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www.businesstoday.in January 31, 2016 `60 STEEL INDUSTRY The Import Menace BT BUSINESS CONFIDENCE INDEX The Slide Continues HBR EXCLUSIVE BUILDING A DIGITAL PLATFORM Online grocery is hot. Hundreds of players have jumped in. Several hundred million dollars were invested in 2015 alone. But it has also been a graveyard for start-ups
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Transcript of The Import Menace The Slide Continues - Magazinos.com
www.businesstoday.in January 31, 2016 `60
STEEL INDUSTRYThe Import Menace
BT BUSINESS CONFIDENCE INDEXThe Slide Continues
HBR EXCLUSIVE
BUILDING A
DIGITAL PLATFORM
Online grocery is hot. Hundreds of players have jumped in. Several hundred million dollars were invested in 2015 alone. But it has also been a graveyard for start-ups
Grocery (31jan2016).indd 1 01/08/2016 10:47:21 PM
One of the biggest casualties of the first dotcom crash of 2000/01 in the US was a company called Webvan. It was founded in 1997, and headquar-tered in Silicon Valley. It was envisaged as an online grocery business,
taking orders and delivering on-demand fresh produce. It had a raft of big venture capitalists’ backing, and was considered a business that would revolutionise groceries much the same way that Amazon was trying to revolutionise the book sales business. It raised almost $400 million from venture capitalists and then another $345 million in an IPO in 1999. At its peak, it was valued at over $5 billion. In 2000, it bought out a smaller rival called HomeGrocer.com, which had started operations one year before it did. Webvan spent millions on infrastructure and publicity and branding, but ran out of cash in 2001.
A number of reasons were put forward for the crash of Webvan by analysts in the aftermath of the dotcom bust. Most agreed it was an idea before its time. The Internet was still in the narrowband and at the dial-up connection stage, the technology platforms were buggy, the company was trying an inventory-led model, which was not very cost-effective, and an inexperienced team ended up burning too much cash while earning too little revenues.
Around the time Webvan shut shop, a few offline grocers, including Safeway, started grocery delivery to homes. This was roughly the time when a few super-market chains in India, like Subhiksha, also tried to systematise grocery delivery. Safeway, while not unsuccessful, did not go on to become a big player in the
online grocery or grocery delivery business. Walmart in the US has a vastly bigger online grocery business, while Amazon.com has also got into the grocery delivery game.
The history of Webvan is instructive, because grocery delivery and online grocery ordering are becoming a hot area for new entrepreneurs as well as big retail chains once again. In India, more than a hundred players are in the business. Some of them are considered veteran players – having survived for five or more years. Others are brash newcomers. A few have all-India aspirations while others are trying to service extremely local markets. The business
models all these players are trying out also vary widely. Some see themselves primarily as specialised order takers and delivery businesses. They work with other offline stores to pick up goods once an order has been placed, and then drop them off to the customer. Others see themselves as true grocers, keeping a fair amount of inventory at all times. Still others essentially aggregate orders every day till a certain time, then go to the main mandis for shopping, and deliver to the customers in the evening. There are others who run big retail stores and are get-ting into the online order and delivery game to compete with new-age rivals.
While some players have managed to raise substantial funds, a few dozen start-ups, offering to deliver groceries, have also shut shop in the country. The mortality rate is probably higher than in other online businesses, because of the margins, non-standardisation of goods, and the fact that a big chunk of the orders involves perishables.
The grocery delivery business in India is somewhat more complicated than it is in the US because of one factor – in India, neighbourhood kiranas have always offered delivery options to regular customers, and the new businesses have to compete with them as well.
So, how will the new grocery delivery business play out? Our cover story on page 58 looks at all the issues in detail.
[email protected]@ProsaicView
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6 BUSINESS TODAY January 31 2016
Best Wishes for BT’s Majestic MarchThis refers to Business Today’s 24th Anniversary Issue (January 17, 2016). First of all, kudos to BT for successfully completing 24 years in the turbulent media industry. It is a remarkable feat. The excellent sug-gestions by experts in the last edi-tion have depicted innovative means to speed up the progress of the Indian economy. With abun-dant resources at our disposal and a vast talent pool, the policymakers must accelerate reforms and disin-vestment, attract huge investments, bolster governance, ensure timely execution of the revamped plans, and make India a global economic and military giant along with the US and China. Many of the mea-sures and weapons that are recom-mended by Admiral Arun Prakash (Retd.) in the defence policy arena are yet to be brought into our de-fence quiver. Keeping in mind the recent terrorist attack in Pathankot, the Centre has to take up these mat-ters seriously on a war-footing for
creating a conducive investment climate at the earliest. Also, BT’s tie-up with Harvard Business Review and publication of lead articles in its issues is a significant journalistic service at an affordable price. It de-serves mentioning as global prac-tices are well illustrated, enhancing Indian managerial outlook and effi-cacy. May the unfolding years add to the feathers of glory in BT’s crowded cap. I offer my best wishes for its majestic march into the fu-ture with flying colours. B. Rajasekaran, Bangalore
It’s Important to Make Ideas HappenThis refers to your 24th Anniversary Issue. Contributions from stalwarts and experts, suggest-ing innovative ideas, are indeed worthy of sharing with BT readers. But it is not enough to just have ideas, it is also important to make them happen. The value of an idea lies in using it. Nelson Mandela is of-ten quoted as saying: “It always seems impossible until it is done.” (And if we split this word it can read as: I M Possible.) Every new idea looks crazy at first. John S. Herrington had once said: “There are no dreams too large, no innova-
tions unimaginable and no frontiers beyond our reach.” So let’s have a crack at them. Hope BT continues its long journey ahead for bringing out a Golden Jubilee Issue! J.S. Broca, New Delhi
Odd-Even Formula:A Futile AttemptThis refers to a piece by environ-mentalist and activist Sunita Narain (Air Pollution Is Slow Murder; Must be Stopped (January 17). The only solution for mini-mising pollution caused by vehi-cles is to ban sale and purchase of cars in metros and other big cities where the level of pollution is high. All other measures are a fu-tile attempt. When the roads are not equipped to handle the grow-ing number of cars in a city, how can their sale be allowed? There is logic in stopping the sale of motor vehicles. When shows are house-ful, ticket sales are stopped. Same is the case for trains and flight tickets, so why not in the case of vehicles? The odd-even formula will not solve any pollution prob-lem Delhiites are facing. So, the formula should be dropped. Mahesh Kapasi, New Delhi
Government decides to shut three HMT units, offer VRS. Vijay scooter, Ambassador car and now HMT watches... Is it development, modernisation or sab ka vikas sab ka saath?.– Afaq Mehmood, @iamafaque
Twitter is considering 10,000-character limit for tweets.It will be boring to read such long tweets. Moreover, it’s fun to write your thoughts in few words. – Chhavi Sinha, @ChhaviSinha24
Both cars and two-wheelers need to be brought under odd-even, says CSE. Shut this nonsense. It has made Delhi into a poor capital of India.– Vick Mederata, @VickraMederata
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Letters to Editor.indd 2 01/08/2016 11:41:51 PM
C O V E R B Y A J A Y T H A K U R I J A N U A R Y / 3 1 / 2 0 1 6 V O L U M E 2 5 / N U M B E R 2
COVER STORY
58
CONTENTSFOCUS
26 I Where Angels Fear to Trade2016 starts on an uncertain note for the Indian equity markets amid global concerns
20 I Drowning in LossesChennai’s industry has suffered grievously from the floods in December
14 I Quick takes on major events
UPFRONT
38 I Keep the Buzz GoingUse social media to promote an event and then retain the buzz around it
46 I Oiling the Economy’s WheelsSteep slump in global oil prices has come to govern-ment’s rescue. But it has not helped the economy
74 I Fighting the Import MenaceA dramatic surge in import of steel has undermined the profitability of domestic industry and increased distressed assets
84 I Sun’s Eclipse2015 was a forgetful year for Sun Pharma, but can it bounce back in the new year?
88 I The Final BetReliance Communications’ plan to become India’s second-largest telecom player looks promising, but is difficult to put into practice
FEATURES
32 I Waiting for the BudgetCorporate sentiment has taken a beating for the fourth straight quarter, reveals the Business Today-C fore Survey
52 I Venezuela: A New Beginning?India needs to watch the political developments in Venezuela closely and enhance its engagement with the eventual dispensation, says Deepak Bhojwani
30 I Graphiti on stock market: Bears on the Prowl
24 I There Are No Free LunchesFacebook is projecting its Free Basics service as a purely altruistic exercise. It is anything but...
18 I Cess Pool MysteryA CAG report, noting that the cesses collected for various noble initiatives often remain either unutilised or unaccounted for, points to the need for transparency in fund utilisation
18
24 54 I Requiem for a CodeWhile some proposals of the abandoned Direct Taxes Code are already in force, its wider objectives seem to have been abandoned
40
“Need to Inject demand into the
economy”Arvind Subramanian
54
January 31 2016 BUSINESS TODAY 9
Online grocery is hot. Hundreds of players have jumped in. Several hundred million dollars were invested in 2015 alone. But it has also been a graveyard for start-ups
The Perishable Business
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Content.indd 2-3 09-01-2016 1:28:54 PM
C O V E R B Y A J A Y T H A K U R I J A N U A R Y / 3 1 / 2 0 1 6 V O L U M E 2 5 / N U M B E R 2
COVER STORY
58
CONTENTSFOCUS
26 I Where Angels Fear to Trade2016 starts on an uncertain note for the Indian equity markets amid global concerns
20 I Drowning in LossesChennai’s industry has suffered grievously from the floods in December
14 I Quick takes on major events
UPFRONT
38 I Keep the Buzz GoingUse social media to promote an event and then retain the buzz around it
46 I Oiling the Economy’s WheelsSteep slump in global oil prices has come to govern-ment’s rescue. But it has not helped the economy
74 I Fighting the Import MenaceA dramatic surge in import of steel has undermined the profitability of domestic industry and increased distressed assets
84 I Sun’s Eclipse2015 was a forgetful year for Sun Pharma, but can it bounce back in the new year?
88 I The Final BetReliance Communications’ plan to become India’s second-largest telecom player looks promising, but is difficult to put into practice
FEATURES
32 I Waiting for the BudgetCorporate sentiment has taken a beating for the fourth straight quarter, reveals the Business Today-C fore Survey
52 I Venezuela: A New Beginning?India needs to watch the political developments in Venezuela closely and enhance its engagement with the eventual dispensation, says Deepak Bhojwani
30 I Graphiti on stock market: Bears on the Prowl
24 I There Are No Free LunchesFacebook is projecting its Free Basics service as a purely altruistic exercise. It is anything but...
18 I Cess Pool MysteryA CAG report, noting that the cesses collected for various noble initiatives often remain either unutilised or unaccounted for, points to the need for transparency in fund utilisation
18
24 54 I Requiem for a CodeWhile some proposals of the abandoned Direct Taxes Code are already in force, its wider objectives seem to have been abandoned
40
“Need to Inject demand into the
economy”Arvind Subramanian
54
January 31 2016 BUSINESS TODAY 9
Online grocery is hot. Hundreds of players have jumped in. Several hundred million dollars were invested in 2015 alone. But it has also been a graveyard for start-ups
The Perishable Business
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Content.indd 2-3 09-01-2016 1:28:54 PM
Page: 116-119From time to
time, you will see pages titled “An Impact
Feature” or “Advertorial” in
Business Today. This is no different from an
advertisement and the magazine’s editorial staff
is not involved in its creation in any way.
An Feature
www.facebook.com/BusinessToday@BT_India
businesstoday.inCONTENTS
LEADERSPEAK122 I R.S. SodhiMD, Amul
120 I PEOPLEBUSINESS
EX-LIBRIS112 I The Real-Life MBA: Corporate Wisdom on Tap; Indian Family Business Mantras: Lessons in Managing Family Businesses
122The New CEO of WiproAbid Ali Neemuchwala’s elevation was speculated right from the time he joined the company after a 23-year stint at TCS. He was considered very close to TCS CEO N. Chandrasekaran, and Wipro bagging him was considered a coup, finds out Venkatesha Babubusinesstoday.in/wipro-neemuchwala
The Transformation of Narendra ModiHe is pushing for more consensus building, talking to opposition leaders at tea, offering water to protesting leaders, attending their birthday parties, and moving away from the reputation of being an adamant politician, says Anilesh Mahajanbusinesstoday.in/Modi-transform
BT COLUMNS
PERSPECTIVES
Foodpanda's Job Cuts Signal Increasing Impact of AutomationFood-tech company foodpanda eliminated 15 per cent of its workforce – that translates to between 250 and 300 employees. The company links the job cuts to automationbusinesstoday.in/foodpanda-tech
GM Eyes Big in India Under Mary BarraThe American carmaker has operated in India for almost two decades, but it hasn’t been able to succeed in a market dominated by Japanese and Korean companiesbusinesstoday.in/GeneralMotors-india
PERSONAL TECH
108 I Tech Trends 2016If 2015 was the year of innovations in the hardware space, with fancy gadgets hitting the stores every other day, this New Year will be more about the awakening of the virtual mind
92 I Luxury Banned in DelhiThe ban on new registrations of 2,000-cc (and above) cars may be a precursor to harsher times for diesel
96 I Pet ProjectThe pet products market may still be small, but DogSpot.in is gearing up to make a splash with fresh infusion of funds from Ratan Tata
HBR EXCLUSIVE100 I How to Launch Your Digital PlatformA playbook for strategists
NEWS
Brick-and-mortar Retail Makes a Comeback in 2015The year saw the beginning of the e-commerce euphoria dying out... because profitability didn’t seem to be anywhere in sightbusinesstoday.in/ecommerce-retail
INTERVIEW
“Both cars and two-wheelers need to be brought under odd-even”Vivek Chattopadhyaya, Programme Manager (Air Pollution Control Unit), Centre for Science and Environment, talks to Sarika Malhotra about Delhi’s odd-even drive to combat pollution businesstoday.in/oddeven-pollution
Content.indd 6 01/09/2016 2:28:39 AM
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UPFRONT
12 BUSINESS TODAY January 31 2016
AJA
Y T
HA
KU
RI
THE H-BOMBNorth Korea leader Kim Jong Un claims his country has successfully tested a hydrogen bomb. Scientists in many countries though doubt his claims.
NO MORE INCREDIBLE The government drops Aamir Khan as brand ambassador of Incredible India campaign. His supporters perceive this as the backlash to his intolerance comments in an interview a month ago.
THE SELFIE COPYWRONGA Federal Judge in the US says that the monkey whose selfie went viral on the net does not own the copyright.
THE SCIENCE & THE CIRCUSIndian born Nobel Laureate Venkataraman Ramakrishnan calls the Indian Science Congress a “circus” in a newspaper interview after hearing some of the topics discussed in it, including Homoeopathy and Astrology.
SHIA-SUNNI OR OIL RIVALRY?After Sunni-dominated Saudi Arabia executed 47, including Shia cleric Nimr al-Nimr, its Embassy in Shia-dominated Iran was attacked and ransacked by an irate mob in Tehran. Saudi Arabia announced breaking off diplomatic ties with Iran and its allies Bahrain, Sudan and UAE also either broke off ties or downgraded their relationship. But more than the Shia-Sunni rivalry, analysts see the event as the after-effect of oil rivalry. Both sides have refused to curtail production to steady global oil prices.
UPFRONT.indd 2 01/08/2016 10:43:53 PM
CALENDAR
14 15REACHING OUT TO KOREAWHAT: India-Korea Business SummitWHEN: January 14-15, Le Meridien, New Delhi
WHAT TO LOOK FOR: More than 100 top executives representing the largest Korean companies, South Korean government officials, besides Indian CEOs. The summit will focus on emerging business opportunities in India in infrastructure, ICT, power, smart cities and manufacturing.
REALITY CHECKWHAT: National Real Estate Summit 2016WHEN: January 21, PHD House, New Delhi
TECH-ENABLING INDIAWHAT: i-Bharat 2016WHEN: January 11, Federation House, New Delhi
WHAT TO LOOK FOR: The second edition of the FICCI-Department of Electronics & IT event is titled ‘Embracing Technology: Transforming India’. It aims to discuss the various technologies and government policies that could enable smart cities, implement Digital India and e-governance.
14 BUSINESS TODAY January 31 2016
THE FUTURE OF RETAIL WHAT: CII National Retail Summit 2016WHEN: January 15, Taj Mahal Hotel, New Delhi
WHAT TO LOOK FOR: CEOs of some of India’s largest retail companies will deliberate on the future of retail, new trends, including omni-channel. The Summit aims to create a roadmap for the retail sector in the current policy environment. Expect sharing of new ideas and innovative practices and the impact of disruptive technologies on the retail sector.
15
11
13 18
21
SHOWCASING INDIAWHAT: Make In India WeekWHEN: February 13-18, NSCI Worli, Mumbai
WHAT TO LOOK FOR: Showcase of innovative products and manufacturing processes developed in India. Commerce Ministry’s Department of Industrial Promotion and Policy is organising the Make in India Week between February 14 and 18 under the aegis of the Maharashtra government. Expect representatives from nearly 1,000 companies from 60-odd countries to participate in the week-long celebrations to commemorate Prime Minister Narendra Modi’s ‘Make In India’ initiative. The Delhi Road Show of the Make in India week is being organised at the India Habitat Centre on January 8.
WHAT TO LOOK FOR: In the wake of the new and stringent Real Estate Bill to be tabled before the Parliament shortly, the event assumes significance to discuss the new challenges to the real estate sector and the impact of the government policies.
UPFRONT1-Calender.indd 2 09-01-2016 1:29:27 PM
and higher education as envisaged in the Finance Act was not transparently ascertainable from the Union account.”
It also points out that only part of the funds obtained through a number of other cesses are accounted for. Of the `5,784 crore collected as cess for research and devel-opment since 1996, only `550 crore – or less than 10 per cent – has been utilised. In 2014/15 alone, the govern-ment collected `907 crore through this cess, but the only outgo recorded is a transfer of `7 crore to a fund adminis-tered by the Technology Development Board. Again, of the primary education cess in force since 2004, which had mopped up `1,54,818 crore, `13,298 crore remains unused or unaccounted for. Of the clean energy cess in force since 2010/11, over 40 per cent – `6,258 crore out of `15,174 crore col-lected – is unuti l ised (see No Accountability). There is no separate fund in which cesses are deposited – they go into the Consolidated Fund of India, alongside all revenue and loans obtained by the Central government.
The latest cess, imposed since last November 15, is the Swachh Bharat Cess of 0.5 per cent on all services, to fund the clean-up campaign of Prime Minister Narendra Modi. But there is no clarity on how much has been collected or how it is being spent, if at all. Service tax was raised last year from 12.37 per cent to 14 per cent, while cess was in-creased to 14.5 per cent.
“It is the government’s right to levy cess to raise money for a specific pur-pose,” says K.V. Thomas, Congress MP from Ernakulam, Kerala, and Chairperson of the Public Accounts Committee (PAC). “But government must be more transparent about the way it uses money. The PAC, under its former chairman, Murli Manohar Joshi, had raised this issue on several occasions. We will also look into it when we take stock of the accounts.”
Have these funds been diverted for other purposes? No one knows.
“If the money collected through a particular cess is not used for the purpose it was intended, it must have been used for something else,” says a CAG official involved in the preparation of the December report, who does not want to be named. “There are many departments and ministries which spend more than the money allotted to them. Unused funds could have been diverted.” In 2014/15, for example, defence pension cost the government `9,436 crore – more than what had been budgeted for it.
The difference between a cess and general funds sanctioned for different ministries and departments is that the former does not need to be annually passed by Parliament as long as it is used for the purpose it was collected. “There are situations where a government needs an uninterrupted flow of funds, where the com-mitment is long term, and which thus warrant imposing
a cess,” says Sen. “Or else, fund utilisation will have to be voted upon every time, which is cumbersome.” But he stresses that it is important to earmark the funds properly, which is not being done. “Ideally, cess funds should be escrowed,” he adds.
But the government remains reluctant to part with details. There are just two references to cesses, for instance, in the plan outlay for 2015/16. At one point it says: “An estimated receipt of `27,575 crore by way of proceeds from the (Primary) Education Cess will be credited to Prarambhik Shiksha Kosh.” The second mention says the government will spend `1,645 crore of the cess on diesel (part of the road cess) on railways. ~
@dipak_journo
Cess Pool MysteryThe CAG report, noting that the cesses collected for various noble initiatives often remain either unutilised or unaccounted for, points to the need for transparency in fund utilisation. By DIPAK MONDAL
FOCUS20 Drowning in Losses
24 No Free Lunches
26 Where Angels
Fear to Trade
January 31 2016 BUSINESS TODAY 1918 BUSINESS TODAY January 31 2016
The report of the Comptroller and Auditor General (CAG) in late December, raising questions about the utilisation of funds col-
lected by the government under various cesses, has jolted taxpayers. “The problem is lack of transparency,” says Pronab Sen, Chairman, National Statistical Commission. “The finance ministry should regularly reveal how much it col-lects and how much it disburses. But it does not.”
The CAG report notes that `64,000 crore was collected as cess on secondary and higher educa-tion between 2005/06 and 2014/15. “Neither was a fund designated to deposit the proceeds of the cess nor were schemes identified on which the cess proceeds were to be spent,” it says. “Conse- quently, the commitment of furthering secondary
Major Cesses Period Total collection
Unutilised/unaccounted for
Primary Education
2004-2015 1,54,818 13,298
Secondary & Higher Ed
2006-2015 64,288 64,288
Clean Energy 2010-2015 15,174 6,258
Roads 2010-2015 1,01,141 1,219
R&D 1996-2015 5,784 5,234
NO ACCOUNTABILITYNo one knows what has been done with the cess on secondary and higher education collected over a decade.
Figures in `crore, Source: CAG
OTHER CESSESAdministered by Revenue Department
Administered by Revenue Department
National Calamity Contingent Duty Swachh Bharat Cess
Coal and Coke Rubber Mica Iron Ore, Manganese Ore & Chrome Ore
Lime Stone and Dolomite Cine Workers
Prevention & Control of (Air & Water) Pollution
Research and Development Beedi Fund Cess Collection on Textiles & Textile Machinery
RA
J V
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MA
Focus Lead Cess Tax.indd Custom V 01/08/2016 10:42:42 PM
and higher education as envisaged in the Finance Act was not transparently ascertainable from the Union account.”
It also points out that only part of the funds obtained through a number of other cesses are accounted for. Of the `5,784 crore collected as cess for research and devel-opment since 1996, only `550 crore – or less than 10 per cent – has been utilised. In 2014/15 alone, the govern-ment collected `907 crore through this cess, but the only outgo recorded is a transfer of `7 crore to a fund adminis-tered by the Technology Development Board. Again, of the primary education cess in force since 2004, which had mopped up `1,54,818 crore, `13,298 crore remains unused or unaccounted for. Of the clean energy cess in force since 2010/11, over 40 per cent – `6,258 crore out of `15,174 crore col-lected – is unuti l ised (see No Accountability). There is no separate fund in which cesses are deposited – they go into the Consolidated Fund of India, alongside all revenue and loans obtained by the Central government.
The latest cess, imposed since last November 15, is the Swachh Bharat Cess of 0.5 per cent on all services, to fund the clean-up campaign of Prime Minister Narendra Modi. But there is no clarity on how much has been collected or how it is being spent, if at all. Service tax was raised last year from 12.37 per cent to 14 per cent, while cess was in-creased to 14.5 per cent.
“It is the government’s right to levy cess to raise money for a specific pur-pose,” says K.V. Thomas, Congress MP from Ernakulam, Kerala, and Chairperson of the Public Accounts Committee (PAC). “But government must be more transparent about the way it uses money. The PAC, under its former chairman, Murli Manohar Joshi, had raised this issue on several occasions. We will also look into it when we take stock of the accounts.”
Have these funds been diverted for other purposes? No one knows.
“If the money collected through a particular cess is not used for the purpose it was intended, it must have been used for something else,” says a CAG official involved in the preparation of the December report, who does not want to be named. “There are many departments and ministries which spend more than the money allotted to them. Unused funds could have been diverted.” In 2014/15, for example, defence pension cost the government `9,436 crore – more than what had been budgeted for it.
The difference between a cess and general funds sanctioned for different ministries and departments is that the former does not need to be annually passed by Parliament as long as it is used for the purpose it was collected. “There are situations where a government needs an uninterrupted flow of funds, where the com-mitment is long term, and which thus warrant imposing
a cess,” says Sen. “Or else, fund utilisation will have to be voted upon every time, which is cumbersome.” But he stresses that it is important to earmark the funds properly, which is not being done. “Ideally, cess funds should be escrowed,” he adds.
But the government remains reluctant to part with details. There are just two references to cesses, for instance, in the plan outlay for 2015/16. At one point it says: “An estimated receipt of `27,575 crore by way of proceeds from the (Primary) Education Cess will be credited to Prarambhik Shiksha Kosh.” The second mention says the government will spend `1,645 crore of the cess on diesel (part of the road cess) on railways. ~
@dipak_journo
Cess Pool MysteryThe CAG report, noting that the cesses collected for various noble initiatives often remain either unutilised or unaccounted for, points to the need for transparency in fund utilisation. By DIPAK MONDAL
FOCUS20 Drowning in Losses
24 No Free Lunches
26 Where Angels
Fear to Trade
January 31 2016 BUSINESS TODAY 1918 BUSINESS TODAY January 31 2016
The report of the Comptroller and Auditor General (CAG) in late December, raising questions about the utilisation of funds col-
lected by the government under various cesses, has jolted taxpayers. “The problem is lack of transparency,” says Pronab Sen, Chairman, National Statistical Commission. “The finance ministry should regularly reveal how much it col-lects and how much it disburses. But it does not.”
The CAG report notes that `64,000 crore was collected as cess on secondary and higher educa-tion between 2005/06 and 2014/15. “Neither was a fund designated to deposit the proceeds of the cess nor were schemes identified on which the cess proceeds were to be spent,” it says. “Conse- quently, the commitment of furthering secondary
Major Cesses Period Total collection
Unutilised/unaccounted for
Primary Education
2004-2015 1,54,818 13,298
Secondary & Higher Ed
2006-2015 64,288 64,288
Clean Energy 2010-2015 15,174 6,258
Roads 2010-2015 1,01,141 1,219
R&D 1996-2015 5,784 5,234
NO ACCOUNTABILITYNo one knows what has been done with the cess on secondary and higher education collected over a decade.
Figures in `crore, Source: CAG
OTHER CESSESAdministered by Revenue Department
Administered by Revenue Department
National Calamity Contingent Duty Swachh Bharat Cess
Coal and Coke Rubber Mica Iron Ore, Manganese Ore & Chrome Ore
Lime Stone and Dolomite Cine Workers
Prevention & Control of (Air & Water) Pollution
Research and Development Beedi Fund Cess Collection on Textiles & Textile Machinery
RA
J V
ER
MA
Focus Lead Cess Tax.indd Custom V 01/08/2016 10:42:42 PM
20 BUSINESS TODAY January 31 2016
The devastating floods in Tamil Nadu in early December, especially in and around Chennai, have dragged down
Indian manufacturing. Though manufactur-ing has been sluggish in recent years, the Nikkei India Manufacturing Purchasing Managers Index (PMI), a measure of manu-facturing output released every month, had been rising, however slowly, continuously for the past 25 months. In December, however, it dipped, and that too to a 28-month low, from 50.3 in November to 49.1 – its sharpest fall since the early months of the downturn of 2008/09. Why? “India's manufacturing sector took a turn for the worse at the year
end, with already gloomy internal demand further hampered by floods in the South of the country,” Pollyanna De Lima, author of the PMI report and economist with global fi-nancial services firm Markit, wrote.
How much is the damage? Estimates vary. N.K. Ranganath, CEO and Managing Director of leading pump manufacturer Grundfos and former president of the CII’s Tamil Nadu chapter, maintains it could be anything between `20,000 and `50,000 crore. “It was an unprecedented calamity,” he says. “The scale of damage inflicted on industry is only now coming to light and be-ing tabulated.” The Associated Chambers of
FOCUS Chennai FloodsJ
AI
SO
N G
Drowning in LossesChennai’s industry has suffered grievously from the fl oods in December By VENKATESHA BABU
In dire straits: People being evacuated from fl ood-hit regions of Chennai
ONE OF THE WORST AFFECTED
IS THE AUTOMOTIVE INDUSTRY ON
CHENNAI’S OUTSKIRTS,
WHERE FACTORIES OF
TOP COMPANIES ARE LOCATED
Focus-Chennai Flood.indd 2 01/09/2016 12:53:09 AM
22 BUSINESS TODAY January 31 2016
Commerce and Industry of India (ASSOCHAM) in its pre-liminary estimate pegged the losses at more than may Rs 15,000 crore, while Aon Benfield, UK-based reinsur-ance broker, has put them at $3 billion (`20,000 crore). A senior government official claims it is too early to say. “It will take many more weeks to arrive at a comprehensive number for the scale of loss suffered by industry,” he says. “But it is apparent that the damage has been higher than initially estimated.”
One of the worst affected is the automotive industry on Chennai’s outskirts, where factories of top companies such as Hyundai, Ford, BMW, Renault-Nissan, Daimler, Royal Enfield and Apollo Tyres are located. Indeed, every third car in the country is manufactured in this area. All of them had to shut down for three days to a week. Some, led by Hyundai, have sought to make up by work-ing extra shifts since then, including on Sundays. Again, Tamil Nadu accounts for close to 20 per cent of the turnover of the country’s auto components industry, em-ploying over 600,000 people. “In the wake of this unforeseen calamity, there is an ur-gent need to announce a relief and rehabili-tation package for the industry and its em-ployees, especially for the SME segment,” says Arvind Balaji, President, Automotive Component Manufacturers Association.
More than the automobile makers, it is this segment that is affected, because many units neither have the deep pockets nor in many cases the expertise, to quickly set things right. Some of them are not even prop-erly insured. “After so much destruction, the General Insurance Corporation (GIC) has re-ported insurance claims of merely $300 mil-
lion,” says a senior function-ary of the Federation of I n d i a n C o m m e r c e a n d Industry (FICCI), who does not want to be named.
Indeed, the state is home to the highest number of small and medium enter-prises (SMES) in the country (which includes the auto an-cillary makers). “There is an urgent need to announce a relief and rehabilitation pack-age for the Tamil Nadu indus-try, especially for the SME seg-ment,” says Balaji. Even big players like Grundfos India have been unable to meet some of their export dead-lines, because some of the components are sourced from vendors and suppliers in the SME sector. “The Centre and the state should work to-gether to provide help to these small companies by giv-ing tax breaks, asking banks to extend loans and so forth,” says Ashok R. Thakkar, Convenor of FICCI’s infra-structure panel.
Most IT majors have large units in Chennai and these too have also suffered.
Already, a number of them have announced that their 2015/16 third quarter results would be impacted because of the floods. Some have also announced setting aside a fund to aid the relief and rehabilitation. TCS has earmarked Rs 1,100 crore for affected employees, while Cognizant has committed $40 million (Rs 260 crore) for the city’s reha-bilitation. Some outside this sector have also responded similarly. “But the state needs to help industry,” says Ranganath.
The floods may have receded but it will take many months – if not years – for the industries that have suffered to bounce back. ~
@venkateshababu
FOCUS Chennai Floods
A NUMBER OF IT MAJORS HAVE
ALREADY ANNOUNCED THAT THEIR
2015/16 THIRD QUARTER
RESULTS WOULD BE IMPACTED
HARD HITEstimates of the
damage to industry caused by the
Chennai deluge
CII’s Tamil Nadu chapter:
Aon Benfield (re-insurance
brokers):
TCS:
HELPING HAND PROVIDED BY COMPANIES:
` 20,000-50,000 crore
$3 billion(Rs 20,000 crore)
` 1,100 crore(For their employees)
`260 crore(For general
rehabilitation)
Focus-Chennai Flood.indd 4 01/09/2016 12:53:34 AM
24 BUSINESS TODAY January 31 2016
Rarely has any company spent so much money to promote an ostensibly
“free” service. Facebook took full- page cover ads in most major newspapers to tout the benefits of Free Basics, a supposedly free Internet service. Facebook is try-ing very hard to make the Indian telecom regulator, TRAI, give an approval for the Free Basics ser-vice. Under the Free Basics scheme, users won’t have to pay data charges for accessing Facebook and certain other sites that it approves, through a mo-bile device using a Reliance Communication connection in India. (Free Basics is being of-fered in 38 poor countries in partnership with a different telco in each country). Mark Zuckerberg pitches it as a purely altruistic service, which would benefit millions of poor people access the Internet.
That is, of course, only half the truth. The service might be free but Facebook gets to col-lect user data. More importantly, Facebook controls and directs which sites the user can access easily. It is, what is dubbed, the Walled Garden strategy. In essence, users get to access only those sites for free which Facebook ap-proves. To access others, he or she pays the full data usage charges. Also, in all probability, sites that are not approved by Facebook will not be as easy to access as the ones it approves, even if one is paying the data charges. Facebook can use all sorts of technology to promote some sites against others. It can also use the data and its control over access to make money in many ways.
Facebook had earlier tried to offer much the same through its Internet.org programme. An outcry forced it to change the name. Facebook is not alone in trying such offerings. Earlier, Airtel, the country’s largest mobile services company, had tried to offer something
similar before backing out be-cause of stiff resistance from Net Neutrality activists. The propo-nents of Net Neutrality say that users should be able to access all legal content and applications, regardless of source, and Internet service providers cannot offer preferential treatment to certain sites while blocking oth-ers. Net Neutrality is important because it puts all content sites on an equal footing and lets the user decide which it will prefer.
Though Net Neutrality activ-ists like to see the Free Basics is-
sue in black and white, the truth is that even if TRAI does allow Facebook to offer it in India, it is unlikely to be as much of a threat as they think it will be. For one, Reliance Communications is not a monopoly – far from it, it is now the fifth largest player with 118 million subscribers, and even if it gains in size after its proposed merger (see story on page 88), it will still not be the sole gateway to the internet for a country as vast as India. It would not even be the sole gateway for mobile users, forget those accessing the Net through other means. More importantly, few users are under the illusion that anything really comes for free – they know that if they want to access impor-tant sites, they will have to pay anyway, and are prepared to do so. And few users on the Net would prefer to be stuck to a few sites approved by Facebook. Finally, people who may opt for free services of the nature of Free Basics may not be the kind of customers who generate much revenues and profits for sites.
In all likelihood, Free Basics is unlikely to be allowed by TRAI given the amount of op-position it is facing from the activists. But even if it is, the fear that it will stifle Net Neutrality is vastly overblown. ~
@ProsaicView
FOCUS Net Neutrality
There Are No Free LunchesFacebook is projecting its Free Basics service as a purely altruistic exercise. It is anything but... By PROSENJIT DATTA
IN ESSENCE, USERS GET TO ACCESS ONLY
THOSE SITES FOR FREE WHICH FACEBOOK
APPROVES. TO ACCESS OTHERS, HE OR SHE PAYS THE FULL DATA
USAGE CHARGES
Focus-Facebook.indd 2 01/08/2016 11:13:20 PM
26 BUSINESS TODAY January 31 2016
The first shock of the year has already registered. On January 7, the BSE Sensex fell 554.50 points – or 2.2 per cent – to
touch 24,851.83, its steepest drop in the past three months. Indeed, stock markets around the world followed suit, all due to China de-valuing its currency by 0.51 per cent to 6.5646 against the US dollar earlier in the day – its lowest levels since March 2011. But to many market watchers, it came as no surprise. “Equity markets in India are expected to be volatile for global reasons,” says Sankaran Naren, Chief Investment Officer, ICICI Prudential Mutual Fund. “For investors, hybrid funds would be the best way to tackle the situ-ation for the next six months.”
The Chinese Yuan appreciated significantly in the past four years relative to many of its trading partners’ currencies, rendering Chinese exports less competitive than before in an economy much focused on exports. To beat
this trend, the Yuan was devalued in August last year and has now been devalued again. There is every chance of further devaluation in coming months. This could impact several segments of domestic industry in India – tyres, tiles, steel and more – if Chinese offerings be-come cheaper than local goods. “What China does will have a huge bearing on India, putting pressure on the current account deficit and the rupee,” says Saurabh Mukherjea, CEO-Institutional Equities, Ambit Capital. China is making structural changes to its economy to shift focus and become a domestic consump-tion-led economy. However, until that process is complete, to keep its exports competitive, its currency is likely to be forcibly depreciated.
The difficulties of the Chinese economy, however, are not the only global threats. “There is need for caution not just because of China, but also due to the likelihood of oil ex-porting countries selling off their investments, as well as concerns of war in West Asia,” says Naren. The drop in crude oil prices, beginning roughly around the time the National Democratic Alliance (NDA) government took charge, has been a very lucky break for India, saving it around $70-80 billion, but it has also shaken the economies of the oil producing countries, some of which have gone from healthy surpluses to staring at deficits. They could well sell off part of their global equity holdings to reduce debt, which in turn would put pressure on Indian equities. As for war, the depredations of the Islamic State (ISIS) and the growing standoff between Saudi Arabia and Iran make it a distinct possibility.
“In the first half of 2016, there are known (unknowns) and unknown unknowns,” says
FOCUS Stock Market
THE FIRST MONTHS OF 2016 TOO ARE LIKELY
TO BE UNCERTAIN BUT MANY
EXPERTS FEEL THE DANGERS ARE FOR THE SHORT TERM
Where Angels Fear to Trade 2016 starts on an uncertain note for the Indian equity markets amid global concerns. By MAHESH NAYAK
AJ
AY
TH
AK
UR
I
Focus-Market.indd 2 01/09/2016 12:49:54 AM
28 BUSINESS TODAY January 31 2016
Uday Kotak, Executive Vice Chairman and Managing Director, Kotak Mahindra Bank. “I’ve entered 2016 with a conservative mind-set.” Kotak feels a combination of things could go wrong in the first half of 2016 due to de-velopments in the US, China and oil producing nations. For instance, with US corporate bond spreads increasing, he feels there could be a credit accident globally or in large companies.
Domestic Issues2015 was not a particularly happy year for the bourses in India. The euphoria of 2014, with the swearing in of the new NDA government, having faded, the Chinese devaluation, a sub-normal monsoon and indifferent corporate earnings took their toll. On December 31, the Sensex closed at 26,117 points, 5 per cent be-low its level exactly a year ago. The first months of 2016, too, are likely to be uncertain, but many experts feel the dangers are only for the short term. “Looking forward five years, it is a great time to be in India and build busi-nesses,” says Kotak. “The countries I would really bet on are US and India.”
Prateek Agrawal, Head of Business and CIO, ASK Investment Managers, agrees about India. “December 2015 quarter results are likely to be the worst, after which corporate performance will improve. I expect the sec-ond quarter of 2016/17 to be a bumper one. All this will give a fillip to the mar-ket. Global developments will not matter all that much if there is strong do-mestic corporate growth.”
A m b i t C a p i t a l ’ s Mukherjea, however, re-mains sceptical. “The earn-ings growth of large-cap companies is likely to re-main weak over the next
couple of years,” he says. “The benchmark indices are likely to remain under pressure. Our Sensex estimate by the end of 2016/17 is around 29,000.” Much will depend on the policies pursued by the government and the Reserve Bank of India, as well as the adoption of advanced technology. “We like companies which have consistently expanded whilst maintaining balance sheet discipline,” he adds. Kotak too worries about the balance sheet discipline. “The high debt of many Indian companies is a concern,” he says. “They have to bring down debt. In an envi-ronment where wholesale price index (WPI) is negative, high leverage is dangerous.”
One important silver lining for the equity markets is the growth of mutual funds, espe-cially the rise in the number of retail investors using systematic investment plans (SIPS). The average monthly inflow into mutual funds through the SIP route in recent months has been around `2,500 crore. Mutual funds were the unsung heroes of the equity market in 2015 and the same is expected this year.
As is the case every year, the forthcoming Budget will impact the market, with the ex-tent of government spending playing a key
role in reviving sectors such as infrastructure. The implementation (or other-wise) of further reforms, especially the passing of key reform bills including the Goods and Services Tax bill, will also make a big difference. The mon-soon too will be crucial – after two consecutive years of below average rains that badly affected rural spending, it is hoped that the Gods will be be-nevolent in 2016. ~
@maheshnayak
FOCUS Stock Market
ONE IMPORTANT SILVER LINING
FOR THE EQUITY MARKETS IS THE
GROWTH OF MUTUAL FUNDS, ESPECIALLY THE
RISE IN THE NUMBER OF
RETAIL INVESTORS USING SIP
“THERE ARE MANY KNOWN (UNKNOWNS) AND UNKNOWN UNKNOWNS AT PLAY. I’VE ENTERED 2016 WITH A CONSERVATIVE MINDSET”
Uday Kotak, Executive Vice Chairman & Managing Director, Kotak Mahindra Bank
WAIT AND WATCHFactors that will impact the Indian equity market in 2016
• Global developments, especially in China, US and West Asia
• Government decisions on spending to revive growth
• The year’s monsoon
• Corporate earnings recovery
• Money flows from FIIs and domestic institutions
Focus-Market.indd 4 09-01-2016 1:45:43 PM
FOCUS Graphiti
Research by: Niti Kiran
Graphic by: Anand Sinha
Bears on the ProwlBears had the upper hand on Dalal Street in 2015. A consequence of a weak global economy, slowdown in China and failure of the Modi government to get key reform bills approved by Parliament. Bulls may be back in the hunt in 2016 if the Indian economy sustains a high growth trajectory with the Sensex gaining 15 to 20 per cent, say market participants. A snapshot of the market gyrations in 2015
160
140
120
100
80
60
40
20
0
Bovespa Hang Seng
PE Sensex Market Cap
NASDAQComposite
Sensex
The Sensex traded at a price-to-earnings ratio of around 19 in 2015, only marginally higher than the fi ve-year average. It indicates that the market was not expecting corporates to surprise with better-than-expected earnings
Indeed, the year was a mixed bag for the global equity markets. Emerging markets remained volatile through the year. The Sensex shed 5 per cent in 2015
A lacklustre market did not deter Indian companies from tapping the primary market. India Inc. raised ` 68,608 crore, a
76 % jump over the previous year
FIIs exited India with net outfl ows of Rs 20,585 crore in the fi rst nine months of 2015/16 but mutual funds came to the rescue with investments of over
`59,000 cr. in the same period
50,00,000
48,00,000
46,00,000
44,00,000
42,00,000
40,00,000
38,00,000
36,00,000
25
20
15
10
5
01 Jan., 2015
2 Jan. 2015 2 Dec. 2015
31 Dec., 2015
45,11,847
19.818.8
44,38,824
But long term investments in equities are still giving good returns. On average, a 10-year holding period since April 1979 has given a return of 17 per cent
31 Mar. 1989 31 Mar. 2015
10 Year CAGR return30.0%
20.0%
10.0%
0.0%
-10.0%
PE: price-to earnings ratio; Market Cap in ` crore
Data rebased to 100
These are rolling returns. For instance, if somebody invested on April 03, 1979, he would have exited the market after 10 years (on March 31, 1989) with annualised returns of over 19 per cent. This process was repeated for each trading day since April 03, 1979 and 10 year annualised returns were calculated – it yields an average of 17 per cent .
