Tuesday, July 31, 2012

Stratagem-INTERNATIONAL : BANK OF AMERICA: THE BURDEN OF COUNTRYWIDE FINANCIAL

So far, the July 2008 acquisition of Countrywide Financial has brought to Bank of America’s table, $197 billion in lawsuits. The bank is in a mess and there appears no relief to the state that the beleaguered entity is in at present. There is one quick-fix solution though – a spin-off! 

During the acquisition, the Charlotte-based bank made a series of transactions which made it liable for every default made by Countrywide in future. One of them which AIG has highlighted in its lawsuit is that even before the acquisition was completed in July 2008, Countrywide Financial had sold Countrywide Home Loans (its subsidiary) to NB Holdings (BofA’s subsidiary). And because it was BofA, which paid in total the consideration, it therefore became liable for future issues arising out of all of Countrywide Home Loans’ past dealings. The mistake BofA made was that it merged its operations with that of Countrywide Financial (in the case of an acquisition, operations of the two companies can be kept separate). Therefore, declaring Countrywide bankrupt today, would be declaring BofA bankrupt – an infeasible cure to its woes.

In such a hopeless situation, every drop of rain seems to convince the market that BofA is fertile. The injection of $5 billion by Warren Buffett on August 25, 2011, was one. The fact that Buffett’s investment sent the bank’s stock soaring 20.02% in just two trading sessions is an indication. Fact is: the infusion gives BofA a chance at improved financials over the next two quarters. Not more. But for Buffett, it’s a case of creating fire from a block of ice. As per the deal, Berkshire will receive 50,000 preferred shares at a fixed divided of 6% (amounting to $300 million p.a. – $821,917.81 a day), irrespective of BofA’s performance or condition. In case BofA wants to buy back that stake, it will need to pay a premium of 5% to Buffett. It’s time BofA investors realise that this deal is about Berkshire’s investors’ wealth. Not theirs.

As for BofA, the mess that it is in will only get worse, as clients get kinder with multi-million & multi-billion dollar class-action suits. [The latest following the AIG suit is that by Western & Southern Life Insurance Co., filed on August 25, 2011, for $63 million.] Till date, 90 suits have been filed against BofA (related to Countrywide), demanding a total of $197 billion – 131.7% more than what BofA is worth today! Enough sign. It’s time that BofA spins-off the ailing unit. Remember – ghosts don’t stop haunting. Not even those from the sub-prime times.

Read more....

Source : IIPM Editorial, 2012.

An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

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Monday, July 30, 2012

Scrutiny-ARAB WORLD: ECONOMIC MUDDLE

The Political Upheaval in key Arabian countries was most welcome as it removed decades of monarchy, but The Subsequent Economic winter is certainly not. It is time for the Arab world to unite and face the crisis

Although military Keynesianism might feel presumptuously correct, history bears testimony that political upheaval is often followed by economic paralysis. Immediately after the 1789 revolution in France, the economy was in doldrums. The 1917 Soviet Socialist Revolution led to huge economic commotion. The impact of Islamic Revolution in Iran in 1979 was so severe that it triggered the 1980-81 recession. This time too, it doesn’t look like an exception will be made.

As per reports by The Arab Organization for Investment Insurance and Export Guarantees, foreign investments in 18 Arab countries have declined from $83.9 billion in 2009 to $64.3 billion in 2010, which is a decline of 23.4% or $19.7 billion. Foreign investment is further projected to decline by 15% in 2011 in the region. Saudi Arabia, the largest FDI recipient, has seen the biggest fall by 41% from $35 billion in 2009 to $21.6 billion in 2010. Another facet to it is that most of the investments that these countries are attracting are going into real estate, banking and oil infrastructure; while there is no surge in investment in IT, education, health, automotive, et al. Unemployment in Arab nations remains the highest compared to any region. According to a McKinsey report, unemployment rate of the Arab region is as high as 25%, far higher than the global average of 8.8%.

The impact of political unrest is worse for Yemen, Libya and Egypt. As per the Gaddafi government, the unrest has cost Libya over $50 billion. While oil remains its major earning, technology and infrastructure are in complete mess with no idea of when they will be get back to normal again. Realising the severity, the World Bank has agreed to lend $2.2 billion to Egypt and WB and IMF together have promised $1 billion to Tunisia. Saudi Arabia has also promised to aid Bahrain with a lump sum, while Iran has also promised to provide loan to Syria. But they have to go beyond these token gestures now. A lesson can be learnt from the East European crisis, when Europe created The European Bank for Reconstruction and Development for recovery. The Arab world needs something similar. Would this crisis be able to unite them?


