IBM: India to Become Major Automotive Manufacturer by 2015

The ongoing malaise within the US automotive industry is well-known. Toyota recently overtook GM as the world’s largest car maker, DaimlerChrysler finally offloaded its struggling Chrysler division to a private equity group, and all the American manufacturers are saddled with “legacy costs”: generous health insurance and pension coverage for workers, concessions given at a time when they were selling record numbers of high-margin vehicles like SUV’s. With rising gas prices, demand for these sorts of vehicles has fallen and American automakers’ profits have followed suit.

Looking towards the future, concern has been raised that the growth of automobile manufacturing in countries like China and India could prove to be the proverbial “nail in the coffin” for US carmakers. However, to paraphrase Mark Twain, the NYT reports on a study by I.B.M. and the University of Michigan’s Transportation Research Institute suggesting that rumors of the death of the American automobile industry are indeed, greatly exaggerated.

In the study, IBM “interviewed 29 Indian automotive executives and experts from government, industry, and academia” on “wide range of issues, including India’s future market and industry structure, relationships between domestic auto companies and their foreign joint venture (JV) partners, as well as the challenges in the areas of infrastructure, air quality, and oil security.”

The study’s findings confirm that India has the potential to become a major vehicle-producing nation within the next decade but “suggest[s] that the Indian car market remains in a fairly primitive stage of development”. The study notes that before real growth in the automotive sector can be accomplished, the Indian government must address road and other transportation infrastructure deficiencies. As the NYT noted, “even if carmakers are able to increase production, many consumers do not want to buy them because roads are in poor shape and congested.”

Additionally, there already are signs that the Indian automotive industry is beginning to suffer from a shortage of skilled labor. This was apparently a surprise to many people outside India. The Transportation Research Institute’s Bruce M. Belzowski noted that “we were under the impression, as most Westerners are, that India is an almost unlimited source of labor.”

India’s domestic market aside, the study also noted that if Indian firms plan on exporting cars made in India (as the Wire has previously reported), they will have to address an additional range of problems. According to the report, “Indian automakers have difficulty understanding foreign consumers, developing a range of models, managing global supply chain logistics and incorporating advanced technology”. Again, on the infrastructure issue, “Indian ports would need significant upgrades to handle high volumes of vehicles”.

Although the study concluded that, given government involvement in addressing these problems, India should be able to live up to is potential as a “powerhouse on the world stage” of automakers, in the meantime US consumers should not plan on seeing Indian or Chinese-badged cars on their local roads.

Towards Uniform Accounting…Can India Catch Up?

The WSJ reported, on June 21st, that the SEC unanimously voted to propose allowing non-U.S.-based companies to file financials using international financial reporting standards (IFRS) as set by the International Accounting Standards Board without reconciling the differences to U.S. generally accepted accounting principles (GAAP). This move is yet another indication from the SEC that it has duly noted the “flight of capital” from America’s markets to foreign exchanges, particularly London and Asia. The proposal is now open for public comment for 75 days at which point the SEC will deliberate the adoption once more and reach a final decision.

What this means for Indian based companies and India’s policymakers is, act now: 1) companies should voluntarily adopt IFRS as a routine method of reporting 2) the federal government should nationally adopt IFRS as the preferred method of reporting in addition to reforms in other areas of corporate governance with an aim towards making India’s markets more inviting.

With respect to some of India’s larger companies such as Infosys and HDFC Bank, the cause for urgency is less pronounced given that they have voluntarily adopted improved standards of accounting and corporate governance. In fact, the Asian Corporate Governance Association (ACGA) noted in its “country snapshot” that India is the only country in the region where the business sector, rather than the government, initiated corporate governance reform in an effort to attract foreign direct investments and increase the companies’ competitiveness, visibility and level of respect. However, the ACGA emphasized significant weaknesses in India’s regulatory infrastructure which fell into three categories: 1) lack of emphasis on enforcement and oversight 2) weak or non-existent protection of shareholders’ rights 3) a general pattern of corruption and aversion to inter-agency cooperation that characterizes Indian governance.

A leading expert on corporate governance and a professor of Finance and Control at the Indian Institute of Management (IIM), Mr. R. Narayanaswamy, echoed these concerns in an interview with The Hindu’s “Business Line“.  One natural consequence arising from a lack of cooperation is what he noted as a multiplicity of accounting standards arising from several competing bodies such as the Reserve Bank of India (RBI), Securities Exchange Board of India (SEBI) and the Institute of Chartered Accountants of India (ICAI), to name a few. Narayanaswamy is a strong proponent of adopting uniform international standards, strengthening domestic regulatory agencies such as SEBI and the Ministry of Company Affairs (MCA), and streamling their enforcement and oversight functions.