Source: CMIE, ACE Equity
FOCUS GRAPHITI Market.indd All Pages 01/09/2016 12:54:35 AM
FOCUS Graphiti
Research by: Niti Kiran
Graphic by: Anand Sinha
Bears on the ProwlBears had the upper hand on Dalal Street in 2015. A consequence of a weak global economy, slowdown in China and failure of the Modi government to get key reform bills approved by Parliament. Bulls may be back in the hunt in 2016 if the Indian economy sustains a high growth trajectory with the Sensex gaining 15 to 20 per cent, say market participants. A snapshot of the market gyrations in 2015
160
140
120
100
80
60
40
20
0
Bovespa Hang Seng
PE Sensex Market Cap
NASDAQComposite
Sensex
The Sensex traded at a price-to-earnings ratio of around 19 in 2015, only marginally higher than the fi ve-year average. It indicates that the market was not expecting corporates to surprise with better-than-expected earnings
Indeed, the year was a mixed bag for the global equity markets. Emerging markets remained volatile through the year. The Sensex shed 5 per cent in 2015
A lacklustre market did not deter Indian companies from tapping the primary market. India Inc. raised ` 68,608 crore, a
76 % jump over the previous year
FIIs exited India with net outfl ows of Rs 20,585 crore in the fi rst nine months of 2015/16 but mutual funds came to the rescue with investments of over
`59,000 cr. in the same period
50,00,000
48,00,000
46,00,000
44,00,000
42,00,000
40,00,000
38,00,000
36,00,000
25
20
15
10
5
01 Jan., 2015
2 Jan. 2015 2 Dec. 2015
31 Dec., 2015
45,11,847
19.818.8
44,38,824
But long term investments in equities are still giving good returns. On average, a 10-year holding period since April 1979 has given a return of 17 per cent
31 Mar. 1989 31 Mar. 2015
10 Year CAGR return30.0%
20.0%
10.0%
0.0%
-10.0%
PE: price-to earnings ratio; Market Cap in ` crore
Data rebased to 100
These are rolling returns. For instance, if somebody invested on April 03, 1979, he would have exited the market after 10 years (on March 31, 1989) with annualised returns of over 19 per cent. This process was repeated for each trading day since April 03, 1979 and 10 year annualised returns were calculated – it yields an average of 17 per cent .
Source: CMIE, ACE Equity
FOCUS GRAPHITI Market.indd All Pages 01/09/2016 12:54:35 AM
Apr-Jun 2015 Jul-Sep 2015 Oct-Dec 2015
Apr-Jun 2015 Jul-Sep 2015 Oct-Dec 2015
Business Confi dence Index
THE SLIDE CONTINUES
Business sentiment hits another low
On January 6, a group of industry captains, including Ajay Piramal, R. Seshasayee, Harshavardhan Neotia and Sunil Kanoria, met Finance Minister Arun Jaitley at North Block to apprise him of industry expecta-tions from the upcoming Budget. While pre-budget meetings with the FM happen every year, industry lead-ers were never so anxious to put out a list of things that they wanted to see in Budget 2016.
The macro, consumer and invest-ment indicators have remained sub-dued for the longest time and the ap-petite for fresh investments in the private sector has been down for sev-eral quarters. The confidence levels have also been dipping with every quarter. This was reflected in the re-cent Business Today-C fore Business Confidence Survey. “Sharp degree of volatility in the global markets, recent
political outcome in local and Bihar elections, and the government’s ina-bility to get big-ticket reforms under-way may have led to a dip in confi-dence levels,” says Shubhada Rao, Chief Economist of Yes Bank.
The confidence levels, on a scale of 100, have dipped for the fourth consecutive quarter to 53.2 between October and December, down from 55.4 in the July-September quarter. The dip in sentiments shows that businesses are losing hope in the re-vival of the Indian economy. The business confidence index has been moving up and down in the past two years. It began to improve during January-March 2014, just before the general elections, and had reached 62.2 in October-December 2014. The survey was launched in the January-to-March quarter of 2011. Market research agency C fore quizzed 500
Corporate sentiment has taken a beating for the fourth straight quarter, reveals the BusinessToday-C fore Business
Confi dence Survey. The Union Budget is an opportunity for the government to get the economy on track. By MANU KAUSHIK
Waiting for the Budget
*Big businesses: Turnover `500 crore Medium businesses: Turnover `100-500 crore Small businesses: Turnover `5-100 crore Micro businesses: Turnover `5 crore
Apr-Jun 2014
Jul-Sep 2014
Oct-Dec 2014
Jan-Mar 2015
Apr-Jun 2015
Jul-Sep 2015
Oct-Dec 2015
BCI by SizeConfi dence levels fell across businesses of all sizes.
56.8
60.5
62.2
60.4
57.4
55.4
53.2
Big businesses
Medium businesses
Small businesses
Micro businesses
59.5
57.8
57.1
56.3
58.1
56.2
54.8
53.7
53.7
54.6
53.1
52.2
BCI by SectorSentiment has dipped across sectors
THE BIG PICTUREWhat the macroeconomic indicators reveal
Services Light Industry Heavy Engineering
56.9 57.3 58.754.4 55.6 57.253.1 54.3 52.4
Jun-15 Jul-15 Aug-15 Sep-15 Oct-15
4.2 4.3
6.3
3.8
9.8
There is little change in exports...
... and CPI infl ation in recent months...
... but the spike in the Index of Industrial Production augurs well for the economy
Exports Imports
Jun-1522,274
33,068
Jul-15 23,14335,794
Aug-15 21,27233,676
Sep-15 21,72032,209
Oct-15 21,40830,937
Nov-15 20,01329,795
In $ million
(Y-o-Y % change )
Jun-15 Nov-15
5.4
3.7 3.74.4
5.05.4
Consumer Price Indices : Base Year 2012
IIP growth (%)
BCI.indd 2-3 01/09/2016 1:58:34 AM
Apr-Jun 2015 Jul-Sep 2015 Oct-Dec 2015
Apr-Jun 2015 Jul-Sep 2015 Oct-Dec 2015
Business Confi dence Index
THE SLIDE CONTINUES
Business sentiment hits another low
On January 6, a group of industry captains, including Ajay Piramal, R. Seshasayee, Harshavardhan Neotia and Sunil Kanoria, met Finance Minister Arun Jaitley at North Block to apprise him of industry expecta-tions from the upcoming Budget. While pre-budget meetings with the FM happen every year, industry lead-ers were never so anxious to put out a list of things that they wanted to see in Budget 2016.
The macro, consumer and invest-ment indicators have remained sub-dued for the longest time and the ap-petite for fresh investments in the private sector has been down for sev-eral quarters. The confidence levels have also been dipping with every quarter. This was reflected in the re-cent Business Today-C fore Business Confidence Survey. “Sharp degree of volatility in the global markets, recent
political outcome in local and Bihar elections, and the government’s ina-bility to get big-ticket reforms under-way may have led to a dip in confi-dence levels,” says Shubhada Rao, Chief Economist of Yes Bank.
The confidence levels, on a scale of 100, have dipped for the fourth consecutive quarter to 53.2 between October and December, down from 55.4 in the July-September quarter. The dip in sentiments shows that businesses are losing hope in the re-vival of the Indian economy. The business confidence index has been moving up and down in the past two years. It began to improve during January-March 2014, just before the general elections, and had reached 62.2 in October-December 2014. The survey was launched in the January-to-March quarter of 2011. Market research agency C fore quizzed 500
Corporate sentiment has taken a beating for the fourth straight quarter, reveals the BusinessToday-C fore Business
Confi dence Survey. The Union Budget is an opportunity for the government to get the economy on track. By MANU KAUSHIK
Waiting for the Budget
*Big businesses: Turnover `500 crore Medium businesses: Turnover `100-500 crore Small businesses: Turnover `5-100 crore Micro businesses: Turnover `5 crore
Apr-Jun 2014
Jul-Sep 2014
Oct-Dec 2014
Jan-Mar 2015
Apr-Jun 2015
Jul-Sep 2015
Oct-Dec 2015
BCI by SizeConfi dence levels fell across businesses of all sizes.
56.8
60.5
62.2
60.4
57.4
55.4
53.2
Big businesses
Medium businesses
Small businesses
Micro businesses
59.5
57.8
57.1
56.3
58.1
56.2
54.8
53.7
53.7
54.6
53.1
52.2
BCI by SectorSentiment has dipped across sectors
THE BIG PICTUREWhat the macroeconomic indicators reveal
Services Light Industry Heavy Engineering
56.9 57.3 58.754.4 55.6 57.253.1 54.3 52.4
Jun-15 Jul-15 Aug-15 Sep-15 Oct-15
4.2 4.3
6.3
3.8
9.8
There is little change in exports...
... and CPI infl ation in recent months...
... but the spike in the Index of Industrial Production augurs well for the economy
Exports Imports
Jun-1522,274
33,068
Jul-15 23,14335,794
Aug-15 21,27233,676
Sep-15 21,72032,209
Oct-15 21,40830,937
Nov-15 20,01329,795
In $ million
(Y-o-Y % change )
Jun-15 Nov-15
5.4
3.7 3.74.4
5.05.4
Consumer Price Indices : Base Year 2012
IIP growth (%)
BCI.indd 2-3 01/09/2016 1:58:34 AM
CEOs and chief financial officers across 12 cities for the survey.
Besides the broad index which has declined, there were various other parameters that have regis-tered a downswing, including the overall economic situation, the sur-vey noted. In the previous survey, just 18 per cent of respondents had expected the economic situation to deteriorate compared to 35 per cent saying the economic situation will worsen in the January-March 2016 period, this time.
Similarly, other parameters, such as the overall business situa-tion, cost of external finance, pro-duction level, order book and sales pick-up have also fallen. In the case of cost of external finance, the swing is most remarkable. In the previous survey, 66 per cent respondents had expected that the cost of finance will go down in the October-December 2015 period, whereas in the current survey, just 10 per cent foresee cost of finance to improve between January and March.
The response on cost of finance is surprising given that interest rates in India have come down consider-ably over the past one year. Last September, the Reserve Bank of India (RBI) had cut the repo rate by 50 basis points to 6.75 per cent, which was a 4.5-year low.
Respondents were, however, gung-ho about certain other param-eters such as profits pick-up and hir-ing pick-up. In the previous survey, 46 per cent respondents had said that the hiring situation would get worse in the October-December quarter. In comparison, just 27 per cent say that it will get worse in the January-March quarter.
More respondents are optimistic about private sector investments. For instance, 34 per cent respondents expect the private investment cycle to improve in the last quarter of 2015/16. In the previous survey, only 19 per cent respondents had expected an uptick in private sector investments and industrial activity in
34 BUSINESS TODAY January 31 2016
Business Confi dence Index
LOSING THE PLOTBusiness environment remained largely unchanged on key parameters in the October-December quarter
Profit MarginsTwo-fi fth saw no change
Hiring Conditions Almost half saw no change
Sam
e/no
ch
ange
Subs
tant
ially
w
orse
Mod
erat
ely
bett
er
Subs
tant
ially
be
tter
Mod
erat
ely
wor
se
4
29
3
16
48
Overall Economic Conditions
Same/no change
Substantially worse
Moderately better
Almost half saw no change
9
21
6Substantially better
47
Moderately worse 17
Demand ConditionsTwo-fi fth felt that the situation
had improved
Sam
e/no
ch
ange
Subs
tant
ially
w
orse
Mod
erat
ely
bett
er
Subs
tant
ially
be
tter
Mod
erat
ely
wor
se
18
35
7
33
7
1927
5
Moderately worse
41
Same/no change
Substantially worse
Moderately better
Substantially better
8
(All fi gures are in %)
BCI.indd 4 01/09/2016 1:59:00 AM
the third quarter of 2015/16.Surprisingly, most respondents
were not hopeful that low commodity prices and public spending will ben-efit the Indian economy in 2016. In the second week of 2016, Brent crude, the main international bench-mark, fell to its 11-year-low of $34.26 per barrel. Some experts point out that public spending has not happened in the rural sector as much as in the urban areas. Also, road projects have seen some traction whereas other infrastructure projects need push from the government.
As a supplement to the BCI sur-vey, we have carried out an assess-ment of other indicators of economic growth, which include macro-eco-nomic conditions, and consumer and investment data. In the case of macro-economic conditions, the situ-ation has remained largely same on the exports and consumer price infla-tion front between April and November 2015. The IIP (Index of Industrial Production), on the other hand, showed improvement during the same period. While consumer inflation has grown marginally from 4.9 per cent to 5.4 per cent between April and November last year, IIP showed remarkable improvement – from 3 per cent to 9.8 per cent – dur-ing the same period.
FDI inflows have registered a fall between April and September 2015. In April, for instance, FDI inflows stood at `3,605 crore as compared to `2,897 crore in September. Low rural demand is evident from the consumer goods industry growth numbers. In September last year, industry sales grew at around 3.8 per cent, far lower than the June numbers at 7.7 per cent.
Weak demand conditions are yet to show some improvement. The forthcoming Budget will hopefully provide some direction on how the government wants to spur demand, deliver on pre-election promises and bring the economy back on track. ~
@manukaushik
Business Confi dence Index
36 BUSINESS TODAY January 31 2016
23 54 6 5
Companies see few reasons to cheer in the January-March quarter
Overall Economic Situation
Sales Pickup
More than a third expect a deterioration
Most see no change
POOR OUTLOOK
Moderately worse
Moderately worse
Same/no change
Same/no change
Substantially worse
Substantially worse
Moderately better
Moderately better
Substantially better
Substantially better
Availabilityof FinanceMore than two-fi fth expect a deterioration
Figures indicate percentage of respondents
12
18
12
23
53
93
24
37
19
2
Moderately worse
Substantially better
Substantially Worse
Same/no change
Moderately better
5655
211662
Hiring Pickup
Substantially better
Substantially worse
Same/no change
Moderately better
A majority see no change
Moderately worse
Profits PickupHalf expect no change
Same/no change
Substantially better
Substantially worse
Moderately better
Moderately worse
720
5117
5
BCI.indd 5 01/09/2016 1:59:15 AM
I t is a no-brainer when you think about it really. Any event you plan, whether it is a global confer-ence or a small networking mixer, is social by design, right? Hence,
it is certain that social media would be key to every aspect of event planning. Yet, strangely enough, for many compa-nies, hosting an event means throwing together a Facebook page to tell people when the event is happening, along with a few tweets or LinkedIn posts. Shouldn't you instead use social to start a nuanced, long-term conversation with your at-tendees? If you are involved with plan-ning an event, consider these tips for weaving social into your event’s fabric, so that the buzz prevails long after the last cheque is cleared.
SOCIAL UNIVERSE
At the beginning, you would want to decide your mix of social networks to get the word out about the event and connect with prospec-tive attendees. Facebook has the most on offer – most attendees are already on it and are familiar with interacting with brand pages; you can host all sorts of content like photos, videos, surveys and dedicated event pages. Facebook also offers targeted ads that let you pick geographic or demo-graphic segments to boost visibility. Head to LinkedIn if you are organis-ing an industry event – LinkedIn Groups, in particular, where you are likely to find key influencers and po-tential attendees. Save Twitter for the actual event experience, to leverage the event hashtag, which is vital to marketing your event – it is used to track everything from promotions, campaigns, conversations and high-lights. Ensure that the hashtag is unique and short, and include it in invites, tickets, blog posts, traditional advertisements and posters.
As you inch closer to the event and significant speakers confirm their presence, start promoting it by in-cluding their social accounts (Facebook, Twitter) in the communi-cation announcing your event – this makes the event instantly shareable to your speakers’ own social media followers – and remember to include subtle calls to action to register for your event. If ticket sales need a pick-
me-up, consider putting an affiliate/ referral program in place that allows influencers to attend your event for free, if they popularise your event on their social channels and drive ticket sales. Giveaways via Twitter contests work well too, but please avoid spam-ming Twitter. You don’t want your event hashtag to end up in power users’ Twitter mute lists.
During the event, it is a good idea to share live quotes, photos, short videos, or have the team walk around the venue, sharing interesting photos of attendees and conversations hap-pening along the sidelines. Either way, dedicate at least a couple of people to monitor your social feed when the event is on, to track conver-sations about the event and also to address questions or complaints com-ing up on the event hashtag. It may be worth grabbing a spare projector and setting up a ‘social wall’ that displays tweets and posts in real time, encouraging attendees to participate in the conversation.
As the curtain comes down on the event, don’t let the buzz dissipate. You can retell the story of the event in your attendees’ words with tweets and posts shared, and video snippets of their takeaways from the sessions. This gives people who could not attend a peek into what happened, luring them to be a part of it next time! ~
@2shar
LISTENING POST
Multi-lingual TextingInstant messaging platform Hike has launched its app in Hindi, Marathi, Tamil,
Gujarati, Bengali, Malayalam, Kannada and Telugu languages. “This launch means that people and communities across the length and breadth of India can now be in touch with their families, friends and contacts in their own native languages, defying the English language barrier erstwhile felt in messaging apps,” the company said in a press release. The app, available for Android phones, features a multi-lingual keyboard that allows the user to type in nine languages including English. The multi-lingual interface helps users choose a language as soon as they download the app. Users can also use the glide functionality at the bottom of the chat panel to swap languages.
Drone Selfi esTwitter has attained a patent from the United States Patent and Trademark Offi ce
for an unmanned aerial vehicle (UAV) that can be controlled by tweets, and can share images and videos on the platform. As per the patent fi led by Twitter in June, “Account holders of the messaging platform may control the UAV with commands embed-ded in messages and directed towards an account associated with the UAV”. The patent also states that the UAV may include a display screen and/ or a micro-phone to facilitate telepresence or interview functionality. When asked to describe the device by CNBC, all that the Twitter spokes-person said was – “Two words: Drone Selfi es”. – DEVIKA SINGH
Keep the Buzz Going
WHAT’S TRENDING
Use social media to promote an event and then retain the buzz around it. By TUSHAR KANWAR
38 BUSINESS TODAY January 31 2016 January 31 2016 BUSINESS TODAY 39
Surging Popularity Expanding FootprintGlobal social networks ranked by number of users (in millions)
Average monthly social media user engagement in select global regions as of June 2015 (in hours)
DIGITAL DASHBOARD
AJ
AY
TH
AK
UR
I
Facebook WhatsApp QQ Facebook Messenger
1,550
6.1 6.1
5.2
3.8
2.1
900 860700 653 650
400316 300 300 249 230 212 211 200
105 100 100 100 97
QZone WeChat Instagram Twitter Baidu Tieba
Skype Viber Tumblr Sina Weibo
BBM LinkedIn* Latin America
Europe North America
Middle East and Africa
Asia Pacifi c
PinterestVKontakteYYSnapchatLINE
Source: Statista Source: comScore
Social Media.indd All Pages 08-01-2016 5:20:55 PM
I t is a no-brainer when you think about it really. Any event you plan, whether it is a global confer-ence or a small networking mixer, is social by design, right? Hence,
it is certain that social media would be key to every aspect of event planning. Yet, strangely enough, for many compa-nies, hosting an event means throwing together a Facebook page to tell people when the event is happening, along with a few tweets or LinkedIn posts. Shouldn't you instead use social to start a nuanced, long-term conversation with your at-tendees? If you are involved with plan-ning an event, consider these tips for weaving social into your event’s fabric, so that the buzz prevails long after the last cheque is cleared.
SOCIAL UNIVERSE
At the beginning, you would want to decide your mix of social networks to get the word out about the event and connect with prospec-tive attendees. Facebook has the most on offer – most attendees are already on it and are familiar with interacting with brand pages; you can host all sorts of content like photos, videos, surveys and dedicated event pages. Facebook also offers targeted ads that let you pick geographic or demo-graphic segments to boost visibility. Head to LinkedIn if you are organis-ing an industry event – LinkedIn Groups, in particular, where you are likely to find key influencers and po-tential attendees. Save Twitter for the actual event experience, to leverage the event hashtag, which is vital to marketing your event – it is used to track everything from promotions, campaigns, conversations and high-lights. Ensure that the hashtag is unique and short, and include it in invites, tickets, blog posts, traditional advertisements and posters.
As you inch closer to the event and significant speakers confirm their presence, start promoting it by in-cluding their social accounts (Facebook, Twitter) in the communi-cation announcing your event – this makes the event instantly shareable to your speakers’ own social media followers – and remember to include subtle calls to action to register for your event. If ticket sales need a pick-
me-up, consider putting an affiliate/ referral program in place that allows influencers to attend your event for free, if they popularise your event on their social channels and drive ticket sales. Giveaways via Twitter contests work well too, but please avoid spam-ming Twitter. You don’t want your event hashtag to end up in power users’ Twitter mute lists.
During the event, it is a good idea to share live quotes, photos, short videos, or have the team walk around the venue, sharing interesting photos of attendees and conversations hap-pening along the sidelines. Either way, dedicate at least a couple of people to monitor your social feed when the event is on, to track conver-sations about the event and also to address questions or complaints com-ing up on the event hashtag. It may be worth grabbing a spare projector and setting up a ‘social wall’ that displays tweets and posts in real time, encouraging attendees to participate in the conversation.
As the curtain comes down on the event, don’t let the buzz dissipate. You can retell the story of the event in your attendees’ words with tweets and posts shared, and video snippets of their takeaways from the sessions. This gives people who could not attend a peek into what happened, luring them to be a part of it next time! ~
@2shar
LISTENING POST
Multi-lingual TextingInstant messaging platform Hike has launched its app in Hindi, Marathi, Tamil,
Gujarati, Bengali, Malayalam, Kannada and Telugu languages. “This launch means that people and communities across the length and breadth of India can now be in touch with their families, friends and contacts in their own native languages, defying the English language barrier erstwhile felt in messaging apps,” the company said in a press release. The app, available for Android phones, features a multi-lingual keyboard that allows the user to type in nine languages including English. The multi-lingual interface helps users choose a language as soon as they download the app. Users can also use the glide functionality at the bottom of the chat panel to swap languages.
Drone Selfi esTwitter has attained a patent from the United States Patent and Trademark Offi ce
for an unmanned aerial vehicle (UAV) that can be controlled by tweets, and can share images and videos on the platform. As per the patent fi led by Twitter in June, “Account holders of the messaging platform may control the UAV with commands embed-ded in messages and directed towards an account associated with the UAV”. The patent also states that the UAV may include a display screen and/ or a micro-phone to facilitate telepresence or interview functionality. When asked to describe the device by CNBC, all that the Twitter spokes-person said was – “Two words: Drone Selfi es”. – DEVIKA SINGH
Keep the Buzz Going
WHAT’S TRENDING
Use social media to promote an event and then retain the buzz around it. By TUSHAR KANWAR
38 BUSINESS TODAY January 31 2016 January 31 2016 BUSINESS TODAY 39
Surging Popularity Expanding FootprintGlobal social networks ranked by number of users (in millions)
Average monthly social media user engagement in select global regions as of June 2015 (in hours)
DIGITAL DASHBOARD
AJ
AY
TH
AK
UR
I
Facebook WhatsApp QQ Facebook Messenger
1,550
6.1 6.1
5.2
3.8
2.1
900 860700 653 650
400316 300 300 249 230 212 211 200
105 100 100 100 97
QZone WeChat Instagram Twitter Baidu Tieba
Skype Viber Tumblr Sina Weibo
BBM LinkedIn* Latin America
Europe North America
Middle East and Africa
Asia Pacifi c
PinterestVKontakteYYSnapchatLINE
Source: Statista Source: comScore
Social Media.indd All Pages 08-01-2016 5:20:55 PM
40 BUSINESS TODAY January 31 2016
I mmediately after taking charge as India’s Chief Economic Advisor (CEA) i n O c t o b e r 2 0 1 4 , A r v i n d Subramanian had identified macro-economic stability and spurring invest-ments as top priorities for the Centre. CEA’S mid-year analysis of the Indian economy indicates that while the coun-try has done well in macroeconomic stability, a lot more needs to be done to
boost growth and investments. In an exclusive interview with Business Today’s Joe C. Mathew and Sumant Banerji, Subramanian explains why India’s growth indicators are mixed. He also asserts that the Goods and Services Tax (GST) can be the best enabler of economic growth. Edited Excerpts:
The mid-year economic review is giving mixed signals in terms of growth...
Let me first emphasise on macroeconomic
stability. Inflation is down, our exter-nal situation is good (due to increase in foreign exchange reserves and comfortable level of current account deficit), and the quality of our ex-penditure has improved. We are go-ing to more than stick to the (fiscal) target set for this year, not just at the Central level, but also at the state level. There is growth in indirect taxes. So, macroeconomic stability is there. At the same time, while there is recovery, it is not easy to judge the pace and the breadth of the recovery. You look at the tax front. Indirect tax has done well, but direct tax has not. Consumer loans have gone up, but industry loans are going down. So, it is mixed.
The reason for this is fa-vourable (low) oil prices that helped boost growth. Low oil price means more money in the pockets of the people. The government has more money, firms have more money, so they spend. But then, exports have pretty much collapsed because of what is happening interna-tionally. Private investment and exports are weak. It is basically consumption and public investment driving the economy.
Given the trend, what will be its near-term growth impact?
Our position is quite remarkable es-pecially if we compare it with other countries. But then, the economy is soft. Looking ahead, the growth outlook and the fiscal outlook are challenging. While we need to keep doing all the things on the supply side, we also need to look at where the demand is going to come from. That’s what we are saying through the fiscal and monetary policies.
Most of the stakeholders believe that it might take another 12-24 months for private invest-ments to pick up in real earnest.
What is your view?
It’s true that private investments have been weak. The growth of real private investment is 2-2.5 per cent. When the economy was booming, private investment growth was 8-9 per cent. We can’t give a date to when that level of growth will hap-pen again. I do think it is a slow pro-cess. What adds to the challenge is that a lot of it is related to the legacy of bad assets, and cleaning that up is going to take some time. That’s why we say that you cannot expect pri-vate investment to recover quickly; we need to think about how to inject demand into the economy.
You are highlighting the impor-tance of stepping up public invest-ment. Do you think the govern-ment should focus more on spend-ing at this stage, even if that means a slight slippage on fiscal prudence?
These are all decisions to be made in the context of the next Budget. What we are saying is that we are commit-ted to a certain fiscal path, and many of the reasons why we set that path remain valid. Government has to have credibility and a medium fiscal target. Borrowing costs of the govern-ment are very important, but at the
same time, the circumstances have changed and there are other consid-erations now. So the question is about how to balance that. Those are the decisions to be taken.
Indirect taxes have picked up, but direct taxes have not. Why?
Let us be clear. If you look at the headline 35 per cent increase in indirect taxes, it is a bit misleading because this includes the revenues from new taxes too. If you take that away, the growth is still quite good at around 10.5 per cent. I think the growth projection we have made in the case of indirect taxes, at 18 per
cent or so, was quite opti-mistic. If you look at actual performance on that basis, there is a slight shortfall. Similarly, we find that some of the increase in direct tax collections was because of high corporate refunds last year. Stripped of that, direct taxes are not as strong as indirect taxes – they are probably growing at 6-7 per cent. And that is consistent with the fact that the corpo-r a t e s e c t o r h a s n o t been doing very wel l ; their profits have not been increasing much.
The government has not been able to pass the GST Bill in the winter session. How big a disappoint-ment is it for the reform process?
Of course it is disappointing. But I am still hoping that it gets done sooner rather than later. It’s true that passing GST is very important, and that passing GST will not solve all the problems. We need to intro-duce it for many reasons as spelt out in the GST report we have pre-pared. At the same time, there are so many other things that also need to be done. So, reforms are a multi-dimensional, multi-pronged effort.
January 31 2016 BUSINESS TODAY 41
“Need to Inject demand into the
economy”“The beauty about
the GST is that it is self-enforcing. It goes after corruption, but not in a heavy-handed manner like other legislations”
INTERVIEW Arvind Subramanian
PH
OT
OG
RA
PH
S B
Y S
HE
KH
AR
GH
OS
H
Interview-Arvind Subramanian.indd 2-3 08-01-2016 5:07:33 PM
40 BUSINESS TODAY January 31 2016
I mmediately after taking charge as India’s Chief Economic Advisor (CEA) i n O c t o b e r 2 0 1 4 , A r v i n d Subramanian had identified macro-economic stability and spurring invest-ments as top priorities for the Centre. CEA’S mid-year analysis of the Indian economy indicates that while the coun-try has done well in macroeconomic stability, a lot more needs to be done to
boost growth and investments. In an exclusive interview with Business Today’s Joe C. Mathew and Sumant Banerji, Subramanian explains why India’s growth indicators are mixed. He also asserts that the Goods and Services Tax (GST) can be the best enabler of economic growth. Edited Excerpts:
The mid-year economic review is giving mixed signals in terms of growth...
Let me first emphasise on macroeconomic
stability. Inflation is down, our exter-nal situation is good (due to increase in foreign exchange reserves and comfortable level of current account deficit), and the quality of our ex-penditure has improved. We are go-ing to more than stick to the (fiscal) target set for this year, not just at the Central level, but also at the state level. There is growth in indirect taxes. So, macroeconomic stability is there. At the same time, while there is recovery, it is not easy to judge the pace and the breadth of the recovery. You look at the tax front. Indirect tax has done well, but direct tax has not. Consumer loans have gone up, but industry loans are going down. So, it is mixed.
The reason for this is fa-vourable (low) oil prices that helped boost growth. Low oil price means more money in the pockets of the people. The government has more money, firms have more money, so they spend. But then, exports have pretty much collapsed because of what is happening interna-tionally. Private investment and exports are weak. It is basically consumption and public investment driving the economy.
Given the trend, what will be its near-term growth impact?
Our position is quite remarkable es-pecially if we compare it with other countries. But then, the economy is soft. Looking ahead, the growth outlook and the fiscal outlook are challenging. While we need to keep doing all the things on the supply side, we also need to look at where the demand is going to come from. That’s what we are saying through the fiscal and monetary policies.
Most of the stakeholders believe that it might take another 12-24 months for private invest-ments to pick up in real earnest.
What is your view?
It’s true that private investments have been weak. The growth of real private investment is 2-2.5 per cent. When the economy was booming, private investment growth was 8-9 per cent. We can’t give a date to when that level of growth will hap-pen again. I do think it is a slow pro-cess. What adds to the challenge is that a lot of it is related to the legacy of bad assets, and cleaning that up is going to take some time. That’s why we say that you cannot expect pri-vate investment to recover quickly; we need to think about how to inject demand into the economy.
You are highlighting the impor-tance of stepping up public invest-ment. Do you think the govern-ment should focus more on spend-ing at this stage, even if that means a slight slippage on fiscal prudence?
These are all decisions to be made in the context of the next Budget. What we are saying is that we are commit-ted to a certain fiscal path, and many of the reasons why we set that path remain valid. Government has to have credibility and a medium fiscal target. Borrowing costs of the govern-ment are very important, but at the
same time, the circumstances have changed and there are other consid-erations now. So the question is about how to balance that. Those are the decisions to be taken.
Indirect taxes have picked up, but direct taxes have not. Why?
Let us be clear. If you look at the headline 35 per cent increase in indirect taxes, it is a bit misleading because this includes the revenues from new taxes too. If you take that away, the growth is still quite good at around 10.5 per cent. I think the growth projection we have made in the case of indirect taxes, at 18 per
cent or so, was quite opti-mistic. If you look at actual performance on that basis, there is a slight shortfall. Similarly, we find that some of the increase in direct tax collections was because of high corporate refunds last year. Stripped of that, direct taxes are not as strong as indirect taxes – they are probably growing at 6-7 per cent. And that is consistent with the fact that the corpo-r a t e s e c t o r h a s n o t been doing very wel l ; their profits have not been increasing much.
The government has not been able to pass the GST Bill in the winter session. How big a disappoint-ment is it for the reform process?
Of course it is disappointing. But I am still hoping that it gets done sooner rather than later. It’s true that passing GST is very important, and that passing GST will not solve all the problems. We need to intro-duce it for many reasons as spelt out in the GST report we have pre-pared. At the same time, there are so many other things that also need to be done. So, reforms are a multi-dimensional, multi-pronged effort.
January 31 2016 BUSINESS TODAY 41
“Need to Inject demand into the
economy”“The beauty about
the GST is that it is self-enforcing. It goes after corruption, but not in a heavy-handed manner like other legislations”
INTERVIEW Arvind Subramanian
PH
OT
OG
RA
PH
S B
Y S
HE
KH
AR
GH
OS
H
Interview-Arvind Subramanian.indd 2-3 08-01-2016 5:07:33 PM
Assuming that GST Bill gets passed in the Budget session, by when can it be rolled out?
If it gets passed soon, techni-cally, we should be able to roll out GST by September 1, 2016. That is because GST is a transaction tax and you don’t have to wait for the next calendar or fiscal year to col-lect it. So, if we can move quickly, we can still aim for September 1 (deadline).
Let us consider the other extreme. What if GST does not get passed at all? To what extent can the ele-ments of GST be implemented through executive action in such a situation? Say a half-GST?
That’s certainly on the agenda. That’s being discussed.
Introduction of GST has a lot to do with pruning of exemptions. Do you think the Centre and the states can come together on this account?
The agreement in the empowered committee is that since the Centre has a much bigger exemption list than the states, it has to bring that down to the level of the states. That is something the Centre can do.
You have stated that the govern-ment expenditure has increased in sectors such as agriculture. Can you give a Centre-state break-up of the expenditure?
In the case of public investment, we have calculated that the ratio has been 60:40 – 60 per cent Centre and 40 per cent states. We have not been able to do a similar break-up in agri-culture because of some classifica-tion issues in the data, but the good thing is that, finally, it is India as a whole that has to spend, and it seems to be happening.
So, going ahead, we should expect states to spend more?
That is a fair expectation. If you de-volve more untied money to the states, they have to spend on impor-tant policy priorities. It is a tricky question as to how much the Centre should influence that. After all, the whole point of decentralisation is that states should get to determine their priorities. But then, we also have a sense that some subjects are very important and the Centre should try and influence the states to focus on such areas.
The critics of the GST say that it takes away the autonomy of the states. How do you react to that?
That is not quite right. Look at inter-national examples: the Centre col-lects tax in Australia; on the other hand, Canada (like India, today) gives powers to both Centre and states. My honest view is that the Indian GST, if passed, will be the cleanest dual VAT (value added tax) in large federal systems. The design of the Indian GST is very nice as it balances the two. In the current ver-sion, the states can still tax alcohol and other things like electricity. So there is lot of freedom, maybe too much freedom. That’s why it should get implemented quickly.
It is often said that GST can turn
black money prone sectors such as liquor and real es-tate more accountable. By keeping liquor and real estate out of GST, are we not really killing a chance to address some of the core problems of the Indian economy?
Real estate, gold and alcohol should be in for all the rea-sons. Normally, where there is a law, and if you don’t abide by it, there are punitive meas-
ures. The beauty about the GST is that it is self-enforcing. It goes after corruption, but not in a heavy-handed manner like other legisla-tions. GST can only be better if there are more sectors. But we don’t want the best to become the enemy of the good. We cannot say we will have a perfect GST and we will implement it. So something that’s good, but not perfect, gets implemented, and you learn from your experience, and you change. That’s how GST implemen-tation should happen in India.
Your report points out the possi-bility of a short to medium term inflationary pressure when GST gets implemented. Do you expect inflation to be too high?
First of all, if you look at a revenue-neutral rate, there should not be any price increase at all. We have carried out a sector by sector assessment of what could be the impact. Our as-sessment is that the impact on infla-tion will be very minimal. That’s partly because the existing CPI (con-sumer price index), a huge part of it, is taxed at very low rates. So, by definition, there will not be much increase. But there could be some sectors where this could happen. We know there will be difficulties in the early stages of implementing GST. It is a new thing and involves a lot of systemic process changes. Inflation could be one issue, compliance could be another. So the question is how
42 BUSINESS TODAY January 31 2016 January 31 2016 BUSINESS TODAY 43
“FDI is doing well and that is the kind of
capital we want, not the hot money that comes
in and goes out”
to minimise these teething issues.
How can it be done?
We have said two or three things. One, we must get a revenue neutral rate, but on balance it is probably slightly better to err on the lower side than the higher, because you can al-ways increase the rate later. To max-imise the chances of GST becoming a success, it is better to keep the rates at a lower side. If there is a shortfall, we can always make up, or we can make up by increasing taxes over time. We
should realise that teething trouble will always be there, and we must not overburden that. If revenue goes down in six months of introduction of GST, you should not be saying ‘GST is bad’. You need to evaluate this after a certain period of time, say after 12 to 18 months. These are very impor-tant to the design of GST.
How disappointed will you be if the one per cent inter-state tax re-mains in GST?
I will be very disappointed. I think
that to ‘Make in India’, you need to make one India. It (the inter-state tax) violates the spirit of GST. It is a consumption tax, not a production tax. The one per cent will be a pro-duction tax and is against the concept of GST.
Some industries are cyclical. Will GST leave some room to do some-thing for sectors?
You don’t want tax rates to go up and down in a cycle. You cannot have tax policies in a cycle. One has to figure
out other ways to help industries that are going through difficulty. But not through changes in GST rates.
What is your personal opinion about the Congress’ demand to cap the rates in the Constitution Amendment Bill?
We have said in the report (on the Revenue Neutral Rate and Structure of Rates for the GST) that it is very problematic. No Constitution says that a tax should be fixed at 18 per cent. There may be situations, like a
national calamity, where you are com-pelled to raise this rate. So, to put it in stone for all times is not correct. I think from all points of view, it makes little sense to p u t t h i s i n t h e Constitution; no coun-try does that.
Did you factor in any growth impact that GST will bring in while arriving at the rates?
No. Just to be on the conservative side, we said we are not going to factor in any growth impacts. The truth is that it is not easy to measure what
will be your growth impact. But we did factor in some compliance bene-fits of GST.
Why have you recommended the inclusion of health and education under GST? How does it serve the government’s social objective of providing affordable healthcare and education?
We have actually done some very deep calculations on this. You gener-ally want to exempt sectors which are consumed a lot by relatively poor
“Looking ahead, the
growth outlook and the fiscal outlook are
challenging”
INTERVIEW Arvind Subramanian
Interview-Arvind Subramanian.indd 4-5 08-01-2016 5:07:48 PM
Assuming that GST Bill gets passed in the Budget session, by when can it be rolled out?
If it gets passed soon, techni-cally, we should be able to roll out GST by September 1, 2016. That is because GST is a transaction tax and you don’t have to wait for the next calendar or fiscal year to col-lect it. So, if we can move quickly, we can still aim for September 1 (deadline).
Let us consider the other extreme. What if GST does not get passed at all? To what extent can the ele-ments of GST be implemented through executive action in such a situation? Say a half-GST?
That’s certainly on the agenda. That’s being discussed.
Introduction of GST has a lot to do with pruning of exemptions. Do you think the Centre and the states can come together on this account?
The agreement in the empowered committee is that since the Centre has a much bigger exemption list than the states, it has to bring that down to the level of the states. That is something the Centre can do.
You have stated that the govern-ment expenditure has increased in sectors such as agriculture. Can you give a Centre-state break-up of the expenditure?
In the case of public investment, we have calculated that the ratio has been 60:40 – 60 per cent Centre and 40 per cent states. We have not been able to do a similar break-up in agri-culture because of some classifica-tion issues in the data, but the good thing is that, finally, it is India as a whole that has to spend, and it seems to be happening.
So, going ahead, we should expect states to spend more?
That is a fair expectation. If you de-volve more untied money to the states, they have to spend on impor-tant policy priorities. It is a tricky question as to how much the Centre should influence that. After all, the whole point of decentralisation is that states should get to determine their priorities. But then, we also have a sense that some subjects are very important and the Centre should try and influence the states to focus on such areas.
The critics of the GST say that it takes away the autonomy of the states. How do you react to that?
That is not quite right. Look at inter-national examples: the Centre col-lects tax in Australia; on the other hand, Canada (like India, today) gives powers to both Centre and states. My honest view is that the Indian GST, if passed, will be the cleanest dual VAT (value added tax) in large federal systems. The design of the Indian GST is very nice as it balances the two. In the current ver-sion, the states can still tax alcohol and other things like electricity. So there is lot of freedom, maybe too much freedom. That’s why it should get implemented quickly.
It is often said that GST can turn
black money prone sectors such as liquor and real es-tate more accountable. By keeping liquor and real estate out of GST, are we not really killing a chance to address some of the core problems of the Indian economy?
Real estate, gold and alcohol should be in for all the rea-sons. Normally, where there is a law, and if you don’t abide by it, there are punitive meas-
ures. The beauty about the GST is that it is self-enforcing. It goes after corruption, but not in a heavy-handed manner like other legisla-tions. GST can only be better if there are more sectors. But we don’t want the best to become the enemy of the good. We cannot say we will have a perfect GST and we will implement it. So something that’s good, but not perfect, gets implemented, and you learn from your experience, and you change. That’s how GST implemen-tation should happen in India.
Your report points out the possi-bility of a short to medium term inflationary pressure when GST gets implemented. Do you expect inflation to be too high?
