic initiatives taken by the company on several fronts notably in the areas of relationship management, deepening of competencies and associate delight. We continue to win the confidence of our prominent customers resulting in opportunities of significant size and criticality.” Whatever might be the claims made by Raju, the fact is that Satyam computers has not performed as per the expectations and needs to keep pace with the fast growing IT industry. “Over the past few months, Satyam has underperformed, due to various issues, critical in nature like wage pressures, high attrition and higher exposure to discretionary spending” explains an equity analyst from Motilal Oswal.

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The juggernaut rolls on...

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Mukesh has ensured that RIL continues to lead in three critical benchmarks of excellence – raise money from the market at cheaper rates than the competition, complete all outstanding projects on schedule and dictate the pricing mechanism in every segment they enter. The Jamnagar unit in Gujarat, with a capability of 33 MMTPA is the biggest green field project across the orb, bringing together a complex plant that has a captive power incorporated with petrochemicals. With the expansion processes being undertaken on a major scale, Reliance Petroleum should start functioning in full capacity by the month of December next year. The sheer size & scale of this project should make Jamnagar the next big refining destination of the globe and in the process, also ensure that RIL further strengthens its overwhelming price leadership in the petrochemicals arena. The company is also setting up an acrylic monomer complex with a capacity of 200,000 TPA in an MoU with US-based Rohm & Haas. There were also rumours of an attempt to form a JV with Dow Chemicals, which did not ultimately see the light of day.

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The all pervasive Tata!

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Just count the zeros, $30 billion in the next 3-5 years.

Blink once & you might risk missing out some expansion or acquisition plan by the Tata group. With a stupendous Rs.1.6 trillion expansion plan announced in 2006, the Tatas seem to have decided that they have to move far ahead of the rest. Six Tata group companies featured in the B&E Power list, with combined profits worth $2.83 billion.

In early 2007, Tata Steel took the world by the storm when it decided to acquire Anglo-Dutch steel maker Corus for a highly profligate sum of $12 billion. Tata Tea made a $677 million acquisition of Glaceau (which it sold off to Coca Cola recently for $1.2 billion). The Taj Group initiated the Ginger group of hotels venture during the period. The Tatas also initiated the Infiniti chain of retail stores in late 2006.

The group has caused it’s fair share of controversy too, in particular with the Rs. 1 lakh car plant in Singur, West Bengal. Besides, the group does faces great risk due to a higher debt-equity ratio. No risk, no gain, as they say!

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The current Outstanding order book of the top three in capital goods is at a whopping $25 billion

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Bharat Heavy Electricals Limited (BHEL), Larsen & Toubro (L&T), Bharat Electronics Ltd. and Kirloskar Brothers are the major companies from the sector, which have made it to the B&E list of 100 most profitable companies. Despite the rising cost of raw material, the earnings visibility and margins of the companies in the sector have improved, thanks to the robust order flows. BHEL grabbed rank one in the capital goods sector notching up profits of Rs.24.15 billion, 44% higher than last year. L&T, with its 39% higher profits of Rs.14.03 billion, ranked second in the sector. The company had revenues of Rs.179.01 billion; 18% of which came from its international operations. Fourth in place is Bharat Electronics that secured profits of Rs.7.14 billion, as compared to Rs.5.53 billion in 2005-06. Kirloskar Brothers, which failed to make it to the list last year, has made it this time because of a gigantic leap of 106% in its profits, which reached Rs.3.36 billion. Tariff s on the capital goods sector, which is on a continuous decline (from 20% in 2003-04 to 12.5% in 2006-07), helped the sector clock record growth.



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The politics of fragmentation will only make resolution of disputes more difficult in future

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“The Gujjars have not abandoned their cause, we have only made a tactical retreat, only to bounce back if the Rajasthan government continues to hoodwink us with false promises,” says Vikram Singh, a graduate Gujjar working in Delhi. This new found love for a cause among the Gujjar community in Rajasthan and adjoining regions in North India is not to upgrade their status in the caste hierarchy. Ironically, the Gujjars (presently in Other Backward Caste (OBC) list) ,desire to be downgraded to the Schedule Tribes (ST) list.

The Gujjars perceive that the competition (for jobs and other benefits) among the communities in ST list is not as intense, as it is among the castes belonging to the OBC category. Therefore, the Meena community (included in the ST list) has moved up the economic ladder at a faster pace; leaving the Gujjars behind.

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Reliance Money to quadruple its kiosks!

