Got Your Lovemark? Buisness World 29th October 2012

Three professors of marketing, 39 companies and innumerable challenges and solutions, The New Emerging Market Multinationals is an excellent collection of ideas and examples that should inspire companies in emerging markets looking to build brands and markets anywhere. The authors, Amitava Chattopadhyay, Rajeev Batra and Aysegul Ozsomer, take challenges faced by companies beyond classrooms and analyse experiences of 39 EMNCs (emerging market MNCs) that have risen to pose a challenge to their peers in developed markets, the triad MNCs or TMNCs.

The challenge for these firms was to build global businesses and global brands in the same breath. Business in developed markets would need a strong brand presence, which, in turn, cannot be established unless the business is large and brings in the numbers to be accepted as a brand. This symbiotic relation is the clue for success for any company in a new geography. The authors explore how this really happened.

The reasons were four-fold: such expansion was a chance occurrence for some, while for software firms, Y2K brought in opportunities. Others went abroad to lower the risk of business cycles, while the last group went out to learn global standards to match TMNCs operating at home. These EMNCs, which were earlier satisfied being low-margin, high-volume suppliers for private labels and OEM goods, moved to the next level by acquiring licences and technological competencies to establish in these regions.

The book talks of four types of strategies that have been used for this purpose. The first is to leverage existing low-cost structures and become cost leaders. Second, harness existing resources and knowledge of home consumers and apply them elsewhere. The third: combine these low-cost advantages to develop niche offerings in other emerging markets. The last is to take these capabilities and build branded businesses in developed markets. An insight provided by the authors is that markets are typically divided into premium brands, mass market and no-brand economy segments. The trick is to work in the areas that give best returns. The premium brand segment provides returns of 12-15 per cent, while the mass market offers 3-5 per cent. The economy segment gives just about 1-2 per cent, and it is just impossible to compete with the Chinese, who are present everywhere making competition difficult. Brands, hence, have to be build to grab attention and change image.

These real life experiences serve as a guide for companies looking to enter developed countries. At times, it becomes more like a textbook as the authors explain how strategic competencies are built on four pillars, which include mixing the right blend of labour and capital (Nano car), conversion of fixed overheads to variable costs (Airtel with Siemens), lowering of raw material, distribution and marketing costs (Apollo uses IT while Natura of Brazil ties up with university talent rather than develop in-house research) and, finally, organisation culture. The examples make for interesting reading.

The authors are, however, less certain of the success levels in acquisitions. Their research leads them to believe that not more than 50 per cent of such acquisitions add value to the acquirer, be they TMNCs and EMNCs. Their approach to brand building is also fascinating, especially when they trace companies such as LG in the US; how it became a leader. It did not place products in Walmart but in Sears to register its brand as a premium one. Here, the authors feel the brand really matters and we need to identify with the best through colours, logos, shapes, etc., which denote quality, leadership and, above all, trust. Interestingly, they put the overall impact as a pyramid that starts from a trademark and evolves to a trust mark and matures to a lovemark. An innovative way.

The New Emerging Market Multinationals: Four strategies for disrupting markets and building brands By Amitava Chattopadhyay & Rajeev Batra with Aysegul Ozsomer Mcgraw Hill Pages: 335 Price: Rs 595

 