First of all, if you look at a revenue-neutral rate, there should not be any price increase at all. We have carried out a sector by sector assessment of what could be the impact. Our as-sessment is that the impact on infla-tion will be very minimal. That’s partly because the existing CPI (con-sumer price index), a huge part of it, is taxed at very low rates. So, by definition, there will not be much increase. But there could be some sectors where this could happen. We know there will be difficulties in the early stages of implementing GST. It is a new thing and involves a lot of systemic process changes. Inflation could be one issue, compliance could be another. So the question is how
42 BUSINESS TODAY January 31 2016 January 31 2016 BUSINESS TODAY 43
“FDI is doing well and that is the kind of
capital we want, not the hot money that comes
in and goes out”
to minimise these teething issues.
How can it be done?
We have said two or three things. One, we must get a revenue neutral rate, but on balance it is probably slightly better to err on the lower side than the higher, because you can al-ways increase the rate later. To max-imise the chances of GST becoming a success, it is better to keep the rates at a lower side. If there is a shortfall, we can always make up, or we can make up by increasing taxes over time. We
should realise that teething trouble will always be there, and we must not overburden that. If revenue goes down in six months of introduction of GST, you should not be saying ‘GST is bad’. You need to evaluate this after a certain period of time, say after 12 to 18 months. These are very impor-tant to the design of GST.
How disappointed will you be if the one per cent inter-state tax re-mains in GST?
I will be very disappointed. I think
that to ‘Make in India’, you need to make one India. It (the inter-state tax) violates the spirit of GST. It is a consumption tax, not a production tax. The one per cent will be a pro-duction tax and is against the concept of GST.
Some industries are cyclical. Will GST leave some room to do some-thing for sectors?
You don’t want tax rates to go up and down in a cycle. You cannot have tax policies in a cycle. One has to figure
out other ways to help industries that are going through difficulty. But not through changes in GST rates.
What is your personal opinion about the Congress’ demand to cap the rates in the Constitution Amendment Bill?
We have said in the report (on the Revenue Neutral Rate and Structure of Rates for the GST) that it is very problematic. No Constitution says that a tax should be fixed at 18 per cent. There may be situations, like a
national calamity, where you are com-pelled to raise this rate. So, to put it in stone for all times is not correct. I think from all points of view, it makes little sense to p u t t h i s i n t h e Constitution; no coun-try does that.
Did you factor in any growth impact that GST will bring in while arriving at the rates?
No. Just to be on the conservative side, we said we are not going to factor in any growth impacts. The truth is that it is not easy to measure what
will be your growth impact. But we did factor in some compliance bene-fits of GST.
Why have you recommended the inclusion of health and education under GST? How does it serve the government’s social objective of providing affordable healthcare and education?
We have actually done some very deep calculations on this. You gener-ally want to exempt sectors which are consumed a lot by relatively poor
“Looking ahead, the
growth outlook and the fiscal outlook are
challenging”
INTERVIEW Arvind Subramanian
Interview-Arvind Subramanian.indd 4-5 08-01-2016 5:07:48 PM
people. It turns out that most of these health and education services are consumed by richer households. That’s the reason we said that private medical services and private medical colleges should be taxed. Why should they be exempted? It was based on that analysis, and not on any philosophy or ideology.
What will be the impact of the just concluded global climate change agreement and WTO ministerial meet-ing on India’s medium and long-term growth plans?
I think the climate change deal is a very good step for-ward, where all countries came together and realised that it is an important global objective. All countries have made contributions. Not a perfect agreement by any means, but I think it is a step forward in the right direction. I am still studying the impact of WTO, but I think that the agreement itself reflects that there are a lot of differences among member countries.
People talk about WTO agreement’s adverse impact on agriculture, on export growth, etc…
This is not the time to go into it, but I think many of these things are vastly exaggerated. At some point, if I find time, I want to write about it.
How crucial is the Bankruptcy Bill that has been tabled?
It is very important for the medium term. One of the big problems for companies in India is exit. But the question is whether we need to do more to help the existing stock of assets which are stressed. That will
help solve future problems.Many of these assets have to be
sold, but there are some assets which should be made opera-tional. We need that expertise. So, it is not about selling assets alone, it is about assets coming back to life again. That also is part of the problem.
How do you see the US Fed rate hike?
We are very well cushioned to ab-
sorb the impact. The markets have been expecting that for a long time. We have reserves as cushion. Also, this hike could be very gradual.
While there has been a surge in FDI, the Indian equity market has also seen the third largest FII outflow in Asia. Is it a wor-rying factor?
The net FDI has been doing quite well. There were some capital inflows in the first
half of the year and some re-versals. This is what the capi-tal markets are all about. They get over-exuberant and then over-pessimistic; it is part of the game of being inte-grated with the international capital market. So, instead of following this on a month-by-month or quarter-by-quarter basis, we should look at the broader message. I think there is a lot of investor interest in India. FDI is doing well and that is the kind of capital we want, not the hot money that comes in and goes out. As long as we can keep attract-ing the real good stuff, that’s all we need.
Inflation has been down. But food inflation is still up. How can that be tackled?
On the food side, cereals have not been an issue. We have stocks. The problem is with pulses. We have begun to address this by increasing the minimum support prices for pulses quite a bit, combining that with procurement. The other thing is how we create a common market. These are the two distinct chal-lenges and both will have to be ad-dressed to handle food inflation. ~
@joecmathew; @sumantbanerji
44 BUSINESS TODAY January 31 2016
“We are very well cushioned to absorb the impact (of the Fed
rate hike). We have reserves... Also this hike could be very gradual”
INTERVIEW Arvind Subramanian
Interview-Arvind Subramanian.indd 6 08-01-2016 5:08:08 PM
ECONOMY Oil
January 31 2016 BUSINESS TODAY 4746 BUSINESS TODAY January 31 2016
OILING THE ECONOMY’S WHEELSThe steep slump in global oil prices has come to the government’s rescue. But it has not helped the economy. By SUMANT BANERJI
It has been a prolonged streak of good luck for the ruling National Democratic Alliance (NDA) government. Since it was sworn in 20 months ago, the global
price of crude has dropped over 60 per cent, from $106.85 a barrel in May 2014 to below $35 a barrel – an 11-year low – in December 2015. As nearly 80 per cent of India’s crude is imported – accounting for almost a quarter of the total import bill – the decline has not only saved precious foreign exchange but also transformed the oil sector from one riddled with under-recoveries and subsidies, a headache for successive previous governments, to a wellspring of savings and revenue generation.
Largely due to the fall in oil prices, India’s import bill between April and November 2015 declined 17 per cent to $261 billion (`17.35 lakh crore). Oil im-ports dropped 42 per cent to $61.41 bil-lion (`4.08 lakh crore) in the same pe-riod. According to the government’s pe-troleum planning and analysis cell, the oil bill over the entire year 2015/16 is expected to be around $69 billion (`4.58 lakh crore). Compare this with the same bill in 2014/15, which was a tidy $113 billion (`6.87 lakh core), or better
AJ
AY
TH
AK
UR
I
Oil.indd 2-3 08-01-2016 5:26:52 PM
ECONOMY Oil
January 31 2016 BUSINESS TODAY 4746 BUSINESS TODAY January 31 2016
OILING THE ECONOMY’S WHEELSThe steep slump in global oil prices has come to the government’s rescue. But it has not helped the economy. By SUMANT BANERJI
It has been a prolonged streak of good luck for the ruling National Democratic Alliance (NDA) government. Since it was sworn in 20 months ago, the global
price of crude has dropped over 60 per cent, from $106.85 a barrel in May 2014 to below $35 a barrel – an 11-year low – in December 2015. As nearly 80 per cent of India’s crude is imported – accounting for almost a quarter of the total import bill – the decline has not only saved precious foreign exchange but also transformed the oil sector from one riddled with under-recoveries and subsidies, a headache for successive previous governments, to a wellspring of savings and revenue generation.
Largely due to the fall in oil prices, India’s import bill between April and November 2015 declined 17 per cent to $261 billion (`17.35 lakh crore). Oil im-ports dropped 42 per cent to $61.41 bil-lion (`4.08 lakh crore) in the same pe-riod. According to the government’s pe-troleum planning and analysis cell, the oil bill over the entire year 2015/16 is expected to be around $69 billion (`4.58 lakh crore). Compare this with the same bill in 2014/15, which was a tidy $113 billion (`6.87 lakh core), or better
AJ
AY
TH
AK
UR
I
Oil.indd 2-3 08-01-2016 5:26:52 PM
still, with that in 2013/14, the last year of the Manmohan Singh-led United Progressive Alliance (UPA) government, when it was $168 billion (`8.65 lakh crore). With global demand sluggish, Indian exports have fallen 17.7 per cent in the past 11 months, but the reduction in oil prices has helped to considerably soften the blow.
Only part of this bonanza, however, has been passed on to consumers. The retail prices of petrol and diesel have dropped by only 17 and 21 per cent, respectively, since April 2014 (see Oilonomics). The rest of the windfall has been mopped up by the government by increasing excise duty more than half a dozen times in 20 months – four times between November 2014 and January 2015, and thrice again since November 2015 so far (See Hike After Hike). The overall excise duty increase is 108 per cent on petrol and over 200 per cent on diesel – the present government thus earns `10.25 more on every litre of petrol bought and `9.33 on every litre of diesel than the UPA government did.
Thanks to the hikes, excise tax collection this fiscal till November 2015 was `1,70,693 crore, or 67.1 per cent higher than in the corresponding period in 2014. By November, almost 75 per cent of the total budgetary excise tax estimate for 2015/16 had already been achieved, with
the oil and gas sector contributing nearly 78 per cent. The rise in excise collection has in turn raised overall indirect tax collection growth to 34.3 per cent. As the finance ministry sets about preparing the coming Budget, meeting the estimate for indirect taxes is the least of its concerns. In addition, low crude prices have also enabled the govern-ment to take the risk of completely de-controlling diesel. Had crude costs been increasing, the step could have had serious political consequences.
“The government is treating the oil and gas sector like a cash cow,” says Ajay Bansal, President, All India Petroleum Dealers Association. “Why should consumers pay for its poor planning? The real benefit should have gone to consumers, but it hasn’t.” Adds Ajay Arora, Partner and Leader, Oil and Gas practice at consultancy firm EY: “Given that other macroeconomic indicators are not that favourable, benign oil prices have been an abso-lute boon for the government. It has helped contain the fiscal deficit and the outflow of dollars.”
Making UpHigher tax generation due to falling crude prices has helped the government offset revenue shortfall in other areas, notably disinvestment. The budgetary target from
January 31 2016 BUSINESS TODAY 4948 BUSINESS TODAY January 31 2016
PETROL DIESEL
APR ’14 JAN ’16 % CHANGE APR ’14 JAN ’16 % CHANGE
Cost and freight ($/bbl) 116.45 52.41 -52.99 122.94 43.74 -64.42
Average exchange rate (`/$)
60.1 66.53 10.70 59.31 66.53 12.17
Refi nery transfer price*
44.79 22.46 -49.85 49.39 18.69 -62.16
Dealer price* 48.03 25.50 -46.91 44.98 23.11 -48.62
Excise duty* 9.48 19.73 108.12 4.5 13.83 207.33
Dealer commission* 2 2.25 12.50 1.19 1.43 20.17
VAT* 11.9 11.87 -0.25 6.61 6.66 0.76
Retail selling price* 71.41 59.35 -16.89 57.28 45.03 -21.39
OILONOMICS: How the different components that determine the retail prices of petrol and diesel have changed between April 2014 and November 2015
prices. IOC, for example, lost over `5,000 crore due to higher inventory cost, which wiped out its entire profit in the second quarter of 2015/16. Even so, its profit in the first quarter was higher than its profit across the entire fiscal year 2014/15.
“We have not gained from falling crude prices,” says A.K. Sharma, Director, Finance, IOC. “We have benefitted to the same extent every bulk consumer of oil has. Lower oil prices have helped all end-users, be it the aviation, fertiliser, power or transport sectors. We buy oil for our refineries so it has benefitted us as well. But it is the government which is the main gainer.”
No More BenefitsThere is general consensus that the price of crude is un-likely to fall any lower, and that further benefit from the slide should not be expected. What is worrying is that this unexpected boost has not produced any buoyancy in the economy. Alongside declining exports, domestic demand also remains low, undermining corporate appetite for investment. Private sector investments announced in the first eight months of 2015/16 were 30 per cent lower than
disinvestment in 2015/16 was set at `67,500 crore, of which (up to December 2015) only ̀ 12,700 crore – or 18 per cent – had been achieved, through stake sales in Rural Electrification Corporation (REC), Power Finance Corporation (PFC), Dredging Corporation of India (DCI) and Indian Oil Corporation (IOC). Unfortunately, August 24, the day chosen for the IOC disinvestment – the last so far – proved singularly unpropitious, as it saw the BSE Sensex crashing 1,624 points – or six per cent. Less than a fifth of the quota reserved for retail investors found takers, and finally Life Insurance Corporation – as it has in numerous past occasions for other PSUs – stepped in to bail out the effort. Since then, another round of disinvestment in Coal India has been cleared by the Cabinet, which, if successful, will add `20,000 crore to government coffers. But collections will still be way short of the target.
Lower crude prices have in turn reduced the cost of LPG and kerosene, thereby bringing down – since their regu-lated selling price has remained the same – the govern-ment’s under-recoveries on both items. Between April 2014 and December 2015, the under-recovery on every cylinder of (subsidised) LPG has come down from `506.06 to `140.48 – a reduction of over 70 per cent – while that on kerosene has dropped from `34.43 to `13.31 per litre – over 60 per cent. This has brightened the chances of the government restricting its subsidy payout to below the `30,000-crore target set for 2015/16, a drop of more than 50 per cent over 2014/15. Taken together, the slashed import bill, the higher excise earnings and reduced under-recoveries have brought the present government a benefit of around `5 lakh crore.
The burden of under-recovery is shared by the govern-ment and the three state-owned oil marketing companies – IOC, Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corp Ltd (BPCL). The reduction, along with the deregulation of diesel prices, has thus benefitted the oil companies, too. In the past 18 months, the three companies have cumulatively registered a profit of `23,859.07 crore, indirectly further swelling govern-ment’s finances with their higher dividend payouts. Part of this gain, no doubt, has been offset by the inventory losses the oil companies have faced due to the fall in oil
*May 26, 2014NDA government assumes offi ce.
Indian basket crude at $106.85 per barrel, petrol at `71.41 pl and
diesel at `57.28 pl
*Oct 19Government de-regulates diesel
prices. Petrol was deregulated
in 2010 itself
*Nov 12Excise duty hiked by `1.5 per litre on diesel and
petrol
*Dec 2, 2014Duty hiked again
by `2.25 per litre on petrol, `1 per litre on
diesel
*Jan 2, 2015Duty hiked by
`2 per litre each on petrol
and diesel
*Jan 2, 2016Duty hiked on
petrol by `0.37 per litre and on
diesel by `2 per litre
*Jan 16Another `2
per litre hike on petrol and diesel
*Nov 7Excise duty on
petrol hiked by R 1.6 per litre, on
diesel by 40 paise
*Dec 16Excise duty on petrol by `0.30 per litre and on diesel by `1.17
per litre
HIKE AFTER HIKE
As crude prices have fallen, excise
duty has been repeatedly hiked
`1,84,949CRORE
Oil sector contribution to the Centre and state ex-chequers in fi rst half of 2015/16, a 22.4% growth
over 2014/15`15,936
CROREUnder-recovery in
the oil sector in fi rst half of this fi scal, a near 70% decline over fi rst half of
last fi scal
ECONOMY Oil
bbl: barrel, *` per litre Source: IOCL
Oil.indd 4-5 08-01-2016 5:27:04 PM
still, with that in 2013/14, the last year of the Manmohan Singh-led United Progressive Alliance (UPA) government, when it was $168 billion (`8.65 lakh crore). With global demand sluggish, Indian exports have fallen 17.7 per cent in the past 11 months, but the reduction in oil prices has helped to considerably soften the blow.
Only part of this bonanza, however, has been passed on to consumers. The retail prices of petrol and diesel have dropped by only 17 and 21 per cent, respectively, since April 2014 (see Oilonomics). The rest of the windfall has been mopped up by the government by increasing excise duty more than half a dozen times in 20 months – four times between November 2014 and January 2015, and thrice again since November 2015 so far (See Hike After Hike). The overall excise duty increase is 108 per cent on petrol and over 200 per cent on diesel – the present government thus earns `10.25 more on every litre of petrol bought and `9.33 on every litre of diesel than the UPA government did.
Thanks to the hikes, excise tax collection this fiscal till November 2015 was `1,70,693 crore, or 67.1 per cent higher than in the corresponding period in 2014. By November, almost 75 per cent of the total budgetary excise tax estimate for 2015/16 had already been achieved, with
the oil and gas sector contributing nearly 78 per cent. The rise in excise collection has in turn raised overall indirect tax collection growth to 34.3 per cent. As the finance ministry sets about preparing the coming Budget, meeting the estimate for indirect taxes is the least of its concerns. In addition, low crude prices have also enabled the govern-ment to take the risk of completely de-controlling diesel. Had crude costs been increasing, the step could have had serious political consequences.
“The government is treating the oil and gas sector like a cash cow,” says Ajay Bansal, President, All India Petroleum Dealers Association. “Why should consumers pay for its poor planning? The real benefit should have gone to consumers, but it hasn’t.” Adds Ajay Arora, Partner and Leader, Oil and Gas practice at consultancy firm EY: “Given that other macroeconomic indicators are not that favourable, benign oil prices have been an abso-lute boon for the government. It has helped contain the fiscal deficit and the outflow of dollars.”
Making UpHigher tax generation due to falling crude prices has helped the government offset revenue shortfall in other areas, notably disinvestment. The budgetary target from
January 31 2016 BUSINESS TODAY 4948 BUSINESS TODAY January 31 2016
PETROL DIESEL
APR ’14 JAN ’16 % CHANGE APR ’14 JAN ’16 % CHANGE
Cost and freight ($/bbl) 116.45 52.41 -52.99 122.94 43.74 -64.42
Average exchange rate (`/$)
60.1 66.53 10.70 59.31 66.53 12.17
Refi nery transfer price*
44.79 22.46 -49.85 49.39 18.69 -62.16
Dealer price* 48.03 25.50 -46.91 44.98 23.11 -48.62
Excise duty* 9.48 19.73 108.12 4.5 13.83 207.33
Dealer commission* 2 2.25 12.50 1.19 1.43 20.17
VAT* 11.9 11.87 -0.25 6.61 6.66 0.76
Retail selling price* 71.41 59.35 -16.89 57.28 45.03 -21.39
OILONOMICS: How the different components that determine the retail prices of petrol and diesel have changed between April 2014 and November 2015
prices. IOC, for example, lost over `5,000 crore due to higher inventory cost, which wiped out its entire profit in the second quarter of 2015/16. Even so, its profit in the first quarter was higher than its profit across the entire fiscal year 2014/15.
“We have not gained from falling crude prices,” says A.K. Sharma, Director, Finance, IOC. “We have benefitted to the same extent every bulk consumer of oil has. Lower oil prices have helped all end-users, be it the aviation, fertiliser, power or transport sectors. We buy oil for our refineries so it has benefitted us as well. But it is the government which is the main gainer.”
No More BenefitsThere is general consensus that the price of crude is un-likely to fall any lower, and that further benefit from the slide should not be expected. What is worrying is that this unexpected boost has not produced any buoyancy in the economy. Alongside declining exports, domestic demand also remains low, undermining corporate appetite for investment. Private sector investments announced in the first eight months of 2015/16 were 30 per cent lower than
disinvestment in 2015/16 was set at `67,500 crore, of which (up to December 2015) only ̀ 12,700 crore – or 18 per cent – had been achieved, through stake sales in Rural Electrification Corporation (REC), Power Finance Corporation (PFC), Dredging Corporation of India (DCI) and Indian Oil Corporation (IOC). Unfortunately, August 24, the day chosen for the IOC disinvestment – the last so far – proved singularly unpropitious, as it saw the BSE Sensex crashing 1,624 points – or six per cent. Less than a fifth of the quota reserved for retail investors found takers, and finally Life Insurance Corporation – as it has in numerous past occasions for other PSUs – stepped in to bail out the effort. Since then, another round of disinvestment in Coal India has been cleared by the Cabinet, which, if successful, will add `20,000 crore to government coffers. But collections will still be way short of the target.
Lower crude prices have in turn reduced the cost of LPG and kerosene, thereby bringing down – since their regu-lated selling price has remained the same – the govern-ment’s under-recoveries on both items. Between April 2014 and December 2015, the under-recovery on every cylinder of (subsidised) LPG has come down from `506.06 to `140.48 – a reduction of over 70 per cent – while that on kerosene has dropped from `34.43 to `13.31 per litre – over 60 per cent. This has brightened the chances of the government restricting its subsidy payout to below the `30,000-crore target set for 2015/16, a drop of more than 50 per cent over 2014/15. Taken together, the slashed import bill, the higher excise earnings and reduced under-recoveries have brought the present government a benefit of around `5 lakh crore.
The burden of under-recovery is shared by the govern-ment and the three state-owned oil marketing companies – IOC, Hindustan Petroleum Corporation Ltd (HPCL) and Bharat Petroleum Corp Ltd (BPCL). The reduction, along with the deregulation of diesel prices, has thus benefitted the oil companies, too. In the past 18 months, the three companies have cumulatively registered a profit of `23,859.07 crore, indirectly further swelling govern-ment’s finances with their higher dividend payouts. Part of this gain, no doubt, has been offset by the inventory losses the oil companies have faced due to the fall in oil
*May 26, 2014NDA government assumes offi ce.
Indian basket crude at $106.85 per barrel, petrol at `71.41 pl and
diesel at `57.28 pl
*Oct 19Government de-regulates diesel
prices. Petrol was deregulated
in 2010 itself
*Nov 12Excise duty hiked by `1.5 per litre on diesel and
petrol
*Dec 2, 2014Duty hiked again
by `2.25 per litre on petrol, `1 per litre on
diesel
*Jan 2, 2015Duty hiked by
`2 per litre each on petrol
and diesel
*Jan 2, 2016Duty hiked on
petrol by `0.37 per litre and on
diesel by `2 per litre
*Jan 16Another `2
per litre hike on petrol and diesel
*Nov 7Excise duty on
petrol hiked by R 1.6 per litre, on
diesel by 40 paise
*Dec 16Excise duty on petrol by `0.30 per litre and on diesel by `1.17
per litre
HIKE AFTER HIKE
As crude prices have fallen, excise
duty has been repeatedly hiked
`1,84,949CRORE
Oil sector contribution to the Centre and state ex-chequers in fi rst half of 2015/16, a 22.4% growth
over 2014/15`15,936
CROREUnder-recovery in
the oil sector in fi rst half of this fi scal, a near 70% decline over fi rst half of
last fi scal
ECONOMY Oil
bbl: barrel, *` per litre Source: IOCL
Oil.indd 4-5 08-01-2016 5:27:04 PM
50 BUSINESS TODAY January 31 2016
in the same period of the previous fiscal. The Index of Industrial Production (IIP) is under four per cent, while that for manufacturing alone is below three per cent. The 2015/16 second quarter results of listed companies show that overall net sales have declined by 5.3 per cent com-pared with the same period in 2014/15, while that of manufacturing companies has fallen 12 per cent.
Neither are companies borrowing much, nor are banks, worried about non-performing assets, inclined to disburse loans. Non-food credit growth in eight months of 2015/16 has been only 8.6 per cent; in many sectors it has fallen. “On the growth front, the central concern is with investments,” said Reserve Bank of India Governor Raghuram Rajan at a business event in Hong Kong on November 20. “Private investment has fallen back quite a bit and so has public investment.”
Meanwhile, massive additional public expenditure is in the offing. Implementing the Seventh Pay Commission’s recommendations, announced in late November, will mean a payout of around `1.02 lakh crore in 2015/16. Bringing in the One Rank, One Pension (OROP) scheme for defence personnel, which the government has agreed to in principle, will cost `2,500-3,000 crore. “I call it a trilemma,” says Jayant Sinha, Minister of State for Finance. “We have the Pay Commission, OROP, and the need to keep pushing public investment. It will require very careful fiscal management if we are to manage this and yet keep the fiscal deficit at 3.5 per cent.”
The hope is that more money in the hands of
government servants will stimulate demand. “Managing the economy in the next fiscal will be very challenging,” says D.K. Joshi, Chief Economist at ratings agency CRISIL. “The pay hike for government employees will help. The government must be praying for a good monsoon next year to take care of the rural economy. The accelerator has also to be pressed on reforms, especially on implementing the goods and services tax (GST).”
But there are also a few signs of hope. While domestic investment may be stagnating, foreign direct investment (FDI) continues to pour in – in the first nine months of 2015, FDI inflow surged 18 per cent over the corresponding period in the previous year, to $26.51 billion. “India still offers the best opportunity among developing nations,” says Arora of EY. “Our domestic demand is substantial and insulates us to some extent from what is happening to the global economy.”
Another good omen is the rise in the sales of heavy trucks and buses, which have grown 31.4 per cent in the first eight months of this fiscal, since they are a sign of in-creased freight movement. “We see demand for light com-mercial vehicles coming back and expect commercial ve-hicle sales to scale peak levels in the first half of next year,” says Vishnu Mathur, Director General, Society of Indian Automobile Manufacturers. Passenger car sales have also risen 11.4 per cent in the same period, indicating that the middle class is slowly stepping out to shop. ~
140
120
100
80
60
40
20
0April ’02 Jan ’03 Jan ’04 Jan ’05 Jan ’06 Jan ’07 Jan ’08 Jan ’09 Jan ’10 Jan ’11 Jan ’12 Jan ’13 Jan ’14 Jan ’15 Jan ’16
25.03
16.59
26.54
59.35
45.03
31.33
SHOCK ABSORBER: When crude prices spiked in previous years, the government absorbed much of the shock through under-recoveries and subsidies. Now it is reaping the benefi ts
GLOBAL PHENOMENON: Many countries impose even higher taxes than India on petrol and diesel India France Germany Italy Spain UK Japan Canada
PetrolDiesel
US
44
62 61 6453
68
48
36
18
32
48 4552
38
58
3527
19
Figures are % of tax in retail selling price Source: ppac.org.in
Petrol retail Diesel retailCrude oil
@sumantbanerji
ECONOMY Oil
Source: ppac.org.in
Oil.indd 6 08-01-2016 5:27:19 PM
INDIAN SEXUAL DESIRES AND KINKS UNMASKED!
GET THE REAL STORIES ONLY ON THE ‘10 YEARS OF SEX SURVEYDIGITAL MAGAZINE’
KNOW MORE
WWW.INDIATODAY.IN/SEXSURVEYMAGAZINE
Venezuela: A New Beginning?
By DEEPAK BHOJWANI
Deepak Bhojwani is a former Indian ambassador to Venezuela
52 BUSINESS TODAY January 31 2016
On December 6, Venezuela under-went a transforma-
tion. A coalition of opposi-tion parties – the Democ-ratic Unity Roundtable (MUD) – won 109 of the 167 seats in elections to the National Assembly, the unicameral parliament. The ruling Socialist Unity Party (PSUV) won 55. Some 15 million, 75 per cent of the electorate, voted.
President Nicolas Mad-uro, anointed as successor by Hugo Chavez before his death in 2013, has fallen in public esteem. Elected for a six-year term by a nar-row margin of just over 1 per cent in April 2013, he has ruled by decree for most of his presidency, backed by a Parliament dominated by the PSUV. With its two-thirds major-ity of 112, the non-PSUVlegislators can amend the Constitution promulgated by Hugo Chavez in 1999.
The MUD, formed in 2008, is not a cogent en-tity. It comprises parties of varying sizes and histories without a unified leader-ship and common pro-gramme. Abhorrence for and resistance to the cur-rent regime won them the election. Chavismo will not
fade away easily. Venezuela’s economic
problems are greater. The IMF has projected GDP to contract by 10 per cent in 2015 and 6 per cent in 2016. It estimates con-sumer inflation at 159 per cent in 2015 and over 200 per cent in 2016. The cur-rency – the Bolivar –pegged by the government at 6.3 to the US dollar, is quoted at 12 for select in-dustries and 200 for most other transactions.
With oil reserves greater than even Saudi Arabia, Venezuela is a strategically important country. The crash in prices of oil, which accounts for 95 per cent of its exports and over half its GDP, precipitated the eco-nomic crisis. With no re-course to the IMF and World bank, with which Chavez suspended rela-tions in 2007, Venezuela has hypothecated its in-creasingly cheaper oil against $50 billion of Chinese loans over the past few years.
Implications for IndiaChavez’s state visit to India in March 2005 set the stage for serious Indian in-vestment in Venezuela. In 2008, ONGC Videsh Ltd
(OVL), with a 40 per cent share, partnered Venezu-elan national oil company PdVSA in the San Cristobal field, producing over 30,000 barrels per day (bpd). In 2010, OVL, Indian Oil and Oil India Ltd took a combined share of 18 per cent in the gigantic Carabobo oilfield, projected to eventually produce 400,000 bpd. These con-cessions were awarded on political considerations, although OVL is highly re-spected in Venezuela as much for its technical ex-pertise as for being a state company.
Reliance Industries Ltd and Essar together are be-lieved to be currently im-porting around 600,000 bpd of oil from Venezuela. In 2014, Venezuela was India’s third largest crude supplier and largest trading partner in Latin America.
India’s principal export to Venezuela has been phar-maceuticals. Companies like Dr. Reddy’s and Glenmark have however faced problems over pay-m e n t s . V e n e z u e l a ’ s Commiss ion for the A d m i n i s t r a t i o n o f C u r r e n c y E x c h a n g e (CADIVI) has restricted re-lease of hard currency.
With the Bolivar sinking, importers have no recourse except to official channels.
Venezuelan foreign pol-icy has been overtly friendly to India. Its con-frontation with the US and most of Europe, and its wooing of Russia, China and Iran have circum-scribed its international relations. Venezuela’s oil wealth makes it a natural partner for India’s energy security. Political instabil-ity and economic problems have, however, held back potential cooperation in infrastructure and hydro-carbon investments.
For several years, the Venezuelan market has been off bounds for many Indian companies, given the difficulties of operating and repatriating profits. The Venezuelan private sector has been decimated or seen as colluding with the establishment. The po-litical order has for the past 15 years emphasised state programmes financed by oil revenues. A change may help stabilise the economy, even if oil prices do not rise significantly. India needs to watch devel-opments and enhance en-gagement with the even-tual dispensation. ~
India needs to watch the political developments in Venezuela closely and enhance its engagement with the eventual dispensation
COLUMN Foreign Relations
Column-Deepak Bhojwani.indd 2 01/08/2016 11:14:03 PM
UNFINISHED TASKAspects of taxation policy included in the DTC that have not been taken up thereafter
l Making terms employed as precise and lucid as possible
l Moderating tax rates for individuals with emphasis on voluntary compliance
l Permitting tax consoli-dation of group entitites
l Reducing scope of litigation by imparting stability and certainty to tax laws
l Simplifying the provisions on taxation of indirect transfers
l Introducing district-based incentive schemes
TAXATION Direct Taxes Code
January 31 2016 BUSINESS TODAY 5554 BUSINESS TODAY January 31 2016
While some proposals of the abandoned Direct Taxes Code are already in force, its wider objectives seem to have been abandoned.BY DIPAK MONDAL
The government’s announcement in November that headline corporate tax may soon be reduced from 30 to 25 per cent is confirmation yet again that the Direct Taxes Code (DTC) is dead and buried. This particu-lar reform was to have been an important component of the DTC pack-age. It is another matter that the announcement has corporate houses worried, since, alongside the reduction, all current exemptions will also be withdrawn. Currently, the exemptions enable most companies to effectively pay 22-23 per cent corporate tax, and once these go, taking the additional surcharge and education cess into account, they could well end up paying around 29 per cent.
For a number of years under the previous United Progressive Alliance (UPA) government, the DTC was spoken of in the same breath as the Goods and Services Tax (GST), as the two reforms that would transform the country’s tax system. But with the coming of the National Democratic Alliance (NDA) government, while the GST has been taken up in right earnest – though it is being hotly debated in Parliament with many points of contention – the DTC has been all but forgotten. Indeed, its death knell was sounded by none other than Finance Minister Arun Jaitley himself, when he declared in his last Budget speech that “there is no great merit in going ahead with the DTC as it exists today”.
Why not? Mainly because even as it spoke about the DTC at length, the UPA government never attempted to make it a law in its entirety. There were plenty of consultations and three successive drafts with numerous modifications were
prepared. The UPA government implemented some of the DTC proposals piecemeal through amendments in the Income Tax Act, 1961. As the fore-warning over corporate tax law changes indicates, the NDA government is taking much the same approach.
The basic objective of the DTC, which was to replace the I-T Act, was to make tax compliance easier by removing ambiguities in tax laws. “The lan-guage used in parts of the I-T Act is so obtuse that different courts have inter-preted the same provisions differently,” says a Central Board of Direct Taxation (CBDT) official. “The DTC was an attempt to bring in simpler laws that would be easy to understand.” But in late October 2015, the NDA government set up a 10-member panel, headed by former Delhi High Court judge R.V. Easwar, to do much the same thing all over again – simplify tax laws and, in particular, identify “the provisions/ phrases in the I-T Act which are leading to litigation due to different interpretations, the provisions of the Act for simplification (of language) and those which are impacting the ease of doing business”.
Already in ForceWhat are the changes the DTC was intended to bring about that are already in place? There is, for instance, the Advance Pricing Agreement (APA) mechanism, which was to have been part of the DTC, but was incorporated in the I-T Act by the UPA government in 2012. Intended to reduce transfer pricing disputes, it sets out criteria by which industries and tax authorities can reach an advance
REQUIEM FOR A CODEI
LL
LU
ST
RA
TI
ON
S B
Y A
JA
Y T
HA
KU
RI
Direct Taxes Code.indd 2-3 08-01-2016 5:16:51 PM
UNFINISHED TASKAspects of taxation policy included in the DTC that have not been taken up thereafter
l Making terms employed as precise and lucid as possible
l Moderating tax rates for individuals with emphasis on voluntary compliance
l Permitting tax consoli-dation of group entitites
l Reducing scope of litigation by imparting stability and certainty to tax laws
l Simplifying the provisions on taxation of indirect transfers
l Introducing district-based incentive schemes
TAXATION Direct Taxes Code
January 31 2016 BUSINESS TODAY 5554 BUSINESS TODAY January 31 2016
While some proposals of the abandoned Direct Taxes Code are already in force, its wider objectives seem to have been abandoned.BY DIPAK MONDAL
The government’s announcement in November that headline corporate tax may soon be reduced from 30 to 25 per cent is confirmation yet again that the Direct Taxes Code (DTC) is dead and buried. This particu-lar reform was to have been an important component of the DTC pack-age. It is another matter that the announcement has corporate houses worried, since, alongside the reduction, all current exemptions will also be withdrawn. Currently, the exemptions enable most companies to effectively pay 22-23 per cent corporate tax, and once these go, taking the additional surcharge and education cess into account, they could well end up paying around 29 per cent.
For a number of years under the previous United Progressive Alliance (UPA) government, the DTC was spoken of in the same breath as the Goods and Services Tax (GST), as the two reforms that would transform the country’s tax system. But with the coming of the National Democratic Alliance (NDA) government, while the GST has been taken up in right earnest – though it is being hotly debated in Parliament with many points of contention – the DTC has been all but forgotten. Indeed, its death knell was sounded by none other than Finance Minister Arun Jaitley himself, when he declared in his last Budget speech that “there is no great merit in going ahead with the DTC as it exists today”.
Why not? Mainly because even as it spoke about the DTC at length, the UPA government never attempted to make it a law in its entirety. There were plenty of consultations and three successive drafts with numerous modifications were
prepared. The UPA government implemented some of the DTC proposals piecemeal through amendments in the Income Tax Act, 1961. As the fore-warning over corporate tax law changes indicates, the NDA government is taking much the same approach.
The basic objective of the DTC, which was to replace the I-T Act, was to make tax compliance easier by removing ambiguities in tax laws. “The lan-guage used in parts of the I-T Act is so obtuse that different courts have inter-preted the same provisions differently,” says a Central Board of Direct Taxation (CBDT) official. “The DTC was an attempt to bring in simpler laws that would be easy to understand.” But in late October 2015, the NDA government set up a 10-member panel, headed by former Delhi High Court judge R.V. Easwar, to do much the same thing all over again – simplify tax laws and, in particular, identify “the provisions/ phrases in the I-T Act which are leading to litigation due to different interpretations, the provisions of the Act for simplification (of language) and those which are impacting the ease of doing business”.
Already in ForceWhat are the changes the DTC was intended to bring about that are already in place? There is, for instance, the Advance Pricing Agreement (APA) mechanism, which was to have been part of the DTC, but was incorporated in the I-T Act by the UPA government in 2012. Intended to reduce transfer pricing disputes, it sets out criteria by which industries and tax authorities can reach an advance
REQUIEM FOR A CODE
IL
LL
US
TR
AT
IO
NS
BY
AJ
AY
TH
AK
UR
I
Direct Taxes Code.indd 2-3 08-01-2016 5:16:51 PM
agreement over the transfer pricing method to be used over a fixed period of time. “the APA sets out a process by which tax authorities and taxpayers can consult and cooperate in a non-adversarial spirit,”
says naveen aggarwal, Partner and Head of tax (north), kPMG in india. “it facilitates
principled and practical negotiations and resolves transfer pricing issues
expeditiously and prospectively.” so far the government has signed 14 APAS across
sectors like telecommunications, oil exploration, pharmaceuticals, finance/banking, software devel-
opment services and IT enabled services (BPoS). another key proposal that was to have been part of
the DTC, but is already in force, is the Place of effective Management (PoEM) concept, which sets out rules for determining if a company is resident in india (and should pay taxes here). this proposal was incorporated by the NDA government in early 2015. it has widened the ambit of ‘residency’ for tax purposes, thereby upset-ting foreign investors who were expecting a less strin-gent tax regime from the NDA government. the PoEM specifies that for tax purposes, a foreign company would be considered resident in india even if a small part of its control and management was exercised from india. earlier, tax demands arose only if the company’s management was wholly located in india.
a third DTC proposal already incorporated in the I-T act in 2012 – and further amended in 2015 – relates to indirect transfers of assets, bringing direct and indirect transfer of capital assets within the tax purview. “among other things, the intent seems to be to tax overseas income from transfer of shares of companies abroad having downstream india holdings,” says aggarwal of kPMG. a fourth is the expansion of the definition of ‘fee for technical services or royalty pay-ments’ to include payment for software used, any con-
sideration given for use of transmission by satellite, cable or optic fibre, and payment for live coverage of any event. such earnings by a company not resident in india are also now taxable.
the biggest bone of contention in the proposed DTC act, however, had been the General anti-avoidance Rules (GAAr), under which all Commissioners of income tax have powers to declare impermissible any commercial transaction carried out in a manner that a tax benefit has accrued, or any transaction they believe is phoney, lacking in ‘commercial substance’. the decision would be binding on the assessing officer. GAAr also overrides applicable treaties with countries like Mauritius. it was first suggested by then Finance Minister – and now President – Pranab Mukherjee in his Budget speech of 2012/ 13, and would have been included in the I-T act that year itself, but it raised such howls of protest that its implementa-tion was deferred to april 2016. Many hoped the NDA government would scrap it altogether, but Jaitley has merely postponed it, once again, by another two years.
What’s Left out still these changes are all very well, but there was more to the idea of replac-ing the I-T act with the DTC than amendments in specific areas. the DTC had been framed to accommodate changes that may have to be made in coming years – as, with the economy expanding, new tax issues arise – without resorting to amendments every time. it was to consolidate the definition of terms, and the provisions relating to incentives, procedures and tax rates, as well as provide tax rate stability, obviating the need to change them through the annual Finance Bill. Will the easwar Committee look at these larger issues too? “the presence of arbind Modi (IrS) on the committee indicates that the larger picture could well be taken up, since he was in the team that drafted the DTC as well,” says M.C. Joshi, former CBDT Chairman. But
most tax experts fear that the terms of reference of the easwar panel are too narrow for it to draft a DTC-like docu-ment. Both easwar and Modi were non-committal, telling Business Today it was too early to comment.
“i don’t think DTC is dead,” says sunil shah, Partner, deloitte Haskins & sells llP. “there is still a need for it if india wants to bring sweeping changes to its tax laws.” However, the overwhelming view is that it is over and done with, and besides, not all are lamenting its demise.
“We were never comfortable with DTC,” says Ved Jain, Chairman, national Council on direct taxes at industry body ASSoChAM. some contest that the DTC would have made compliance easier. “the GAAr provisions would have increased litigation,” says a tax expert at rival industry body FICCI, who prefers not to be named. “We would rather the DTC is not revived, especially after so many of its provisions are al-ready in the I-T act. Reviving it would require tax payers to realign themselves to another set of rules.”