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Anil Ambani owned Reliance Money is making all possible efforts to take the count of its web-enabled trading kiosks from the present 2,500 to 10,000 by March 2008. The company has joined hands with coffee chain Barista for setting up 100 stalls at its outlets across the country. Reliance Money provides a trading stand for carrying on deals in stocks, commodities trading, insurance, mutual fund, and other products. The company will also put up an institutional desk to transact with foreign institutional investors. Reliance Money, a relatively new entrant in the market, already has a turnover of close to Rs.6 billion.

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An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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Feel good factor reigns!

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Setting new records and then breaking it is not new for Wall Street. Once again, the Dow Jones industrials and S&P 500 have touched new peaks, while the Nasdaq closed at its highest point in six years. Investors welcomed positive readings due to growth in the rate of jobs, manufacturing and inflation, as well as a strong earnings report from Dell. All this gathered up the momentum to instigate positive results in the stock market. After a slight slump on Thursday, Friday happened to be a good day. On June 8, the Dow Jones industrial average managed to add 1.19%, the broader S&P 500 index added 1.14% and closed at a peak point, making it the index’s third record close at a stretch while Nasdaq composite gained 1.27% and ended at a new six-year high. The Russell 2000 small-cap index added 0.7%, also finishing at a new peak three days at a stretch. May was the third big month in a row for the Wall Street, with all three major weighing parameters and the Russell 2000 gaining between 3% and 4.5%. The month of June also started off on a positive note as investors welcomed the economic news, including a better-than-expected May jobs report, a strong ISM manufacturing reading and a drop in a key measure of inflation. The reports seemed to suggest the blend of rock-solid growth and gentle inflation that stock investors tend to prefer. However, gains were annoyed off by some unwillingness after the recent run – and by a big sell off in Treasury prices, which sent the yield on the benchmark 10-year note up to 5.12%.

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A race to the bottom? Who dares sins!

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The industrialised world – consisting mainly of the US, UK, France, Germany, Canada, Australia and Japan – maintain a vice-like-grip over global affairs. If you thought they just intend to control trade in goods, services & global financial capital (top 300 industrial corporations control 25% of the world’s $20 trillion stocks of productive assets), you may be in for a surprise. The developed world intends to extends its poisonous tentacles into the whole gamut of human activity on planet earth, by subsuming all economic, political and cultural institutions.

The creation of the Bretton Wood twins in the early seventies (World Bank controlled by USA & IMF by Europe) to change the structure of international exchange rate mechanism was the first salvo fired to re-colonise the third world and break their monopoly over natural resources. The Bretton Wood twins extended a tranche of loans to the third world nations coupled with strict conditionality to carry out ‘structural reforms’ of their economies. The pliable & corrupt leadership in the third world fell into the Fund Bank trap, only to discover that the prescriptions only pauperised their nations. Nation after nation (Argentina, Mexico, Brazil , East –Asia, Russia) went bankrupt in succession. And now we have the spectre of WTO over our heads. They want the Third World to liberalise agriculture sector, without lowering the massive agricultural subsidies being offered in the West. They are also insisting on liberalising the trade in services, without giving an assurance about free movement of labour. They blame the third world for sweat shops, and themselves twist rules as per their convenience. And when it comes to global warming, they have had their fill of excesses, and now want the third world to adopt green measures. Surely, their hypocrisy knows no limits!!!

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Source : IIPM Editorial, 2007

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

This is, of course, about the fight against global warming; and about the ludicrous ideologies opposing it!

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“Global warming?!? What global warming? Solve our damned water and electricity problems first and then we’ll talk about... what was that again?!?” Ask any average working Indian Joe about how worried he or she is about global warming, and we bet that the deeply choleric and ill-tempered scowl you see with the ruthlessly ‘warm’ and snappy retort mentioned above would be more than enough for you to conclude your search for enlightenment right there in your tracks... Relax, it happened to us too, and we hadn’t even started discussing the international analyst forecasts that because of global warming, India would suffer a major freshwater shortage by 2030... “2030?!??” Oh alright, we get it... But what about the really poor Indians? Allow us, please. You see, poor, homeless, destitute, illiterate, jobless Indians (400 million plus of them), really had it good before global warming set in. And now, they’re all running scared and worried stiff about the fearful destruction this ‘warming stuff ’ is going to unleash upon them... Got it? Phew, it’s already getting hot!

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Source : IIPM Editorial, 2007

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

Smarter Choice

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BRAND : AMD
AGENCY: Contact Advertising
BASELINE: Smarter Choice

DESCRIPTION: A girl explains what’s multi-tasking for her – dating many guys. For a boss, it is giving 10 different orders to 10 different people at the same time, including one to fire an employee. For a musician it’s playing many instruments. The ad ends with a VO, “Are you as good at multi-tasking as the AMD dual core processor? Participate in the AMD King of multi-tasking contest...”