The language will matter more now: Financial Express: 27th October 2012

Will RBI show a desire to support the overall policy package being implemented by the finance ministry?October 29, 2012, is an important day from the point of view of RBI, for two reasons. The first is that there will be monetary policy action where even no change is an action of the central bank as the market is already busy discounting the same. The second is the wording of the document that throws light on the state of the economy, with its own take on certain developments that have taken place or will probably take place.Monetary policy today has actually been filtered down to only rate changes, ever since RBI started hiking them some two years back. In the past, there were announcements on prudential regulation, debt market, credit delivery, money market, cooperative banks and so on. But, today, these facets get just some perfunctory mention and do not even merit discussion as the focus is on rate cuts all the time. Also, any such structural change invariably leads to the setting up of working groups that bring out a draft report for public comments before being finalised, which is a part of the consultative process pursued by RBI. Therefore, monetary policy is actually rate policy.When it comes to rate stance now, the picture is quite straightforward. RBI has been maintaining a hawkish stance on rates on account of inflation, where different indicators have been used periodically: generalised WPI, core inflation, food inflation and CPI inflation. The message is that inflation is an issue and as long as we are in the territory of negative real rates, going back on rates may not be expected. This is pragmatic in a way because a closer examination of corporate performance in the last few quarters does reveal that inflation has been a factor affecting profitability more than interest costs. RBI has brought forward its own benchmark inflation rate now to 7% from 5% earlier. This means that the new normal is 7% and rate action should be expected once we break this barrier or the rate moves towards this number.What about CRR? Currently, liquidity may appear to be under pressure, though looking at the growth in deposits and credit so far this year does not give a similar picture. As of October 5, growth in deposits was 8.5% and 4.3% in credit. In incremental terms, the excess of deposits over credit was R2.9 lakh crore after adjusting for CRR, which is still higher than R2.6 lakh crore of investment in GSecs. Clearly, liquidity is not an issue today, though the repo borrowings have been higher than the 1% of deposits notional target of RBI. Add to this the clamour of banks to have CRR lowered, and RBI may come up with 25 bps cut in this reserve. This will provide additional R35,000 crore of funds to banks but, given that demand is low today, these may just flow into GSecs. CRR funds released get absorbed into the system quite rapidly and may not be available when there is revival in demand for credit during the so-called busy season, which should have begun. The moot question is whether or not banks will lower rates.The last time RBI lowered CRR unexpectedly, the range of the base rate has admittedly come down, though this has not been all pervasive. Given that demand for credit may be increasing at this time of the year, it would be interesting to see if banks do follow suit and lower rates this time around. Therefore, it all comes down to a CRR cut this time. Also, given the controversy on high CRR which earns no return, RBI could consider paying some interest on these funds, which will placate banks.But, the more interesting aspect of the policy will be how RBI views the economy and the action taken so far by the government through fiscal correction and reform, FDI policy and so on. Also, economic conditions have improved in a way, with the rupee looking fitter, and foreign funds have once again started flowing in—with the government providing assurances on GAAR and retrospective taxation.RBI has averred all through that fiscal action was necessary for things to move on its end. But on deeper thought, while this stance cannot be contested on theoretical grounds, there may still not be a link with the monetary system. The higher fiscal deficit so far on account of the subsidy bill has not led to excess demand for goods. In fact, one major grievance of industry is that demand has stepped down with even the auto segment witnessing lower production in August. Also, since RBI has never really spoken of excess demand as being the reason for inflation and pointed more to cost and structural factors, the linkage of policy with deficit can be debated.Also, given low demand for credit, there has never been a liquidity shortage caused by government crowding out private demand. But, notwithstanding these contra arguments, the government has done its bit by lowering its deficit target by adjusting fuel prices and also bringing about policy actions. Therefore, RBI’s stance on government action and state of the economy becomes even more important now.Given this situation, RBI may now be compelled to take some action, and hence while a repo rate cut would be against its own original stance on inflation, a CRR reduction would probably show its own commitment to growth. By doing this bit, it could become a part of the overall policy package being implemented by the ministry of finance—or rather to use the cliché, monetary policy will start talking to fiscal policy.

It will be hard for RBI to cut rates: Mint 23rd October 2012

If the central bank lowers rates when inflation is still high, it’s an admission its policy has not worked

 

Traditionally, monetary policy has been motivated by the twin goals of fuelling growth and containing inflation. Accordingly, we attribute a Keynesian face or a Friedman-like policy stance to it. Interestingly, in the last two years or so, there is a degree of skepticism about whether these theories really make sense when evaluating the efficacy of the monetary policy.