Jain is even sceptical about the easwar Committee’s report achieving anything worthwhile. “unless the tax department’s attitude changes and it stops treating every taxpayer as a pos-sible tax evader, no panel can solve taxpayers’ problems,” he says. He points to the report of the tax administration Reforms Commission, headed by Parthasarthi shome, sub-mitted in June 2014. it broadly called for a shift in the IT department’s focus,
making it not an enforcement agency, but a service provider for taxpayers. “if the recommendations of that committee alone are implemented, it will solve many problems,” he adds. ~
@dipak_journo
January 31 2016 Business today 5756 Business today January 31 2016
taxation Direct Taxes Code
arun Jaitley, Union Finance Minister, in his Budget speech on February 28, 2015
“Most of the provisions of the DTC have already been included in the Income Tax Act. Among the very few aspects left out, we have addressed some of the issues in the present Budget”
Ved Jain, Chairman,
National Council on Direct Taxes, ASSOCHAM
“We were never comfortable with DTC. It was written with the sole objective of
increasing tax collection and making life easier for tax
administrators”
Sunil Shah, Partner, Deloitte Haskins & Sells LLP
“I don’t think DTC is dead. I still see the need for it if India wants to bring sweeping changes in tax laws”
2015
12 Aug: First DTC draft released
15 Jun: Revised discussion paper on DTC issued, addressing 11 major points raised over the initial draft
30 Aug: Direct Taxes Code Bill, 2010, introduced in the Lok Sabha, then referred to Standing Committee on Finance
09 Mar: Standing Committee on Finance submits report
20 Aug: After considering Standing Committee report, note sent to Cabinet to withdraw DTC Bill, 2010, and introduce revised DTC Bill, 2013
1 Apr: Fresh draft Bill released
26 May: NDA government sworn in
28 Feb: “There is no great merit in going ahead with the Direct Tax Code as it exists today,” says Finance Minister Arun Jaitley
20152009 2010 2011 2012 2013 2014
neW direcTionsThe mandate of the R. V. Easwar Panel
l To identify provisions in the I-T Act that are prone to differing interpretations and thus lead to litigation
l To identify provisions that are impacting ease of doing business
l To suggest alternatives or modifications to existing pro-visions in identified areas to bring about predictability and certainty in tax laws, without substantial impact on the tax base and revenue collection
coming To noThingHow the idea of formulating a comprehensive Direct Taxes Code fizzled out
Direct Taxes Code.indd 4-5 01/08/2016 8:08:07 PM
agreement over the transfer pricing method to be used over a fixed period of time. “the APA sets out a process by which tax authorities and taxpayers can consult and cooperate in a non-adversarial spirit,”
says naveen aggarwal, Partner and Head of tax (north), kPMG in india. “it facilitates
principled and practical negotiations and resolves transfer pricing issues
expeditiously and prospectively.” so far the government has signed 14 APAS across
sectors like telecommunications, oil exploration, pharmaceuticals, finance/banking, software devel-
opment services and IT enabled services (BPoS). another key proposal that was to have been part of
the DTC, but is already in force, is the Place of effective Management (PoEM) concept, which sets out rules for determining if a company is resident in india (and should pay taxes here). this proposal was incorporated by the NDA government in early 2015. it has widened the ambit of ‘residency’ for tax purposes, thereby upset-ting foreign investors who were expecting a less strin-gent tax regime from the NDA government. the PoEM specifies that for tax purposes, a foreign company would be considered resident in india even if a small part of its control and management was exercised from india. earlier, tax demands arose only if the company’s management was wholly located in india.
a third DTC proposal already incorporated in the I-T act in 2012 – and further amended in 2015 – relates to indirect transfers of assets, bringing direct and indirect transfer of capital assets within the tax purview. “among other things, the intent seems to be to tax overseas income from transfer of shares of companies abroad having downstream india holdings,” says aggarwal of kPMG. a fourth is the expansion of the definition of ‘fee for technical services or royalty pay-ments’ to include payment for software used, any con-
sideration given for use of transmission by satellite, cable or optic fibre, and payment for live coverage of any event. such earnings by a company not resident in india are also now taxable.
the biggest bone of contention in the proposed DTC act, however, had been the General anti-avoidance Rules (GAAr), under which all Commissioners of income tax have powers to declare impermissible any commercial transaction carried out in a manner that a tax benefit has accrued, or any transaction they believe is phoney, lacking in ‘commercial substance’. the decision would be binding on the assessing officer. GAAr also overrides applicable treaties with countries like Mauritius. it was first suggested by then Finance Minister – and now President – Pranab Mukherjee in his Budget speech of 2012/ 13, and would have been included in the I-T act that year itself, but it raised such howls of protest that its implementa-tion was deferred to april 2016. Many hoped the NDA government would scrap it altogether, but Jaitley has merely postponed it, once again, by another two years.
What’s Left out still these changes are all very well, but there was more to the idea of replac-ing the I-T act with the DTC than amendments in specific areas. the DTC had been framed to accommodate changes that may have to be made in coming years – as, with the economy expanding, new tax issues arise – without resorting to amendments every time. it was to consolidate the definition of terms, and the provisions relating to incentives, procedures and tax rates, as well as provide tax rate stability, obviating the need to change them through the annual Finance Bill. Will the easwar Committee look at these larger issues too? “the presence of arbind Modi (IrS) on the committee indicates that the larger picture could well be taken up, since he was in the team that drafted the DTC as well,” says M.C. Joshi, former CBDT Chairman. But
most tax experts fear that the terms of reference of the easwar panel are too narrow for it to draft a DTC-like docu-ment. Both easwar and Modi were non-committal, telling Business Today it was too early to comment.
“i don’t think DTC is dead,” says sunil shah, Partner, deloitte Haskins & sells llP. “there is still a need for it if india wants to bring sweeping changes to its tax laws.” However, the overwhelming view is that it is over and done with, and besides, not all are lamenting its demise.
“We were never comfortable with DTC,” says Ved Jain, Chairman, national Council on direct taxes at industry body ASSoChAM. some contest that the DTC would have made compliance easier. “the GAAr provisions would have increased litigation,” says a tax expert at rival industry body FICCI, who prefers not to be named. “We would rather the DTC is not revived, especially after so many of its provisions are al-ready in the I-T act. Reviving it would require tax payers to realign themselves to another set of rules.”
Jain is even sceptical about the easwar Committee’s report achieving anything worthwhile. “unless the tax department’s attitude changes and it stops treating every taxpayer as a pos-sible tax evader, no panel can solve taxpayers’ problems,” he says. He points to the report of the tax administration Reforms Commission, headed by Parthasarthi shome, sub-mitted in June 2014. it broadly called for a shift in the IT department’s focus,
making it not an enforcement agency, but a service provider for taxpayers. “if the recommendations of that committee alone are implemented, it will solve many problems,” he adds. ~
@dipak_journo
January 31 2016 Business today 5756 Business today January 31 2016
taxation Direct Taxes Code
arun Jaitley, Union Finance Minister, in his Budget speech on February 28, 2015
“Most of the provisions of the DTC have already been included in the Income Tax Act. Among the very few aspects left out, we have addressed some of the issues in the present Budget”
Ved Jain, Chairman,
National Council on Direct Taxes, ASSOCHAM
“We were never comfortable with DTC. It was written with the sole objective of
increasing tax collection and making life easier for tax
administrators”
Sunil Shah, Partner, Deloitte Haskins & Sells LLP
“I don’t think DTC is dead. I still see the need for it if India wants to bring sweeping changes in tax laws”
2015
12 Aug: First DTC draft released
15 Jun: Revised discussion paper on DTC issued, addressing 11 major points raised over the initial draft
30 Aug: Direct Taxes Code Bill, 2010, introduced in the Lok Sabha, then referred to Standing Committee on Finance
09 Mar: Standing Committee on Finance submits report
20 Aug: After considering Standing Committee report, note sent to Cabinet to withdraw DTC Bill, 2010, and introduce revised DTC Bill, 2013
1 Apr: Fresh draft Bill released
26 May: NDA government sworn in
28 Feb: “There is no great merit in going ahead with the Direct Tax Code as it exists today,” says Finance Minister Arun Jaitley
20152009 2010 2011 2012 2013 2014
neW direcTionsThe mandate of the R. V. Easwar Panel
l To identify provisions in the I-T Act that are prone to differing interpretations and thus lead to litigation
l To identify provisions that are impacting ease of doing business
l To suggest alternatives or modifications to existing pro-visions in identified areas to bring about predictability and certainty in tax laws, without substantial impact on the tax base and revenue collection
coming To noThingHow the idea of formulating a comprehensive Direct Taxes Code fizzled out
Direct Taxes Code.indd 4-5 01/08/2016 8:08:07 PM
COVER STORY Grocery Wars
January 31 2016 BUSINESS TODAY 59
In the past fortnight, two diametrically opposite business calls captured the dilemma in one of the hottest segments of India’s fast-growing e-com-merce industry — grocery e-tailing.
While instant grocery delivery firm Grofers, which has raised $167 million in three rounds from Softbank, Tiger Global and Sequoia Capital, decided to stop operations in nine cities, and LocalBanya, among the top five players, halted operations, Sanjiv Goenka group-owned
Spencer’s Retail bought New Delhi/Gurgaon-based start-up meragrocer.com and announced that it would scale up to 35 cities.
The dichotomy — of two players scaling down due to lack of business and the other one scaling up — sums up exactly what is happening in grocery e-tail. Over the past three to four years, this business opportunity has spawned over 60 multi-city start-ups and hundreds of hyper-local grocery delivery chains. The total funding to the top five
online grocery start-ups has exceeded $400 million since 2011. But with the initial euphoria dying out, it’s now down to testing of business models and the business ma-trix. Perhaps, it’s time to fine-tune those less-than-perfect business models and scrap the ones that have failed to help the businesses scale up.
Mind you, this isn’t the first time money has flowed into the business of grocery delivery. The first round, in the late 1990s, saw a variant of the brick-and-mortar model that led to ramping up of neighbourhood stores by the likes of Subhiksha, which expanded to over 1,600 outlets, but suffered a massive cash crunch towards 2009, leading to shutdown of dozens of stores.
Similar was the fate of the second round that started in 2007/08 right after the great real estate and banking meltdown in the US when website-based online grocery firms such as FamilyKart, Dazo, Langhar and Ordersnack, among dozens of others, were founded, but had to scale down or shut shop. This round lasted three to four years.
Online grocery is hot. Hundreds of players have jumped in. Several hundred million dollars were invested in 2015 alone.
But it has also been a graveyard for start-ups.BY TASLIMA KHAN WITH GOUTAM DAS AND NEVIN JOHN
THE BIG FISHFunding has not been an issue for the top online grocers
START-UP BASED IN LAUNCH FOUNDER TOTAL FUNDING YEAR
Grofers Gurgaon 2013 Albinder Dindsa & Saurabh Kumar $167 million
Big Basket Bangalore 2011 Hari Menon & 3 others $155 million
PepperTap Gurgaon 2013 Navneet Singh & Milind Sharma $51.2 million
ZopNow Bangalore 2011 Mukesh Singh & Bal Krishn Birla $10 million + undisclosed rounds
Local Banya Mumbai 2012 Karan Mehrotra & 2 others $5 million+2 undisclosed rounds
ING
ion ion
A N A N D S I N H A
AJ
AY
TH
AK
UR
I
COVERSTORY.indd 2-3 01/09/2016 2:03:21 AM
COVER STORY Grocery Wars
January 31 2016 BUSINESS TODAY 59
In the past fortnight, two diametrically opposite business calls captured the dilemma in one of the hottest segments of India’s fast-growing e-com-merce industry — grocery e-tailing.
While instant grocery delivery firm Grofers, which has raised $167 million in three rounds from Softbank, Tiger Global and Sequoia Capital, decided to stop operations in nine cities, and LocalBanya, among the top five players, halted operations, Sanjiv Goenka group-owned
Spencer’s Retail bought New Delhi/Gurgaon-based start-up meragrocer.com and announced that it would scale up to 35 cities.
The dichotomy — of two players scaling down due to lack of business and the other one scaling up — sums up exactly what is happening in grocery e-tail. Over the past three to four years, this business opportunity has spawned over 60 multi-city start-ups and hundreds of hyper-local grocery delivery chains. The total funding to the top five
online grocery start-ups has exceeded $400 million since 2011. But with the initial euphoria dying out, it’s now down to testing of business models and the business ma-trix. Perhaps, it’s time to fine-tune those less-than-perfect business models and scrap the ones that have failed to help the businesses scale up.
Mind you, this isn’t the first time money has flowed into the business of grocery delivery. The first round, in the late 1990s, saw a variant of the brick-and-mortar model that led to ramping up of neighbourhood stores by the likes of Subhiksha, which expanded to over 1,600 outlets, but suffered a massive cash crunch towards 2009, leading to shutdown of dozens of stores.
Similar was the fate of the second round that started in 2007/08 right after the great real estate and banking meltdown in the US when website-based online grocery firms such as FamilyKart, Dazo, Langhar and Ordersnack, among dozens of others, were founded, but had to scale down or shut shop. This round lasted three to four years.
Online grocery is hot. Hundreds of players have jumped in. Several hundred million dollars were invested in 2015 alone.
But it has also been a graveyard for start-ups.BY TASLIMA KHAN WITH GOUTAM DAS AND NEVIN JOHN
THE BIG FISHFunding has not been an issue for the top online grocers
START-UP BASED IN LAUNCH FOUNDER TOTAL FUNDING YEAR
Grofers Gurgaon 2013 Albinder Dindsa & Saurabh Kumar $167 million
Big Basket Bangalore 2011 Hari Menon & 3 others $155 million
PepperTap Gurgaon 2013 Navneet Singh & Milind Sharma $51.2 million
ZopNow Bangalore 2011 Mukesh Singh & Bal Krishn Birla $10 million + undisclosed rounds
Local Banya Mumbai 2012 Karan Mehrotra & 2 others $5 million+2 undisclosed rounds
ING
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A N A N D S I N H A
AJ
AY
TH
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UR
I
COVERSTORY.indd 2-3 01/09/2016 2:03:21 AM
The latest round started three-four years ago when app-based e-grocers such as Grofers, Peppertap, LocalBanya and Zopnow were founded. It included a not-so-successful attempt by Future Group in 2013 to deliver stuff di-rectly from warehouses. While the first two attempts have been a total failure with some battered survivors clinging on for dear life (see Global Big-Bang Failures), the latest round, too, is threatening to go the same way.
This is not a purely Indian predicament. From Australia to US and Europe to China, grocery e-tail has been one of the biggest challenges for brick-and-mortar giants such as Walmart as well as seasoned e-tailers such as Amazon. US-based online grocer Webvan shut shop in 2001, four years after the launch, despite raising a whopping $830 million. Others that started around the same time, Homeruns and Kozmo, too, shut down. It’s neither difficult to explain the rush, nor the need. While on one hand, long working hours and growing distances leave people with little time for shopping at stores, on the other hand, the near ubiqui-tous presence of the Internet and the advent of e-shopping have emerged as ready solu-tions. This is increasing grocery demand by up to 30 per cent per annum in most big
cities, making India the world’s sixth-largest grocery mar-ket where grocery shopping is expected to rise from $383
billion a year to $1 trillion by 2020, accord-ing to retail consultancy Technopak.
Grocery Delivery Re-runNearly five-seven years ago, when online shopping was going beyond books to elec-tronics, clothing, even shoes, a dozen start-ups extended the shop-with-a-click service to fruits, vegetables, staples and fast mov-ing consumer goods. If people bought products that were required to be touched and felt to know their quality online, why would they not value the convenience of getting dal and rice delivered home, was the driving thought.
However, it took only two years to prove the ‘convenience’ hypothesis wrong. A number of start-ups bled to death as they could not sustain on wafer-thin margins. Also, while investors were gung-ho on e-commerce, they stayed away from grocery start-ups, as no one was willing to burn fingers in this extremely low-margin busi-ness that was hard to scale up beyond a city and involved challenges such as logistics and perishability of the products. But with interest in e-commerce sustaining all these years, and due to fewer opportunities re-
maining in funding horizontal e-tailers such as Flipkart and Snapdeal, investors are back to looking at vari-ous niches in e-tailing,
including e-grocery. India’s largest venture capital firm by fund size, Sequoia Capital, has two competing food start-ups in its portfolio —PepperTap, in which it has co-invested with SAIF Partners besides Snapdeal and other investors, and Grofers, where it has invested with Tiger Global Management. Valuations of such start-ups are also on an upswing. Until June this year, for instance, Grofers had raised $10 million and $35 million in two rounds, its valuation tripling from $33 million to $115 million in less than six months. Towards the end of 2015, Grofer’s valu-ation in the last funding round worth $120 million led by Japanese investor SoftBank, stood at $300 million. The number of start-ups jumping in to take a bite of ‘grocery’ is overwhelming. Besides Grofers and PepperTap, those who have received funding or are in the fray include Jiffstore, Meragrocer and AaramShop, apart from a dozen others such as Delyver, which was recently acquired by a larger player, Big Basket. Interestingly, Webvan, too, had got funding from both Softbank and Sequoia.
Biz Model RevampDespite the overall objective of catering to the need for delivering grocery instantly to the customer’s home, there
are vast differences in business models between the three generations of grocery start-ups, as well as between the different models in vogue today.
The latest round, for instance, is not just technology-heavy due to use of apps (barring a few exceptions such as Big Basket, PepperTap and LocalBanya), it is also asset-light as it relies less on holding inventory and more on lo-gistics and local/hyper-local sourcing of products. A few investors see this as more sustainable than the inventory-led model that requires building of huge infrastructure such as warehouses. “In this wave, the companies are hyper local, they are technology and logistics companies,” says Mukul Arora, Principal at SAIF Partners.
Like SAIF, no other investor is backing inventory-owned grocery business models, barring an exception like Big Basket, which by far is the largest and the only inven-tory-led online player with a total funding of `280 crore. Others, such as Bangalore-based ZopNow and LocalBanya, which started with the inventory model, pivoted to hyper-local and inventory-light models, respectively.
“There are some things that we have learnt from Webvan — not to be a completely inventory-led model,” says Rashi Choudhary, Co-founder and COO, LocalBanya.
Next-gen grocery start-ups are also trying out niche models. For example, New Delhi-based iorderfresh delivers fruits and vegetables within two hours of the order being placed. “Fresh foods’ supply chain is extremely complex but the catch is higher margins as compared to packaged FMCG food products,” says Nitin Sawhney, the Founder and CEO who started the venture in December 2014.
January 31 2016 BUSINESS TODAY 6160 BUSINESS TODAY January 31 2016
JAN 2015
Godrej Nature’s Basket ties up with Snapdeal
to retail 700 of its international gourmet products. Orders to be delivered the next day
Mumbai-based LocalBanya raises
undisclosed Series A funding from Karmvir
Avant Group, a real estate player
SRS Group ventures into e-commerce with the launch
of its grocery website SRSgrocery.com. It caters
to Gurgaon, Noida and Faridabad
FEB 2015
24X7 Fresh, a-yet-to-be-launched online grocery venture, reportedly gets funding interest from SAIF Partners
Hyper local grocery start-up Grofers raises $10 million from Sequoia Capital and Tiger Global Management at a valuation of $33 million
Godrej Nature’s Basket acquires e-grocer Ekstop.com, valuing it at `30-40 crore
Hyper local fruits and vegetables e-tailor FreshWorld raises funds from Infosys Co-founder Kris Gopalakrishnan and IAN.
PepperTap raises about $1.2 million from Sequoia Capital.
Mumbai-based start-up incubation platform AntFarm announces merger with Meals on Wheels with its yet-to-be-launched grocery and essential products ordering platform Scootsy
LATEST DEVELOPMENTS IN ONLINE GROCERY
ARP 2015
ZopNow raises $10 million from Dragoneer Investment Group and existing investors —— Accel Partners, Times Internet & Qualcomm Ventures
Hyper local grocery e-tailer Grofers acquires mobile grocery start-up My Green Box
Grofers raises $35 million from Tiger Global Management and Sequoia Capital India at a valuation of $115 million. Plans to launch in Hyderabad and Pune
Amazon starts piloting express delivery service KiranaNow with local stores in Bangalore
PayTM launches mobile app PayTM Zip to start hyper local grocery delivery in Bangalore
JUN 2015
BigBasket announces tie-ups with 1,800 grocery stores to sell its private label products. This includes grocery products from brands like Royal, Popular and Fresho. Resolves to soon launch a private label coffee brand and venture into fl avoured tea and cookies
Big Basket acquires on-demand hyper local delivery start-up Delyver for foray into 60-90 minute delivery
On-demand grocery start-up JiffStore raises funds from Unitus Seed Fund and TLabs
This includes brands likeesho. Resolvessssssse label
ure intokies
WHY HYPER LOCAL MAKES SENSE TO START-UPSl No investment required in warehousing and cold storage
l Faster expansion across cities
l Much faster delivery than in inventory model
l Investors see potential in the business model
CHALLENGES WITH HYPER LOCALl Supply chain of local stores is highly primitiveand broken
l Stores can only carry limited inventory
l It takes long to refurbish stocks
l Inability of stores to meet spike in demand
l No control over margins
mhsSbo
Hyper local grocery start-up PepperTap raises $10 million from SAIF Partners and Sequoia Capital. Plans to expand beyond Gurgaon, Noida and Delhi, across Bangalore, Hyderabad, Pune and Mumbai.
COVER STORY Grocery Wars
COVERSTORY.indd 4-5 01/09/2016 2:03:53 AM
The latest round started three-four years ago when app-based e-grocers such as Grofers, Peppertap, LocalBanya and Zopnow were founded. It included a not-so-successful attempt by Future Group in 2013 to deliver stuff di-rectly from warehouses. While the first two attempts have been a total failure with some battered survivors clinging on for dear life (see Global Big-Bang Failures), the latest round, too, is threatening to go the same way.
This is not a purely Indian predicament. From Australia to US and Europe to China, grocery e-tail has been one of the biggest challenges for brick-and-mortar giants such as Walmart as well as seasoned e-tailers such as Amazon. US-based online grocer Webvan shut shop in 2001, four years after the launch, despite raising a whopping $830 million. Others that started around the same time, Homeruns and Kozmo, too, shut down. It’s neither difficult to explain the rush, nor the need. While on one hand, long working hours and growing distances leave people with little time for shopping at stores, on the other hand, the near ubiqui-tous presence of the Internet and the advent of e-shopping have emerged as ready solu-tions. This is increasing grocery demand by up to 30 per cent per annum in most big
cities, making India the world’s sixth-largest grocery mar-ket where grocery shopping is expected to rise from $383
billion a year to $1 trillion by 2020, accord-ing to retail consultancy Technopak.
Grocery Delivery Re-runNearly five-seven years ago, when online shopping was going beyond books to elec-tronics, clothing, even shoes, a dozen start-ups extended the shop-with-a-click service to fruits, vegetables, staples and fast mov-ing consumer goods. If people bought products that were required to be touched and felt to know their quality online, why would they not value the convenience of getting dal and rice delivered home, was the driving thought.
However, it took only two years to prove the ‘convenience’ hypothesis wrong. A number of start-ups bled to death as they could not sustain on wafer-thin margins. Also, while investors were gung-ho on e-commerce, they stayed away from grocery start-ups, as no one was willing to burn fingers in this extremely low-margin busi-ness that was hard to scale up beyond a city and involved challenges such as logistics and perishability of the products. But with interest in e-commerce sustaining all these years, and due to fewer opportunities re-
maining in funding horizontal e-tailers such as Flipkart and Snapdeal, investors are back to looking at vari-ous niches in e-tailing,
including e-grocery. India’s largest venture capital firm by fund size, Sequoia Capital, has two competing food start-ups in its portfolio —PepperTap, in which it has co-invested with SAIF Partners besides Snapdeal and other investors, and Grofers, where it has invested with Tiger Global Management. Valuations of such start-ups are also on an upswing. Until June this year, for instance, Grofers had raised $10 million and $35 million in two rounds, its valuation tripling from $33 million to $115 million in less than six months. Towards the end of 2015, Grofer’s valu-ation in the last funding round worth $120 million led by Japanese investor SoftBank, stood at $300 million. The number of start-ups jumping in to take a bite of ‘grocery’ is overwhelming. Besides Grofers and PepperTap, those who have received funding or are in the fray include Jiffstore, Meragrocer and AaramShop, apart from a dozen others such as Delyver, which was recently acquired by a larger player, Big Basket. Interestingly, Webvan, too, had got funding from both Softbank and Sequoia.
Biz Model RevampDespite the overall objective of catering to the need for delivering grocery instantly to the customer’s home, there
are vast differences in business models between the three generations of grocery start-ups, as well as between the different models in vogue today.
The latest round, for instance, is not just technology-heavy due to use of apps (barring a few exceptions such as Big Basket, PepperTap and LocalBanya), it is also asset-light as it relies less on holding inventory and more on lo-gistics and local/hyper-local sourcing of products. A few investors see this as more sustainable than the inventory-led model that requires building of huge infrastructure such as warehouses. “In this wave, the companies are hyper local, they are technology and logistics companies,” says Mukul Arora, Principal at SAIF Partners.
Like SAIF, no other investor is backing inventory-owned grocery business models, barring an exception like Big Basket, which by far is the largest and the only inven-tory-led online player with a total funding of `280 crore. Others, such as Bangalore-based ZopNow and LocalBanya, which started with the inventory model, pivoted to hyper-local and inventory-light models, respectively.
“There are some things that we have learnt from Webvan — not to be a completely inventory-led model,” says Rashi Choudhary, Co-founder and COO, LocalBanya.
Next-gen grocery start-ups are also trying out niche models. For example, New Delhi-based iorderfresh delivers fruits and vegetables within two hours of the order being placed. “Fresh foods’ supply chain is extremely complex but the catch is higher margins as compared to packaged FMCG food products,” says Nitin Sawhney, the Founder and CEO who started the venture in December 2014.
January 31 2016 BUSINESS TODAY 6160 BUSINESS TODAY January 31 2016
JAN 2015
Godrej Nature’s Basket ties up with Snapdeal
to retail 700 of its international gourmet products. Orders to be delivered the next day
Mumbai-based LocalBanya raises
undisclosed Series A funding from Karmvir
Avant Group, a real estate player
SRS Group ventures into e-commerce with the launch
of its grocery website SRSgrocery.com. It caters
to Gurgaon, Noida and Faridabad
FEB 2015
24X7 Fresh, a-yet-to-be-launched online grocery venture, reportedly gets funding interest from SAIF Partners
Hyper local grocery start-up Grofers raises $10 million from Sequoia Capital and Tiger Global Management at a valuation of $33 million
Godrej Nature’s Basket acquires e-grocer Ekstop.com, valuing it at `30-40 crore
Hyper local fruits and vegetables e-tailor FreshWorld raises funds from Infosys Co-founder Kris Gopalakrishnan and IAN.
PepperTap raises about $1.2 million from Sequoia Capital.
Mumbai-based start-up incubation platform AntFarm announces merger with Meals on Wheels with its yet-to-be-launched grocery and essential products ordering platform Scootsy
LATEST DEVELOPMENTS IN ONLINE GROCERY
ARP 2015
ZopNow raises $10 million from Dragoneer Investment Group and existing investors —— Accel Partners, Times Internet & Qualcomm Ventures
Hyper local grocery e-tailer Grofers acquires mobile grocery start-up My Green Box
Grofers raises $35 million from Tiger Global Management and Sequoia Capital India at a valuation of $115 million. Plans to launch in Hyderabad and Pune
Amazon starts piloting express delivery service KiranaNow with local stores in Bangalore
PayTM launches mobile app PayTM Zip to start hyper local grocery delivery in Bangalore
JUN 2015
BigBasket announces tie-ups with 1,800 grocery stores to sell its private label products. This includes grocery products from brands like Royal, Popular and Fresho. Resolves to soon launch a private label coffee brand and venture into fl avoured tea and cookies
Big Basket acquires on-demand hyper local delivery start-up Delyver for foray into 60-90 minute delivery
On-demand grocery start-up JiffStore raises funds from Unitus Seed Fund and TLabs
This includes brands likeesho. Resolvessssssse label
ure intokies
WHY HYPER LOCAL MAKES SENSE TO START-UPSl No investment required in warehousing and cold storage
l Faster expansion across cities
l Much faster delivery than in inventory model
l Investors see potential in the business model
CHALLENGES WITH HYPER LOCALl Supply chain of local stores is highly primitiveand broken
l Stores can only carry limited inventory
l It takes long to refurbish stocks
l Inability of stores to meet spike in demand
l No control over margins
mhsSbo
Hyper local grocery start-up PepperTap raises $10 million from SAIF Partners and Sequoia Capital. Plans to expand beyond Gurgaon, Noida and Delhi, across Bangalore, Hyderabad, Pune and Mumbai.
COVER STORY Grocery Wars
COVERSTORY.indd 4-5 01/09/2016 2:03:53 AM
Average margins in fresh foods are 29-35 per cent. In pack-aged foods, the figure is 19-25 per cent.
In sharp contrast, Amazon’s India arm launched hyper local grocery delivery service KiranaNow towards mid-2015. The service, which is still at a pilot stage in Bangalore, focuses only on dry food items with long expiry dates. “I miss things like pickle from my hometown. This is the kind of local stuff we want to make available to custom-ers through the convenience of e-commerce,” says Samir Kumar, Category Head at Amazon. Kumar claims to sell more than 7,000 unique gourmet products on the plat-form. KiranaNow is on the lines of Prime Now, Amazon’s
service for local delivery of everyday products. Betting on gourmet food products, Snapdeal, in early
2015, tied up with Godrej Nature’s Basket to sell its prod-ucts online.
Also, some of India’s biggest e-tailers are betting on the asset-light model where the supply chain is simpler to han-dle. Mobile wallet company PayTM, which runs its own marketplace as well, launched a separate mobile applica-tion, Paytm Zip, towards the middle of 2015. It, however, withdrew the app from app stores within a couple of months. Flipkart too, launched a similar app, called Nearby, last October, to get into the hyper local space.
The asset-light model allows consumers to place an order with local kirana stores via a mobile app. The kirana store receives the order and, using the logistics services of start-ups, is able to deliver within a certain radius of the store, wider than its offline reach, assuring it incremental revenue. One of the biggest prob-lems the hyper local grocery model solves is the speed of delivery of food and daily essentials. This is stuff that consumers will not wait for a day or two. “If you are replacing the need to run errands to the market, your delivery time should match that,” says Albinder Dhindsa, Founder and CEO of Gurgaon-based Grofers, whose team of bikers delivers within 90 min-utes of getting the order. Dhindsa kicked off the international operations of restaurant-listing start-up Zomato and then found his calling in entrepreneurship. Initially, two years ago, he launched OneNumber, a logistics company that would do deliveries for grocery stores. The same company re-branded to Grofers in January 2015, allowing consumers to place orders to kirana stores. The start-up operates with eight to 10 bikers per city and has hubs throughout the city that serve as cash collec-tion and attendance points.
Same-day delivery poses a huge challenge for those following the inventory-led model as they can’t afford a large warehouse in every neighbourhood. Supermarkets or kirana stores have their own micro-warehouses close by and, hence, can deliver twice a day to a customer in the neighbourhood.
Besides saving costs related to managing the supply chain and warehouses, another big ad-vantage is that the cost incurred per delivery is lower due to shorter distances. This works bet-
January 31 2016 BUSINESS TODAY 6362 BUSINESS TODAY January 31 2016
AUG 2015 OCT
2015NOV 2015
DEC 2015
Cab and auto booking start-up AUTOnCAB acquires Gurgaon-based online grocery delivery start-up BigZop
Big Basket raises $50 million from existing investors led by Bessemer Venture Partners at a $400-million valuation
Local Banya suspends operations, raising concerns about its survival
Grofers acquires TownRush and Spoonjoy
Flipkart launches hyper-local grocery delivery mobile app Nearby in Bangalore
Kolkata-based online super market Indian Grahak acquires online hyper local marketplace Dyscover
HARI MENON Co-founder and CEO /Big Basket
”We start in any city, source from mandis or consolidation centres, and later as volumes grow, move backwards in the supply chain to the farm. Our buying
units are closest to the farm”
Softbank, along with other investors, pumps in $120 million in Grofers, raising its valuation to over $300 million
Spencer's Retail buys Mera Grocer
NI
LO
TP
AL
BA
RU
AH
COVER STORY Grocery Wars
COVERSTORY.indd 6-7 01/09/2016 2:04:18 AM
Average margins in fresh foods are 29-35 per cent. In pack-aged foods, the figure is 19-25 per cent.
In sharp contrast, Amazon’s India arm launched hyper local grocery delivery service KiranaNow towards mid-2015. The service, which is still at a pilot stage in Bangalore, focuses only on dry food items with long expiry dates. “I miss things like pickle from my hometown. This is the kind of local stuff we want to make available to custom-ers through the convenience of e-commerce,” says Samir Kumar, Category Head at Amazon. Kumar claims to sell more than 7,000 unique gourmet products on the plat-form. KiranaNow is on the lines of Prime Now, Amazon’s
service for local delivery of everyday products. Betting on gourmet food products, Snapdeal, in early
2015, tied up with Godrej Nature’s Basket to sell its prod-ucts online.
Also, some of India’s biggest e-tailers are betting on the asset-light model where the supply chain is simpler to han-dle. Mobile wallet company PayTM, which runs its own marketplace as well, launched a separate mobile applica-tion, Paytm Zip, towards the middle of 2015. It, however, withdrew the app from app stores within a couple of months. Flipkart too, launched a similar app, called Nearby, last October, to get into the hyper local space.
The asset-light model allows consumers to place an order with local kirana stores via a mobile app. The kirana store receives the order and, using the logistics services of start-ups, is able to deliver within a certain radius of the store, wider than its offline reach, assuring it incremental revenue. One of the biggest prob-lems the hyper local grocery model solves is the speed of delivery of food and daily essentials. This is stuff that consumers will not wait for a day or two. “If you are replacing the need to run errands to the market, your delivery time should match that,” says Albinder Dhindsa, Founder and CEO of Gurgaon-based Grofers, whose team of bikers delivers within 90 min-utes of getting the order. Dhindsa kicked off the international operations of restaurant-listing start-up Zomato and then found his calling in entrepreneurship. Initially, two years ago, he launched OneNumber, a logistics company that would do deliveries for grocery stores. The same company re-branded to Grofers in January 2015, allowing consumers to place orders to kirana stores. The start-up operates with eight to 10 bikers per city and has hubs throughout the city that serve as cash collec-tion and attendance points.
Same-day delivery poses a huge challenge for those following the inventory-led model as they can’t afford a large warehouse in every neighbourhood. Supermarkets or kirana stores have their own micro-warehouses close by and, hence, can deliver twice a day to a customer in the neighbourhood.
Besides saving costs related to managing the supply chain and warehouses, another big ad-vantage is that the cost incurred per delivery is lower due to shorter distances. This works bet-
January 31 2016 BUSINESS TODAY 6362 BUSINESS TODAY January 31 2016
AUG 2015 OCT
2015NOV 2015
DEC 2015
Cab and auto booking start-up AUTOnCAB acquires Gurgaon-based online grocery delivery start-up BigZop
Big Basket raises $50 million from existing investors led by Bessemer Venture Partners at a $400-million valuation
Local Banya suspends operations, raising concerns about its survival
Grofers acquires TownRush and Spoonjoy
Flipkart launches hyper-local grocery delivery mobile app Nearby in Bangalore
Kolkata-based online super market Indian Grahak acquires online hyper local marketplace Dyscover
HARI MENON Co-founder and CEO /Big Basket
”We start in any city, source from mandis or consolidation centres, and later as volumes grow, move backwards in the supply chain to the farm. Our buying
units are closest to the farm”
Softbank, along with other investors, pumps in $120 million in Grofers, raising its valuation to over $300 million
Spencer's Retail buys Mera Grocer
NI
LO
TP
AL
BA
RU
AH
COVER STORY Grocery Wars
COVERSTORY.indd 6-7 01/09/2016 2:04:18 AM
ter in markets with low aggregate margins. “If on a `500 basket, you are getting a margin of `70-80, you cannot afford to spend `150 on last-mile delivery,” says Grofers’ Dhindsa. Grofers makes a margin on 12-15 per cent only on order values ranging between `700 and `1,000.
Tech UnlimitedThe biggest differentiator has been the extensive use of technology. “We use technology heavily, which older start-ups did not do,” says Navneet Singh, Co-founder and CEO of PepperTap, which launched in Gurgaon on December 20, 2014. Singh, who had earlier founded re-verse logistics company Nuvoex, believes investors have bet on the team’s past experience in logistics. Among other things like digitising inventories of kirana stores and receiv-ing orders on a mobile app, PepperTap has made sure that its delivery boys use a mobile app to know what items to
pick from which store and deliver to which customers. “We need to track in real time which products are avail-able at which store so that only the available products are shown to shoppers,” says Singh. PepperTap delivers 8,000-10,000 orders a day across 15 cities. It is aiming for an annual gross merchandise value, or GMV, of $60-80 million by March this year.
Similarly, Big Basket, which stocks inventory, uses technology in each of its functions. Its back-end predicts future sales patterns. The reports generated by the system are used to place orders with vendors via an automated system. Orders placed on the website are transferred to smart phones of ‘pickers’ stationed in the warehouse who pick the items from the shelves. If he selects a wrong item, he gets a message. Even the routes of delivery vans are system-generated so that deliveries on the same route can be managed efficiently.
It is technology again that is at the centre of growth of the non-inventory asset-light model. As a result, e-grocers, which are essentially platforms to connect customers and local stores, are growing faster than those such as Big Basket that have embraced the stock-and-sell inventory model. Big Basket stayed in its maiden market, Bangalore, for over three years before expanding to other cities.
On the other hand, the asset-light Grofers expanded from Delhi-NCR to Mumbai and Bangalore within five months of launching its mobile app. By June, it also had operations in Pune, Ahmedabad, Jaipur, Lucknow, Hyderabad and Chennai, going up to 26 cities within the first year of operation. The company also claims to be tri-pling order volumes month-on-month. Currently manag-
ing a monthly GMV of $5.5 million, it is looking at touching $7.5 million per month by March 2016.
However, the biggest player, Big Basket, operating from 14 cities, aims to achieve a GMV of `1,000 crore by the end of March 2016. It is innovating, giving a tough fight to the inventory-light start-ups. Since it stocks prod-ucts, it is investing heavily in private labels, which (de-pending on the product category) deliver 20-50 per cent higher margins than the branded products. It has already created its own premium and regular brands of staples — Big Basket Royal and Big Basket Popular. Besides, it sells fresh fruits, vegetables, meat, coffee, baked-to-order breads and pani puri (a popular snack) under its Fresho brand.
Private labels already account for 35 per cent of its sales. Big Basket clocked `210 crore revenue in 2014/15, up from `85 crore in the previous year. Multiple other innovations are under way. Drawing inspiration from the US-based website Blue Apron, which provides packets of measured ingredients associated with a recipe, it has launched 45 recipes in the gourmet food range. The plan is to soon launch another 200-300 recipes with common Indian meals such as khichdi and rajma-chawal. The com-pany is setting up ‘dark stores’ or smaller warehouses in neighbourhoods. This is besides a large central ware-house hub. This will enable faster deliveries of essentials that customers want quickly.
Then there are those that have taken the middle ground between inventory-led players such as BigBasket and the no-inventory players such as PepperTap. One such player is the Hyderabad-based Zip.in, which does same-day deliveries by consolidating orders and procuring
in bulk. “We don’t identify a store close to you. That would limit choice and be less efficient in terms of delivery. We deliver multiple orders at the same time – in a van. The order value is also high as we have a wide range,” says Founder and CEO Kishore Ganji. His average order value is `1,200-1,500. Zip.in claims 15-20 per cent margins depending on the category of the product. According to the CEO, the hyper local model of Peppertap is less efficient and has significantly less average order value.
GrosseryHub.com, which operates in Delhi-NCR and started in June 2013, also follows a hybrid model. Anand Kishore, Marketing Manager, says it is partly inventory-led and partly marketplace. The company operates two ware-houses, buys in bulk, and so is able to give discounts. Still,
NAVNEET SINGH Co-Founder & CEO / PepperTap
“We use technology heavily. We need to track in real time which products are available at which store so that only the available products are shown to buyers”
ALBINDER DHINDSA Founder & CEO / Grofers
“If you are replacing the need to run errands to the market, your delivery time should match that”
64 BUSINESS TODAY January 31 2016
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ter in markets with low aggregate margins. “If on a `500 basket, you are getting a margin of `70-80, you cannot afford to spend `150 on last-mile delivery,” says Grofers’ Dhindsa. Grofers makes a margin on 12-15 per cent only on order values ranging between `700 and `1,000.
Tech UnlimitedThe biggest differentiator has been the extensive use of technology. “We use technology heavily, which older start-ups did not do,” says Navneet Singh, Co-founder and CEO of PepperTap, which launched in Gurgaon on December 20, 2014. Singh, who had earlier founded re-verse logistics company Nuvoex, believes investors have bet on the team’s past experience in logistics. Among other things like digitising inventories of kirana stores and receiv-ing orders on a mobile app, PepperTap has made sure that its delivery boys use a mobile app to know what items to
pick from which store and deliver to which customers. “We need to track in real time which products are avail-able at which store so that only the available products are shown to shoppers,” says Singh. PepperTap delivers 8,000-10,000 orders a day across 15 cities. It is aiming for an annual gross merchandise value, or GMV, of $60-80 million by March this year.
Similarly, Big Basket, which stocks inventory, uses technology in each of its functions. Its back-end predicts future sales patterns. The reports generated by the system are used to place orders with vendors via an automated system. Orders placed on the website are transferred to smart phones of ‘pickers’ stationed in the warehouse who pick the items from the shelves. If he selects a wrong item, he gets a message. Even the routes of delivery vans are system-generated so that deliveries on the same route can be managed efficiently.
It is technology again that is at the centre of growth of the non-inventory asset-light model. As a result, e-grocers, which are essentially platforms to connect customers and local stores, are growing faster than those such as Big Basket that have embraced the stock-and-sell inventory model. Big Basket stayed in its maiden market, Bangalore, for over three years before expanding to other cities.
On the other hand, the asset-light Grofers expanded from Delhi-NCR to Mumbai and Bangalore within five months of launching its mobile app. By June, it also had operations in Pune, Ahmedabad, Jaipur, Lucknow, Hyderabad and Chennai, going up to 26 cities within the first year of operation. The company also claims to be tri-pling order volumes month-on-month. Currently manag-
ing a monthly GMV of $5.5 million, it is looking at touching $7.5 million per month by March 2016.
However, the biggest player, Big Basket, operating from 14 cities, aims to achieve a GMV of `1,000 crore by the end of March 2016. It is innovating, giving a tough fight to the inventory-light start-ups. Since it stocks prod-ucts, it is investing heavily in private labels, which (de-pending on the product category) deliver 20-50 per cent higher margins than the branded products. It has already created its own premium and regular brands of staples — Big Basket Royal and Big Basket Popular. Besides, it sells fresh fruits, vegetables, meat, coffee, baked-to-order breads and pani puri (a popular snack) under its Fresho brand.
Private labels already account for 35 per cent of its sales. Big Basket clocked `210 crore revenue in 2014/15, up from `85 crore in the previous year. Multiple other innovations are under way. Drawing inspiration from the US-based website Blue Apron, which provides packets of measured ingredients associated with a recipe, it has launched 45 recipes in the gourmet food range. The plan is to soon launch another 200-300 recipes with common Indian meals such as khichdi and rajma-chawal. The com-pany is setting up ‘dark stores’ or smaller warehouses in neighbourhoods. This is besides a large central ware-house hub. This will enable faster deliveries of essentials that customers want quickly.