“‘I doubt if anyone is monitoring compliance. Both the SEBI and the MCA do not have the kind of technical staff they need.’”

In addition to its weak regulatory structure, India’s laws protecting shareholders’ rights are notably weaker than their American or even Asian counterparts. For example, as it stands now, shareholders are unable to sue their company’s management derivatively, on their company’s behalf for reckless management practices. Strengthening this area of the law is also critical to ensuring growth in India’s capital markets. Narayanaswamy cites the SEC of the U.S. as a strong model to emulate although he worries that future abuses by companies may jeopardize trust in the capital markets and lead to “horrible rule-based accounting standards.” In the States, Sarbanes-Oxley is viewed by many as exactly what Narayanaswamy fears may befall Indian companies.

For its part, the SEC is exploring ways for U.S. companies to report under international accounting standards by giving them a choice between U.S. GAAP and the IFRS. Critics worry this may provoke companies to cherry-pick the kind of reporting that casts their business in the most favorable light but proponents maintain that this will be a necessary step towards a convergence of global accounting standards. Whatever course the SEC may chart, prudence counsels Indian companies to heavily invest in tightening up their reporting mechanisms in accordance with IFRS regardless of whether Indian law requires it. Prudence also counsels New Delhi to take this latest move by the SEC as a signal to invigorate its own efforts towards reform. Promulgating stronger, across-the-board standards with effective oversight and enforcement will not only make India’s markets attractive for foreign investors but will increase faith in Indian-based companies (big and small) overseas, thereby making it easier for them to list in foreign exchanges for additional capital generation.

Starbucks Renews Effort to Enter India

Reuters reports today that Starbucks is revising a previously stalled application to enter the Indian coffee shop market. The news agency also cites the Business Standard in noting that the India’s Department of Industrial Policy and Promotion (DIPP) supports Starbucks’ entry into India’s “fast-expanding” economy through a “foreign direct investment route” since its previous (franchise) plan “did not conform to foreign investment norms”.

Reports on the details of the previous plan suggested that Starbucks’ Indian operations would be 51% owned by Indonesian Starbucks franchisee V.P. Sharma and the rest owned by Kishore Biyani, CEO of Future Group, a subsidiary of Pantaloon Retail. The DIPP was unwilling to approve this joint venture version of Starbucks’ plan because Sharma was a non-resident Indian.

In refiling its application, Starbucks is reportedly pursuing a franchise-based operation. According to Reuters:

“Foreign single-brand retailers can take 51 percent in a venture with a local Indian partner, while multiple-brand retailers are limited to cash-and-carry or franchise and license operations.”

Faced with rising material costs and lowered growth forecasts at home, Starbucks is keen to expand into both China and India.

Large Corporations Issue Report on How to Help Globalization’s “Losers”

The WSJ reported today that the Financial Services Forum (FSF), a non-profit/non-partisan group made up of CEOs of the world’s largest financial-services corporations, offered suggestions on what to do about workers “on the losing end of globalization”. Although similar concerns were raised by the OECD (and reported by the Wire here), the WSJ notes that the FSF report “marks one of the first times top business leaders have sought to weigh in collectively in the globalization debate”. Many of the companies represented within the FSF are worried that a public backlash against globalization could manifest itself in protectionist legislation and “the banking, investment and other CEOs who belong to the group have consistently cited protectionism as the leading threat to continued U.S. and global economic growth.”

The members of the FSF, including Lloyd Blankfein (CEO of Goldman Sachs) Stan O’Neal (CEO of Merrill Lynch), and Kenneth Lewis (CEO of Bank of America), noted in a statement that:

“Our open-trade and investment policies have significantly enhanced the economic well-being of American citizens, although not everyone has shared equally in the benefits of globalization.”

Along with this, the report offered the following positive statistics:

• Living standards in the US are $1 trillion higher per year because of globalization
  • This translates to a gain of $10,000 a year per US household
• If trade and investment is allowed to continue without restriction, annual US income could be $500 billion higher, with an additional gain of $5,000 a year per household

These developments were contrasted by evidence that:

• From the mid 1970s to late 1990s, the income growth of less-skilled workers in the US lagged behind “economy-wide productivity gains” as well as the income growth of “their more skilled counterparts”
• Since 2000 “the large majority of American workers have seen poor income growth”

In addressing these concerns, the report offered a wide range of policy suggestions. The WSJ noted:

“Its ideas range from the familiar — such as raising taxes on the wealthy to address income disparities — to the novel, such as insuring communities against “sudden economic dislocation” caused by a plant shutdown or other factors.”