Further, two other dimensions have been added. The first is what has been called “pressure by the government” and the second is “market expectations”.

One is still not sure whether these two really affect policy formulation; but, given that the finance minister keeps making statements on the need to lower interest rates and the Reserve Bank of India (RBI) holds meetings with bankers, one never really knows if such things matter and become self-fulfilling. Also, in April, RBI lowered the repo rate, or the rate at which it gives short-term money to banks, with a caveat that we should not expect more rate cuts soon. This came at a time when the the finance minister spoke about lower interest rates after presenting the Union budget. There appears to be some merit in believing that these two factors also matter for RBI.

Given these motivations, what can we expect? Growth is stagnant. The recent positive industrial growth numbers should not cloud our vision that things have changed drastically. While a turnaround from negative to positive growth is good news, we need to wait and see if this is sustainable from now on. At best, one can say that growth has bottomed out.

There’s a status quo on inflation, too. Wholesale inflation rose 7.8% in September with all segments coming under pressure. Retail inflation is closer to 10%. Inflationary expectations are high, given that fuel prices have been increased and that the kharif (or winter) crop will be below optimal.

Now inflation is on the supply side but RBI has, in its various policies, taken a varied approach to inflation. At times, it was core inflation that was targeted; on other occasions, it was food inflation. More recently, it has spoken of retail inflation. Whichever way we look at it, none of these numbers has come down significantly to warrant a change in monetary stance.

Also, if RBI lowers rates when inflation is still high, then it is an admission that the policy has not worked; and that, as a corollary, its original approach was not right. Therefore, it is hard for RBI to lower rates.

The so-called pressure put by the government can be an important factor, considering that the government has done its bit for reforms and fiscal consolidation, albeit more through announcements than actions. With banks also looking at the regulator to lower rates and the cash reserve ratio (CRR) or the portion of deposits that banks need to keep with RBI, there is indeed pressure on the central bank.

Given all this, RBI could go in for a CRR cut, though admittedly liquidity is not an issue for the system today. Still, this will placate the market and leave the banks to decide on interest rates.

The CRR cuts have not, in the past, been very effective in lowering rates. While banks have claimed that they will be in a position to lower rates if CRR is lowered, past experience does not provide such an indication. Still, cutting CRR and leaving the policy rate intact should send the right signal to the market, though this may not be adequate to excite the market which is banking on a rate cut.

I expect a CRR cut of 25 basis points (0.25%) with no change in the policy rate. One basis point is one-hundredth of a percentage point. Also, some sort of payment on CRR balances can be thrown in as an icing on the cake to make banking stocks tastier.