Then there are those that have taken the middle ground between inventory-led players such as BigBasket and the no-inventory players such as PepperTap. One such player is the Hyderabad-based Zip.in, which does same-day deliveries by consolidating orders and procuring
in bulk. “We don’t identify a store close to you. That would limit choice and be less efficient in terms of delivery. We deliver multiple orders at the same time – in a van. The order value is also high as we have a wide range,” says Founder and CEO Kishore Ganji. His average order value is `1,200-1,500. Zip.in claims 15-20 per cent margins depending on the category of the product. According to the CEO, the hyper local model of Peppertap is less efficient and has significantly less average order value.
GrosseryHub.com, which operates in Delhi-NCR and started in June 2013, also follows a hybrid model. Anand Kishore, Marketing Manager, says it is partly inventory-led and partly marketplace. The company operates two ware-houses, buys in bulk, and so is able to give discounts. Still,
NAVNEET SINGH Co-Founder & CEO / PepperTap
“We use technology heavily. We need to track in real time which products are available at which store so that only the available products are shown to buyers”
ALBINDER DHINDSA Founder & CEO / Grofers
“If you are replacing the need to run errands to the market, your delivery time should match that”
64 BUSINESS TODAY January 31 2016
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he says, they have been under pressure from the bigger asset-light players such as Big Basket and so is going slow with cash burn. “We have seen 15 companies close in two years. It is not sustainable in the current environment. The market will mature in two-three years. At present, the Delhi market is driven by kirana stores. Bangalore and Mumbai are mature as 50 per cent of their population is from outside and there are more working couples and a lot of societies and apartments,” he says.
Grocermax, which started operating in early 2015, is now in Gurgaon and the rest of Delhi-NCR. The founders, K. Radhakrishnan and Gaurav Juneja, tend to think of themselves as running a retail company more than an IT company. They also believe that the on-demand model of Peppertap or Grofers carries a higher risk — not only are their order sizes smaller, they are also unlikely to fulfil all the orders placed. They may take orders for `1,000 but deliver orders worth only `700. That is because of fore-
casting problems — the local stores they source from don’t store everything since the cost of capital is high in India, they say.
Grocermax has a hybrid model and 60 per cent of its orders are “flow-through”. Orders are taken till 11 in the morning and aggregated. The fruits and vegetables come from Azadpur mandi and other things from Metro Cash & Carry. They are packed and sent to a warehouse from where they are picked up for delivery to customers by 5 pm.
It is not an on-demand model but caters more to the planned purchase of the customer. The catalogue size in planned purchase is bigger and the average order value is `1,200-1,300, two-three times higher than the figure for on-demand hyper local companies. The company had raised a couple of million in the seed round. It is now in active discussions for Series A funding of $10 mil-lion. The founders say they need the money for customer acquisition.
Hunt For The WinnerNeither model is foolproof, though. Experts such as Arvind Singhal, Chairman and Managing Director at retail consultancy Technopak, believe that just as the Grofers’ scale-down has proved, even the asset-light model is not weather-proof. While it does allow tremendous flexibility in sourcing, delivery and quick ramp-up, it is tougher to introduce the higher margin private labels because of multiple sourcing points.
There are other challenges as well. While working with local stores enables quick delivery,
the stores themselves are largely stodgy. There are multi-ple inefficiencies involved in movement of products from the manufacturer to the store and there are several inter-mediaries involved. “The supply chain of these stores is primitive but we are investing to make it better through technology and having dedicated areas within supermar-kets for Grofers,” says Dhindsa of Grofers. “The biggest roadblock for us is the time spend at the stores.”
On Sunday, June 7, Grofers delivered 6,000 orders across the country, 3,000 in Delhi alone. A lot of
stores it had partnered with ran out of inventory. It usually takes three to four days to refurbish stocks when the store owner places a request with the distributor. Because of limited inventory and tardy refurbishing, the old-generation stores cannot handle a spike in orders. On the same day, June 7, the start-up sold 600 kg of tomatoes in South Delhi. All the eight stores in South Delhi that Grofers works with ran out of stock.
Also, not all retail stores find the services of delivery companies viable. Pankaj Dalakoti, who
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Rashi Choudhary, Co-founder, LocalBanya: Shutting shop
COVER STORY Grocery Wars
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mans the cash counter at a super market in Ghaziabad, says they were approached by one such delivery company, but they refused to partner with them. "They wanted to charge a little extra to the consumer as delivery charges and we were not okay with that. We feared loss of business and reputation," says Dalakoti, who manages his deliveries via four-five locally-hired boys and does not charge a penny extra for delivery of milk and other supplies.
PepperTap says it doesn’t work with small mom & pop stores because they don’t keep sufficient inven-tory. Organised bigger stores work better.
Big Basket, however, is bet-ter placed in terms of sourcing capabilities. It sources 30-35 per cent fruits and vegetables directly from farmers. “We start in any city, source from mandis or consolidation cen-tres, and later as volumes grow, move backwards in the supply chain to the farm. Our buying units are closest to the farm,” says Hari Menon, Co-founder and CEO of Big Basket.
He along with others had set up FabMart, one of the ear-liest chains of grocery stores in 1999 that was in 2006 sold to the Aditya Birla Group. It is now called More. Similarly, for staples, the company starts sourcing from mandis and then finally ends up buying from the mills. For FMCG, it starts with
the distributors and over a period of time moves to buying directly from companies.
The Viability QuestionThe biggest question being posed is: Can start-ups that do not own the stock actually make money? Logistics is the biggest puzzle to be solved, accounting for upwards of 70 per cent of the total cost these businesses are incurring. However, it will be difficult to pass on the delivery costs to consumers because as far as grocery items are concerned, they will not be willing to pay a penny more than the MRP.
Store owners, too, are reluctant to bear the cost of delivery unless they see a very substantial spike in volumes.
“There is no business model in place,” says Singhal of Technopak. Most such start-ups, including Big Basket, charge a delivery fee for orders below a certain value. Grofers, for instance, charges `49 for order value below `250, making no money. However, the company says it makes money after the fourth or fifth repeat purchase, when the order value swells to `700-1,000.
Start-ups are also engaged in a race to expand across cities, which may backfire, as it did with Grofers. “Expanding fast and making ongoing in-vestments with returns is the mistake that big offline retailers like Subhiksha or Future Group’s Big Bazaar made. You need to get your economics right before expanding,” says Singhal, who believes both LocalBanya and Big Basket expanded too fast, without cap-turing the market in one city. That way they faced the same risk as the offline retailers. “Three years looks like a big period but it is actually too small if you see the huge differ-ence between the size of the market with their current turn-over,” he says. The Bangalore market alone is around `15,000 crore as compared to Big Basket’s turnover of `200-250 crore by the end of March
2015. Even Amazon’s grocery service, AmazonFresh, launched in Seattle in 2007, did not move beyond the city for a good six to seven years.
The other question is whether the asset-light grocery start-ups will remain e-grocers in the true sense! After all, they are largely logistics companies focused on grocery. Eventually, they may deliver products such as medicines or even a mobile charger or a mobile recharge coupon from the local market.
Take the case of New Delhi-based AaramShop, which was the earliest start-up to attempt a business model in-
68 BUSINESS TODAY January 31 2016
SAMIR KUMAR Category Head / Amazon.com
“I miss things like pickle from my hometown. This is the kind of local stuff we want to make available to customers through the convenience of e-commerce”
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January 31 2016 BUSINESS TODAY 7170 BUSINESS TODAY January 31 2016
volving kirana stores. Today, it works on a different model altogether. Started in June 2012, it works with over 7,500 mom & pop retailers across the country to bring their in-ventory online while letting them take care of own deliver-ies. “We want to fix what is broken and delivery is not broken in India as it is in the US where delivery boys cost a couple of dollars per hour. In India, kirana stores have been doing own deliveries for a long time now,” says Vijay Singh, F o u n d e r a n d C E O , AaramShop. Harping on the fact that neighbourhood stores account for 90 per cent of the retail business in India, the company earns most of its rev-enues by providing analytics on consumer behaviour at kirana stores to FMCG compa-nies. “Big Bazaar gives analyt-ics on what’s happening within Big Bazaar. Our analy-sis talks about more than 95 per cent of retail in the coun-try,” says Singh.
In the US, Instacart was founded in July 2012 to rep-licate the Uber model in local delivery of grocery. While it does not invest either in in-ventory or logistics, it pro-vides a technology interface to connect consumers to youngsters with cars who are willing to run an errand pick-ing grocery from a nearby store, deliver to the nearby consumer, and get paid per delivery. The Coming AssaultThe newest challenge, of course, is the assault of the brick-and-mortar retailers. The country’s largest retailer, Reliance Retail, with revenues of `17,640 crore in
2014/15, had piloted its online grocery business www.reliancefreshdirect.com at its corporate park before the launch in Navi Mumbai and Thane about 10 months ago. Gradually, it expanded to South Mumbai and later to en-tire Mumbai. It delivers grocery orders either from Reliance Fresh stores or the nearest distribution centre.
With 6,000-plus products on sale on the platform, the com-pany is looking to scale up in Tier-I cities across India ini-tially. The expansion will go along with the launch of its digital service business Jio.
“ F o r a c o m p a n y o f Reliance’s size, the start-ups will never pose a threat. Right now, we are going slow with the online retailing business because of the launch of Jio. The Jio platform will help us massively expand our grocery e-commerce, cashing in on the existing network of Reliance Fresh,” says an executive. Reliance Fresh operates in around 100 cities across India with 700-plus stores. Mukesh Ambani said in the recent an-nual general meeting, "www.reliancefreshdirect.com has seen significant success and would be further scaled up to serve new markets."
Brick-and-mortar retailer Future Group has also made multiple attempts at online and hasn’t give up yet. It is get-
ting ready yet again. The largest retailer, controlled by Kishore Biyani, is preparing to try the omni-channel model to counter the e-tailers and e-grocers by investing around `100 crore. Earlier, Biyani had made several half-hearted attempts to build e-tail (futurebazaar.com, BigBazaar.com and Big Bazaar Direct, in addition to the beta versions), but
achieved little success.Biyani has around 200 Big Bazaar stores, 130 KB’s
Fairprice shops, in addition to 150 Nilgiris stores, 188 Easy Day supermarkets and 15 Easy Day hypermarkets, where he sells grocery. In the omni-channel model, Biyani’s stores would act as warehouses and deliver to the surrounding localities. “This will help the retail chain deliver perishable goods like grocery faster to customers. Since grocery shopping is more prevalent in Tier-I and Tier-II cities, the Future Group will have an edge while selling grocery online or via omni-channel,” says a retail expert with a global bank.
Aditya Birla group’s retail chain, More, too, started the online food and grocery business in Gurgaon about a cou-ple of months ago. In May, it roped in online grocery re-tailer ZopNow for enhancing the home delivery business in Bengaluru, Hyderabad and Kolkata. More has 16 hy-permarkets in these cities. “Technology allows us to con-nect a lot better with our customers and to take a true 'omni-channel' approach to meet their ever-changing needs. We have already initiated multiple pilots to see which models work best and expect to scale up accord-ingly,” says Pranab Barua, Business Director, Apparel &
Retail Business, Aditya Birla Group.There is a huge question mark over which model will
succeed eventually. More importantly, there are doubts whether online grocery will succeed at all, especially since physical delivery of low-value goods will always run up against the constraints of infrastructure, labour and perishability. Inarguably, a great hope rests in de-livery via drones that Amazon.com is banking on. Even Walmart recently sought approvals for testing the use of drones for delivery.
But a successful model still eludes e-grocers around the world. Even inventory-led businesses like the US-based Webvan shut shop in 2001 after raising a whop-ping $830 million. But retailers who have both a physi-cal supply chain and an additional online front have been only marginally successful. These include the world’s largest retailer, Walmart, which is already the second-largest e-tailer in the US after Amazon (though less than one-fourth its size still), and UK’S largest retailer Tesco. Their perennial concern is whether there is yet another disruptor round the corner. ~
@KhanTaslima, Goutam20, nevinjl
VIJAY SINGH Founder & CEO / aaramshop.com
“We want to fix what is broken, and delivery is not broken in India as it is in the US where delivery boys cost a couple of dollars per hour”
GLOBAL BIG-BANG FAILURES
US-based Webvan, launched in 1999, shut down in 2001.It had raised $830 million. Some others that started around the same time, Homeruns and Kozmo, also shut shop. While the earlier generation of grocery start-ups in the US were largely inventory-based, the next
generation ones, including the likes of Instacart (founded in July 2012), bring the Uber model to local delivery of grocery. Instacart, for instance, provides a technology interface to connect consumers to youngsters with cars who can pick stuff from mom & pop stores and deliver to customers in the vicinity.
ed, the next l to local
umers to the vicinity.
Shashwat Goenka, Head(Retail), RP-Sanjiv Goenka Group: Goingthe online way
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COVERSTORY.indd 12-13 01/09/2016 2:30:39 AM
January 31 2016 BUSINESS TODAY 7170 BUSINESS TODAY January 31 2016
volving kirana stores. Today, it works on a different model altogether. Started in June 2012, it works with over 7,500 mom & pop retailers across the country to bring their in-ventory online while letting them take care of own deliver-ies. “We want to fix what is broken and delivery is not broken in India as it is in the US where delivery boys cost a couple of dollars per hour. In India, kirana stores have been doing own deliveries for a long time now,” says Vijay Singh, F o u n d e r a n d C E O , AaramShop. Harping on the fact that neighbourhood stores account for 90 per cent of the retail business in India, the company earns most of its rev-enues by providing analytics on consumer behaviour at kirana stores to FMCG compa-nies. “Big Bazaar gives analyt-ics on what’s happening within Big Bazaar. Our analy-sis talks about more than 95 per cent of retail in the coun-try,” says Singh.
In the US, Instacart was founded in July 2012 to rep-licate the Uber model in local delivery of grocery. While it does not invest either in in-ventory or logistics, it pro-vides a technology interface to connect consumers to youngsters with cars who are willing to run an errand pick-ing grocery from a nearby store, deliver to the nearby consumer, and get paid per delivery. The Coming AssaultThe newest challenge, of course, is the assault of the brick-and-mortar retailers. The country’s largest retailer, Reliance Retail, with revenues of `17,640 crore in
2014/15, had piloted its online grocery business www.reliancefreshdirect.com at its corporate park before the launch in Navi Mumbai and Thane about 10 months ago. Gradually, it expanded to South Mumbai and later to en-tire Mumbai. It delivers grocery orders either from Reliance Fresh stores or the nearest distribution centre.
With 6,000-plus products on sale on the platform, the com-pany is looking to scale up in Tier-I cities across India ini-tially. The expansion will go along with the launch of its digital service business Jio.
“ F o r a c o m p a n y o f Reliance’s size, the start-ups will never pose a threat. Right now, we are going slow with the online retailing business because of the launch of Jio. The Jio platform will help us massively expand our grocery e-commerce, cashing in on the existing network of Reliance Fresh,” says an executive. Reliance Fresh operates in around 100 cities across India with 700-plus stores. Mukesh Ambani said in the recent an-nual general meeting, "www.reliancefreshdirect.com has seen significant success and would be further scaled up to serve new markets."
Brick-and-mortar retailer Future Group has also made multiple attempts at online and hasn’t give up yet. It is get-
ting ready yet again. The largest retailer, controlled by Kishore Biyani, is preparing to try the omni-channel model to counter the e-tailers and e-grocers by investing around `100 crore. Earlier, Biyani had made several half-hearted attempts to build e-tail (futurebazaar.com, BigBazaar.com and Big Bazaar Direct, in addition to the beta versions), but
achieved little success.Biyani has around 200 Big Bazaar stores, 130 KB’s
Fairprice shops, in addition to 150 Nilgiris stores, 188 Easy Day supermarkets and 15 Easy Day hypermarkets, where he sells grocery. In the omni-channel model, Biyani’s stores would act as warehouses and deliver to the surrounding localities. “This will help the retail chain deliver perishable goods like grocery faster to customers. Since grocery shopping is more prevalent in Tier-I and Tier-II cities, the Future Group will have an edge while selling grocery online or via omni-channel,” says a retail expert with a global bank.
Aditya Birla group’s retail chain, More, too, started the online food and grocery business in Gurgaon about a cou-ple of months ago. In May, it roped in online grocery re-tailer ZopNow for enhancing the home delivery business in Bengaluru, Hyderabad and Kolkata. More has 16 hy-permarkets in these cities. “Technology allows us to con-nect a lot better with our customers and to take a true 'omni-channel' approach to meet their ever-changing needs. We have already initiated multiple pilots to see which models work best and expect to scale up accord-ingly,” says Pranab Barua, Business Director, Apparel &
Retail Business, Aditya Birla Group.There is a huge question mark over which model will
succeed eventually. More importantly, there are doubts whether online grocery will succeed at all, especially since physical delivery of low-value goods will always run up against the constraints of infrastructure, labour and perishability. Inarguably, a great hope rests in de-livery via drones that Amazon.com is banking on. Even Walmart recently sought approvals for testing the use of drones for delivery.
But a successful model still eludes e-grocers around the world. Even inventory-led businesses like the US-based Webvan shut shop in 2001 after raising a whop-ping $830 million. But retailers who have both a physi-cal supply chain and an additional online front have been only marginally successful. These include the world’s largest retailer, Walmart, which is already the second-largest e-tailer in the US after Amazon (though less than one-fourth its size still), and UK’S largest retailer Tesco. Their perennial concern is whether there is yet another disruptor round the corner. ~
@KhanTaslima, Goutam20, nevinjl
VIJAY SINGH Founder & CEO / aaramshop.com
“We want to fix what is broken, and delivery is not broken in India as it is in the US where delivery boys cost a couple of dollars per hour”
GLOBAL BIG-BANG FAILURES
US-based Webvan, launched in 1999, shut down in 2001.It had raised $830 million. Some others that started around the same time, Homeruns and Kozmo, also shut shop. While the earlier generation of grocery start-ups in the US were largely inventory-based, the next
generation ones, including the likes of Instacart (founded in July 2012), bring the Uber model to local delivery of grocery. Instacart, for instance, provides a technology interface to connect consumers to youngsters with cars who can pick stuff from mom & pop stores and deliver to customers in the vicinity.
ed, the next l to local
umers to the vicinity.
Shashwat Goenka, Head(Retail), RP-Sanjiv Goenka Group: Goingthe online way
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INDUSTRY Steel
January 31 2016 BUSINESS TODAY 00074 BUSINESS TODAY January 31 2016
A dramatic surge in import of steel has undermined the profi tability of domestic industry and increased distressed assets. By SUMANT BANERJI
Narendra Singh Tomar’s office is abuzz with activity these days. The gamut of visitors who have sought the attention of the Union Minister of Steel and Mines in the past month includes industrialists such as Essar Group CEO Prashant Ruia, JSW Steel Chairman Sajjan Jindal, and Tata Steel Managing Director T.V. Narendran. Even Nirmala Sitharaman, Minister of State for Commerce and Industry, walked
across the few blocks that separate her ministry from Tomar’s in Udyog Bhavan, to meet him.
In an unregulated sector like steel, this kind of frenetic activity is far from usual. The only other time when a Union steel minister was this busy was a decade ago when Ram Vilas Paswan headed the ministry. At that time, global giants like Posco and ArcelorMittal were making a beeline to invest in India, because with its low per capita consumption of steel and ambition to become the fastest-growing economy in the world, the country’s steel market was an obvious attraction.
Only this time, the context is starkly different.In 2015, India emerged as the only market world over that was witnessing
growth in demand for steel. But that is not the reason for Tomar’s busy schedule. An unprecedented surge in imports from China, Korea and Japan is threatening
Estimates suggest the global industry is burdened with massive excess capacity of around 550 million tonnes
(approx. 25% of global capacity). The biggest overcapacity of 250-300 million tonnes is in China alone
FIGHTING THE IMPORT MENACE
SURGING IMPORTSSteel imports and exports over the years
*Estimated In million tonnes per annum Source: Joint Plant Committee
2005/06 2015/16*
4.3
15.0
4.1
4.8
7.0
5.1
5.2
2.1
6.96.0
5.54.6
Imports Exports
SH
EK
HA
R G
HO
SH
Steel.indd 2-3 01/08/2016 7:38:42 PM
INDUSTRY Steel
January 31 2016 BUSINESS TODAY 00074 BUSINESS TODAY January 31 2016
A dramatic surge in import of steel has undermined the profi tability of domestic industry and increased distressed assets. By SUMANT BANERJI
Narendra Singh Tomar’s office is abuzz with activity these days. The gamut of visitors who have sought the attention of the Union Minister of Steel and Mines in the past month includes industrialists such as Essar Group CEO Prashant Ruia, JSW Steel Chairman Sajjan Jindal, and Tata Steel Managing Director T.V. Narendran. Even Nirmala Sitharaman, Minister of State for Commerce and Industry, walked
across the few blocks that separate her ministry from Tomar’s in Udyog Bhavan, to meet him.
In an unregulated sector like steel, this kind of frenetic activity is far from usual. The only other time when a Union steel minister was this busy was a decade ago when Ram Vilas Paswan headed the ministry. At that time, global giants like Posco and ArcelorMittal were making a beeline to invest in India, because with its low per capita consumption of steel and ambition to become the fastest-growing economy in the world, the country’s steel market was an obvious attraction.
Only this time, the context is starkly different.In 2015, India emerged as the only market world over that was witnessing
growth in demand for steel. But that is not the reason for Tomar’s busy schedule. An unprecedented surge in imports from China, Korea and Japan is threatening
Estimates suggest the global industry is burdened with massive excess capacity of around 550 million tonnes
(approx. 25% of global capacity). The biggest overcapacity of 250-300 million tonnes is in China alone
FIGHTING THE IMPORT MENACE
SURGING IMPORTSSteel imports and exports over the years
*Estimated In million tonnes per annum Source: Joint Plant Committee
2005/06 2015/16*
4.3
15.0
4.1
4.8
7.0
5.1
5.2
2.1
6.96.0
5.54.6
Imports Exports
SH
EK
HA
R G
HO
SH
Steel.indd 2-3 01/08/2016 7:38:42 PM
their own production cost. “We are aware of the
problems and are worried about it,” says Tomar. “China’s dumping is a big reason. We are consider-ing how to protect the domestic industry from getting impacted by this dumping.” Tomar adds that he has met Finance Minister Arun Jaitley and Sitharaman over this is-sue. “Principally, every-body is agreeable to pro-tecting the domestic in-dustry, but at the same time, the forward course of action will depend on the merit of laws, cus-toms, procedures and arguments.”
Already, the government has increased import duty on steel twice in 2015. Last June, the finance minister hiked duty on flat steel products used in the manufacture of automobiles and consumer durables to 10 per cent from 7.5 per cent, and on long steel products used in construction and infrastructure development to 7.5 per cent from 5.5 per cent. He followed it up with another round of hike on import of non-alloy flat products to 12.5 per cent in August 2015 from 10 per cent earlier, while duties were hiked in some of the other categories at the same time. Additionally, an anti-dumping duty of $316 per tonne on import of certain products – such as indus-trial grade stainless steel – from China, Malaysia and Korea was implemented in August. Further, to circum-
vent India’s foreign trade agreements with Japan and Korea, a safeguard duty of 20 per cent on steel im-ported from the two coun-tries along with China was imposed for a period of 200 days in September. More re-cently, in December, anti-dumping duty ranging be-tween five and 57 per cent was imposed for cold-rolled flat products of stainless steel for five years on China, South Korea, US, South Africa, Taiwan, Thailand and EU.
Yet, these measures have had little impact on imports as global prices have contin-ued to fall. The glut-like situ-ation has only worsened. At
the time of investigation of the safeguard duty, for exam-ple, hot-rolled coil from China was being imported at $370, but by the time it was imposed, prices had fallen to $320, almost negating the entire benefit. They have fallen below $300 now. According to the government’s own admission, the stress in the sector may continue for an-other 18 months if there is no improvement in the global scenario.
“Initially, there was some impact (of safeguard du-ties),” says Tomar. “But the stress is still intense. In my view, the way those countries are behaving, they can continue for another year to year and a half. Capacity utilisation in the domestic industry has come down, and because we are in a slowdown, it has impacted every
SPLITTING THE PIEShare in Indian imports
not only the profitability but even the viability of many players in the domestic market.
Import of the commodity in India grew by a staggering 71 per cent last fiscal and has continued unabated in the first half of the current financial year. Imports are up 31.2 per cent now, and at 7.45 million tonne, it has already exceeded the full year 2013/14 tally. This fiscal, imports are slated to touch 15 million tonne, crossing double digits for the first time ever. In the process, imports would account for around 15 per cent of the steel consumed in the country.
The primary reason for the surge is overcapacity in the global industry – esti-mated at about 25 per cent. Around half of that is from China, the world’s biggest steel producer with a share of almost 50 per cent of global production. Even as coun-tries are scrambling to cut production and manage in-ventories to minimise losses, India has become a target to park some of their excess production. Reason: it is the only country in the top 10 major steel markets to post a growth in production of 2.8 per cent in the first 11 months of 2015, and is seeing domestic steel demand growing at a higher clip of around 4-5 per cent (Platts estimates).
Not surprisingly, China accounts for the bulk of steel imported into India – 28 per cent. More worryingly, in fiscal 2014/15, imports from China jumped a mind-boggling 232 per cent. Japan and Korea, with whom India has free trade agreements, account for another 48 per cent (see Surging Imports). Together, the three Asian economies are exploiting the need for steel in India.
Their gains, however, have come at the cost of the do-mestic industry.
The Price ShockThe overcapacity in the global steel industry has, as ex-pected, led to a steep decline in prices. From the pre-global recession highs of 2008/09, when a tonne of hot-rolled coil was being imported at the docks in Mumbai at $744, prices crashed to below $300 in 2015 – a 12-year low. This has brought down prices in the domestic market as well. A tonne of hot-rolled coil today costs between `27,500 and `28,000 in the domestic market against `37,200 in November 2014, a drop of over 23 per cent. Even then, there is a huge gap in prices of around `19,000 between steel produced in India and the imported variety. Allegations are flying thick and fast that China and Korea are dumping steel in the country by pricing it lower than
January 31 2016 BUSINESS TODAY 7776 BUSINESS TODAY January 31 2016
INDUSTRY Steel
SESHAGIRI RAO Joint Managing Director and Group CFO/ JSW Steel
“Globally, fi xed costs, including taxes on steel, come to $7-8 per tonne. For domestic players, it comes to about $41 a tonne. Interest rates in India are at 10-11 per cent, while in China, South Korea and Japan, they are far lower. China has had several rounds of interest rate cut. In such a scenario, there is no level-playing fi eld for domestic steel producers”
Figures in % Source: JPC
Indonesia
Germany
China28
Others12
Korea26
Japan22
4332
Russia
Ukraine
MELTDOWNSteel prices have tumbled in recent years
Source: Industry; *estimated average for the 2015/16 fi scal
Steel prices in $ per tonne
2622002/03 320*
2015/16
5532013/14
6872012/13
5302009/10
6542008/09
4112006/07
RA
CH
IT
GO
SW
AM
I
Steel.indd 4-5 08-01-2016 5:13:43 PM
their own production cost. “We are aware of the
problems and are worried about it,” says Tomar. “China’s dumping is a big reason. We are consider-ing how to protect the domestic industry from getting impacted by this dumping.” Tomar adds that he has met Finance Minister Arun Jaitley and Sitharaman over this is-sue. “Principally, every-body is agreeable to pro-tecting the domestic in-dustry, but at the same time, the forward course of action will depend on the merit of laws, cus-toms, procedures and arguments.”
Already, the government has increased import duty on steel twice in 2015. Last June, the finance minister hiked duty on flat steel products used in the manufacture of automobiles and consumer durables to 10 per cent from 7.5 per cent, and on long steel products used in construction and infrastructure development to 7.5 per cent from 5.5 per cent. He followed it up with another round of hike on import of non-alloy flat products to 12.5 per cent in August 2015 from 10 per cent earlier, while duties were hiked in some of the other categories at the same time. Additionally, an anti-dumping duty of $316 per tonne on import of certain products – such as indus-trial grade stainless steel – from China, Malaysia and Korea was implemented in August. Further, to circum-
vent India’s foreign trade agreements with Japan and Korea, a safeguard duty of 20 per cent on steel im-ported from the two coun-tries along with China was imposed for a period of 200 days in September. More re-cently, in December, anti-dumping duty ranging be-tween five and 57 per cent was imposed for cold-rolled flat products of stainless steel for five years on China, South Korea, US, South Africa, Taiwan, Thailand and EU.
Yet, these measures have had little impact on imports as global prices have contin-ued to fall. The glut-like situ-ation has only worsened. At
the time of investigation of the safeguard duty, for exam-ple, hot-rolled coil from China was being imported at $370, but by the time it was imposed, prices had fallen to $320, almost negating the entire benefit. They have fallen below $300 now. According to the government’s own admission, the stress in the sector may continue for an-other 18 months if there is no improvement in the global scenario.
“Initially, there was some impact (of safeguard du-ties),” says Tomar. “But the stress is still intense. In my view, the way those countries are behaving, they can continue for another year to year and a half. Capacity utilisation in the domestic industry has come down, and because we are in a slowdown, it has impacted every
SPLITTING THE PIEShare in Indian imports
not only the profitability but even the viability of many players in the domestic market.
Import of the commodity in India grew by a staggering 71 per cent last fiscal and has continued unabated in the first half of the current financial year. Imports are up 31.2 per cent now, and at 7.45 million tonne, it has already exceeded the full year 2013/14 tally. This fiscal, imports are slated to touch 15 million tonne, crossing double digits for the first time ever. In the process, imports would account for around 15 per cent of the steel consumed in the country.
The primary reason for the surge is overcapacity in the global industry – esti-mated at about 25 per cent. Around half of that is from China, the world’s biggest steel producer with a share of almost 50 per cent of global production. Even as coun-tries are scrambling to cut production and manage in-ventories to minimise losses, India has become a target to park some of their excess production. Reason: it is the only country in the top 10 major steel markets to post a growth in production of 2.8 per cent in the first 11 months of 2015, and is seeing domestic steel demand growing at a higher clip of around 4-5 per cent (Platts estimates).
Not surprisingly, China accounts for the bulk of steel imported into India – 28 per cent. More worryingly, in fiscal 2014/15, imports from China jumped a mind-boggling 232 per cent. Japan and Korea, with whom India has free trade agreements, account for another 48 per cent (see Surging Imports). Together, the three Asian economies are exploiting the need for steel in India.
Their gains, however, have come at the cost of the do-mestic industry.
The Price ShockThe overcapacity in the global steel industry has, as ex-pected, led to a steep decline in prices. From the pre-global recession highs of 2008/09, when a tonne of hot-rolled coil was being imported at the docks in Mumbai at $744, prices crashed to below $300 in 2015 – a 12-year low. This has brought down prices in the domestic market as well. A tonne of hot-rolled coil today costs between `27,500 and `28,000 in the domestic market against `37,200 in November 2014, a drop of over 23 per cent. Even then, there is a huge gap in prices of around `19,000 between steel produced in India and the imported variety. Allegations are flying thick and fast that China and Korea are dumping steel in the country by pricing it lower than
January 31 2016 BUSINESS TODAY 7776 BUSINESS TODAY January 31 2016
INDUSTRY Steel
SESHAGIRI RAO Joint Managing Director and Group CFO/ JSW Steel
“Globally, fi xed costs, including taxes on steel, come to $7-8 per tonne. For domestic players, it comes to about $41 a tonne. Interest rates in India are at 10-11 per cent, while in China, South Korea and Japan, they are far lower. China has had several rounds of interest rate cut. In such a scenario, there is no level-playing fi eld for domestic steel producers”
Figures in % Source: JPC
Indonesia
Germany
China28
Others12
Korea26
Japan22
4332
Russia
Ukraine
MELTDOWNSteel prices have tumbled in recent years
Source: Industry; *estimated average for the 2015/16 fi scal
Steel prices in $ per tonne
2622002/03 320*
2015/16
5532013/14
6872012/13
5302009/10
6542008/09
4112006/07
RA
CH
IT
GO
SW
AM
I
Steel.indd 4-5 08-01-2016 5:13:43 PM
company, big or small.”That much time may be disastrous. Already, imports
and the resultant impact on domestic prices have taken a toll on the performance of domestic players. India’s largest steelmaker, Steel Authority of India (SAIL), saw its quarterly loss widen from `321.64 crore in April-June 2015 to `1,055.96 crore in July-September. It had posted a net profit of `2,092.68 crore in the first half of the previ-ous fiscal. Tata Steel, in fact, had to undertake strategic stake sales in two group companies – Tata Motors and Titan Industries – in the second quarter that generated `1,887.45 crore, to project a healthy balance sheet.
“China, Japan and Korea have resorted to predatory pricing for exports to India, selling steel at much lower prices than in their domestic markets or even their cost of production,” says Sanak Mishra, Secretary General of the Indian Steel Association. “The strategy is simply to kill the do-mestic industry here so that India,
the only market where demand for steel will grow in the next 50 years, remains dependent on imported steel in future.”
The Debt BurdenIndian steel companies are also overleveraged and burdened with debt. A Credit Suisse report says the five top primary and secondary steel makers in the country – Tata, Jindal, Essar, Bhushan and JSW – have accu-m u l a t e d d e b t o f a r o u n d `2,50,000 crore. With cash flow drying up, servicing these debts is a big worry. “As much as 37 per cent of India Inc’s borrow-ings are held by companies, led by steel firms, that are not gener-ating enough revenues to service their interest expenses – or stressed assets,” the report says. “Further, banks’ exposures to stressed steel companies are at 10-30 per cent of net worth.” Similarly, the Reserve Bank of India’s Financial Stability Report back in June last year itself had
78 BUSINESS TODAY January 31 2016
INDUSTRY Steel
SANAK MISHRA Secretary General, Indian Steel Association
“China, Japan and Korea have resorted to predatory pricing for exports to India... The strategy is simply to kill the domestic industry here so that India, the only market where demand for steel will grow in the next 50 years, remains dependent on imported steel in future”
IN THE RED Steel industry has reported losses in H1 of 2015/16
19,640.52007/08
14,654.52008/09
17,327.72009/10
17,428.12010/11
15,104.22011/12
6,124.22012/13
8,954.92013/14
9,5172014/15
-161.62015/16 H1
Figures in ` crore Source: CMIE
Profi t after tax
Steel.indd 6 08-01-2016 5:14:03 PM
highlighted the distress in the sector. “Five out of top 10 private steel producing companies are under severe stress on account of delayed implementation of their projects due to land acquisition and environmental clearances among other factors,” the report had said.
As a thumb rule, domestic companies incur losses at prices below `28,000 per tonne. But today, imported steel prices are at much lower levels. Though Indian companies benefit from abundant supply of iron ore – a key raw material in steel making – freight cost in India is one of the highest in the world. At the same time, taxation on mining in India and statutory levies, includ-ing royalty in the sector, are also among the highest globally. According to estimates by Indian Steel Alliance, domestic steel companies suffer a price disadvantage of $100 per tonne (`6,600) due to higher taxes and interest costs compared to peers in countries such as China,
Brazil, Japan or Korea. “Globally, fixed costs, including taxes on steel, come
to $7-8 per tonne, but for Indian companies, it comes to about $41 a tonne,” says Seshagiri Rao, Joint Managing Director and Group CFO of JSW Steel, the country’s larg-est private sector steel-maker. “Interest rates here are much higher at around 10-11 per cent, while in China, South Korea and Japan, they are far lower. There is no level-playing field for domestic steel producers and, cer-tainly, domestic steel players need protection.”
The government is fast running out of options. Another round of safeguard duty is in the offing and anti-dumping duties for specific countries may also be
80 BUSINESS TODAY January 31 2016
INDUSTRY Steel
Q&A
“We are worried, but confi dent”
A dramatic surge in import of steel from China, Japan and Korea has battered the domestic steel industry. Numerous policy interventions have not helped.
Union Steel and Mines Minister Narendra Singh Tomar tells BT’s Rajeev Dubey and Sumant Banerji that while the government is considering more measures to restrict imports, the sector may remain under stress for some more time. Edited excerpts:
BT: How severe is the distress in the domestic steel industry?
Tomar: This sector is deregulated and keeps fluctuat-ing as per the overall market. It is true that there are lots of problems right now and we are aware of it. Industry is also trying to wriggle out of it. After a long time there is stress in this sector. The impact of this is on everything.
How do you plan to tackle the surge in import of steel?
We imposed safeguard duty, in-creased anti-dumping and import duty, and our intention is to improve the situation. But even after that there is lot of stress. Industry has been arguing for more protection. When the right time comes, we will look into the merit of those argu-ments because protecting the inter-ests of the steel industry is without doubt a priority for us. This sector brings in a lot of investments, there is a lot of exposure of banks, and it is also a big employment generator,
providing direct employment to seven lakh people and indirectly 35 lakh people are affected by it. It also contributes two per cent to GDP. We are worried but confident that we will sail through this time of crisis.
There are reports that China is selling steel at prices lower than production cost. How do you manage that?
China’s dumping is a major concern and they are selling at a cost lower than their own production cost. It may be their strategy, but without doubt it is damaging us. We
are considering how best we can protect the domestic in-dustry from getting impacted by this dumping. I have met the FM (Arun Jaitley) as also (commerce minister) Nirmala Sitharaman over this issue and discussed it at length. Principally, everybody is agreeable to protecting the domestic industry, but at the same time, the forward course of action will depend on the merit of laws, cus-toms, procedures and arguments, and representation by the industry as per the laid-down procedure substanti-ated with data and statistics. In today’s scenario, imports from China, Japan and Korea are hurting us. We have FTAs with Japan and Korea, but we cannot go back and undo that and have to honour our commitment. At the same time, we have to look for a way out.
Has there been any impact of the safeguard duty imposed in September?
Initially, there was some impact. But the stress is still intense. In my view, the way those countries are be-having, they can continue for another year, year and a half. But the way we are thinking, we may be able to wriggle out of it.
Have you heard of plants being shut or capacity utilisation falling?
I have not received any information about any major plants shutting down in the domestic market. I don’t think that will happen either. Of course, capacity utili-sation has come down, because we are in a slowdown and that has impacted every company, big or small. Demand should increase and we are also in favour of it. We are also trying our level best to do that. At the same time, our industry should also grow and be prof-itable. Our domestic industry should not be impacted by anything. Public investments planned by the gov-ernment of India and low base of per capita consump-tion will be the growth drivers.
Considering the distress right now, do you think there is a need to review the roadmap for the sector including SAIL’s own capacity expansion plans?
We keep reviewing SAIL’s plans from time to time. It is true that even our vision of 300 mtpa and SAIL’s 50 mtpa by 2025 should be impacted in the current scenario and we will definitely review this at some point of time. It looks daunting in today’s time, but we should not shy away from it. Right now the mar-ket is not favourably inclined towards achieving these numbers, but it will not stay like this forever. If we have to achieve the vision of ‘Make in India’, then demand for steel will obviously go up. We should be able to meet that demand and not fall short.
levied. However, estimates suggest the global industry is burdened with massive excess capacity of around 550 million tonnes (25 per cent of global capacity). The big-gest overcapacity of 250-300 million tonnes exists in China alone.
According to a survey done by Platts, a leading global energy, petrochemicals and metals information provider, the boom years have seen China build up crude steel production capacity of some 1.1 billion MT per year, of which only 73 per cent is being used currently. “Last year, China’s steel consumption fell 3.4 per cent year-on-year, its first reversal in three decades. World Steel Association has forecast China’s steel consumption will fall 3.5 per cent this year and by a further two per cent in 2016. The country’s steel production in 2015 appears on track to fall one-two per cent on last year. Even BHP has scaled back its outlook for China’s steel output to 935 million – 985 million MT by the middle of next dec-ade from one billion MT previously. Rio insists Chinese output will still creep up by around one per cent a year to reach one billion MT by 2030,” the survey states.
The uncertainty in the world’s largest steel producing country only means increased volatility in global steel prices in 2016. As such, nobody can say for sure when steel prices will stabilise domestically. The Indian govern-ment is now looking at levying a minimum import price of around $450 (`30,000) per tonne for the sector. Such a move, however, would be untenable under World Trade Organization rules of fair trade, and India would be vul-nerable to arbitration by any of the exporting countries.
“A minimum import price would still be a good step as it would provide immediate relief to the domestic in-dustry,” says a senior official in a top Indian steel com-pany. “China and Korea cannot sustain this price in the long term but by keeping it this low, they want to kill the domestic industry here. The WTO hearings can be tedi-ous and take a lot of time, and that is what we want.”
Till such time a permanent solution is thrashed out, Indian companies would need all the steel within to ride out this storm. ~
@sumantbanerji
According to a Credit Suisse report, fi ve top primary and secondary steel makers in the country, includ-ing Tata, Jindal, Essar, Bhushan and JSW, alone have accumulated debt of a`2,50,000 crore
SH
EK
HA
R G
HO
SH
January 31 2016 BUSINESS TODAY 81
Steel.indd 8-9 08-01-2016 5:50:01 PM
highlighted the distress in the sector. “Five out of top 10 private steel producing companies are under severe stress on account of delayed implementation of their projects due to land acquisition and environmental clearances among other factors,” the report had said.
As a thumb rule, domestic companies incur losses at prices below `28,000 per tonne. But today, imported steel prices are at much lower levels. Though Indian companies benefit from abundant supply of iron ore – a key raw material in steel making – freight cost in India is one of the highest in the world. At the same time, taxation on mining in India and statutory levies, includ-ing royalty in the sector, are also among the highest globally. According to estimates by Indian Steel Alliance, domestic steel companies suffer a price disadvantage of $100 per tonne (`6,600) due to higher taxes and interest costs compared to peers in countries such as China,
Brazil, Japan or Korea. “Globally, fixed costs, including taxes on steel, come
to $7-8 per tonne, but for Indian companies, it comes to about $41 a tonne,” says Seshagiri Rao, Joint Managing Director and Group CFO of JSW Steel, the country’s larg-est private sector steel-maker. “Interest rates here are much higher at around 10-11 per cent, while in China, South Korea and Japan, they are far lower. There is no level-playing field for domestic steel producers and, cer-tainly, domestic steel players need protection.”