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Saturday, July 28, 2012

Scrutiny-LATIN AMERICA: CHARISMATIC CONUNDRUM

Latin American states are led by Iconic Leaders who last The Short term, while North America is led by Democratically elected leaders through strong Institutional structures, which last the long term. Time enough for South American nations to gain from institutionalising Governance Structures than depend on individuals

But this has created problems for them too. Latin American states have always struggled to find their rightful successors. Thus, even though many assumed rightly that Raul Castro would be the successor to his elder brother in Cuba, there were ambiguities and speculations after Raul’s health problems in 2006.

The story is quite different in case of United States. While South America was led by popular leaders, North America was always led by leaders elected through the institution of democracy. Thus, US succeeded in establishing stronger institutions rather than just leaders. In US, leaders are held accountable unlike in Latin America, where leaders have emerged and stood above institutions. More importantly, when power is institutionalised rather than individualised, there is always a replacement/successor in place of the premier.

That is why Latin American states have a higher probability of facing trouble during transfer of power. This also gives enough reasons for states like North Korea as well as Russia to be concerned. North Korea was ruled and led by Kim Jong II since the 1980s. His authoritative and dictatorial command didn’t create many options as successors. Similarly, Russia has been run by Vladimir Putin since the 1990s. Even though Medvedev is virtually leading the state, actual power is still in the hands of Putin. In such a situation, if Putin were to vanish from the scene, it will invite political crisis.

These states can learn from China’s example as well. A communist state, China – rather than run on the whims of an individual – is being run by the Communist Party of China since 1949, which has a clearly defined planning process. This gives China stability as well as flexibility in leadership change and transfer of power within members of the ruling party and national leadership.


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Friday, July 27, 2012

After Posting Impressive Numbers in The Last Fiscal, BAJAJ auto HAS a slew of New Projects to keep it on top of The Game

Too good to be true? Will Bajaj be able to sustain such a high margin in this fiscal even as raw materials and commodity prices threaten to take the wind out of the sails of many business enterprises? On its part, the company is not content with its recent laurels but is hungry for more. “We always consider profitable growth rather than focusing only on the top-line. Bajaj’s margins will continue to remain strong in the coming years as well,” claims Milind Bade, GM – Marketing, Bajaj Auto. At a time when rivals like Hero Honda was stuck going over the rituals of separation from Honda, Bajaj Auto was devoting all its time, efforts and energy in establishing the brand value of its Discover & Pulsar bikes. The company has not only created a family of products under these two brands, it will soon be entering the four-wheeler segment as well with the launch of its car that has been in the works since 2008.

As the company spreads its wings to new segments, the focus on its core two-wheelers business remains as strong as ever as is its awareness about the intensifying competition. To stay ahead of the curve, the company has crafted and is working on its triple-game strategy in the market, which will ensure profitable growth in the long term. First, the company is working on expanding its volumes from exports. Currently, Bajaj exports over 30% of its total production to the global markets. With KTM now under the Bajaj umbrella, the company is seriously looking to amplify its export numbers as it enters new markets in Europe, the US, Australia and Brazil. Second, it is working on a project to replace the Rs.5-lakh Bajaj three-wheelers with a more environment-friendly product. Even as the company is aware of the fact that the product will cost 15-20% more than its typical Rs1.1 lakh price tag, it is confident of pulling it off and nudge the project towards better product viability and enhanced profitability.

Another project on which the future of Bajaj Auto could be riding is the development of ‘Bharat Bike’. For quite sometime, the two-wheeler major has been working on expanding its base in the rural parts of the country, where a lucrative market is waiting to be tapped. The Bharat Bike project is part of Bajaj Auto’s plans to develop a 150-cc engine bike to run on rugged rural roads, which will cost Rs 40,000. Bajaj’s arch rival Hero Honda sells more than 45% of its total bike volumes in the rural parts of India, which explains why Bajaj is keen to make its Bharat Bike project work. However, this third strategy for Bajaj could prove to be a gamble. While the first two strategies (exports & development of a green auto-rickshaw) are expected to bring rich financial dividends for the company, its Bharat Bike project is expected to pull in volumes, though it will be tough retaining any appreciable margin on this product. The Nano, despite its low price took a toll on Tata Motors’ profitability. Is Mr. Bajaj listening?