Notable among these recommendations are the following:

• Merge all worker assistance (unemployment, wage insurance, and trade-adjustment assistance) into a single program
• Increase the progressivity of the overall tax system and ensure broader sharing of the benefits of America’s participation in the global economy
  • This would include elimination of the payroll tax for those earning less than the national average
• Policymakers should begin knitting individual free trade agreements into the basis for wider agreements
• Congress should significantly expand the resources available for enforcement of U.S. trade agreements
• Congress should limit the scope of inward investment reviews by the Committee on Foreign Investment in the United States.

Another area of importance touched upon is “one of the most frequently talked-about prescriptions for success in a global economy — improving workers’ skills through continued education.” Although the three economists who authored the report agree that education can have a role in reducing negative impacts of globalization in the future, greater training is deemed in adequate in its ability to address problems plaguing low-skilled Americans right now. Illustrating this, one of the authors, former Bush Administration economist and current Dartmouth College professor Matthew Slaughter, noted that “it has taken 60 years for the percentage of Americans with college degrees to grow to 30% from 6%.”

Apparently keen to see government consideration of its suggestions, the WSJ reports that the paper’s authors met with legislators this past Friday. However, the article cautions that “many of the paper’s recommendations are likely to be politically difficult to achieve.”

Pointing Fingers in Potsdam: Trade Talks Collapse

Trade talks between the US, EU, Brazil, and India ended today with each side blaming the other for the lack of progress. The WSJ reports that although the three-day event did not involve the participation of all 150 WTO members, the inability of the organization’s four most powerful parties to reach a compromise makes more a comprehensive trade agreement much more unlikely.

As with the Doha Round of trade talks, which began in 2001, the major area of disagreement on eliminating barriers to trade focuses on farm subsidies in industrialized nations and closed markets in developing countries.

For the part of developing countries, EU Trade Commissioner Peter Mandelson placed the blame on India and Brazil noting,

“It emerged from the discussion … that we would not be able to point to any substantive or commercially meaningful changes in the tariffs of the emerging economies, as a reasonable return on what we are paying into the round.”

Echoing this, President Bush accused India and Brazil of being more concerned with their own interests than helping more impoverished countries adding through a spokesman,

“[that he was] disappointed that certain countries are blocking an opportunity to expand trade and large economies like Brazil and India should not stand in the way of progress for smaller, poor developing nations.”

In response, Brazil Foreign Minister Celso Amorim and Indian Commerce Minister Kamal Nath blamed the US and EU for the talks’ collapse saying,

“It was useless to continue the discussion given what was on the table … This round is about trade flows from developing countries to developed countries, not the other way round [but the West was only interested in] perpetuation of the inequalities in global trade.”

The insistence of Brazil and India that farm tariffs be lowered has been problematic, particularly for the EU, which protects its farmers through high tariffs on agricultural imports. Similar difficulties have resulted from calls for the US to reduce its level of farm subsidies. Developing countries argue that both these policies result in a lower price for agricultural goods on the international market, negatively impacting their ability to achieve economic growth through greater exports.

Although officials reported that the EU had exhibited a degree of flexibility on the farm tariff issue, increasing a tariff cut on protected products from 60% (last offered in 2005) to 70%, India was unwilling to open its agricultural sector to greater foreign competition. Both Brazil and India offered significantly less market access than the US and EU had hoped for. Addressing this concern, US Agricultural Secretary Mike Johanns has noted that India’s proposal that 20% of its existing farm tariffs be left untouched would result in “an outcome [that] would shield up to 95% of what India imports from cuts”.

Although Foreign Minister Amorim described the failure as a definite “setback”, US Trade Representative Susan Schwab (pictured) noted that the US was not ready to “give up on negotiations”.