The government is fast running out of options. Another round of safeguard duty is in the offing and anti-dumping duties for specific countries may also be
80 BUSINESS TODAY January 31 2016
INDUSTRY Steel
Q&A
“We are worried, but confi dent”
A dramatic surge in import of steel from China, Japan and Korea has battered the domestic steel industry. Numerous policy interventions have not helped.
Union Steel and Mines Minister Narendra Singh Tomar tells BT’s Rajeev Dubey and Sumant Banerji that while the government is considering more measures to restrict imports, the sector may remain under stress for some more time. Edited excerpts:
BT: How severe is the distress in the domestic steel industry?
Tomar: This sector is deregulated and keeps fluctuat-ing as per the overall market. It is true that there are lots of problems right now and we are aware of it. Industry is also trying to wriggle out of it. After a long time there is stress in this sector. The impact of this is on everything.
How do you plan to tackle the surge in import of steel?
We imposed safeguard duty, in-creased anti-dumping and import duty, and our intention is to improve the situation. But even after that there is lot of stress. Industry has been arguing for more protection. When the right time comes, we will look into the merit of those argu-ments because protecting the inter-ests of the steel industry is without doubt a priority for us. This sector brings in a lot of investments, there is a lot of exposure of banks, and it is also a big employment generator,
providing direct employment to seven lakh people and indirectly 35 lakh people are affected by it. It also contributes two per cent to GDP. We are worried but confident that we will sail through this time of crisis.
There are reports that China is selling steel at prices lower than production cost. How do you manage that?
China’s dumping is a major concern and they are selling at a cost lower than their own production cost. It may be their strategy, but without doubt it is damaging us. We
are considering how best we can protect the domestic in-dustry from getting impacted by this dumping. I have met the FM (Arun Jaitley) as also (commerce minister) Nirmala Sitharaman over this issue and discussed it at length. Principally, everybody is agreeable to protecting the domestic industry, but at the same time, the forward course of action will depend on the merit of laws, cus-toms, procedures and arguments, and representation by the industry as per the laid-down procedure substanti-ated with data and statistics. In today’s scenario, imports from China, Japan and Korea are hurting us. We have FTAs with Japan and Korea, but we cannot go back and undo that and have to honour our commitment. At the same time, we have to look for a way out.
Has there been any impact of the safeguard duty imposed in September?
Initially, there was some impact. But the stress is still intense. In my view, the way those countries are be-having, they can continue for another year, year and a half. But the way we are thinking, we may be able to wriggle out of it.
Have you heard of plants being shut or capacity utilisation falling?
I have not received any information about any major plants shutting down in the domestic market. I don’t think that will happen either. Of course, capacity utili-sation has come down, because we are in a slowdown and that has impacted every company, big or small. Demand should increase and we are also in favour of it. We are also trying our level best to do that. At the same time, our industry should also grow and be prof-itable. Our domestic industry should not be impacted by anything. Public investments planned by the gov-ernment of India and low base of per capita consump-tion will be the growth drivers.
Considering the distress right now, do you think there is a need to review the roadmap for the sector including SAIL’s own capacity expansion plans?
We keep reviewing SAIL’s plans from time to time. It is true that even our vision of 300 mtpa and SAIL’s 50 mtpa by 2025 should be impacted in the current scenario and we will definitely review this at some point of time. It looks daunting in today’s time, but we should not shy away from it. Right now the mar-ket is not favourably inclined towards achieving these numbers, but it will not stay like this forever. If we have to achieve the vision of ‘Make in India’, then demand for steel will obviously go up. We should be able to meet that demand and not fall short.
levied. However, estimates suggest the global industry is burdened with massive excess capacity of around 550 million tonnes (25 per cent of global capacity). The big-gest overcapacity of 250-300 million tonnes exists in China alone.
According to a survey done by Platts, a leading global energy, petrochemicals and metals information provider, the boom years have seen China build up crude steel production capacity of some 1.1 billion MT per year, of which only 73 per cent is being used currently. “Last year, China’s steel consumption fell 3.4 per cent year-on-year, its first reversal in three decades. World Steel Association has forecast China’s steel consumption will fall 3.5 per cent this year and by a further two per cent in 2016. The country’s steel production in 2015 appears on track to fall one-two per cent on last year. Even BHP has scaled back its outlook for China’s steel output to 935 million – 985 million MT by the middle of next dec-ade from one billion MT previously. Rio insists Chinese output will still creep up by around one per cent a year to reach one billion MT by 2030,” the survey states.
The uncertainty in the world’s largest steel producing country only means increased volatility in global steel prices in 2016. As such, nobody can say for sure when steel prices will stabilise domestically. The Indian govern-ment is now looking at levying a minimum import price of around $450 (`30,000) per tonne for the sector. Such a move, however, would be untenable under World Trade Organization rules of fair trade, and India would be vul-nerable to arbitration by any of the exporting countries.
“A minimum import price would still be a good step as it would provide immediate relief to the domestic in-dustry,” says a senior official in a top Indian steel com-pany. “China and Korea cannot sustain this price in the long term but by keeping it this low, they want to kill the domestic industry here. The WTO hearings can be tedi-ous and take a lot of time, and that is what we want.”
Till such time a permanent solution is thrashed out, Indian companies would need all the steel within to ride out this storm. ~
@sumantbanerji
According to a Credit Suisse report, fi ve top primary and secondary steel makers in the country, includ-ing Tata, Jindal, Essar, Bhushan and JSW, alone have accumulated debt of a`2,50,000 crore
SH
EK
HA
R G
HO
SH
January 31 2016 BUSINESS TODAY 81
Steel.indd 8-9 08-01-2016 5:50:01 PM
CORPORATE Sun Pharma
January 31 2016 BUSINESS TODAY 85
RA
J V
ER
MA
ix years ago, Dilip Shanghvi, the pro-moter and Managing Director of Sun P h a r m a c e u t i c a l Industries, was clear
and confident when asked two questions that
were key to the company’s future — Is it risky to over-depend
on the US market? And, is it possible to maintain the sky-high margins of more than 40 per cent?
“US is the biggest market, and is going to remain so in the future. Margins may go down as base increases, but we will try to maintain ‘above industry average’ growth and returns. We are looking at giving maximum share-holder returns every year,” he had said.
This was the period when Sun was consid-ered a miracle wrought by Shanghvi. In 2007/08, for instance, its net profits were over 44 per cent of sales. A year before that, the fig-ure was 36 per cent (see Sliding Margins). The key was its ability to make complex high-value generic drugs with limited competition. Though Ranbaxy, Cipla and Dr. Reddy’s were bigger in sales, Sun Pharma was, and still is, sitting on
huge cash, despite the numerous acquisitions over the years.
Sun’s big moment came in 2014, when it became India’s largest drug company after ac-quiring the troubled Ranbaxy Laboratories from Daiichi Sankyo in an all-stock deal. It also be-came one of the top 10 Indian companies with sales of over `27,000 crore as well as the world’s fifth-largest specialty generics company. But this growth had come at a cost. In 2014/15, the merged entity’s profit margins were only 16 per cent, mainly due to costs re-lated to integrating the troubled Ranbaxy. A year before, they were 19.6 per cent, without Ranbaxy (in 2013/14, it had taken a huge hit due to a patent case settlement). In 2014/15, Lupin’s margins were 19 per cent and Dr. Reddy’s 14.9 per cent. Sun’s profits were `3,141 crore without Ranbaxy in 2013/14 and `4,541 crore (including Ranbaxy) in 2014/15.
Since the past eight months the merged entity has been trading on the Bombay Stock Exchange, nervous investors have been asking two questions — is Shangvi’s magic fading? Or, is the slump just a small hitch in Sun’s glorious journey over the past one decade? Most experts that we talked to for the story agreed that
2015 was a forgetful year for Sun Pharma, but can it bounce back in the new year? By P.B. JAYAKUMAR and E. KUMAR SHARMA
CLIPSEESUN’S
S7-9%is the revenue that Sun earns from its Halol facility that is under the FDA scanner
Sunpharma.indd 2-3 01/08/2016 10:25:13 PM
CORPORATE Sun Pharma
January 31 2016 BUSINESS TODAY 85
RA
J V
ER
MA
ix years ago, Dilip Shanghvi, the pro-moter and Managing Director of Sun P h a r m a c e u t i c a l Industries, was clear
and confident when asked two questions that
were key to the company’s future — Is it risky to over-depend
on the US market? And, is it possible to maintain the sky-high margins of more than 40 per cent?
“US is the biggest market, and is going to remain so in the future. Margins may go down as base increases, but we will try to maintain ‘above industry average’ growth and returns. We are looking at giving maximum share-holder returns every year,” he had said.
This was the period when Sun was consid-ered a miracle wrought by Shanghvi. In 2007/08, for instance, its net profits were over 44 per cent of sales. A year before that, the fig-ure was 36 per cent (see Sliding Margins). The key was its ability to make complex high-value generic drugs with limited competition. Though Ranbaxy, Cipla and Dr. Reddy’s were bigger in sales, Sun Pharma was, and still is, sitting on
huge cash, despite the numerous acquisitions over the years.
Sun’s big moment came in 2014, when it became India’s largest drug company after ac-quiring the troubled Ranbaxy Laboratories from Daiichi Sankyo in an all-stock deal. It also be-came one of the top 10 Indian companies with sales of over `27,000 crore as well as the world’s fifth-largest specialty generics company. But this growth had come at a cost. In 2014/15, the merged entity’s profit margins were only 16 per cent, mainly due to costs re-lated to integrating the troubled Ranbaxy. A year before, they were 19.6 per cent, without Ranbaxy (in 2013/14, it had taken a huge hit due to a patent case settlement). In 2014/15, Lupin’s margins were 19 per cent and Dr. Reddy’s 14.9 per cent. Sun’s profits were `3,141 crore without Ranbaxy in 2013/14 and `4,541 crore (including Ranbaxy) in 2014/15.
Since the past eight months the merged entity has been trading on the Bombay Stock Exchange, nervous investors have been asking two questions — is Shangvi’s magic fading? Or, is the slump just a small hitch in Sun’s glorious journey over the past one decade? Most experts that we talked to for the story agreed that
2015 was a forgetful year for Sun Pharma, but can it bounce back in the new year? By P.B. JAYAKUMAR and E. KUMAR SHARMA
CLIPSEESUN’S
S7-9%is the revenue that Sun earns from its Halol facility that is under the FDA scanner
Sunpharma.indd 2-3 01/08/2016 10:25:13 PM
though Sun faces an eclipse, at least for the next one-two years, as it grapples with integrating Ranbaxy and resolv-ing old and fresh issues raised by the US Food and Drugs Administration, or USFDA, regarding manufacturing practices both at Ranbaxy and its own plants, it will, more likely than not, regain its shine.
Double Blow – 2015“100 per cent compliance, enhancing R&D productivity and strong business growth are the key priorities for Sun Pharma as a combined entity,” the company had said while announcing the completion of the merger on March 25, 2015. The markets also reacted positively to the merger. From `891 on 25 February, the stock rose to `1,168 on April 6, making Shanghvi India’s richest busi-nessman, overtaking Mukesh Ambani. But this was short-lived. From there, the stock fell to ̀ 764.15 (as on December 22), taking the market capitalisation to `1.83 lakh crore, eroding `93,000 crore of investor wealth.
Of course, signs of trouble with Ranbaxy were clear even at the peak. For instance, while announcing the merger, Sun had said that the remedial action at Mohali, Dewas, Poanta Sahib and Toansa facilities of Ranbaxy, which were banned by the USFDA for violating manufac-turing standards, was on track.
But when its own plants also got into trouble with the USFDA, it was really a bolt from the blue, and a big one at that. In May 2014, it was issued a warning letter and im-port alert for violations of current good manufacturing practice regulations for finished pharmaceuticals from its facility in Karkhadi in Baroda that makes cephalosporin drugs. Sun maintained that the plant’s contribution to its overall revenues was negligible.
More trouble was brewing. In July, Sun said it was re-solving manufacturing discrepancies found by the USFDA at its Halol facility in Gujarat, and that this was causing some supply constraints in the US for some products. It also warned that the situation would continue for some more time till the remedial steps were completed.
In spite of Sun’s regular updates to the USFDA on reme-dial measures since the September 2014 inspection, it was issued a warning letter a little more than two weeks ago. Some analysts, though, maintain that the issues at Halol are not serious and may not lead to the USFDA ban.
“As far as Halol is concerned, there have been no new product approvals. While for the approved products, sup-plies from Halol continue, there has been some supply disruptions due to the ongoing remediation efforts,” said a company spokesperson.
But investors are wary. “The worrisome factor is the warning letter even after the company said it had taken corrective action,” says Sarabjit Kour Nangra, Vice President, Research (Pharma), Angel Broking.
The Halol plant is crucial as it contributes 7-9 per cent of Sun’s overall revenues and 15 per cent of US revenues.
86 BUSINESS TODAY January 31 2016
CORPORATE Sun Pharma
SLIDING MARGINS2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
1,79631.9%
36.3% Revenue
net profi tas % of sales
44.2%
42.5%
32.9%
31.7%
32%
26%
19.6%
16%
2,132
3,356
4,272
4,103
5,723
8,006
11,239
16,004
27,287
573
774
1,486
1,817
1,351
1,816
2,587
2,983
3,141
4,541
In ` crore; Source: Company data, BT research
while the net profit was ̀ 479 crore, due to a one-time ̀ 685 -crore spend related to impairment of fixed assets and goodwill and other related costs as part of the integration. In the second quarter, net sales were `6,803 crore, down 15 per cent over the same quarter last year, while the net profit was `1,107 crore.
However, analysts say Sun has the potential to shine brighter in the coming years considering the high-value limited-competition products in the pipeline.
“Sun has multiple catalysts which could limit the dam-age. Low competition in the base business of Gleevec (blood cancer drug) and Xenazine (acne drug), coupled with faster-than-expected ramp-up of Keveyis (a drug for pa-ralysis from Sun subsidiary Taro) and Ximino (acne drug of Ranbaxy) could surprise investors positively,” say
Kumar Saurabh and Amey Chalke, ana-lysts with Motilal Oswal. The analysts are also betting big on a novel molecule from the company, MK 3222, now in the third phase of clinical trials.
Sun has also lined up quite a few prod-ucts for the US market. Its 154 abbreviated new drug applications (ANDAs) are await-ing approval with the USFDA. The US market contributes 48 per cent to its overall revenues.
Analysts expect Sun to post a revenue of `28,400 crore this year, `33,690 crore in 2016/17 and `36,540 crore in 2017/18, without acquisitions. Net profit
is expected to be flat this year at `4,390 crore, but jump to `6,860 crore next year and to `9,150 crore in 2017/18.
The future will be bright unless the USFDA issues be-come more complex and the integration with Ranbaxy fails. Still, the earlier profit margins are unlikely to be touched as global generic drug sales dynamics have changed due to rising competition from new players in high-value limited-competition product segments.~
@pb_pbjayan, EKumarSharma
Also, the company was planning to manufacture a host of injectable products at this facility by 2020. Even though Sun has acquired one more injectable facility in the US (Pharmalucence), not all products can be shifted to that facility. “The focus is on remediating Halol,” said the spokesperson when asked if there were plans to move production of injectable products to other facilities.
Analysts, however, see hope in Sun’s several USFDA-compliant plants (out of 48) that have been audited in the past 15 months without negative observations.
Diverse IssuesExperts say one of the biggest problems was that these manufacturing issues came up at a time the management was already grappling with integrating Ranbaxy. The in-tegration had seen the exodus of several key Ranbaxy ex-ecutives, many voluntarily and some as part of the merger process in which Sun’s executives took over the key re-sponsibilities, though the company spokesperson says that not all exits were a result of integration.
Sanjiv Kaul, Managing Director, ChrysCapital Investment Advisors, who was with Ranbaxy before 2004, says, “While there is little doubt that the Ranbaxy deal was a very astute move and a shrewd investment decision, the integration could have been better planned and managed.”
An industry veteran, who has known Shanghvi for long, says his major problem today is the sheer diversity of challenges he is facing at the same time. “There are just too many priorities today. People who are run-ning a company should not be actively in-volved in the integration as this makes them take eyes off the company,” he says.
As part of the integration exercise, Sun is planning to divest some non-core strate-gic assets. For instance, it recently sold a plant in the US.
“We are going to implement synergies ahead of time and realise full value by 2017/18. While significant costs related to the integration have been incurred, and some costs will continue, the benefits will be visible going forward,” Shanghvi re-cently said in a con-call with analysts. The company spokesperson said they were committed to $300 million synergies by year three of the merger.
Sun has already warned that consolidated revenues will remain flat or decline over 2014/15. It has also said that profits may also be adversely impacted due to certain expenses/charges arising out of integration as well as re-medial actions.
Sunshine AheadThe first two quarters of 2015/16 were bleak for the com-pany. In the first quarter, sales were flat at `6,522 crore,
January 31 2016 BUSINESS TODAY 87
COMPANY SALES NET PROFIT
MARGINS MARKET CAP
SUN PHARMA 27,287 4,541 16 1,90,723
LUPIN 12,599 2,403 19 79,023
CIPLA 11,345 1,181 10.4 52,403
DR. REDDY'S 14,819 2,218 14.97 51,990
ZYDUS CADILA 8,685 1,151 13.2 32,688
STILL THE LEADER
Numbers are consolidated (in ` crore); margins in %; market cap as on January 6, 2016; data is for 2014/15
$300MILLION
This is the level of synergies that Sun is looking at from the merger of Ranbaxy
with itself
Sunpharma.indd 4-5 01/08/2016 10:26:08 PM
though Sun faces an eclipse, at least for the next one-two years, as it grapples with integrating Ranbaxy and resolv-ing old and fresh issues raised by the US Food and Drugs Administration, or USFDA, regarding manufacturing practices both at Ranbaxy and its own plants, it will, more likely than not, regain its shine.
Double Blow – 2015“100 per cent compliance, enhancing R&D productivity and strong business growth are the key priorities for Sun Pharma as a combined entity,” the company had said while announcing the completion of the merger on March 25, 2015. The markets also reacted positively to the merger. From `891 on 25 February, the stock rose to `1,168 on April 6, making Shanghvi India’s richest busi-nessman, overtaking Mukesh Ambani. But this was short-lived. From there, the stock fell to ̀ 764.15 (as on December 22), taking the market capitalisation to `1.83 lakh crore, eroding `93,000 crore of investor wealth.
Of course, signs of trouble with Ranbaxy were clear even at the peak. For instance, while announcing the merger, Sun had said that the remedial action at Mohali, Dewas, Poanta Sahib and Toansa facilities of Ranbaxy, which were banned by the USFDA for violating manufac-turing standards, was on track.
But when its own plants also got into trouble with the USFDA, it was really a bolt from the blue, and a big one at that. In May 2014, it was issued a warning letter and im-port alert for violations of current good manufacturing practice regulations for finished pharmaceuticals from its facility in Karkhadi in Baroda that makes cephalosporin drugs. Sun maintained that the plant’s contribution to its overall revenues was negligible.
More trouble was brewing. In July, Sun said it was re-solving manufacturing discrepancies found by the USFDA at its Halol facility in Gujarat, and that this was causing some supply constraints in the US for some products. It also warned that the situation would continue for some more time till the remedial steps were completed.
In spite of Sun’s regular updates to the USFDA on reme-dial measures since the September 2014 inspection, it was issued a warning letter a little more than two weeks ago. Some analysts, though, maintain that the issues at Halol are not serious and may not lead to the USFDA ban.
“As far as Halol is concerned, there have been no new product approvals. While for the approved products, sup-plies from Halol continue, there has been some supply disruptions due to the ongoing remediation efforts,” said a company spokesperson.
But investors are wary. “The worrisome factor is the warning letter even after the company said it had taken corrective action,” says Sarabjit Kour Nangra, Vice President, Research (Pharma), Angel Broking.
The Halol plant is crucial as it contributes 7-9 per cent of Sun’s overall revenues and 15 per cent of US revenues.
86 BUSINESS TODAY January 31 2016
CORPORATE Sun Pharma
SLIDING MARGINS2005/06
2006/07
2007/08
2008/09
2009/10
2010/11
2011/12
2012/13
2013/14
2014/15
1,79631.9%
36.3% Revenue
net profi tas % of sales
44.2%
42.5%
32.9%
31.7%
32%
26%
19.6%
16%
2,132
3,356
4,272
4,103
5,723
8,006
11,239
16,004
27,287
573
774
1,486
1,817
1,351
1,816
2,587
2,983
3,141
4,541
In ` crore; Source: Company data, BT research
while the net profit was ̀ 479 crore, due to a one-time ̀ 685 -crore spend related to impairment of fixed assets and goodwill and other related costs as part of the integration. In the second quarter, net sales were `6,803 crore, down 15 per cent over the same quarter last year, while the net profit was `1,107 crore.
However, analysts say Sun has the potential to shine brighter in the coming years considering the high-value limited-competition products in the pipeline.
“Sun has multiple catalysts which could limit the dam-age. Low competition in the base business of Gleevec (blood cancer drug) and Xenazine (acne drug), coupled with faster-than-expected ramp-up of Keveyis (a drug for pa-ralysis from Sun subsidiary Taro) and Ximino (acne drug of Ranbaxy) could surprise investors positively,” say
Kumar Saurabh and Amey Chalke, ana-lysts with Motilal Oswal. The analysts are also betting big on a novel molecule from the company, MK 3222, now in the third phase of clinical trials.
Sun has also lined up quite a few prod-ucts for the US market. Its 154 abbreviated new drug applications (ANDAs) are await-ing approval with the USFDA. The US market contributes 48 per cent to its overall revenues.
Analysts expect Sun to post a revenue of `28,400 crore this year, `33,690 crore in 2016/17 and `36,540 crore in 2017/18, without acquisitions. Net profit
is expected to be flat this year at `4,390 crore, but jump to `6,860 crore next year and to `9,150 crore in 2017/18.
The future will be bright unless the USFDA issues be-come more complex and the integration with Ranbaxy fails. Still, the earlier profit margins are unlikely to be touched as global generic drug sales dynamics have changed due to rising competition from new players in high-value limited-competition product segments.~
@pb_pbjayan, EKumarSharma
Also, the company was planning to manufacture a host of injectable products at this facility by 2020. Even though Sun has acquired one more injectable facility in the US (Pharmalucence), not all products can be shifted to that facility. “The focus is on remediating Halol,” said the spokesperson when asked if there were plans to move production of injectable products to other facilities.
Analysts, however, see hope in Sun’s several USFDA-compliant plants (out of 48) that have been audited in the past 15 months without negative observations.
Diverse IssuesExperts say one of the biggest problems was that these manufacturing issues came up at a time the management was already grappling with integrating Ranbaxy. The in-tegration had seen the exodus of several key Ranbaxy ex-ecutives, many voluntarily and some as part of the merger process in which Sun’s executives took over the key re-sponsibilities, though the company spokesperson says that not all exits were a result of integration.
Sanjiv Kaul, Managing Director, ChrysCapital Investment Advisors, who was with Ranbaxy before 2004, says, “While there is little doubt that the Ranbaxy deal was a very astute move and a shrewd investment decision, the integration could have been better planned and managed.”
An industry veteran, who has known Shanghvi for long, says his major problem today is the sheer diversity of challenges he is facing at the same time. “There are just too many priorities today. People who are run-ning a company should not be actively in-volved in the integration as this makes them take eyes off the company,” he says.
As part of the integration exercise, Sun is planning to divest some non-core strate-gic assets. For instance, it recently sold a plant in the US.
“We are going to implement synergies ahead of time and realise full value by 2017/18. While significant costs related to the integration have been incurred, and some costs will continue, the benefits will be visible going forward,” Shanghvi re-cently said in a con-call with analysts. The company spokesperson said they were committed to $300 million synergies by year three of the merger.
Sun has already warned that consolidated revenues will remain flat or decline over 2014/15. It has also said that profits may also be adversely impacted due to certain expenses/charges arising out of integration as well as re-medial actions.
Sunshine AheadThe first two quarters of 2015/16 were bleak for the com-pany. In the first quarter, sales were flat at `6,522 crore,
January 31 2016 BUSINESS TODAY 87
COMPANY SALES NET PROFIT
MARGINS MARKET CAP
SUN PHARMA 27,287 4,541 16 1,90,723
LUPIN 12,599 2,403 19 79,023
CIPLA 11,345 1,181 10.4 52,403
DR. REDDY'S 14,819 2,218 14.97 51,990
ZYDUS CADILA 8,685 1,151 13.2 32,688
STILL THE LEADER
Numbers are consolidated (in ` crore); margins in %; market cap as on January 6, 2016; data is for 2014/15
$300MILLION
This is the level of synergies that Sun is looking at from the merger of Ranbaxy
with itself
Sunpharma.indd 4-5 01/08/2016 10:26:08 PM
TELECOM Reliance Communications
January 31 2016 BUSINESS TODAY 89
l The three-way merger will create India's largest telco
l It is necessary for RCom to survive the telecom battle that’s going to take place af-ter the full-fl edged 4G rollout
l The reduction of debt through sale of tower and fi bre optic businesses will create a new entity with much less debt on its books
l The impending tie-up with Jio will create a mega entity with huge amount of 4G spectrum across the country
F or years now, Reliance Communications has been a fringe player, more in news for its debt and plans to trim it, than ris-ing profits or market share. But just when it appeared to be quietly walking off the limelight – leaving the market to Airtel, Idea, Vodafone and Reliance Industries’ Jio – it came up with a plan to stay in the game, and that too as a serious contender.
RCom is working on a merger with Sistema Shyam Teleservices and Aircel, the two other also-rans, to create an entity that will be the country’s second-largest after Airtel in subscriber base. “On a standalone basis, if these companies
had continued to operate in the same way, they would become inconse-quential in the next three-four years. We had to do this, otherwise we would have been wiped out,” says an RCom executive who did not want to be quoted. Sistema Shyam runs operations under the MTS name.
The new entity is expected to have 211.7 million subscribers, RCom’s 118 million, MTS’ 8.7 million and Aircel’s 85 million (in September), more than Vodafone’s 191.95 million and Idea’s 170.66 million (in November). In addition, RCom said in October that it was discussing trad-ing and sharing of the 800-850 MHZ spectrum with Reliance Jio.
Numbers May LieHowever, the finer details of the deal don’t excite analysts and investors. Take debt, for instance. RCom’s debt was `39,984 crore at the end of September. The figures were ̀ 4,535 crore for Sistema and around ̀ 20,000 crore for Aircel. These are huge numbers, though company officials claim that the combined entity will have just `20,000 crore debt, half of it RCom’s and the other half Aircel’s. It is believed that Aircel’s `10,000-crore debt will be paid off by its parent Maxis Communications, while RCom is expected to cut debt by selling optic fibre and tower busi-nesses. MTS’S debt is expected to be paid off by majority shareholder Sistema JSFC. RCom owns around 96 per cent stake in Reliance Infratel, which runs its tower business. The sale of towers alone could fetch some `22,000 crore. Plus, ̀ 7,000 crore could come from the sale of related infrastructure, including optic fibre assets. Reliance Infratel has some 45,000 towers and over 1.2 lakh km intra and inter-circle fibre network.
Experts, however, say that there has to be a compelling reason for
The Final BetReliance Communications’ plan to become India's
second-largest telecom player looks promising, but is diffi cult to put into practice. By MANU KAUSHIK
WHAT IS ANIL AMBANI THINKING
Anil Ambani, Chairman, Reliance Group
SUBSCRIBER BASE
How the telcos fare:
Airtel 235.21 million
o t e te cos a e:
Airtel 235.21 million
RCOM+Aircel+MTS 211.7 million
Vodafone 188.17 million
Idea 166.56 million
Source: COAI, companies
RA
CH
IT
GO
SW
AM
I
RCom.indd 2-3 01/09/2016 1:11:38 AM
TELECOM Reliance Communications
January 31 2016 BUSINESS TODAY 89
l The three-way merger will create India's largest telco
l It is necessary for RCom to survive the telecom battle that’s going to take place af-ter the full-fl edged 4G rollout
l The reduction of debt through sale of tower and fi bre optic businesses will create a new entity with much less debt on its books
l The impending tie-up with Jio will create a mega entity with huge amount of 4G spectrum across the country
F or years now, Reliance Communications has been a fringe player, more in news for its debt and plans to trim it, than ris-ing profits or market share. But just when it appeared to be quietly walking off the limelight – leaving the market to Airtel, Idea, Vodafone and Reliance Industries’ Jio – it came up with a plan to stay in the game, and that too as a serious contender.
RCom is working on a merger with Sistema Shyam Teleservices and Aircel, the two other also-rans, to create an entity that will be the country’s second-largest after Airtel in subscriber base. “On a standalone basis, if these companies
had continued to operate in the same way, they would become inconse-quential in the next three-four years. We had to do this, otherwise we would have been wiped out,” says an RCom executive who did not want to be quoted. Sistema Shyam runs operations under the MTS name.
The new entity is expected to have 211.7 million subscribers, RCom’s 118 million, MTS’ 8.7 million and Aircel’s 85 million (in September), more than Vodafone’s 191.95 million and Idea’s 170.66 million (in November). In addition, RCom said in October that it was discussing trad-ing and sharing of the 800-850 MHZ spectrum with Reliance Jio.
Numbers May LieHowever, the finer details of the deal don’t excite analysts and investors. Take debt, for instance. RCom’s debt was `39,984 crore at the end of September. The figures were ̀ 4,535 crore for Sistema and around ̀ 20,000 crore for Aircel. These are huge numbers, though company officials claim that the combined entity will have just `20,000 crore debt, half of it RCom’s and the other half Aircel’s. It is believed that Aircel’s `10,000-crore debt will be paid off by its parent Maxis Communications, while RCom is expected to cut debt by selling optic fibre and tower busi-nesses. MTS’S debt is expected to be paid off by majority shareholder Sistema JSFC. RCom owns around 96 per cent stake in Reliance Infratel, which runs its tower business. The sale of towers alone could fetch some `22,000 crore. Plus, ̀ 7,000 crore could come from the sale of related infrastructure, including optic fibre assets. Reliance Infratel has some 45,000 towers and over 1.2 lakh km intra and inter-circle fibre network.
Experts, however, say that there has to be a compelling reason for
The Final BetReliance Communications’ plan to become India's
second-largest telecom player looks promising, but is diffi cult to put into practice. By MANU KAUSHIK
WHAT IS ANIL AMBANI THINKING
Anil Ambani, Chairman, Reliance Group
SUBSCRIBER BASE
How the telcos fare:
Airtel 235.21 million
o t e te cos a e:
Airtel 235.21 million
RCOM+Aircel+MTS 211.7 million
Vodafone 188.17 million
Idea 166.56 million
Source: COAI, companies
RA
CH
IT
GO
SW
AM
I
RCom.indd 2-3 01/09/2016 1:11:38 AM
Maxis to pay off Aircel’s debt. While Maxis is expected to get around 40 per cent stake in the new entity, MTS is ex-pected to get 9 per cent in RCom.
“More than the battle for survival, these deals show that foreign investors in Indian telecom companies aren’t getting exit routes. Clearly, there is a dearth of opportuni-ties for them,” says a telecom analyst.
Also, although RCom’s strategy is to gain market share, there is a question mark over the kind of customers it will acquire from Aircel and MTS. There are already concerns around the quality of customers in RCom’s port-folio. RCom’s average revenue per user, also called ARPU, as well as the number of post-paid subscribers, are fairly low compared to the market leaders. Post-paid subscribers spend more than pre-paid customers. In India, a vast ma-jority, over 95 per cent, of subscribers are pre-paid. That is why RCom’s blended (voice & data combined) ARPU was `138 during July-September 2015, compared to Airtel’s `193 and Idea’s ̀ 144. On the quality of customers, an MTS spokesperson, requesting anonymity, said, “It is mostly RCom officials who will be calling the shots in the new entity. Customer quality is something that they have to deal with. As far as we are con-cerned, we are giving them high-quality data customers.”
Analysts, too, are not convinced. “How many Reliance numbers do you have in your contact list?” asks one. “I guess it would be much less than the subscribers of other telcos. This shows the number of customers with them,” he says, adding that high-value customers usually gravi-tate towards bigger players such as Airtel or Vodafone.
“Their customer base is not as high-value as that of others. Also, when you merge three different networks, a lot of complexities emerge which may not be visible at the moment,” says Shobhit Khare, Research Analyst, Motilal Oswal Securities. The deals will require approval from the Competition Commission of India. They will also have to go to high courts before getting the final approval from the Department of Telecommunications.
It's the Spectrum, StupidRCom is betting big on the spectrum that the new entity will hold. According to estimates, it will have 19.3 per cent of the country’s total spectrum, the highest among all telecom companies. The prized possession will be the 800/ 850-MHZ spectrum, which works best for 4G ser-vices. The other spectrum bands for 4G include 1,800 MHZ and 2,300 MHZ. So far, RCom has a nationwide footprint of at least five MHZ 800/ 850 MHZ spectrum whereas MTS has spectrum in this band in nine circles. “The 850 MHZ spectrum holding of the new entity will be
tremendous. It will have at least five MHZ in all circles. In some circles, it will have 10 MHZ. If you add Jio, then be-tween the two of them they will have at least 12 MHZ spectrum across the country,” says an analyst.
RCom is also hoping that the Jio tie-up will help it bolster 4G services. However, industry watchers express caution and say that voice customers still make a large chunk of the market. 3G or mobile broadband subscribers account for less than 10 per cent (90 million) of the country’s total subscribers (over 1,000 million). Once 4G comes, these 3G customers are expected to be the first ones to migrate to 4G. And, in 4G the big battle is going to be between large players such as Airtel and Jio that have made huge investments in technology. Jio alone has, for instance, spent around `1 lakh crore for rolling out 4G services so far.
“Why would someone go for RCom when there is Jio in the market with a much wider network, marketing push and content strategy? The kind of positive rub-off that RCom is expecting from the Jio partnership may just be
imaginary,” says a telecom analyst. So, while the new entity will
have much lower debt, some of the b iggest i ssues wi l l remain. Historically, low capital investment has marred RCom’s growth pros-pects. It has also not been able to compete with the likes of Airtel, Vodafone and Idea in terms of both trade and customer perceptions. In the telecom business, operators need to invest huge sums of money to upgrade or expand networks. Even if RCom is able to form a new entity,
its ability to invest will not substantially improve.“All these claims look good on paper but, in reality,
things could be entirely different. The biggest problem with these players is investments. You can increase market share by aggregating subscribers, but that is hardly the way to improve cash flow and margins. In the services sec-tor, things move slowly. In the next three-four years, you will find RCom still struggling for survival,” says an analyst.
Over the past two quarters, RCom’s net profits have dipping with a corresponding decline in revenues. For instance, in the September quarter, it posted a net income of `5,260 crore, down 7.4 per cent from the March quar-ter, and net profit of `156 crore, down 31.6 per cent from the March quarter. It’s not going to be easy for RCom to keep going in a market that’s expected to undergo dra-matic changes in the near future. It needs to work on multiple areas, such as brand building, capital expendi-ture and focused customer acquisition strategy, to make the merger a success in the long run. ~
@manukaushik
90 BUSINESS TODAY January 31 2016
Although RCom’s strategy is to gain
market share, there is a question mark over the kind of customers it will
acquire from Aircel and MTS
TELECOM Reliance Communications
RCom.indd 4 01/09/2016 12:45:32 AM
The Supreme Court order banning registra-tion of new vehicles with two-litre or heavier engines in the Delhi-NCR region – Delhi, Noida, Gurgaon, Faridabad and Ghaziabad – until March 31, has thrown the Indian luxury car market into turmoil.
The court’s verdict has eliminated more than 60 luxury models from the country’s biggest car market. Of course, the 2,000 cc and above ban covers more than four dozen models of Toyota, Tata Motors, Chevrolet, Skoda, Mahindra & Mahindra (M&M), Ford India, Hyundai, Isuzu and Force Motors as well.
Delhi-NCR accounts for 15 per cent of the three mil-lion vehicles sold (across all segments) in India, but for the luxury car brands, it generates about 25 per cent of total sales. Between January and March 2015, Mercedes-Benz sold around 800-900 cars in the NCR region, while BMW sold 500. While the NCR market’s customer would be starved for quality – with top-notch offerings like Audi Q7, Jaguar XJ, BMW 7 Series, Range R o v e r S p o r t s , M a s e r a t i Quattroporte and Porsche Cayenne not available – for the car makers, these are gloomy times considering the size of the NCR market, and the fact that petrol cars probably comprise less than 3 per cent of the total 35,000 luxury cars sold in India per year.
“The decision is going to emerge as a major setback for all premium car makers in India, but some may be hit harder,” says Amit Kaushik, Country Head, JATO Dynamics, a UK-based automotive consulting company. “These sudden policy changes will force automakers to rethink their India product portfolio and expansion strat-
CORPORATE Automobiles
egies in this emerging ambiguous environment.”Some players like Audi, BMW and Volvo are ‘margin-
ally’ lucky, as a majority of their diesel models have engines missing the 2,000-cc threshold by a whisker. That gives them a clear advantage over the raging market leader, Mercedes-Benz, whose entire tally of 11 volume models has been shunted out of its most significant market until March 2016. “Diesel forms approximately 80 per cent of our volumes as we have gradually developed this portfolio on strong domestic demand; in fact, larger SUVS like the GLE and GL don’t have a petrol option, and also the CLS Coupe is available only in diesel,” rues Roland Folger, the newly appointed MD & CEO of Mercedes-Benz India.
The company vociferously contested the ban in the Supreme Court, and is now putting together documentary evidence to prove that diesel is not dirty and it conforms to all regulatory requirements. For the time being, its twin dealers in NCR are selling only petrol cars, awaiting clarity from the court’s hearing scheduled on January 20. The focus is also to market the 10 sporty AMG models it sells in India, along with regular petrol variants that together form 20 per cent of its cumulative sales. “We are working on a strategy to instil confidence in the dealers and ensure that we have products which the customers want,” says Folger. “For example, we have a strong petrol portfolio and have customers who prefer a petrol mill only. Hence, we have to look at options like these to counter the situation.”
The unexpected ban is likely to extend a huge advan-tage to Mercedes’s archrival, Volkswagen-owned Audi, which has been desperately trying to regain leadership in
the Indian luxury car space after it lost the coveted slot to Mercedes-Benz in 2015. However, Audi
India Head, Joe King, told BT that the situa-tion is not as simple: “As a manufacturer,
we conform to all the mandated norms and surprisingly the problem has cropped up. However, the need of the hour is a multi-pronged, 360-degree, cohesive approach to look at the entire environmental issue holistically, with-out affecting the long-term business
environment.” The bulk of Audi’s sales originates from its 1,968-cc diesel engine,
unlike Mercedes-Benz’s 2,143-cc diesel. Even BMW is a tad lucky. Many of its entry-
level cars are strapped with a 1,995-cc engine, but, unlike Audi, only a few models like the entry 1 Series and 3 Series sedans, and the X1 & X3 SUVS would be able to make the customer’s list. For Audi, only four cars face the ban, while 10 of its models available in India would con-tinue to sell unabated. The sales tally is seven for the regu-lar BMW along with its sporty and expensive M Series range that largely caters to motoring aficionados. The situation is causing concern for the Tata Motors-owned Jaguar-Land
The ban on new registrations of 2,000-cc (and above) cars may be a precursor to harsher times for diesel.By CHANCHAL PAL CHAUHAN
25% is Delhi-NCR’s
contribution to luxury car sales in India
January 31 2016 BUSINESS TODAY 9392 BUSINESS TODAY January 31 2016
Lux Car.indd 2-3 01/09/2016 12:55:34 AM
The Supreme Court order banning registra-tion of new vehicles with two-litre or heavier engines in the Delhi-NCR region – Delhi, Noida, Gurgaon, Faridabad and Ghaziabad – until March 31, has thrown the Indian luxury car market into turmoil.
The court’s verdict has eliminated more than 60 luxury models from the country’s biggest car market. Of course, the 2,000 cc and above ban covers more than four dozen models of Toyota, Tata Motors, Chevrolet, Skoda, Mahindra & Mahindra (M&M), Ford India, Hyundai, Isuzu and Force Motors as well.
Delhi-NCR accounts for 15 per cent of the three mil-lion vehicles sold (across all segments) in India, but for the luxury car brands, it generates about 25 per cent of total sales. Between January and March 2015, Mercedes-Benz sold around 800-900 cars in the NCR region, while BMW sold 500. While the NCR market’s customer would be starved for quality – with top-notch offerings like Audi Q7, Jaguar XJ, BMW 7 Series, Range R o v e r S p o r t s , M a s e r a t i Quattroporte and Porsche Cayenne not available – for the car makers, these are gloomy times considering the size of the NCR market, and the fact that petrol cars probably comprise less than 3 per cent of the total 35,000 luxury cars sold in India per year.
“The decision is going to emerge as a major setback for all premium car makers in India, but some may be hit harder,” says Amit Kaushik, Country Head, JATO Dynamics, a UK-based automotive consulting company. “These sudden policy changes will force automakers to rethink their India product portfolio and expansion strat-
CORPORATE Automobiles
egies in this emerging ambiguous environment.”Some players like Audi, BMW and Volvo are ‘margin-
ally’ lucky, as a majority of their diesel models have engines missing the 2,000-cc threshold by a whisker. That gives them a clear advantage over the raging market leader, Mercedes-Benz, whose entire tally of 11 volume models has been shunted out of its most significant market until March 2016. “Diesel forms approximately 80 per cent of our volumes as we have gradually developed this portfolio on strong domestic demand; in fact, larger SUVS like the GLE and GL don’t have a petrol option, and also the CLS Coupe is available only in diesel,” rues Roland Folger, the newly appointed MD & CEO of Mercedes-Benz India.
The company vociferously contested the ban in the Supreme Court, and is now putting together documentary evidence to prove that diesel is not dirty and it conforms to all regulatory requirements. For the time being, its twin dealers in NCR are selling only petrol cars, awaiting clarity from the court’s hearing scheduled on January 20. The focus is also to market the 10 sporty AMG models it sells in India, along with regular petrol variants that together form 20 per cent of its cumulative sales. “We are working on a strategy to instil confidence in the dealers and ensure that we have products which the customers want,” says Folger. “For example, we have a strong petrol portfolio and have customers who prefer a petrol mill only. Hence, we have to look at options like these to counter the situation.”