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Thursday, July 26, 2012

Can India become a Telecom Manufacturing Hub?

Depite a Humongous Growth in The Telecom Sector, The Country has failed to build an Ecosystem that Promotes Telecom Manufacturing, Forcing Operators to Import most of The Equipment for their networks.

The latest joke doing the rounds in Electronic Niketan (IT and Telecom Minister’s Office) is that the import bill for telecom equipment will soon surpass petrol’s. It’s a telling comment on the Indian telecom industry, which has witnessed exponential growth in the last one decade but failed miserably on the manufacturing front.

Telecom industry in India has come a long way from having 5.07 million subscribers in 1991 to being the world’s second-largest market with a subscriber base 811.59 million by the end of March 2011. Ironically, in the year 2009-10, Indian products were able to meet just 3% of the telecom equipment demand in India. Equipment used for expansion of telecom networks was imported mostly from Europe and China. The figures highlight that the contribution of home-grown manufacturers to the great telecom success story has been negligible. Telecom manufacturing is one of the key areas for the government as well as telecom regulator to seriously look at, as the demand and supply chain will continue to widen. As per a TRAI report the subscriber base is expected to touch 1.5 billion by 2015, considering that India will continue to have 10% of the global market share.

Recently TRAI recommended to Department of Telecommunications (DoT) that manufacturing must be spurred to achieve the target of meeting 80% of the domestic demand. The recommendation was a little ambitious than the target for the XI Five Year Plan, which envisaged meeting 75% of the telecom equipment demand and handsets. If accepted in its present form, a cap on buying equipment manufactured outside the country cannot be ruled out. “The telecom ecosystem has so far failed to adequately spur the manufacturing segment. The demand and supply gap is widening. We need to have a proactive approach towards manufacturing of telecom equipment” says N.K. Goyal, Chairman, Telecom Equipment Manufacturers Association (TEMA).

India’s information and communications technology equipment consumption is expected to touch 11.5% of the global market by 2015 from the current level of 5.5%, as per combined estimates of ISA-Forst & Sullivan, CII and others. A TRAI report says that requirement of equipment for 3G, LTE and WiMAX services alone would be around Rs 232.85 billion by 2015-16. The report predicts that by the year 2020, the combined demand would be worth Rs 264.56 billion. But the question is: Can India become the next telecom manufacturing hub and will it be able to meet 80% of the domestic demand for telecom equipment by 2020? People in the industry believe that if China can do it in a span of 10 years than India can do it as well. But the road ahead for telecom equipment manufacturing appears full of pitfalls.



 
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Wednesday, July 25, 2012

Introducing World Class Retail Technology and Practices

Some Nifty Retail Strategies, Putting in Place a Superior Customer Relationship Programme and Introducing World Class Retail Technology and Practices, all have helped The Department Store Chain to be on top of The Retail Game.

However, when it comes to retail penetration, Shoppers Stop has been following a selective strategy. Until 2001, the company had just seven stores, whereas Westside from Tatas, which also followed a selective retail strategy within the first 10 years of its operation, had 14 stores. But Shrikhande points to a more aggressive retail penetration strategy in recent years. “In the last 10 years, we opened another 31 stores. In the next three years we plan to open another 31 stores. This is phenomenal growth vis-à-vis what we have achieved over the last 20 years. Maintaining our focus on delivering happiness to customers while growing at a fast pace will be the key challenge,” he avers. The chain’s cautious approach to expansion has had an up-side and paid off well during the bad times. When retailers such as Pantaloon and Woodland have had to close down 10 stores during the slowdown to combat rising rental cost, Shoppers Stop didn’t have to shutter any of its stores.