Matching behaviour: Financial Express 22nd October 2012

The Nobel prizes show that behavioral economics has become the new hotbed of researchAfter bestowing the Nobel Prize to the EU for peace, it would not have been a surprise if the Nobel for Economics was given to the ECB, considering that this institution has done a lot to keep the eurozone from disintegrating. Evidently, the award has not gone to an institution but been conferred upon Alvin Roth and Lloyd Shapley, both of who have worked on a similar path albeit independently, to come up with their own theories on match-making that are distanced from prices. Normally, all demand and supply factors lead to a price determination, which then decides who is in and who is out. This is the efficient markets theory. However, at times prices do not matter and there may be a need for alternative systems to bring about equilibrium. Working on cases where prices do not matter is Roth and Shapley's way of looking at economic isues.They have looked at marriages, school allocations, jobs, hospitals and donations to prove their theory. At a very rudimentary level, when prices do not matter, school admissions are first based on the applications made by parents who express their choice through a pecking order. The school decides on who to take based on parents' preferences--such as distance from home, availability of transport, status of household etc while allotting seats. Based on matching the parents' criteria with their own, schools fill seats, through ‘first, second and third lists’. Does this work in India? On the face of it, matching theory does not work where prices decide the equilibrium. The starting point for the sellers' market is that there is a predetermined price which rations out the commodity that is available. As all commodities have a price, it is possible for the market to match demand with supply. If demand is high, then supply gets created as producers set in motion processes to optimise use of their capacity.But when it comes to non-commodities, it would work even if the price separates effective demand from desire, that is, when demand is greater than its supply. Schools, hospitals and similar services have an attached price, which decides the inclusion criteria. After that, ‘matching theory’ can be applied. For hospitals, it is more democratic and works on a first-in basis; no further criterion comes into play. In case of education, at the school level it is the fee or the donation that is the starting point. After the fee threshold, the matching takes place through a pecking order. First, those with a certain background are permitted entry based on maintenance of culture. Second, those who have to be given a seat based on recommendation are admitted. Last, there are the principles of matching that come into play in allocation. Therefore, even when price matters and lots of people qualify, the institution has other ways of discovering potential candidates. However, if the institution is publicly run, then the matching principles work from the start.An interesting area that can be explored is marriages in the Indian context. Roth and Shapley have discussed at length the so called couple discovery, which today is used in dating web sites. The Indian system of arranged marriages has long had this implicit arrangement wherein advertisement in dailies, which is also a revenue earner for dailies, helps to bring about such compatibility. These are all signalling mechanisms, which are similar to mechanisms created by another Nobel Laureate, Michael Spence, to create efficient markets in the presence of information asymmetry. The newspaper or dating site provides a signalling mechanism for concerned parties who then narrow down their choices and begin exploration of compatibility.In case of jobs, matching again takes place through a tangible medium, that is, employment agencies, consultants or advertisements. There is no pricing here, but there is an intermediary who decides which profiles fit the employer’s requirements and then takes the process forward through a short listing procedure. Various criteria such as qualification, salary drawn, designation , and experience are used.When it comes to choosing a doctor or any other professional, the matching takes place through a reputation check. While qualifications and price matter, one goes for a professional based on other people’s experiences. Hence, here it is the seller of the service who reaches out to the buyer by sending signals through the way in which clients are serviced. Therefore, all these theories of matching demand and supply assume different tones depending on the service one is talking of. Public services are more democratic and are open to all, generally on a ‘time preference’. But, in the case of private services, price is certainly the first criterion, which then would contest the views of Roth and Shapley. However, given that a supply gap exists for all such services, there is a rationing system that comes into play where these principles operate. Quite interestingly, the recipients of this prestigious award in recent years have been on the behavioural side which is practical. The day of the macro-theorist appears to be over. This could probably be indicating that there are few new theories on the macro front that have dominated economic thought. We still talk of Keynes, Friedman, Hayek or Sarjent, whose works were written prior to the eighties. We are yet to see new theories that explain what has caused the crises we see around us. This has raised more criticism and cynicism, but not sown the seeds of new economic ideas that provide a solution.