4Ps TAKE: Well, this is the age of multi-tasking and the ad cashes in on the quest of more and more people to manage several tasks at one time. The ad ably brings about the singleminded focus, which is to promote AMD’s dual core processor. The storyboard is gripping and well executed. The communication is bang on, as it targets anyone who is all for multi-tasking through a contest. Don’t know how many will participate in it, but AMD will surely establish its prowess through the event and the ads around it. Now, that’s what we call a multi-tasking ad.

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Source : IIPM Editorial, 2007

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

Despite consolidation, content is the key

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If you can’t beat them, buy them. ...This seems to be the latest mantra that’s spreading across media industry like wildfire. Just like all industries across the globe reeling under the pressure to consolidate to maintain competitiveness, media industry is by no means an exception. And this is amply visible when a Rupert Murdoch makes an unsolicited and unsuccessful $5 billion takeover bid for Dow Jones, Microsoft Corp. looks to buy Yahoo Inc. for $50 billion and Thomson completes a massive $17.2 billion acquisition of Reuters.

While news of Microsoft Corp. buying out internet portal Yahoo Inc. has cooled, amid denials from the company, none dare deny that the era of M&As in media has arrived. Companies have a two-fold focus for inorganic expansion – either build subscribers who are willing to pay for information or build mass audiences that can be sold to advertisers at a premium.

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Source : IIPM Editorial, 2007

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

Reuters getting a new owner

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International wire agency Reuters is being sold to Thomson Corp., the Canadian publisher, for around $17.2 billion. While the Thomson and Reuters news and financial businesses will be called Reuters, the other Thomson businesses are going to be renamed Thomson-Reuters Professional. This signals the formation of the world’s biggest financial news and data service. Thomson-Reuters will have revenues of a whopping $12 billion and close to 50,0000 employees worldwide. This entity will command around 34% of the financial information market; Bloomberg LP, that has 33%, will soon slip to second place. Tom Glocer, the Reuters Group Chief Executive, will now become the Chief Executive Officer of Thomson- Reuters “The combination of these two great businesses will create an exceptional global information company guided by the Reuters Trust Principles,” Tom Glocer said in the statement.

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Source : IIPM Editorial, 2007

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

So why do people really eat Chlormint?!?

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No, we’ve not yet left the question? Why do people really eat Chlormint; or for that matter, any of the other confectionery items sold by Perfetti Van Melle India, a company that lays claim to more than a quarter of the market share in the estimated Rs.1,800- 2,000 crore confectionery segment? “Over 35 million Indians touch a Perfetti product everyday,” an overly proud Prakash Wakankar is besides himself when he gloats over the figure to us. But perhaps he’s earned quite some right to be boastful; well, he is the Managing Director of this Rs.700 crore behemoth.

But that’s easier said than eaten, huh? Having bagged some of the biggest advertising awards of recent times with flamboyant commercials for its brands Mentos and Happydent, one would assume that with a 15-product-strong portfolio, which includes radically transformative success stories like Centre Fresh, Alpenliebe, Mentos, Chlormint, Big Babool, Happydent, and others, a company like Perfetti would be beyond reach of most competitors, huh? Well, didn’t we tell you, that’s easier said than eaten.

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Source : IIPM Editorial, 2007

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

The fountain of success

IIPM BEST B-SCHOOL

The most innovative ways of distribution have been developed by the Cola companies. They introduced the vending machines which soon became very popular and gave a boost to their sales. Vending machines suddenly made it so convenient to buy products you would hesitate to pick up otherwise (like condoms). Of course, they also made cigarettes and alcohol easily accessible to the youth. Today vending machines are selling just about anything and everything. Companies are quickly realising the potential of new distribution techniques. In the United States, sales through snack and beverage vending machines grew by 150% over a tenyear period reaching $35 billion annually in 1999.

Apple even started distributing its iPods and other products via vending machines. From digital cameras to batteries to other accessories, all were available in a single vending machine. Who would have thought a whole store could be shrunk into a staff-less 6-foot wide space!

Like the vending machine, the “soda fountain machine” is the very heart of Coke’s US strength and the major reason for Pepsi’s weakness. It’s the fountains business, which accounts for nearly all the difference in the 12 to 13 share-point lead Coke has over Pepsi (in US). About 25% of soft drinks sold in the US are dispensed by fountains (at McDonald’s, Pizza Hut etc). It just goes on to show that good and unique distribution channels can really become a brand’s “fountain” of success.

For Complete IIPM Article, Click on IIPM Article

Source : IIPM Editorial, 2007

An IIPM and Professor Arindam Chaudhuri (Renowned Management Guru and Economist) Initiative

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