Today, even as it is pulling out all stops to position itself as a global retailer by bringing the world’s best retail technology and practices to its customers, the chain is looking to add more stores and has lined up investments worth Rs 450 crore over the next four years. The company has eight Hypercity stores and 36 Shoppers Stop stores across the country at present. But right now the biggest challenge for the group is to foray into tier I cities where Pantaloon, Lifestyle and other players have already entered much earlier. Pantaloon, with its comparatively easy-on-the-pocket portfolio of private labels mints 50% of its turnover from tier I and tier II cities. But unlike Pantaloon and Westside, both of whom have been thriving on private labels, Shoppers Stop has been banking on its power brands to grow, which are expensive than the private labels. The group has more than 400 international brand in its portfolio and that’s what makes Shrikhande confident about taking on the competition. However, its bridge-to-luxury positioning might not work in tier I cities. So positioning Shoppers Stop in tier I cities remains a challenge. Concurs Shrikhande: “Understanding different kinds of customers in smaller cities is a big challenge. Ramping up the supply chain, developing quality teams in the smallest of stores, maintaining the values of the company, developing multi channel capabilities, delivering shareholder returns, etc. would be the other challenges.” And with Westside planning to open 30 stores by this fiscal year in tier II cities and Pantaloon, too, sounding the battle cry, the competition in the retail space will only get tougher in the coming years. That will prove to be the real test for Shoppers Stop.


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Tuesday, July 24, 2012

Policy-BELOW POVERTY LINE: THE NUMBER GAME

Varying findings of different Committee Reports, an Absolute lack of consensus and The Dependence of poverty alleviation schemes on BPL Estimates makes its Calculation process Extremely crucial. And now, Despite Accepting that 37% of India could be in The BPL category, The Government has failed to notify this.

If we consider the United Nations data, 220 million people in India suffer from hunger and the prevalence of hunger is found in all age groups ranging from infants to old. Food production has been going down, food imports are rising and food insecurity is on rise. Whereas, per capita availability of foodgrains was 190 kilogram per person per annum in 1979-80,it declined to only 186 kilogram in 2004-05. The Multidimensional Poverty Index (MPI), calculated by the Human Development Report Office of the United Nations Development Programme (UNDP), that looks beyond income at a wider range of household-level deprivation, including services, which could then be used to help target development resources, throw up stark statistics compared to regular poverty measures. The study has found that half of the world’s MPI poor people live in South Asia, and just over a quarter in Africa. There are 421 million MPI poor people in 8 Indian states alone – Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Orissa, Rajasthan, Uttar Pradesh, West Bengal – as compared to 410 million in the 26 poorest African countries combined.

While clarity over the extent of poverty has always been a matter of debate, in a recent development, the entire process of the manner in which the poor are counted in India is under a legal scrutiny. The Supreme Court has asked the government to prove the efficacy of the BPL survey to be held in June this year, if all the poor identified fail to get government benefit. The court has asked the government to give reasons behind the Planning Commission putting up a cap on the number of poor in India, which many believe is unrealistic. The existing conflict between the Centre and states over who decides the number of poor is more of a political battle for an upper hand when it comes to taking credit for the impact of a welfare measure.

However, a scenario such as this calls for further introspection before the concerned parties quarrel over committee reports. Before deliberating upon the contours of who the government would recognise as ‘poor’, there has to be a consensus and stricter vigilance to ensure that the existing welfare measures are reaching the actual needy.


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Friday, July 20, 2012

India-Ranks on top in terms of Child Deaths due to Malnutrition

India, as a Unique case in The World, ranks 2nd in Farm output and also ranks on top in terms of Child Deaths due to Malnutrition. There are huge Flaws in The Delivery Mechanism. Who will solve them? 

Ironically, India is also home to over 230 malnourished people. It is a country where malnourishment is the primary cause for around 50% of child deaths. Given this, India can’t afford to waste any food products irresponsibly. And it’s not rocket science to find out the solution. All that the agriculture ministry should do, hand in hand with the Ministry of Consumer Affairs, Food and Public Distribution is that investment into developing food stock capacity infrastructure should be increased massively. India, with only 60 million tonnes in food storage capacity, lacks far behind when compared with China’s 150 million tonnes. At the same time, godowns of Food Corporation of India (FCI) are 93% full.

Yes, the government is inviting private players to build new storage facilities and rent them to the government for seven years. But even if it materialises, that is never going to be sufficient, with growing farm output and productivity. The government has to make substantial investments to increase public storage capacity.

The food processing industry is still indigenous and unorganised. Only around 2% of perishable goods are processed every year – very low compared to Thailand’s 30%, Brazil’s 70% or 78% in the Philippines. Private players’ participation can play an important role, as the lack of an organised and integrated approach to a cold chain infrastructure leads to losses estimated at around Rs.1 trillion every year. As per various researches, allowing organised retail to directly buy food grains from farmers can increase efficiency in the supply chain. Farmers’ earnings can also go up by some 40-50%. But this needs strong political commitment from Pawar.


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