The unexpected ban is likely to extend a huge advan-tage to Mercedes’s archrival, Volkswagen-owned Audi, which has been desperately trying to regain leadership in
the Indian luxury car space after it lost the coveted slot to Mercedes-Benz in 2015. However, Audi
India Head, Joe King, told BT that the situa-tion is not as simple: “As a manufacturer,
we conform to all the mandated norms and surprisingly the problem has cropped up. However, the need of the hour is a multi-pronged, 360-degree, cohesive approach to look at the entire environmental issue holistically, with-out affecting the long-term business
environment.” The bulk of Audi’s sales originates from its 1,968-cc diesel engine,
unlike Mercedes-Benz’s 2,143-cc diesel. Even BMW is a tad lucky. Many of its entry-
level cars are strapped with a 1,995-cc engine, but, unlike Audi, only a few models like the entry 1 Series and 3 Series sedans, and the X1 & X3 SUVS would be able to make the customer’s list. For Audi, only four cars face the ban, while 10 of its models available in India would con-tinue to sell unabated. The sales tally is seven for the regu-lar BMW along with its sporty and expensive M Series range that largely caters to motoring aficionados. The situation is causing concern for the Tata Motors-owned Jaguar-Land
The ban on new registrations of 2,000-cc (and above) cars may be a precursor to harsher times for diesel.By CHANCHAL PAL CHAUHAN
25% is Delhi-NCR’s
contribution to luxury car sales in India
January 31 2016 BUSINESS TODAY 9392 BUSINESS TODAY January 31 2016
Lux Car.indd 2-3 01/09/2016 12:55:34 AM
sedans as well as the Q3 SUV carry this engine, much to the chagrin of its rivals. Global luxury car market leader, BMW, which is now No. 3 in India, may have the last laugh as only a few of its two dozen-strong portfolio sold here – 5, 6 and 7 Series sedans, along with SUVS X3, X5 and X6 – are under the court's knife.
The Future of DieselWhile Mercedes-Benz’s Folger says he still hasn’t seen any trend inclining towards petrol, he adds he would “not be surprised if such a preference emerges”. The company is planning to reinforce its new product strategy with a strong petrol engine portfolio to support market demand and the possibility of a complete ban on diesel, something India had enforced two decades ago.
The government had restricted diesel only to agricul-ture, commercial vehicles and industrial use, and it was not allowed as an automotive fuel till 1995. The relaxation came only in 1996/97, initially to maintain the viability of the quintessential Ambassador that was allowed to strap a diesel engine to compete. Later, the foray of the country’s
Rover (JLR) as well. All its six SUVS under the Land Rover badge are sold in diesel and the two highest-sold sedan models – Jaguar XF and XJ – are sold with the similar fuel.
For Mercedes-Benz, the bigger jolt is the long-term impact on its larger design of market leadership. For the last reported sales, Audi had beaten Mercedes-Benz to the No. 1 spot in India by selling just 79 more vehicles for the March ended 2015 fiscal. It sold 11,292 units, compared to 11,213 for Mercedes-Benz. However, Mercedes-Benz had been closing in on Audi and, in the first nine months of 2015, had attained leadership with sales of 10,079 units, close to its entire 2014 volume. Audi has refused to share its recent sales.
But for Audi, the ban could not have come at a better time. Stung by the global revelation of Volkswagen’s ad-mission of cheating on diesel emission norms in the US and other major markets last September, Audi had recalled all its cars sold in India, which was part of the 315,000 cars recalled by Volkswagen India, translating into the largest ever recall. Today, it is the same 1,968-cc engine that has come to Audi’s rescue. All its top sellers like A3, A4 and A6
CORPORATE Automobiles
efficacy as a clean fuel has come under a cloud. “The World Health Organisation had announced diesel as a known carcinogen. We welcome the court’s decision,” says Parthaa Bosu, India Director for Clean Air Asia, a Philippines-based environmental agency. “Nevertheless, the problem lies with in-use vehicles that are probably big-ger or equally polluting. Many poorly maintained diesel cars less than 2,000 cc have been seen spewing smoke in Delhi’s streets and remain untouched by the ban.”
“Our understanding is if the earlier Bharat Stage I/II/III vehicles are phased out, it would be more effective in controlling pollution than restricting registration of new BS IV vehicles,” says T.S. Jaishankar, Toyota Kirloskar Motor’s Deputy MD-Commercial, after the ban totally curbed sales of its bread-and-butter models like Fortuner and Innova, in NCR.
Meanwhile, Swedish luxury carmaker Volvo is plan-ning smaller engines for India and a shift to greener hybrid and electric. “Globally, we are shifting to smaller sub-2 litre engines. Our XC90 is the only model that directly breaches the banned 2-litre engine displacement size. Even for this, we are launching the XC90 T8 in India in 2016, with a petrol plug-in hybrid. Our global ambition for 2020 is to have 10 per cent of Volvo’s global sales from electrified cars,” says Tom von Bonsdorff, MD of Volvo Auto India.
In fact, BMW had introduced its hybrid range – the BMW i8 – in mid-2015, but the whopping `2 crore price tag found very few takers.
Analysts tracking the automotive industry say that the ban may change the buying cycles in the largest market. “The metro customers may now be more aware of their motoring needs. Besides keeping their vehicles in good condition, they should be ready to pay slightly more to induct environment-friendly vehicles in their portfolio,” says Abdul Majeed, Partner, PriceWaterhouse India. He adds that while the new developments would surely impact automakers, it might lead to more innovation on diesel technology to address the sensitive emissions issue and also promote the use of alternative fuel and electric vehicles.
Companies are evaluating options to bring new fuels like biodiesel as a lesser polluting option. Local players like M&M are capable of producing biodiesel vehicles quickly, even as the steam emitting fuel cell hydrogen car technology may still be many decades away. ~
@sablaik
MERCEDES-BENZ, A-CLASS,
Hatchback, ENGINE SIZE: 2,143CC
MERCEDES-BENZ, S-CLASS,
LIMOUSINE, ENGINE SIZE: 2,987CC
PORSCHE, MACAN,
SUV, ENGINE SIZE: 2,967CC
BMW, 7SERIES,
SEDAN, ENGINE SIZE: 2,993CC
JAGUAR-LAND ROVER, RANGE ROVER EVOQUE, COMPACT SUV, ENGINE SIZE: 2,179CC
JAGUAR-LAND ROVER, JAGUAR XJ, LIMOUSINE , ENGINE SIZE: 2,993CC
VOLVO, S80, SEDAN, ENGINE SIZE: 2,400CC
AUDI, Q7, SUV, ENGINE SIZE: 2,967CC
SUDDEN BRAKESPopular cars banned by the court order
“Diesel forms approximately 80 per cent of our volumes as we have gradually developed this portfolio on strong domestic demand”Roland Folger, MD & CEO, Mercedes-Benz India
largest automaker (by revenue), Tata Motors, into India’s passenger car market with the diesel Indica hatchback virtually created a market for this second fuel.
Now the hot topic of environmental impact from mo-torised traffic specific to diesel has posted a bigger question on the future of this fuel. Besides completely dominating the luxury market, it also controls 45 per cent of the mass car market. According to industry experts, about 400,000 units of diesel vehicles with two-litre or heavier engines are sold in the country annually. And of these, around 10 per cent sell in NCR. Diesel dominates many developed markets like Europe and has been growing steadily in the US, but its
10%is the contribution of NCR to the total
sales of diesel vehicles with
two-litre or heavier engines January 31 2016 BUSINESS TODAY 95
Lux Car.indd 4-5 01/09/2016 12:55:57 AM
sedans as well as the Q3 SUV carry this engine, much to the chagrin of its rivals. Global luxury car market leader, BMW, which is now No. 3 in India, may have the last laugh as only a few of its two dozen-strong portfolio sold here – 5, 6 and 7 Series sedans, along with SUVS X3, X5 and X6 – are under the court's knife.
The Future of DieselWhile Mercedes-Benz’s Folger says he still hasn’t seen any trend inclining towards petrol, he adds he would “not be surprised if such a preference emerges”. The company is planning to reinforce its new product strategy with a strong petrol engine portfolio to support market demand and the possibility of a complete ban on diesel, something India had enforced two decades ago.
The government had restricted diesel only to agricul-ture, commercial vehicles and industrial use, and it was not allowed as an automotive fuel till 1995. The relaxation came only in 1996/97, initially to maintain the viability of the quintessential Ambassador that was allowed to strap a diesel engine to compete. Later, the foray of the country’s
Rover (JLR) as well. All its six SUVS under the Land Rover badge are sold in diesel and the two highest-sold sedan models – Jaguar XF and XJ – are sold with the similar fuel.
For Mercedes-Benz, the bigger jolt is the long-term impact on its larger design of market leadership. For the last reported sales, Audi had beaten Mercedes-Benz to the No. 1 spot in India by selling just 79 more vehicles for the March ended 2015 fiscal. It sold 11,292 units, compared to 11,213 for Mercedes-Benz. However, Mercedes-Benz had been closing in on Audi and, in the first nine months of 2015, had attained leadership with sales of 10,079 units, close to its entire 2014 volume. Audi has refused to share its recent sales.
But for Audi, the ban could not have come at a better time. Stung by the global revelation of Volkswagen’s ad-mission of cheating on diesel emission norms in the US and other major markets last September, Audi had recalled all its cars sold in India, which was part of the 315,000 cars recalled by Volkswagen India, translating into the largest ever recall. Today, it is the same 1,968-cc engine that has come to Audi’s rescue. All its top sellers like A3, A4 and A6
CORPORATE Automobiles
efficacy as a clean fuel has come under a cloud. “The World Health Organisation had announced diesel as a known carcinogen. We welcome the court’s decision,” says Parthaa Bosu, India Director for Clean Air Asia, a Philippines-based environmental agency. “Nevertheless, the problem lies with in-use vehicles that are probably big-ger or equally polluting. Many poorly maintained diesel cars less than 2,000 cc have been seen spewing smoke in Delhi’s streets and remain untouched by the ban.”
“Our understanding is if the earlier Bharat Stage I/II/III vehicles are phased out, it would be more effective in controlling pollution than restricting registration of new BS IV vehicles,” says T.S. Jaishankar, Toyota Kirloskar Motor’s Deputy MD-Commercial, after the ban totally curbed sales of its bread-and-butter models like Fortuner and Innova, in NCR.
Meanwhile, Swedish luxury carmaker Volvo is plan-ning smaller engines for India and a shift to greener hybrid and electric. “Globally, we are shifting to smaller sub-2 litre engines. Our XC90 is the only model that directly breaches the banned 2-litre engine displacement size. Even for this, we are launching the XC90 T8 in India in 2016, with a petrol plug-in hybrid. Our global ambition for 2020 is to have 10 per cent of Volvo’s global sales from electrified cars,” says Tom von Bonsdorff, MD of Volvo Auto India.
In fact, BMW had introduced its hybrid range – the BMW i8 – in mid-2015, but the whopping `2 crore price tag found very few takers.
Analysts tracking the automotive industry say that the ban may change the buying cycles in the largest market. “The metro customers may now be more aware of their motoring needs. Besides keeping their vehicles in good condition, they should be ready to pay slightly more to induct environment-friendly vehicles in their portfolio,” says Abdul Majeed, Partner, PriceWaterhouse India. He adds that while the new developments would surely impact automakers, it might lead to more innovation on diesel technology to address the sensitive emissions issue and also promote the use of alternative fuel and electric vehicles.
Companies are evaluating options to bring new fuels like biodiesel as a lesser polluting option. Local players like M&M are capable of producing biodiesel vehicles quickly, even as the steam emitting fuel cell hydrogen car technology may still be many decades away. ~
@sablaik
MERCEDES-BENZ, A-CLASS,
Hatchback, ENGINE SIZE: 2,143CC
MERCEDES-BENZ, S-CLASS,
LIMOUSINE, ENGINE SIZE: 2,987CC
PORSCHE, MACAN,
SUV, ENGINE SIZE: 2,967CC
BMW, 7SERIES,
SEDAN, ENGINE SIZE: 2,993CC
JAGUAR-LAND ROVER, RANGE ROVER EVOQUE, COMPACT SUV, ENGINE SIZE: 2,179CC
JAGUAR-LAND ROVER, JAGUAR XJ, LIMOUSINE , ENGINE SIZE: 2,993CC
VOLVO, S80, SEDAN, ENGINE SIZE: 2,400CC
AUDI, Q7, SUV, ENGINE SIZE: 2,967CC
SUDDEN BRAKESPopular cars banned by the court order
“Diesel forms approximately 80 per cent of our volumes as we have gradually developed this portfolio on strong domestic demand”Roland Folger, MD & CEO, Mercedes-Benz India
largest automaker (by revenue), Tata Motors, into India’s passenger car market with the diesel Indica hatchback virtually created a market for this second fuel.
Now the hot topic of environmental impact from mo-torised traffic specific to diesel has posted a bigger question on the future of this fuel. Besides completely dominating the luxury market, it also controls 45 per cent of the mass car market. According to industry experts, about 400,000 units of diesel vehicles with two-litre or heavier engines are sold in the country annually. And of these, around 10 per cent sell in NCR. Diesel dominates many developed markets like Europe and has been growing steadily in the US, but its
10%is the contribution of NCR to the total
sales of diesel vehicles with
two-litre or heavier engines January 31 2016 BUSINESS TODAY 95
Lux Car.indd 4-5 01/09/2016 12:55:57 AM
START-UPs DogSpot
The pet products market may still be small, but DogSpot.in is gearing up to make a splash with fresh infusion of funds from Ratan Tata. By SAPNA NAIR PUROHIT
January 31 2016 BUSINESS TODAY 9796 BUSINESS TODAY January 31 2016
The son of a Professor of Veterinary Sciences, Rana Atheya had become a pet expert by the time he was a young man, picking up details about domesticated animals from his father. But in pursuit of his engi-neering degree from MJP Rohilkhand University, Uttar Pradesh, and later an MBA from
Coventry University, UK, the dog-lover in him waited in the wings only to reappear as a blogger on his pet subject – how to adopt animals, train them and what to feed them.
Finally, in 2007, the trigger to migrate from BlogSpot.com to DogSpot.in came from a friend. “Why blogspot; why not dogspot?,” the friend had quipped. There was no looking back since then. He bought the domain name, DogSpot.in, and started populating it with content on weekends, while he still kept his job. The response was encouraging.
In 2011, he teamed up with childhood friend Ankur Tandon, the Chief of Operations at DogSpot, and Shalesh Visen, who owned a web solutions company (now the Chief Technology Officer, DogSpot), to launch e-commerce services on DogSpot.in. “Content and community existed; we added another C – commerce,” says Atheya. But, no one was willing to invest as the pet products category was almost non-existent. The three friends pooled in `2 lakh and hired an intern to run the e-commerce venture under PetsGlam Services. “We decided to do it on our own to prove that there is a market for it and that it can be profitable,” he adds.
DogSpot.in caught the fancy of pet lovers and pet owners as it provided them an inter-active and informative platform. “You can buy normal dog food at any store. We cater to the special needs of a family member – your dog. That’s why we have a community and content around pets. It is not like a gro-cery vertical; it is a super-specialised vertical and not just commerce,” Atheya asserts.
Within one year, the company got its first round of funding from friends and family – a princely sum of `50 lakh. “Since we were starting a new category and no one had bought dog food online, we had to invest in inventory,” Atheya says. Even then, there was resistance from all quarters – from logis-tics partners to payment gateways. Barely one year later, India Quotient invested `1 crore in DogSpot. In 2014, it attracted invest-ments from Unilazer Ventures, promoted by Ronnie Screwvala, and GrowthStory’s K. Ganesh, followed by a second round of fund-ing by India Quotient. By December 2015, it claims to have raised a little over $1 million (approximately `6.68 crore). In January 2016, the Chairman Emeritus of Tata Sons, Ratan Tata, invested an undisclosed amount in DogSpot in his personal capacity. Knowing Tata’s passion for start-ups and love for dogs, Atheya merely tried his luck by contacting him through R. Venkat, a close associate of Tata, on e-mail, and it paid off. Other investors in this round were Dheeraj Jain and Ashok Mittal.
Investors vouch for Atheya’s conviction and dedication to the pet products business. “I wouldn’t have invested in this company if
TAIL TALE
2007: Starts a pet blog on BlogSpot
September 2007: Launches DogSpot.in — a community for pet lovers
2011: Introduces e-commerce on DogSpot.in
2013: Receives funding of `1 crore from India Quotient
2014: Raises funding from Unilazer Ventures, GrowthStory and India Quotient
2015: Launches a line of pet products
2016: Gets funding from Ratan Tata
Rana Atheya (centre) with his partners Ankur Tandon (L) and Shalesh Visen
PET PROJECTS
HE
KH
AR
GH
OS
H
Startups-DogSpot.indd 2-3 01/08/2016 10:12:28 PM
START-UPs DogSpot
The pet products market may still be small, but DogSpot.in is gearing up to make a splash with fresh infusion of funds from Ratan Tata. By SAPNA NAIR PUROHIT
January 31 2016 BUSINESS TODAY 9796 BUSINESS TODAY January 31 2016
The son of a Professor of Veterinary Sciences, Rana Atheya had become a pet expert by the time he was a young man, picking up details about domesticated animals from his father. But in pursuit of his engi-neering degree from MJP Rohilkhand University, Uttar Pradesh, and later an MBA from
Coventry University, UK, the dog-lover in him waited in the wings only to reappear as a blogger on his pet subject – how to adopt animals, train them and what to feed them.
Finally, in 2007, the trigger to migrate from BlogSpot.com to DogSpot.in came from a friend. “Why blogspot; why not dogspot?,” the friend had quipped. There was no looking back since then. He bought the domain name, DogSpot.in, and started populating it with content on weekends, while he still kept his job. The response was encouraging.
In 2011, he teamed up with childhood friend Ankur Tandon, the Chief of Operations at DogSpot, and Shalesh Visen, who owned a web solutions company (now the Chief Technology Officer, DogSpot), to launch e-commerce services on DogSpot.in. “Content and community existed; we added another C – commerce,” says Atheya. But, no one was willing to invest as the pet products category was almost non-existent. The three friends pooled in `2 lakh and hired an intern to run the e-commerce venture under PetsGlam Services. “We decided to do it on our own to prove that there is a market for it and that it can be profitable,” he adds.
DogSpot.in caught the fancy of pet lovers and pet owners as it provided them an inter-active and informative platform. “You can buy normal dog food at any store. We cater to the special needs of a family member – your dog. That’s why we have a community and content around pets. It is not like a gro-cery vertical; it is a super-specialised vertical and not just commerce,” Atheya asserts.
Within one year, the company got its first round of funding from friends and family – a princely sum of `50 lakh. “Since we were starting a new category and no one had bought dog food online, we had to invest in inventory,” Atheya says. Even then, there was resistance from all quarters – from logis-tics partners to payment gateways. Barely one year later, India Quotient invested `1 crore in DogSpot. In 2014, it attracted invest-ments from Unilazer Ventures, promoted by Ronnie Screwvala, and GrowthStory’s K. Ganesh, followed by a second round of fund-ing by India Quotient. By December 2015, it claims to have raised a little over $1 million (approximately `6.68 crore). In January 2016, the Chairman Emeritus of Tata Sons, Ratan Tata, invested an undisclosed amount in DogSpot in his personal capacity. Knowing Tata’s passion for start-ups and love for dogs, Atheya merely tried his luck by contacting him through R. Venkat, a close associate of Tata, on e-mail, and it paid off. Other investors in this round were Dheeraj Jain and Ashok Mittal.
Investors vouch for Atheya’s conviction and dedication to the pet products business. “I wouldn’t have invested in this company if
TAIL TALE
2007: Starts a pet blog on BlogSpot
September 2007: Launches DogSpot.in — a community for pet lovers
2011: Introduces e-commerce on DogSpot.in
2013: Receives funding of `1 crore from India Quotient
2014: Raises funding from Unilazer Ventures, GrowthStory and India Quotient
2015: Launches a line of pet products
2016: Gets funding from Ratan Tata
Rana Atheya (centre) with his partners Ankur Tandon (L) and Shalesh Visen
PET PROJECT
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it wasn’t for Rana,” says Anand Lunia, Founder-Partner, India Quotient. Besides, he believes, India is seeing a pet population explosion – 10-15 per cent growth every year. He attributes this to late marriages, early retirement and increasing number of families with a single child, which makes a case for a companion or friend. Rising incomes and bigger houses, too, make it conducive for middle-class families to adopt a pet. “When the pet becomes the child’s friend, he becomes a baby. People are willing to spend to feed and groom them well,” says Lunia.
It is not surprising then that several players, such as Pupkart , PetShop18, Petsworld and Heads Up For Tails (HUFT), have mushroomed in the past few years. Several online marketplaces, such as A m a z o n , I n d i a m a r t , Flipkart, Snapdeal and Big Basket, too, are selling pet products. Atheya considers HUFT, which was launched around the same time as DogSpot.in, to be a serious competitor.
Six months ago, DogSpot launched its own line of products. “We were earlier looking to be a tradi-tional e-commerce marketplace, aim-ing at growth on the GMV (gross mer-chandise value) side. We were grow-ing 20-30 per cent month-on-month. But looking at how the e-commerce landscape has changed over the past year, I realised that we need to have a sustainable business model,” says Atheya. He believes that this is a great opportunity to build brand DogSpot, and sustain the company with com-petitive pricing and better margins. The company’s contribution margins have risen from 4 per cent to 20 per cent in the past six months, he claims.
Today, the site hosts 3,000-plus products from across 170 brands. The company earns four times the margin from its own la-bel compared to other brands. It has launched products across 12 categories, including biscuits and
treats, supplements, grooming, bowls and feeders, collars and leashes, t-shirts, mats, toys, etc. Experts are roped in from across verticals in the pet products categories to make high-standard and niche products (such as shampoos specific to dog breeds, based on their hair length and texture) and it conducts field tests among its dog-owning employees. “We even taste all the biscuits,” adds Atheya. He believes his company has an upper hand be-cause it can alter and re-launch a product based on feedback from its community.
“There are no known brands in this space apart from Pedigree.
With the credibility and crit-ical mass we have gath-
ered, we are creating barriers so that no hori-zontal player can enter this space. We are mak-
ing habit-forming products of high standard and high quality to become the super specialist that pet owners seek,” he says. It is retailing products through online marketplaces, pet shops and veterinary clinics, though its own site drives maximum sales. The home-based pet boarding and grooming facility that his wife Vizal runs in Gurgaon, called PetSpot, also houses its products.
DogSpot, which has a team of 20, does not have a manufacturing unit of its own. It hires contract manufac-turers for its private labels and ships products from its 5,000 sq. ft ware-house in Gurgaon, which doubles up
as its office. Atheya says the web-site gets around 20,000 unique visits and the company ships
around 200 orders per day. On average, customers make
monthly purchases worth `2,000-3,000. DogSpot
also runs a customer care service with the help of an expert to solve pet own-ers’ queries and facilitate adoptions. It has tied up with NGOS, such as Friendicoes, SPCA and Precious Paws to run fundraising events, adoptions and donations. Till date, it hasn’t in-vested in marketing the site or prod-ucts, but is active on Facebook. The company broke even six months ago, after having burnt a lot of money till July 2015.
The new round of funding has added a spring in Atheya’s step. From the existing 300 under the private label, he plans to have 1,500 products in a year. The focus will be on repeat buying categories, including treats, biscuits and shampoos. After launch-ing an economical range earlier, DogSpot is now focusing on a pre-mium range by entering into exclu-sive partnerships with brands such as
Petmate for travel kennels , FURminator for specialised grooming products, and Spotty for in-home toilet training products. The company clocked revenues of around `6 crore (source: Ministry of Corporate Affairs) in 2014/15, and aims to double it in 2015/16.
The pet products market, Atheya estimates, is worth `2,000 crore to-day, expected to grow at 30-40 per cent per year. Lunia says investor in-terest is still not very high in this cat-egory, but is confident that newer players will come in. “We did invest ahead of the curve in this company. But that only means we will make money in six years instead of three, which is fine with us,” he says. According to TechSci Research, the pet food market in India will cross $270 million by 2019.
This category is certainly not going to the dogs. ~
START-UPs DogSpot
ANAND LUNIA
Founder-Partner, India Quotient
"We did invest ahead of the curve in this company. But that only means we will make money in six years instead of three, which is fi ne with us"
98 BUSINESS TODAY January 31 2016
Startups-DogSpot.indd 4 01/08/2016 10:13:02 PM
How to Launch Your Digital Platform
100 BUSINESS TODAY January 31 2016 January 31 2016 BUSINESS TODAY 101
A playbook for strategists. By BENJAMIN EDELMAN
For online platform businesses, cus-tomer mobilisation challenges loom large. The most successful platforms connect two or more types of users – buyers and sellers on a shopping portal, travellers and hotel operators on a booking service – and a strong
launch usually requires convincing early users to join even before the platform reaches scale.
Customers find Skype worth installing only if there are people on the platform to talk to. Who would join PayPal if there were no one to pay? Every platform starts out empty, making these wor-ries particularly acute. For multisided platforms, which need not only many users, but many users of different types, the risk is even greater. It’s not
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How to Launch Your Digital Platform
100 BUSINESS TODAY January 31 2016 January 31 2016 BUSINESS TODAY 101
A playbook for strategists. By BENJAMIN EDELMAN
For online platform businesses, cus-tomer mobilisation challenges loom large. The most successful platforms connect two or more types of users – buyers and sellers on a shopping portal, travellers and hotel operators on a booking service – and a strong
launch usually requires convincing early users to join even before the platform reaches scale.
Customers find Skype worth installing only if there are people on the platform to talk to. Who would join PayPal if there were no one to pay? Every platform starts out empty, making these wor-ries particularly acute. For multisided platforms, which need not only many users, but many users of different types, the risk is even greater. It’s not
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HBR.indd 2-3 08-01-2016 5:23:26 PM
HBR Exclusive
102 BUSINESS TODAY January 31 2016 January 31 2016 BUSINESS TODAY 103
enough for a ride-sharing plat-form to have a large base of customers who want to book taxis by smartphone. It also needs drivers willing to accept those bookings.
Despite these challenges, the number of online platforms has spiked in recent years. It’s not hard to see why entrepre-neurs are drawn to these busi-nesses: They create significant value by enabling communica-tion and commerce that might not otherwise occur. They have modest operating costs because they don’t usually manufacture tangible goods or hold inven-tory. And network effects pro-tect their position once estab-lished; users rarely leave a vi-brant platform.
I have been studying the dynamics of platform busi-nesses for 10 years, and, with colleagues including Peter Coles, Chris Dixon, Tom Eisenmann, and Andrei Hagiu, I have documented and analysed case studies on dozens of platform sites and products. In the following pages, I draw from this re-search to offer a framework to help aspiring entrepreneurs make the right strategic decisions as they build their own platforms. The framework involves asking five basic questions:
Can I Attract a Large Group of Users at Once?The first question entrepreneurs should ask is whether they can quickly attract a large group of users. Getting a mass sign-up at the outset can almost eliminate uncertainty about a platform’s prospects because it effectively builds critical scale into the platform’s network from day one. But in my experience, a new platform can do this only if at least one of two conditions is true:
The company already has the us-ers it needs on another platform. Consider Google’s 2003 launch of the AdSense contextual advertising ser-vice, the now-ubiquitous “Ads by
Google” that appear on myriad web-sites. At the start, advertisers were hesitant to buy these placements. They worried that website publishers might click ads on their own sites (increasing the site’s revenue but depleting advertisers’ budgets) and that their ads might be placed on in-appropriate sites (such as those with adult content).
But advertisers had already joined Google’s popular AdWords platform, providing advertisement text and payment details in order to obtain search engine advertising. By enrolling these advertisers in AdSense, Google set the platform up for a successful launch. With many advertisers, Google had relevant ads to place on most publishers’ sites, ensuring high revenue to publishers. Of course, this approach raised legal questions: Could Google provide ad-vertisers with a new service they hadn’t asked for? The company had written its contract to retain great discretion over where ads could be shown, and to date advertisers have not succeeded in challenging un-wanted Google ad placements.
User data is publicly available.
Consider Zillow’s early efforts to present profile pages for most houses in the United States,
including “Zestimate” prices, in-formation about neighbourhoods and school districts, and more. Zillow was able to gather this in-formation from government re-cords, circumventing the impos-sible task of soliciting information from property owners for a site that was, at the start, unproven. Zillow’s initial information was good enough to attract consumer interest, at which point property owners happily contributed cor-rections, photos, and other infor-mation. Indeed, real estate agents were soon willing to pay to show their advertisements in and around Zillow’s property listings.
Zillow’s approach typifies a three-step process for launching an advertising-supported plat-form: (1) Collect data from public
sources, and organise it to create a useful service that attracts consum-ers. (2) Encourage users to submit improved data directly to the plat-form. (3) Charge companies for pre-ferred ad placement. Even Google’s widely used search engine is grounded in this approach. Initially, the company collected page contents by scraper; then it accepted struc-tured data feeds from sites; and now it charges advertisers billions of dol-lars to appear adjacent to search re-sults. It’s a proven path to success –one that overcomes the mobilisation barriers that initially challenge so many platforms.
Can I OfferStand-alone Value? If signing up large numbers of users is not feasible, platform businesses should look for ways of providing value to individual users even if no one else is on the platform. Consider the VCR in the 1980s. The challenge was that owning a VCR was useful to viewers only if they could get enough videocassettes to watch – and content owners would bother to make the
tapes only if enough people had VCRs to watch them on. The problem was exacerbated by competition among incompatible formats.
The VCR could have been a flop, but its recording capability came to the rescue. The device could tape television broadcasts – and this ben-efit didn’t require that anyone else own a VCR or that any studio offer content on videocassette. Thanks to the wide popularity of the recording function (its legality was confirmed in a 1984 Supreme Court decision), VCRs avoided the mobilisation problems that hinder many multi-sided platforms.
Creating stand-alone value can present difficulties, of course, espe-cially when extra features require costly hardware. But it’s easy to add functionality to a software pro-gramme or an app. Suppose you find that your taxi-book-ing app is unpopu-lar with passengers
because few drivers accept bookings through it. Perhaps the app can pro-vide train and bus schedules too, or give phone numbers for traditional taxi dispatchers. With the right ad-ditional content, the app could attract enough passengers to make the plat-form appealing to drivers, who would then pay to be included.
As you try to figure out what kind of stand-alone value to offer and which customers you should be offer-ing it to, consider two strategies:
Start with an industry niche. A good approach for many platforms is to target customers in a relatively narrow market where the platform can more readily gain traction. The Yelp review site now evaluates al-most every small business in the US (and many international businesses,
too), but initially it focused on a much smaller sector: ethnic food in San Francisco. With that base, the com-pany attracted dedicated reviewers and interested readers. Word of mouth and participants’ travel facili-tated growth – first to covering other cities and then to reviewing sectors other than restaurants. As it grew, Yelp naturally expanded from re-views to other functions, such as ac-cepting reservations, forwarding on-line orders, and offering discounts.
In a world focused on getting big fast, it’s all too easy to overreach. Having built a general-purpose review platform, Yelp could have tried publishing reviews of all businesses eve-rywhere from the outset.
Instead, it stayed focused on a nar-row sector until it had attracted de-voted fans and higher-quality con-tent, which paved the way for subse-quent success.
Find or build small social groups. For some platforms, success comes through identifying and serving the social needs of small groups. Two people can use Skype and immedi-ately enjoy its free, high-quality calls; they get these benefits even if no one else ever joins. Skype spread exactly this way – a student calling parents, far-flung friends staying in touch – with users often joining in pairs who call only each other. Of course, Skype becomes even better when most peo-ple have accounts.
Skype expanded naturally because users were motivated to spread the
word and encourage others to join in order to get the most out of the plat-form. But not all platforms are inher-ently social, so businesses may need to build that capability into the value proposition. Computer and video games, for example, are not necessar-ily a social activity; historically, gam-ers have played alone. Zynga reimag-ined online games as “games with friends”. In running an imaginary farm on Zynga, a player might run out of key supplies and need to borrow from a real-life acquaintance playing the same game. Social features like this accelerated Zynga’s spread; hav-ing friends to call on helped people
perform better, giving them an in-centive to recruit more friends to the platform. Another approach to building in sociability is discounter LivingSocial’s
offering of a free res-taurant meal, spa
visit, or other local service if a cus-tomer can find three friends who will buy the same thing. The approach has helped expand the service while reduc-ing the high marketing expenses that have strained competitors.
These strategic choices are all largely within the control of a plat-form designer. As first envisioned, a platform might require thousands of diverse users – hundreds of taxi driv-ers in every city, or a full suite of mov-ies playable on a new device. But the right adjustment can make it attrac-tive when used by just a few people – or even by a single person.
How Will I Build Credibility with Customers? When there are competing platforms in your space, users need some rea-
AMASS A LARGE USER BASE• Leverage existing user groups• Use publicly available data as a substitute
for one user group
OFFER STAND-ALONE VALUE• Add a service that is useful even if few
others join the platform
RECRUIT MARQUEE USERS• Pay them to join• Buy the marquee brand
REDUCE USERS’ RISKS• Offer pay-as-you-go pricing• Subsidise early users
ENSURE COMPATIBILITY WITH LEGACY SYSTEMS• Offer just enough compatibility to
attract new users • Anticipate resistance from legacy systems
The Platform Builder’s Checklist
present difficulties, of course, espe-cially when extra features require costly hardware. But it’s easy to addfunctionality to a software pro-gramme or an app. Suppose you find that your taxi-book-ing app is unpopu-lar with passengers
of all businesses eve-rywhere from the outset.
centive to recruit more friends to the platform. Another approach to building in sociability is discounter LivingSocial’s
offering of a free res-taurant meal, spa
HBR.indd 4-5 08-01-2016 5:23:38 PM
HBR Exclusive
102 BUSINESS TODAY January 31 2016 January 31 2016 BUSINESS TODAY 103
enough for a ride-sharing plat-form to have a large base of customers who want to book taxis by smartphone. It also needs drivers willing to accept those bookings.
Despite these challenges, the number of online platforms has spiked in recent years. It’s not hard to see why entrepre-neurs are drawn to these busi-nesses: They create significant value by enabling communica-tion and commerce that might not otherwise occur. They have modest operating costs because they don’t usually manufacture tangible goods or hold inven-tory. And network effects pro-tect their position once estab-lished; users rarely leave a vi-brant platform.
I have been studying the dynamics of platform busi-nesses for 10 years, and, with colleagues including Peter Coles, Chris Dixon, Tom Eisenmann, and Andrei Hagiu, I have documented and analysed case studies on dozens of platform sites and products. In the following pages, I draw from this re-search to offer a framework to help aspiring entrepreneurs make the right strategic decisions as they build their own platforms. The framework involves asking five basic questions:
Can I Attract a Large Group of Users at Once?The first question entrepreneurs should ask is whether they can quickly attract a large group of users. Getting a mass sign-up at the outset can almost eliminate uncertainty about a platform’s prospects because it effectively builds critical scale into the platform’s network from day one. But in my experience, a new platform can do this only if at least one of two conditions is true:
The company already has the us-ers it needs on another platform. Consider Google’s 2003 launch of the AdSense contextual advertising ser-vice, the now-ubiquitous “Ads by
Google” that appear on myriad web-sites. At the start, advertisers were hesitant to buy these placements. They worried that website publishers might click ads on their own sites (increasing the site’s revenue but depleting advertisers’ budgets) and that their ads might be placed on in-appropriate sites (such as those with adult content).
But advertisers had already joined Google’s popular AdWords platform, providing advertisement text and payment details in order to obtain search engine advertising. By enrolling these advertisers in AdSense, Google set the platform up for a successful launch. With many advertisers, Google had relevant ads to place on most publishers’ sites, ensuring high revenue to publishers. Of course, this approach raised legal questions: Could Google provide ad-vertisers with a new service they hadn’t asked for? The company had written its contract to retain great discretion over where ads could be shown, and to date advertisers have not succeeded in challenging un-wanted Google ad placements.
User data is publicly available.
Consider Zillow’s early efforts to present profile pages for most houses in the United States,
including “Zestimate” prices, in-formation about neighbourhoods and school districts, and more. Zillow was able to gather this in-formation from government re-cords, circumventing the impos-sible task of soliciting information from property owners for a site that was, at the start, unproven. Zillow’s initial information was good enough to attract consumer interest, at which point property owners happily contributed cor-rections, photos, and other infor-mation. Indeed, real estate agents were soon willing to pay to show their advertisements in and around Zillow’s property listings.
Zillow’s approach typifies a three-step process for launching an advertising-supported plat-form: (1) Collect data from public
sources, and organise it to create a useful service that attracts consum-ers. (2) Encourage users to submit improved data directly to the plat-form. (3) Charge companies for pre-ferred ad placement. Even Google’s widely used search engine is grounded in this approach. Initially, the company collected page contents by scraper; then it accepted struc-tured data feeds from sites; and now it charges advertisers billions of dol-lars to appear adjacent to search re-sults. It’s a proven path to success –one that overcomes the mobilisation barriers that initially challenge so many platforms.
Can I OfferStand-alone Value? If signing up large numbers of users is not feasible, platform businesses should look for ways of providing value to individual users even if no one else is on the platform. Consider the VCR in the 1980s. The challenge was that owning a VCR was useful to viewers only if they could get enough videocassettes to watch – and content owners would bother to make the
tapes only if enough people had VCRs to watch them on. The problem was exacerbated by competition among incompatible formats.
The VCR could have been a flop, but its recording capability came to the rescue. The device could tape television broadcasts – and this ben-efit didn’t require that anyone else own a VCR or that any studio offer content on videocassette. Thanks to the wide popularity of the recording function (its legality was confirmed in a 1984 Supreme Court decision), VCRs avoided the mobilisation problems that hinder many multi-sided platforms.
Creating stand-alone value can present difficulties, of course, espe-cially when extra features require costly hardware. But it’s easy to add functionality to a software pro-gramme or an app. Suppose you find that your taxi-book-ing app is unpopu-lar with passengers
because few drivers accept bookings through it. Perhaps the app can pro-vide train and bus schedules too, or give phone numbers for traditional taxi dispatchers. With the right ad-ditional content, the app could attract enough passengers to make the plat-form appealing to drivers, who would then pay to be included.
As you try to figure out what kind of stand-alone value to offer and which customers you should be offer-ing it to, consider two strategies:
Start with an industry niche. A good approach for many platforms is to target customers in a relatively narrow market where the platform can more readily gain traction. The Yelp review site now evaluates al-most every small business in the US (and many international businesses,
too), but initially it focused on a much smaller sector: ethnic food in San Francisco. With that base, the com-pany attracted dedicated reviewers and interested readers. Word of mouth and participants’ travel facili-tated growth – first to covering other cities and then to reviewing sectors other than restaurants. As it grew, Yelp naturally expanded from re-views to other functions, such as ac-cepting reservations, forwarding on-line orders, and offering discounts.
In a world focused on getting big fast, it’s all too easy to overreach. Having built a general-purpose review platform, Yelp could have tried publishing reviews of all businesses eve-rywhere from the outset.
Instead, it stayed focused on a nar-row sector until it had attracted de-voted fans and higher-quality con-tent, which paved the way for subse-quent success.
Find or build small social groups. For some platforms, success comes through identifying and serving the social needs of small groups. Two people can use Skype and immedi-ately enjoy its free, high-quality calls; they get these benefits even if no one else ever joins. Skype spread exactly this way – a student calling parents, far-flung friends staying in touch – with users often joining in pairs who call only each other. Of course, Skype becomes even better when most peo-ple have accounts.
Skype expanded naturally because users were motivated to spread the
word and encourage others to join in order to get the most out of the plat-form. But not all platforms are inher-ently social, so businesses may need to build that capability into the value proposition. Computer and video games, for example, are not necessar-ily a social activity; historically, gam-ers have played alone. Zynga reimag-ined online games as “games with friends”. In running an imaginary farm on Zynga, a player might run out of key supplies and need to borrow from a real-life acquaintance playing the same game. Social features like this accelerated Zynga’s spread; hav-ing friends to call on helped people
perform better, giving them an in-centive to recruit more friends to the platform. Another approach to building in sociability is discounter LivingSocial’s
offering of a free res-taurant meal, spa
visit, or other local service if a cus-tomer can find three friends who will buy the same thing. The approach has helped expand the service while reduc-ing the high marketing expenses that have strained competitors.
These strategic choices are all largely within the control of a plat-form designer. As first envisioned, a platform might require thousands of diverse users – hundreds of taxi driv-ers in every city, or a full suite of mov-ies playable on a new device. But the right adjustment can make it attrac-tive when used by just a few people – or even by a single person.
How Will I Build Credibility with Customers? When there are competing platforms in your space, users need some rea-
AMASS A LARGE USER BASE• Leverage existing user groups• Use publicly available data as a substitute
for one user group
OFFER STAND-ALONE VALUE• Add a service that is useful even if few
others join the platform
RECRUIT MARQUEE USERS• Pay them to join• Buy the marquee brand
REDUCE USERS’ RISKS• Offer pay-as-you-go pricing• Subsidise early users
ENSURE COMPATIBILITY WITH LEGACY SYSTEMS• Offer just enough compatibility to
attract new users • Anticipate resistance from legacy systems
The Platform Builder’s Checklist
present difficulties, of course, espe-cially when extra features require costly hardware. But it’s easy to addfunctionality to a software pro-gramme or an app. Suppose you find that your taxi-book-ing app is unpopu-lar with passengers
of all businesses eve-rywhere from the outset.
centive to recruit more friends to the platform. Another approach to building in sociability is discounter LivingSocial’s
offering of a free res-taurant meal, spa
HBR.indd 4-5 08-01-2016 5:23:38 PM
HBR Exclusive
104 BUSINESS TODAY January 31 2016 January 31 2016 BUSINESS TODAY 105
son to believe that your platform will be worth joining, especially if doing so involves a significant investment, as is the case with game consoles. To attract initial users, a new platform must satisfy those concerns by build-ing credible expectations for its fu-ture success.