Not much sound in Kelkar Committee: Financial Express 6th October 2012

The Kelkar Committee’s recommendations on fiscal consolidation balance on the edge of either sounding clichéd or making impractical suggestions. The report goes on at length to say that India is in a precarious state and resembles its situation in 1991 when we had a crisis, which can be debated. It offers nothing really new and puts numbers to the fiscal impact of various measures that should be implemented. It talks of a fiscal deficit range of 5.2% to 6.1% depending on whether or not we choose to act.There are basically seven issues that come to mind here. First, the committee talks of reducing the gap between the economic cost and issue price of foodgrains. This is not really practical because both the policies are guided by different motivations. The ministry of agriculture fixes the minimum support price to ensure that the farmers get a better income every year, while the issue price has been pegged ostensibly to protect the vulnerable sections. Increasing the issue price is a logical option which has always been there, but has been desisted from on the grounds of protecting consumers from food inflation, especially when it is running at a double digit level. Therefore, the suggestion is just as logical and impractical as saying that the government should run a close-ended procurement programme.Second, the Committee talks at length about the fuel subsidy being a sore thumb. It does not recognise that while the reason for not raising prices could mainly be political, there has been a substantial inflation buffer provided through this route. Increasing prices are seriously inflationary and not only with a short-term effect, as claimed in the report.Third, it is a bit too pessimistic on disinvestment and concludes that not more than R10,000 crore would be garnered, which again can be contested. The government has already announced a fairly aggressive programme for disinvestment, which will probably take us closer to the targeted amount of R30,000 crore.Fourth, the committee has spoken of how the fuel subsidy bill will be exceeded as the targeted amount of R43,500 crore has already been nearly exhausted. An issue missed is that the budget had assumed a price of $115/barrel for the year, and the price has been lower for most of the year. Clearly, the budget had gotten its numbers wrong.Fifth, the Committee talks of ensuring there is no constraint on using MGNREGA to protect farm workers. It, however, says that the late monsoon had helped. But the first estimate of agricultural production shows shortfalls across the board, meaning that there will be financials stress in this sector which will necessitate more action from the government.Sixth, the report talks of savings in plan expenditure of R20,000 crore which can compensate for the higher outflow on other accounts. This is a surprising statement to make because, ideally, the committee should be pitching for this expenditure to ensure that the Keynesian fiscal action takes place meaningfully. While this could have become a habit based on past experience, we should definitely ensure that the money is not saved but spent as a part of conscious policy. It provides a cover by saying that this should not come in the way of social expenditure but should certainly be a result of cost savings through efficiency. Does this mean that there are these many leakages in the system?Last, the committee talks of how the fiscal deficit has crowded out the private sector. While this is a theoretical outcome, in our context, this has never really been proved in the last two years. RBI has never stated that it has raised rates because the government was borrowing too much. It was an anti-inflation stance that provoked such action. Second, liquidity has never been an issue as banks were never constrained to lend to the private sector because of paucity. RBI has supplemented well with open market operations to ensure that the mismatch was corrected. If the private sector could not get credit, it was because of the reluctance of banks to lend on account of fear of NPAs or due to higher interest rates. Also, core inflation has never gone beyond 5%, meaning that excess demand was missing across sectors to really blame excessive monetisation. Besides, with the investment deposit ratio being above 30% for most of the last 2 years, banks certainly were not constrained here.On the positive side, it has rightly observed that changes in fuel prices should be calibrated and in small measures. This it says is easier to be absorbed by the system rather than large increases. This is quite pragmatic as when inflation (CPI and food) is around 10%, it is imperative that input prices should not be increased substantially at one stroke.The other interesting thought from the report is the use of the ETF concept to sell government stake in PSUs. The idea of pooling the stake and then selling the same especially to retail investors has never been tested to see whether it will work, considering that several of such entities may not be the ones to catch investor attention. Nevertheless, it may be worth persevering with.The committee hence does speak a lot of theoretical sense but does not really add much to the practical side of implementation. Some of the theoretical conclusions like the impact of fiscal deficit are not really pertinent today. Quite clearly, while this report will provoke some discussion as everyone today is against subsidies, it will be surprising if these known solutions which have been reiterated here, will actually find utterance through implementation.