Picture of WTO OMC: ©AFP/File – Fabrice Coffrini

Picture of Susan Schwab: ©AFP/File – Eric Piermont

Indian Beer Magnate Signs $7.3 Billon Deal for 50 Airbus Planes

Since July 18th, the eyes of the aviation world have been fixed on the 2007 International Paris Air Show. As one of the most important trade shows for the industry, the two manufactures of commercial airliners, Boeing and Airbus, have been in competition to sign the most orders for their newest planes. Airbus has struggled recently as orders for its “superjumbo” A380 (pictured) have been eclipsed by the Boeing 787 “Dreamliner“. Additionally, the Airbus has been forced to redesign its upcoming A350 model, in response to potential buyers being drawn to the cost savings offered by the more fuel efficient 787.

However, the announcement by Vijay Mallya, owner of Indian carrier Kingfisher Airlines, of a purchase of five A340s, fifteen A350s, ten A330s and twenty planes from the A320 family, was welcome news for Airbus. Previously, Kingfisher Airlines had ordered five A340s and five of the A380 superjumbos. When the A380s are delivered in 2011, Kingfisher will be the only Indian airline flying the world’s largest airplane.

The purchase of such a large number of new planes is inline with Mallya’s plans to expand beyond the Indian domestic market. Currently the Indian government requires a domestic carrier operate for at least five years before flying abroad. Once these planes are delivered and Kingfisher wins government approval, the airline will be able to offer non-stop flights to the US. The A380 and A340 are only economical when used for long-range flights and Mallya plans to capitalize on this through direct flights to both East and West Coast cities in the US.

Often described as an “Indian Donald Trump”, the flamboyant Mallya is well-known for his leadership of the massive United Breweries Group, the second largest liquor conglomerate in the world. Along with Kingfisher Beer and Kingfisher Airlines, Mallya has acquired a variety of foreign companies, including the Bay Area microbrewery Mendocino Brewing Company.

A NYT piece on the purchase agreement appears here

“Reverse Outsourcing”

Sure there are one-way streets but no one can guarantee they’ll point the same way forever. So it is with outsourcing and in case Obama or any other presidential candidate wants to make a stop at the “trash-foreign-workforces-station” on their campaign trail, it would behoove them to examine job-flow trends past and present to reach a sound conclusion. In a June 19th article, The Hindustan Times quoted analyst John McCarthy of Forrester Research Inc (FORR) as saying, “The Indians are doing to the world’s IT processes what the Japanese did to manufacturing.” Indian companies such as Wipro, Infosys and the largest offshoring firm, Tata Consultancy Services (TCS) are increasingly hiring American workers in cities such as Austin, TX and Atlanta, GA where there are significant tech talent pools.

The companies cited several business considerations that justified the recent trend; 1) the need to hire local talent in order to satisfy local customers 2) the relative increased cost in shipping Indian workers to the States on H-1B foreign worker visas and providing temporary housing 3) the recent appreciation of the Rupee made hiring Americans cheaper and prospectively, due to stiff competition in India, tech-sector wages there are projected to increase 12 to 15% a year.

In sum, the Hindustan reports that Indian firms are poised to become “major employers in the U.S. economy.” Consider this in light of Nick’s recent posting on the OECD’s employment outlook report. The report expressed reservations about globalization’s adverse impact on low-wage workers in developed economies. If the idea is to keep low-wage workers at low-wage then globilization is certainly a serious policy concern for the OECD’s 30 members. On the other hand, if the idea is to move human resources to a higher state of utility and raise the low-wage sector’s standard of living, the serious policy concern should be how OECD’s member states can begin to satisfy the growing demand for skilled-labor that companies like Wipro, Infosys and TCS will inevitably present.

State-owned IOC Remains Giant in India’s Oil Sector: Indians Apathetic

Despite the dominant position of state-owned Indian Oil Corporation (IOC) within the country’s oil refining and petrochemical sector, the FT reports that IOC “rarely makes the news” and is much less familiar to Indians than smaller privately-held firms. Refining and petrochemical companies like Reliance Industries, capture most of the public’s attention, despite their smaller market share. Reliance in particular, is known for the “lavish displays of personal wealth and power” of its billionaire owner Mukesh Ambani, whom Forbes.com lists as the worlds 14th richest individual.

Although companies like Reliance receive more press than relatively staid IOC, the company, formed through the merger of Indian Oil Company Ltd. and Indian Refineries Ltd., deserves attention due to its sheer size and importance to the Indian economy. The largest “public sector undertaking” in India, IOC is also the country’s biggest oil refiner (controlling 40% total national capacity) and owner of gas stations (16,455). It’s $54.5 billion in sales for 2006 double those of Reliance.