The MGNREGA effect on wages: Financial Express 29th September 2012

RBI’s data release on average daily wage rates for men in rural areas is quite an eye opener. Besides presenting various data points that show how people live across professions and states, it also sets a different perspective on other issues relating to wages that are spoken of in debates, including the impact of MGNREGA and the poverty definition.The data provided is over eight years across different occupations and states. The occupations, agro-related and others, cover 18 distinct groups. Some of the important takeaways are the following. First, wages vary across jobs significantly depending on the level of skill that is required for the same. The non-agriculture segment provides higher wages as seen in the case of masons (R256), carpenters (R212), well diggers (R212) that contrast with weeding and picking, which paid R133 as of March 2012. The herdsman’s job is the lowest with a pay of R95 as of March 2012. Second, the growth in wages over the last eight years is fairly good, at an average of between 12% to 21%, for cobblers and winnowers, respectively. This means that the increase in wages does adequately cover inflation over the period, and that there could be a higher gain considering that CPI for agricultural workers has averaged 7.5% during this period. However, as will be discussed later, a substantial part of this increase has emanated in the last 2-3 years, ostensibly on account of MGNREGA. Third, the wage profile across states presents stark variations across these professions.Kerala has the highest wages, which can be attributed more to the higher literacy rate where there is less labour available as also the fact that farming is not a major profession in this state. Tamil Nadu, Punjab, Haryana, Himachal Pradesh and Jammu & Kashmir are the states with higher wages. Scarcity can be the factor for J&K, while the agriculture focus has pushed up wages in Haryana, Punjab and Himachal. Tamil Nadu comes as a surprise, where wages are one of the highest across professions.Andhra Pradesh, Karnataka and Rajasthan provide wages just above the country average while Tripura, Meghalaya, Manipur and Assam have wages lower than the average. This is surprising because one would have expected wages to be higher in the north-eastern states where the supply of labour would compare favourably for the agricultural jobs but falls short in the case of non-farming related professions. However, the biggest surprises are Maharashtra and Gujarat, which are clearly the most industrialised states in the country but where wages are lower than the national average. This may be attributed to the fact that these tend to be states affected by shortfalls in rainfall, which, in turn, could make labour lose some bargaining power. Madhya Pradesh has virtually the lowest wages across all the professions.Two issues that merit debate relate to MGNREGA and poverty thresholds. One of the thoughts that have been expressed often is that MGNREGA wages have actually drawn labour away from the farm sector to public works. Data shows that MGNREGA wages for April 2012 ranged between a low of R91 in Tamil Nadu to a high of R190 in Haryana. The picture is hence not too clear. But a drill down through the time series reveals quite a bit. In agriculturally-rich states like Punjab, Haryana, and to a certain extent Himachal Pradesh, there has been a spurt in agriculture-related wages after 2009, which can be linked directly to MGNREGA. For the non-farming related jobs, there has been an increase, albeit more gradual, though there is a tendency for wages to move in a contemporaneous manner. Therefore, definitely a causal link could be established between MGNREGA wages and the general level of wages. This also means that to a large extent the adjustment for inflation has come about due to the competitive wage being offered by MGNREGA. This has been good for rural labour, which has also helped to improve their consumption levels. Also, this has caused demand to grow for both food and non-food items, which will necessitate supplies to increase at a comparable pace in the future.The other issue relates to poverty. There has been adequate controversy over what constitutes a poverty mark. Based on the wage data, it looks like farm labour has a greater possibility of falling into the poverty trap even today, assuming a single worker with a family of four to support, as certain categories still earn at the national average level—less than R130/day (based on R26 criteria) and R160/day (R32 criteria). The non-farm labourers are better off in general, though again this picture varies across states. Clearly, we need to focus on bettering the wages in rural areas to ensure that living is sustainable.MGNREGA benchmarks have helped to elevate the living standards of rural families and should hence be commended. While this programme works essentially between seasons and assures employment for a fixed set of days for families, the wage benchmarks, which have risen progressively, have been useful in improving the overall wage levels. The unevenness across states needs to be corrected or else there will be a tendency for migration, which, in turn, will aggrandise the supply of labour in specific fields. This has already been witnessed in cane crushing where wages have almost doubled in the last two years in states like Tamil Nadu.Going ahead, we can expect wages to move in line with inflation-adjusted MGNREGA wages, which will help to improve standards of living as well as reduce the inequality in incomes. This will help to reduce the incentive to migrate to urban areas, which will be useful for the rural economy.