With all the market power IOC can bring to bear in addressing India’s growing energy needs, the FT asks: “why do Indians seem anything but excited about their country’s largest commercial enterprise?” The answer seems to be related to awareness that government ownership of IOC severely limits its ability to undertake investment decisions necessary to improve revenue and thus, achieve greater capacity. Most of the government’s meddling occurs with restrictions on how much IOC can charge consumers for its products, namely kerosene, liquefied petroleum gas, and diesel fuel. These subsidies keep fuel prices artificially low but expose refiners to as much as one third the total cost of the market distortion. Although these government-led price controls are politically attractive, they do not appear to be an effective management policy. As the FT notes, while India’s stock market has risen over 42% in the past year, IOC has lagged, with its share price rising only 5.4%.

The IOC has made some efforts to expand away from traditional upstream (refining) operations and has considered investing in production facilities abroad. In a good sign, IOC’s chairman Sarthak Behuria says that the company plans on investing $12 billion in the next 5 years, in order to increase revenue to $60 billion. However, before any real progress can be made, Dehli will have to allow for greater privatization of IOC and the end of fuel subsidies. This may prove unpopular amongst Indian consumers but market reforms like this are necessary if India is truly going to address its coming energy deficiencies.

Maybe Mukesh Ambani could be interested in a post at IOC?………

Cyber Mangoes

  Mangoes of all shapes, sizes and flavors, born and raised in various parts of South India, will be available for online-trading beginning this month, according to a report in the June 15th edition of the Hindu. The Safal National Exchange of India (SNX), which specializes in providing an online marketplace for perishable commodities, matches seller-farmers with prospective buyers allowing farmers to get a fair return on their produce. SNX also provides a counter-party guarantee with respect to all trades as well as arranging for quality certification, warehousing and logistics.

What’s exciting for any mango enthusiast who is familiar with India’s mangoes is that now, they will be more accessible to buyers across the globe in the myriad species that delight Indians every year.  No less important is the fact that the conscientious buyer can rest easy knowing that the farmers are getting a fair and competitive price. The India Times reported that the first day of trading saw 24 tons of mangoes traded followed by 16 tons on the next day. The mechanics are quite similar to any online trading system. Farmers set prices according to prevailing market conditions and the prices are displayed on the trading portal. Once a buyer finds a seller, the trade is complete and farmers receive their money within two days of the trade. The delivery deadline is set for the end of the following trading day. SNX seems to impose a 10% penalty for failure to execute on either the buyer or seller’s part.

What will be interesting to monitor is when online mango trading takes off on a global scale and foreign buyers seek enforcement of any unfulfilled contracts. SNX’s growth as a self-regulated organization with effective remedial procedures is vital to its sustained success.

Contraception: The Coy Leading the Blind

Two of the world’s largest democracies, India and the United States share more in common than their form of government. Both societies demonstrate a distinctive recalcitrance to programs that promote sex education and awareness despite being faced with significant populations of high at-risk, sexually active citizens. Today’s NYTimes article, “Pigs With Cellphones, but No Condoms” underscores this disfunction which is even prevalent in America’s top networks. Fox and CBS both rejected a Trojan condom commercial that, according to a written response from Fox, “addressed prevention of pregnancy” instead of stressing health-related issues. While an element of hypocrisy has always persisted in both American and Indian cultures when it comes to sex, those in the contraception business may find this development especially disqueiting if the networks’ reaction is any indication of how more conservative societies will respond to marketing by the prophylactic industry.

In a May 26, 2007 article, “Conservatives obstruct sex education in 6 states“, LiveMint reported that six of India’s twenty-eight states suspended a federally approved “adolescence education” program designed for 15- to 17-year-olds primarily due to conservative uproar that took issue with an illustrated flip-book depicting the changes an adolescent goes through during puberty. Among these states were Karnataka and Maharashtra, home to two of India’s largest sprawling metropolises, Bangalore and Mumbai. In such cities, young adults are leading increasingly independent and Westernized lifestyles free from the physical familial restrictions that historically made casual sex a dangerous and hence, less frequently embarked upon adventure. Condom manufacturers targetting these markets will be forced to strive for exceedingly creative ways to reach their consumers while satisfying the rightist groups (Hindu, Muslim and Christian) that decry the “corruption of their youth” to the high heavens.

Although a recent study suggested that India’s HIV infected population may be significantly less than once estimated, as the Wire noted in “Second Place is Better“, the fact remains that an epidemic is what we have to reckon with.