The basic strategy for credibility building is to attract a marquee plat-form contributor. Gaming console makers, for example, need to demon-strate that highly sought-after games will be available, so they often pay a well-known game developer to pro-vide a given game on the console. In some cases, console makers have bought the developer outright: Once Microsoft acquired Halo, for example, there was no doubt that its epony-mous game would be available on Xbox. For the greatest effect, the marquee contributor’s participation should be exclusive. That’s why Microsoft pays some game developers a premium to provide their content on Xbox only. If devoted gamers want those games, they have to buy an Xbox console.
Exclusivity with a marquee user can drive growth; however, a plat-form must compensate that user for the profit it could have made by join-ing other platforms. The costs can be prohibitive, giving incumbents a big advantage.
While the high costs of attracting such users may tempt platform busi-nesses to build their own capabilities, there are downsides to relying too much on in-house development: Prospective users may see it as com-petition. For example, starting in 1984, Apple’s hardware lineup in-cluded printers. Suddenly other printer manufacturers thought twice about making them for Macs, figur-ing (not unjustifiably) that Apple was bound to give its own devices some advantages. After weighing the mod-est printer profits against the risk of losing key partners, Apple exited the printer business in 1997.
How Should I Charge Users?Building a vibrant network has al-ways required making choices about how to charge users and which us-ers to charge. But the functionality of digital platforms offers increased flexibility in making these choices, and platform entrepreneurs have more scope to challenge industry norms. Let’s look at how successful platforms have worked two impor-tant pricing levers:
Pay-as-you-go. Offering pay-as-you-go pricing is a powerful way to reduce the risks of a platform for some types of users. Groupon, for example, could have sold advertising to restau-rants on a flat-fee basis, letting them reach all Groupon consumers in a city at one low price. Like the familiar print-advertising model, this would have yielded simple, predictable pric-ing. But it would also have created significant risks for restaurants – that Groupon’s consumer sign-ups would fall short of expectations and that those who did sign up would be unin-terested in a given restaurant’s offer. Instead, Groupon charged restau-rants only when a consumer bought a voucher. This approach raised other problems but protected restau-rants against the risks of low user counts and limited interest.
As the Groupon case illustrates, pay-as-you-go pricing is a feasible option in more and more cases be-cause technology can easily capture and record individual transactions automatically. It would not have been feasible to equip an early fax machine with a counter that re-corded how many pages were sent and received. Anyone renting a de-vice with a by-the-page fee would have had a strong incentive to turn back the dial to reduce fees, and a tamper-proof counter would have added to the cost of an already-expen-sive device. But today, platform op-erators have many ways to let users try the service before committing in
full, making pay-as-you-go is a viable option for most platforms.
User subsidies. Whether it’s launching a cereal brand or opening a restaurant, marketers widely use discounts and promotions to encour-age consumers to try new offerings. For platform businesses, subsidies play an even more important role, because low usage at the outset often means that a platform’s early benefits are not great enough to outweigh the cost or hassle of joining.
Lyft, the ride-sharing service, is a case in point. To attract drivers, Lyft could have offered them a higher fee per minute and per mile, but they probably would have been reluctant; with few early passengers, drivers would have worried that even at a higher rate, zero customers still equals zero dollars. Instead, Lyft re-structured compensation to early drivers: Rather than paying them for minutes worked and miles driven, it sometimes paid them simply to be on call in case passengers sought rides.
At the same time, Lyft stimulated passenger in-terest thro- ugh generous pro-motions – in some cities, it offered five free rides to any-one who joined early. Notably, the two promotions re-inforced each other: Having already paid drivers to be on call, Lyft could provide free rides to promote the service at no additional cost. Subsidising both sides of a platform like this implies significant expenditures, which consume a platform’s capi-tal. But once a platform gains scale, users’ desire to connect to others (for example, drivers’ interest in reaching riders) should reduce the need for subsidies.
Even when they have scaled up,
however, platforms often continue to subsidise one type of user in order to attract more of that type, because the platform can then charge higher fees to other, more lucrative types. Google, for example, provides free services including search, e-mail, and maps in order to attract more con-sumers, allowing it to charge higher fees for ad placements to another side of the market: advertisers. (For details on perpetual one-sided subsidies, see Thomas Eisenmann, Geoffrey Parker, and Marshall Van Alstyne, “Strate- gies for Two-sided Markets,” HBR, October 2006.)
Can I Make My Platform Compatible withLegacy Systems?Few platforms create entirely new networks. Typically, users migrate to a new platform from some prior system. Building in compatibility with legacy systems is often key to a successful launch, though it may involve marrying yourself to out-dated technology.
Consider the launch of Paytrust, the online bill-payment service, in 1998. Paytrust sought to let custom-ers log on to a secure site, see their bills, and click to authorise payment, thereby avoiding the need for paper, envelopes, or stamps. As initially en-visioned, Paytrust’s strategy involved recruiting major billers to send bills and receive payments electronically.
HBR: WHAT WAS PAYTRUST OFFERING?McLaughlin: We enabled customers to receive and pay household bills online
– quite a thing in 1998. Customers would tell companies to send their bills to Paytrust. We’d convert the paper bills to genuine electronic bills – not simple PDFs – and then alert the customers by e-mail that they had a bill, which they could view on our site and pay from anywhere. We also offered other functionality, like custom alerts, automatic payment rules, and payment history. Essentially, we did away with the old process of receiving a bill by mail, tearing off a stub, attaching a check, and mailing it to the biller, who would then need to get the check converted into electronic money.
WHO WERE YOUR FIRST CUSTOMERS?Back then, many people were uncomfortable with the Internet, let alone using it to pay bills. In fact, when people started using Paytrust, they’d make payments to themselves fi rst to see if it worked. So we focused our marketing on frequent e-mail users and people with at least one e-commerce transaction to their name. We also looked for people who travelled a lot, or who had second homes, because they risked not receiving paper bills on time. We focused on urban areas, where many people pay the same companies, which made bill conversion easier. We soon saw customer groups forming by themselves. Parents, for instance, would use Paytrust to pay their college kids’ bills.
WHAT WAS YOUR VALUE PROPOSITION TO BILLING COMPANIES?We offered a way to move to a completely paper-free billing process, connect with their customers online, and dramatically reduce their costs of billing and collection. An e-bill is a lot better as a customer touch point than a paper document. You can better understand your customers and easily offer additional products and services.
WHAT WAS YOUR REVENUE MODEL?We offered free trials. Once people got used to the system, they converted to paying a monthly subscription fee of $7.95 pretty willingly. When we raised the price to $10.95, we didn’t lose many customers. As we built up our payer base, more companies wanted to partner with us in a complete e-billing and e-payment system, which attracted yet more payers. Banks began licensing our technology for their own bill-payment services. We sold the company to a bank and payment processor, which licenses the consumer service to Intuit. The service is fl ourishing, and I still use it to pay my own bills.
Ed McLaughlin, a cofounder and the former CEO of Paytrust, is currently the chief emerging payments offi cer at MasterCard
AMERICA’S FIRST E-BILLING SYSTEM An Interview with Paytrust cofounder Ed McLaughlin
January 31 2016 BUSINESS TODAY 105
ngers sought rides. time, d
o-me ve y-ed he re-ther: y paidcall, Lyft ee rides to rvice at no
Subsidising atform like this nt expenditures, a platform’s capi-
atform gains scale, connect to others rivers’ interest in should reduce the
s. hey have scaled up,
involve marrying yourself to out-dated technology.
Consider the launch of Paytrust, the online bill-payment service, in 1998. Paytrust sought to let custom-ers log on to a secure site, see their bills, and click to authorise payment, thereby avoiding the need for paper, envelopes, or stamps. As initially en-visioned, Paytrust’s strategy involved recruiting major billers to send bills and receive payments electronically.
HBR.indd 6-7 08-01-2016 5:24:21 PM
HBR Exclusive
104 BUSINESS TODAY January 31 2016 January 31 2016 BUSINESS TODAY 105
son to believe that your platform will be worth joining, especially if doing so involves a significant investment, as is the case with game consoles. To attract initial users, a new platform must satisfy those concerns by build-ing credible expectations for its fu-ture success.
The basic strategy for credibility building is to attract a marquee plat-form contributor. Gaming console makers, for example, need to demon-strate that highly sought-after games will be available, so they often pay a well-known game developer to pro-vide a given game on the console. In some cases, console makers have bought the developer outright: Once Microsoft acquired Halo, for example, there was no doubt that its epony-mous game would be available on Xbox. For the greatest effect, the marquee contributor’s participation should be exclusive. That’s why Microsoft pays some game developers a premium to provide their content on Xbox only. If devoted gamers want those games, they have to buy an Xbox console.
Exclusivity with a marquee user can drive growth; however, a plat-form must compensate that user for the profit it could have made by join-ing other platforms. The costs can be prohibitive, giving incumbents a big advantage.
While the high costs of attracting such users may tempt platform busi-nesses to build their own capabilities, there are downsides to relying too much on in-house development: Prospective users may see it as com-petition. For example, starting in 1984, Apple’s hardware lineup in-cluded printers. Suddenly other printer manufacturers thought twice about making them for Macs, figur-ing (not unjustifiably) that Apple was bound to give its own devices some advantages. After weighing the mod-est printer profits against the risk of losing key partners, Apple exited the printer business in 1997.
How Should I Charge Users?Building a vibrant network has al-ways required making choices about how to charge users and which us-ers to charge. But the functionality of digital platforms offers increased flexibility in making these choices, and platform entrepreneurs have more scope to challenge industry norms. Let’s look at how successful platforms have worked two impor-tant pricing levers:
Pay-as-you-go. Offering pay-as-you-go pricing is a powerful way to reduce the risks of a platform for some types of users. Groupon, for example, could have sold advertising to restau-rants on a flat-fee basis, letting them reach all Groupon consumers in a city at one low price. Like the familiar print-advertising model, this would have yielded simple, predictable pric-ing. But it would also have created significant risks for restaurants – that Groupon’s consumer sign-ups would fall short of expectations and that those who did sign up would be unin-terested in a given restaurant’s offer. Instead, Groupon charged restau-rants only when a consumer bought a voucher. This approach raised other problems but protected restau-rants against the risks of low user counts and limited interest.
As the Groupon case illustrates, pay-as-you-go pricing is a feasible option in more and more cases be-cause technology can easily capture and record individual transactions automatically. It would not have been feasible to equip an early fax machine with a counter that re-corded how many pages were sent and received. Anyone renting a de-vice with a by-the-page fee would have had a strong incentive to turn back the dial to reduce fees, and a tamper-proof counter would have added to the cost of an already-expen-sive device. But today, platform op-erators have many ways to let users try the service before committing in
full, making pay-as-you-go is a viable option for most platforms.
User subsidies. Whether it’s launching a cereal brand or opening a restaurant, marketers widely use discounts and promotions to encour-age consumers to try new offerings. For platform businesses, subsidies play an even more important role, because low usage at the outset often means that a platform’s early benefits are not great enough to outweigh the cost or hassle of joining.
Lyft, the ride-sharing service, is a case in point. To attract drivers, Lyft could have offered them a higher fee per minute and per mile, but they probably would have been reluctant; with few early passengers, drivers would have worried that even at a higher rate, zero customers still equals zero dollars. Instead, Lyft re-structured compensation to early drivers: Rather than paying them for minutes worked and miles driven, it sometimes paid them simply to be on call in case passengers sought rides.
At the same time, Lyft stimulated passenger in-terest thro- ugh generous pro-motions – in some cities, it offered five free rides to any-one who joined early. Notably, the two promotions re-inforced each other: Having already paid drivers to be on call, Lyft could provide free rides to promote the service at no additional cost. Subsidising both sides of a platform like this implies significant expenditures, which consume a platform’s capi-tal. But once a platform gains scale, users’ desire to connect to others (for example, drivers’ interest in reaching riders) should reduce the need for subsidies.
Even when they have scaled up,
however, platforms often continue to subsidise one type of user in order to attract more of that type, because the platform can then charge higher fees to other, more lucrative types. Google, for example, provides free services including search, e-mail, and maps in order to attract more con-sumers, allowing it to charge higher fees for ad placements to another side of the market: advertisers. (For details on perpetual one-sided subsidies, see Thomas Eisenmann, Geoffrey Parker, and Marshall Van Alstyne, “Strate- gies for Two-sided Markets,” HBR, October 2006.)
Can I Make My Platform Compatible withLegacy Systems?Few platforms create entirely new networks. Typically, users migrate to a new platform from some prior system. Building in compatibility with legacy systems is often key to a successful launch, though it may involve marrying yourself to out-dated technology.
Consider the launch of Paytrust, the online bill-payment service, in 1998. Paytrust sought to let custom-ers log on to a secure site, see their bills, and click to authorise payment, thereby avoiding the need for paper, envelopes, or stamps. As initially en-visioned, Paytrust’s strategy involved recruiting major billers to send bills and receive payments electronically.
HBR: WHAT WAS PAYTRUST OFFERING?McLaughlin: We enabled customers to receive and pay household bills online
– quite a thing in 1998. Customers would tell companies to send their bills to Paytrust. We’d convert the paper bills to genuine electronic bills – not simple PDFs – and then alert the customers by e-mail that they had a bill, which they could view on our site and pay from anywhere. We also offered other functionality, like custom alerts, automatic payment rules, and payment history. Essentially, we did away with the old process of receiving a bill by mail, tearing off a stub, attaching a check, and mailing it to the biller, who would then need to get the check converted into electronic money.
WHO WERE YOUR FIRST CUSTOMERS?Back then, many people were uncomfortable with the Internet, let alone using it to pay bills. In fact, when people started using Paytrust, they’d make payments to themselves fi rst to see if it worked. So we focused our marketing on frequent e-mail users and people with at least one e-commerce transaction to their name. We also looked for people who travelled a lot, or who had second homes, because they risked not receiving paper bills on time. We focused on urban areas, where many people pay the same companies, which made bill conversion easier. We soon saw customer groups forming by themselves. Parents, for instance, would use Paytrust to pay their college kids’ bills.
WHAT WAS YOUR VALUE PROPOSITION TO BILLING COMPANIES?We offered a way to move to a completely paper-free billing process, connect with their customers online, and dramatically reduce their costs of billing and collection. An e-bill is a lot better as a customer touch point than a paper document. You can better understand your customers and easily offer additional products and services.
WHAT WAS YOUR REVENUE MODEL?We offered free trials. Once people got used to the system, they converted to paying a monthly subscription fee of $7.95 pretty willingly. When we raised the price to $10.95, we didn’t lose many customers. As we built up our payer base, more companies wanted to partner with us in a complete e-billing and e-payment system, which attracted yet more payers. Banks began licensing our technology for their own bill-payment services. We sold the company to a bank and payment processor, which licenses the consumer service to Intuit. The service is fl ourishing, and I still use it to pay my own bills.
Ed McLaughlin, a cofounder and the former CEO of Paytrust, is currently the chief emerging payments offi cer at MasterCard
AMERICA’S FIRST E-BILLING SYSTEM An Interview with Paytrust cofounder Ed McLaughlin
January 31 2016 BUSINESS TODAY 105
ngers sought rides. time, d
o-me ve y-ed he re-ther: y paidcall, Lyft ee rides to rvice at no
Subsidising atform like this nt expenditures, a platform’s capi-
atform gains scale, connect to others rivers’ interest in should reduce the
s. hey have scaled up,
involve marrying yourself to out-dated technology.
Consider the launch of Paytrust, the online bill-payment service, in 1998. Paytrust sought to let custom-ers log on to a secure site, see their bills, and click to authorise payment, thereby avoiding the need for paper, envelopes, or stamps. As initially en-visioned, Paytrust’s strategy involved recruiting major billers to send bills and receive payments electronically.
HBR.indd 6-7 08-01-2016 5:24:21 PM
HBR Exclusive
January 31 2016 BUSINESS TODAY 107
This approach would obviously have reduced billers’ costs for paper and postage, but it was unrealistic to ask, say, Comcast or Verizon to connect its systems to an unproven start-up that at the outset had no users.
Instead, Paytrust encouraged customers to update their billing ad-dresses so that their bills would be sent directly to Paytrust, which scanned each bill and posted it to the corresponding person’s account. Meanwhile, with information about a customer’s bank account, Paytrust could write checks on the customer’s behalf. Thus, Paytrust made itself compatible with billers’ legacy sys-tems, so the service was useful to consumers even before billers “signed up”. With a viable product to attract consumers, Paytrust’s pitch to billers was much more ap-pealing, and billers were soon able to justify digital data transfers that eliminated paper and scanning.
Today, platforms typically rely on interoperability, data conversions, and information synchronisation to reduce the costs of switching. For example, a new Gmail user often has an existing e-mail account that will continue to receive messages. Google’s MailFetcher feature pulls those messages into Gmail, thereby reducing the barrier to switching.
Compatibility doesn’t have to be perfect – just good enough. Consider smartphone apps. At its launch, in 2007, Apple’s category-defining iP-hone had no capacity for users to in-stall apps from third parties. (Apple added the App Store and third-party apps more than a year later.) The company provided selected tools through preinstalled apps, but ini-tially users could not add pro-grammes from anyone else.
However, the iPhone’s web browser allowed users to access web-based applications. Although those apps, designed for use on a desktop, did not fully exploit the iPhone’s ca-pabilities, there was enough user in-terest to demonstrate an opportunity. Rapid iPhone adoption soon moti-
vated developers to write native apps that took advantage of the device’s full capabilities.
Many platforms now offer this kind of imperfect compatibility: It at-tracts new users and then gives them an incentive to switch more fully to the platform. Users can run DOS apps on Windows, but they lose key Windows benefits (such as shared clipboard and device drivers). Blu-ray devices can play standard- quality
DVDs, but without the improved qual-ity that is Blu-ray’s main selling point. It’s a delicate balance: Platforms must offer enough compat-ibility to showcase potential benefits, yet not so much that users delay switching to reap those benefits.
Of course, not every business welcomes compatibility. If the owners of incumbent systems feel threatened by a new entrant, they will attempt to block compatibility. Consider RealNetworks’ 2004 launch of Harmony, a digital music subscrip-tion service and player that would compete with Apple iTunes. As an incentive to customers who had al-ready bought iTunes files, Real pro-vided a converter that let iTunes files
play on Real devices. It was a clever hack and positioned Harmony to take off. But Apple quickly changed its file formats to block Real’s converter. Facing ongoing format changes and the threat of litigation, Real was forced to withdraw efforts at compat-ibility. For this and other reasons, Harmony ultimately flopped. (Anti- trust litigation that challenges Apple’s tactics as unlawfully extend-ing its dominance from devices to media sales is ongoing.)
Google similarly sought to block data synchronisation for its AdWords platform. From 2006 to 2013, Go- ogle banned the creation of tools to help advertisers copy their campaigns from AdWords into competing search engines like Microsoft Bing and Yahoo. Only when competition regu-lators challenged the practice (after I flagged it in 2008 testimony) did Google lift the restriction – a move that now enables one-click copying to other ad platforms.
FOR NUMEROUS online services and other platforms, launch is both the most exciting moment and the most difficult. Platforms usually provide exceptional value to multiple types of users – if the platforms are widely adopted. Yet at the outset they are not used at all, and every prospec-tive user reasonably fears wasting time and resources signing up for a service that may fail to gain trac-tion. At first the problem may seem as insurmountable as solving the chicken and the egg puzzle. But by using these strategies, entrepre-neurs can improve their odds of a successful launch. ~
Benjamin Edelman is an associ-ate professor at Harvard Business
School. He also advises numerous com-panies that rely on or compete with some of the platforms mentioned in this arti-cle, including Google. This article was published in Harvard Business Review, April 2015. Copyright©2015 Harvard Business School Publishing Corporation. All rights reserved.
HBR.indd 8 08-01-2016 5:24:43 PM
PERSONAL TECH
January 31 2016 BUSINESS TODAY 109108 BUSINESS TODAY January 31 2016
If 2015 was the year of innovations in the hardware space, with fancy gadgets hitting the stores every other day, this New Year will be more about the awakening of the virtual mind. By NIDHI SINGAL
TECH TRENDS 2016
AJ
AY
TH
AK
UR
I
Over the past decade, the technology world has grown at an ex-ponential rate. From HD to full HD to 4k resolution in televi-
sions and smartphones, to wearable gadgets and the advent of hybrids, a lot has happened in the personal technology space. The future, on the other hand, holds great promise for technologies such as artificial intelli-gence and machine learning. A lot has already been achieved in the technology space, such as Internet of Things, artificial intelligence, ma-chine learning and robotics, but 2016 promises to showcase what these innovations are capable of – it would be a year of evolution and may not be about revolution.
INTERNET OF THINGS (IOT): It has al-most become a household name fol-lowing all the talk around connecting electronics, software and sensors
through a network during 2015. But have we achieved anything substan-tial yet? Not really. While things have gradually started moving towards IoT, 2016 will witness some real work. Says Narendra Nayak, Managing Director, BlackBerry India: “In this increasingly connected world, technologies that connect to machines and devices for seamless interaction will gain greater promi-nence than those that connect people to people. Mobility, IoT, cloud and analytics are changing the way we interact. In 2016, we expect a wider adoption of IoT technologies and smarter devices in industry scenarios. In the connected IoT ecosystem, data will become the most critical aspect and we will see businesses adopting unified communication approach where text, chat, video, file sharing and screen sharing across devices will become more cohesive. Given the huge opportunity, IoT may begin to shape many more ways we conduct
business and live our lives.”
ARTIFICIAL INTELLIGENCE: Thanks to artificial intelligence, machines today have become smarter and can react like humans. They have come a long way from just analysing and reading from a database to learning in real time. While it is being actively used in many industries, such as automated processes in manufacturing units and robotics, to health care and finance, and self-driving cars, it’s still to realise its full potential. “Over the last few years, digitisation disrupted IT inno-vation, redefined business models, empowered consumers and redrew the lines of competition across multi-ple industries. Whether in an educa-tion setting that helps students learn in a style that’s best suited for them, or in the form of early childhood toys, such as Cogni Toys, thinking systems will permeate businesses and the products and services they produce,” says Amit Verma, Vice President and
Personal Tech 1.indd 2-3 08-01-2016 5:10:45 PM
PERSONAL TECH
January 31 2016 BUSINESS TODAY 109108 BUSINESS TODAY January 31 2016
If 2015 was the year of innovations in the hardware space, with fancy gadgets hitting the stores every other day, this New Year will be more about the awakening of the virtual mind. By NIDHI SINGAL
TECH TRENDS 2016
AJ
AY
TH
AK
UR
I
Over the past decade, the technology world has grown at an ex-ponential rate. From HD to full HD to 4k resolution in televi-
sions and smartphones, to wearable gadgets and the advent of hybrids, a lot has happened in the personal technology space. The future, on the other hand, holds great promise for technologies such as artificial intelli-gence and machine learning. A lot has already been achieved in the technology space, such as Internet of Things, artificial intelligence, ma-chine learning and robotics, but 2016 promises to showcase what these innovations are capable of – it would be a year of evolution and may not be about revolution.
INTERNET OF THINGS (IOT): It has al-most become a household name fol-lowing all the talk around connecting electronics, software and sensors
through a network during 2015. But have we achieved anything substan-tial yet? Not really. While things have gradually started moving towards IoT, 2016 will witness some real work. Says Narendra Nayak, Managing Director, BlackBerry India: “In this increasingly connected world, technologies that connect to machines and devices for seamless interaction will gain greater promi-nence than those that connect people to people. Mobility, IoT, cloud and analytics are changing the way we interact. In 2016, we expect a wider adoption of IoT technologies and smarter devices in industry scenarios. In the connected IoT ecosystem, data will become the most critical aspect and we will see businesses adopting unified communication approach where text, chat, video, file sharing and screen sharing across devices will become more cohesive. Given the huge opportunity, IoT may begin to shape many more ways we conduct
business and live our lives.”
ARTIFICIAL INTELLIGENCE: Thanks to artificial intelligence, machines today have become smarter and can react like humans. They have come a long way from just analysing and reading from a database to learning in real time. While it is being actively used in many industries, such as automated processes in manufacturing units and robotics, to health care and finance, and self-driving cars, it’s still to realise its full potential. “Over the last few years, digitisation disrupted IT inno-vation, redefined business models, empowered consumers and redrew the lines of competition across multi-ple industries. Whether in an educa-tion setting that helps students learn in a style that’s best suited for them, or in the form of early childhood toys, such as Cogni Toys, thinking systems will permeate businesses and the products and services they produce,” says Amit Verma, Vice President and
Personal Tech 1.indd 2-3 08-01-2016 5:10:45 PM
PERSONAL TECH
General Manager, Operations, IBM, adding: “We will see more such im-plementations around education, health care, retail and banking, among others. And all of this will completely redefine how they build strategies to stay ahead in their game, engage and interact with their customers and employees.” It’s not just the big names, such as IBM, Wipro and Infosys, who are saying this. A recent report by Microsoft Research quotes its Managing Director, Chris Bishop: “The emergence of new silicon architec-
tures are tuned to the intensive workloads of machine learning.”
MACHINE LEARNING: Although a sub-category of artificial intelligence, there will be significant advance-ments in machine learning as well. It has already made steady progress in the personal technology space with Apple’s Siri, Google’s Google Now and Microsoft’s Cortana, making them part of our daily lives. While it continues to grow, a significant amount of work will be done in the enterprise space, too. Says Akhilesh Tuteja, Partner and Head, IT Advisory Services, KPMG India: “In my view, it will be a defining year where people will move from experi-mental technology to proof-of-con-cept. It will happen first in personal technology and then in enterprise, because in enterprise technology you cannot be 90 per cent right.” The key drivers for machine learning are computers that have the ability to process a lot of information and data on the cloud in real time. “The reason why machine learning wasn’t a big
ing actively in this space. The Rasberry Pi model B+, for instance, runs seven embedded LEDs, a couple of sensors to measure humidity, baro-metric pressure and temperature, and a stepper motor that remotely opens and closes doors. With connectivity going mainstream and compact chipsets getting affordable, there will be plenty of smart home solutions coming up in 2016.
BOTS: After revolutionising the man-ufacturing sector, robots are actively becoming a part of the services indus-try, too. Last year we saw Toshiba’s Aiko Chichira venturing into depart-mental stores to interact with cus-tomers, Japan’s Hen-na Hotel com-pletely operated by robots, and the Pepper humanoid interacting with customers in stores. This New Year will see far-advanced bots, which will have machine learning capabilities that allow smart learning over the codified jobs they do currently. Recently, Australia got its first fire-fighting robot. There are talks about robots patrolling the streets.
DRIVERLESS CARS: During the past couple of years, we have witnessed frantic activity in the fully autono-mous car space. This year will be no different as this segment will continue to witness more innovations. But will it turn into a reality and hit the Ind- ian roads? No. At least, not in 2016.
While most of these technologies will witness development and growth in 2016, they are still futur-istic and are likely to settle down in another four to five years. Says Michael Björn, Head of Research, Ericsson Consumer Lab: “Some of these trends may seem futuristic. But consumer interest in new interac-tion paradigms, such as AI and VR, as well as in embedding the Internet in the walls of homes or even in our bodies, is quite strong. This means we could soon see new consumer product categories appearing – and whole industries transforming – to accommodate this development.” ~
thing in 2014/2015 when develop-ments were happening, was because artificial intelligence requires huge amount of processing capability that cannot be bundled on the phone. What you need is processing on the cloud in real time. So, if you asked a question and the reply came after a few minutes, it wouldn’t be of any worth. The gap shrunk in 2015 and,
this year, we will have smarter devices to shrink it further,”
adds Tuteja. Natural lan-guage processing or un-derstanding natural lan-
guage will also become big in the coming year.
VIRTUAL REALITY: There has been a lot of buzz
around virtual reality since the time Oculus Rift made its de-
but, followed by Google’s Cardboard. Though the biggest names in the technology space – Google, Facebook, Sony, Samsung, HTC, etc. – are focus-ing on making it big, VR has only been linked with gaming and entertain-ment. But this technology can be put to some practical use, including edu-cation, health care, sports, retail and tourism. This is what 2016 promises to deliver. VR headsets, such as Oculus Rift, HTC Vive, Sony Morpheus, Samsung Gear VR and Microsoft Hololens, along with the host of other brands, are also expected to dominate the floor at the world’s biggest tech-nology show – the Consumer Electronics Show at Las Vegas.
SMART HOMES: Various technologies put together are pushing this world towards smart homes. The IoT, evolu-tion of high-speed networks and ma-chine learning are contributing to-wards development of smart homes, which include smart products, smart systems and apps. While Huawei has announced its HiLink open source platform for smart homes, Bosch has created a subsidiary that will offer products and services for connected homes covering security and heating. Google’s acquired Nest, too, is work-
110 BUSINESS TODAY January 31 2016
Japanese WarriorThe hybrid from Toshiba, the Z20t is a no-nonsense business machine.By NIDHI SINGAL
Hybrids seem to be the future of computing devices and Toshiba’s Z20t comes with a detachable 12.5-inch screen, which allows it to work in a true-tablet mode. Priced at `1.3 lakh, it targets the serious enterprise
audience. The Toshiba Z20t has a neat, straight-line design.
Encased in a slim chassis in black, the 12.5-inch tablet is docked on a keyboard that converts it into a full-fledged laptop. The dual lock mechanism – one on the top of the keyboard and one on the left side – prevents accidently undocking the tablet. In tablet mode, it is 8.8 mm thin and weights 730 gm. Dock it on the keyboard and it weighs 1.51 kg. The 12.5-inch full HD screen is bright and crisp. While the default Windows wallpaper looked slightly washed out, once I replaced it with a full-HD wallpaper, the screen looked super bright. The touch response on the tablet was good. It looks good and is available in only black. The monochrome colour takes away the ap-peal and renders it the look of a blue-collared work horse.
The review unit ran on the Widows 7 Pro operating system. I felt it was an outdated OS in the age of Windows 10 OS, but the option to upgrade to Windows 8.1 (accompanied with the hybrid) and later to Windows 10 over the air, gives users the freedom and
versatility to choose the operating system they are com-fortable with. It is powered by the Intel Core M processor and has Intel HD graphics onboard. It comes with 256 GB SSD storage and 8 GB DDR 3 RAM. The machine performed most tasks without any lag and scored decently in bench-mark tests, too. The keys on the backlit keyboard dock are well placed and typing is a delight on this machine. The trackpad is responsive and I often ended up selecting the options using the touch interface. The accupoint clickpad gives better accuracy, something that is present in ThinkPad laptops from Lenovo. There are a host of con-nectivity options on board – a micro HDMI port, micro USB port, and a micro SD card slot in tablet mode, and a full-size RGB port, HDMI port, Gigabit LAN and two USB 3.0 ports in the tablet dock.
One of the pros of using a hybrid is its battery backup. With Toshiba Z20t, the tablet and the keyboard dock come with individual bat-teries. The tablet offered me close to 7.5 hours of backup, while I still had 100 per cent charge in the dock, which gave the machine another eight hours of charge.
Usually charging adapters of laptops and hybrids are a bit too heavy, but Toshiba has done a great job by adding a small but punchy power adapter that eas-ily fits in a laptop bag. ~
@nidhisingal
BAG IT OR JUNK IT:A solid business machine priced
in the range of a MacBook Pro
RATING: 4/5
PRICE: `1,29,990
PLUS: Full HD display, Battery
MINUS: Simple design
January 31 2016 BUSINESS TODAY 111
Personal Tech 1.indd 4-5 01/08/2016 11:40:55 PM
PERSONAL TECH
General Manager, Operations, IBM, adding: “We will see more such im-plementations around education, health care, retail and banking, among others. And all of this will completely redefine how they build strategies to stay ahead in their game, engage and interact with their customers and employees.” It’s not just the big names, such as IBM, Wipro and Infosys, who are saying this. A recent report by Microsoft Research quotes its Managing Director, Chris Bishop: “The emergence of new silicon architec-
tures are tuned to the intensive workloads of machine learning.”
MACHINE LEARNING: Although a sub-category of artificial intelligence, there will be significant advance-ments in machine learning as well. It has already made steady progress in the personal technology space with Apple’s Siri, Google’s Google Now and Microsoft’s Cortana, making them part of our daily lives. While it continues to grow, a significant amount of work will be done in the enterprise space, too. Says Akhilesh Tuteja, Partner and Head, IT Advisory Services, KPMG India: “In my view, it will be a defining year where people will move from experi-mental technology to proof-of-con-cept. It will happen first in personal technology and then in enterprise, because in enterprise technology you cannot be 90 per cent right.” The key drivers for machine learning are computers that have the ability to process a lot of information and data on the cloud in real time. “The reason why machine learning wasn’t a big
ing actively in this space. The Rasberry Pi model B+, for instance, runs seven embedded LEDs, a couple of sensors to measure humidity, baro-metric pressure and temperature, and a stepper motor that remotely opens and closes doors. With connectivity going mainstream and compact chipsets getting affordable, there will be plenty of smart home solutions coming up in 2016.
BOTS: After revolutionising the man-ufacturing sector, robots are actively becoming a part of the services indus-try, too. Last year we saw Toshiba’s Aiko Chichira venturing into depart-mental stores to interact with cus-tomers, Japan’s Hen-na Hotel com-pletely operated by robots, and the Pepper humanoid interacting with customers in stores. This New Year will see far-advanced bots, which will have machine learning capabilities that allow smart learning over the codified jobs they do currently. Recently, Australia got its first fire-fighting robot. There are talks about robots patrolling the streets.
DRIVERLESS CARS: During the past couple of years, we have witnessed frantic activity in the fully autono-mous car space. This year will be no different as this segment will continue to witness more innovations. But will it turn into a reality and hit the Ind- ian roads? No. At least, not in 2016.
While most of these technologies will witness development and growth in 2016, they are still futur-istic and are likely to settle down in another four to five years. Says Michael Björn, Head of Research, Ericsson Consumer Lab: “Some of these trends may seem futuristic. But consumer interest in new interac-tion paradigms, such as AI and VR, as well as in embedding the Internet in the walls of homes or even in our bodies, is quite strong. This means we could soon see new consumer product categories appearing – and whole industries transforming – to accommodate this development.” ~
thing in 2014/2015 when develop-ments were happening, was because artificial intelligence requires huge amount of processing capability that cannot be bundled on the phone. What you need is processing on the cloud in real time. So, if you asked a question and the reply came after a few minutes, it wouldn’t be of any worth. The gap shrunk in 2015 and,
this year, we will have smarter devices to shrink it further,”
adds Tuteja. Natural lan-guage processing or un-derstanding natural lan-
guage will also become big in the coming year.
VIRTUAL REALITY: There has been a lot of buzz
around virtual reality since the time Oculus Rift made its de-
but, followed by Google’s Cardboard. Though the biggest names in the technology space – Google, Facebook, Sony, Samsung, HTC, etc. – are focus-ing on making it big, VR has only been linked with gaming and entertain-ment. But this technology can be put to some practical use, including edu-cation, health care, sports, retail and tourism. This is what 2016 promises to deliver. VR headsets, such as Oculus Rift, HTC Vive, Sony Morpheus, Samsung Gear VR and Microsoft Hololens, along with the host of other brands, are also expected to dominate the floor at the world’s biggest tech-nology show – the Consumer Electronics Show at Las Vegas.
SMART HOMES: Various technologies put together are pushing this world towards smart homes. The IoT, evolu-tion of high-speed networks and ma-chine learning are contributing to-wards development of smart homes, which include smart products, smart systems and apps. While Huawei has announced its HiLink open source platform for smart homes, Bosch has created a subsidiary that will offer products and services for connected homes covering security and heating. Google’s acquired Nest, too, is work-
110 BUSINESS TODAY January 31 2016
Japanese WarriorThe hybrid from Toshiba, the Z20t is a no-nonsense business machine.By NIDHI SINGAL
Hybrids seem to be the future of computing devices and Toshiba’s Z20t comes with a detachable 12.5-inch screen, which allows it to work in a true-tablet mode. Priced at `1.3 lakh, it targets the serious enterprise
audience. The Toshiba Z20t has a neat, straight-line design.
Encased in a slim chassis in black, the 12.5-inch tablet is docked on a keyboard that converts it into a full-fledged laptop. The dual lock mechanism – one on the top of the keyboard and one on the left side – prevents accidently undocking the tablet. In tablet mode, it is 8.8 mm thin and weights 730 gm. Dock it on the keyboard and it weighs 1.51 kg. The 12.5-inch full HD screen is bright and crisp. While the default Windows wallpaper looked slightly washed out, once I replaced it with a full-HD wallpaper, the screen looked super bright. The touch response on the tablet was good. It looks good and is available in only black. The monochrome colour takes away the ap-peal and renders it the look of a blue-collared work horse.
The review unit ran on the Widows 7 Pro operating system. I felt it was an outdated OS in the age of Windows 10 OS, but the option to upgrade to Windows 8.1 (accompanied with the hybrid) and later to Windows 10 over the air, gives users the freedom and
versatility to choose the operating system they are com-fortable with. It is powered by the Intel Core M processor and has Intel HD graphics onboard. It comes with 256 GB SSD storage and 8 GB DDR 3 RAM. The machine performed most tasks without any lag and scored decently in bench-mark tests, too. The keys on the backlit keyboard dock are well placed and typing is a delight on this machine. The trackpad is responsive and I often ended up selecting the options using the touch interface. The accupoint clickpad gives better accuracy, something that is present in ThinkPad laptops from Lenovo. There are a host of con-nectivity options on board – a micro HDMI port, micro USB port, and a micro SD card slot in tablet mode, and a full-size RGB port, HDMI port, Gigabit LAN and two USB 3.0 ports in the tablet dock.
One of the pros of using a hybrid is its battery backup. With Toshiba Z20t, the tablet and the keyboard dock come with individual bat-teries. The tablet offered me close to 7.5 hours of backup, while I still had 100 per cent charge in the dock, which gave the machine another eight hours of charge.
Usually charging adapters of laptops and hybrids are a bit too heavy, but Toshiba has done a great job by adding a small but punchy power adapter that eas-ily fits in a laptop bag. ~
@nidhisingal
BAG IT OR JUNK IT:A solid business machine priced
in the range of a MacBook Pro
RATING: 4/5
PRICE: `1,29,990
PLUS: Full HD display, Battery
MINUS: Simple design
January 31 2016 BUSINESS TODAY 111
Personal Tech 1.indd 4-5 01/08/2016 11:40:55 PM
The Real-Life MBABy Jack and Suzy Welch
PAGES: 256PRICE: ̀ 803 HarperBusiness
The book provides an insight into the world of Jack Welch, and how he ran GE
January 31 2016 BUSINESS TODAY 113112 BUSINESS TODAY January 31 2016
When the “great-est manager of the last century” (Jack Welch, For-tune 1999) and a
successful ex-editor of “the world’s most infl uential business magazine since 1922” (Suzy Welch, Harvard Business Review 2002) get together to publish their second book, you can expect an engrossing read. And The Real-Life MBA: Your No-nonsense Guide to Winning the Game, Build-ing a Team, and Growing Your Career does not disappoint.
Amidst the profusion of business literature on innovation, disrup-tion, uncertainty and everything else, The Real Life MBA emerges as a refreshing read. It’s simple in mes-saging, pointed in focus and action-oriented in guidance, despite being aggressive in tenor. Business is like a game, and winning matters. Fol-lowing a few key principles can yield success for the company, for the team and for the leader.
There are a few recurring themes across each of the sections. Leadership is about truth and trust (and integrity and ethics are non-negotiable). The authors are clinical in their recipe to deal with employees – reward and retain per-formers, and ease out non-perform-ers (re-iteration of the controversial ‘rank and yank’ philosophy, but what else would you expect from its creator?). Money is the best mo-tivator and the only effective way to ensure ‘alignment’, results and, thus, “happiness” (don’t be stingy with it)! There is a lot of heart in
the book. The authors don’t mince words defending their stance. They are self-confessed workaholics and they love it. Their disdain for those who are not is obvious!
As can be expected, most of the advice in the book is steeped in decades of corporate wisdom and hands-on experience. Simplicity is essential in strategy, in dealing with people, in your actions as well as your career plans. Use resources ap-propriately: don’t distribute, focus. How to manage a crisis? Remem-ber, it will pass!
The authors bring a few unique perspectives and, of these, the ones that resonated most with my thoughts were around business risk, using HR (human resources function) as a growth driver, glo-balisation and focus on (the right) measures. Risk is addressed in its manifold hues, as against the tradi-tional approach of looking at it as a fi nancial theme only. They discuss the touchy issue of expatriate man-agers including whom to bring and why. Anyone who has experienced the infl ux of expatriates with two to three-year stints – which are lost be-tween long acclimatisation periods and longer return planning – will identify with the perspective. They call out the need to focus HR’S efforts in identifying and retaining the right talent, thereby building a winning team. This can only be achieved if HR is freed of administrative respon-sibility and limited to a few people with the right “street cred” (experi-ence of hands-on business). Dealing with fi nance should not mean pour-
Corporate Wisdom on TapThe book is an incisive guide, though not comprehensive, to creating winning businesses and forging fulfi lling careers. By PRAKASH BAGRI
EX-LIBRIS
ing over reams of spreadsheets and charts, but should instead be attending to meaningful meas-ures with variance (vs. plan) as the theme of analysis.
I found the section on manag-ing one’s own career very inter-esting. Many a middle-aged and successful corporate leader will be able to identify with it (I certainly did, having found my own “Area of Destiny” some years ago). I also loved the piece of advice for the multitude of budding entrepre-neurs: It starts with a great idea. Having had similar discussions with a few hundred students my-self, I now look forward to referring them to this part of the book.
The book also provides an in-sight into the world of Jack Welch, and how he ran GE. Many of the experiences mentioned revolve around his erstwhile staff and col-leagues who went on to head a diverse spectrum of companies, given GE’S role as the CEO incu-bation factory of the world. The language of the book is pleasing with a splattering of humour (of-ten at the authors’ own expense), which makes it an enjoyable read. It is well laid out, with common themes running across the three sections, action plans in bulleted form and emphasised in italics, fol-lowed by a summary at the end of each chapter.
However, if you are a fresher or young executive and were planning to jettison your MBA plans post reading this book, think again. And if you are a senior pro-fessional, it is likely you’ve heard it all before and experienced it too. In fact, The Real-Life MBA is a bit schizophrenic in nature. At times, it is talking to newly anointed CEOS or leaders striving for the top job, and at other times it appears to be talking to fi rst-time managers as also to everyone else.
I particularly found the two chapters on Finance & Market-
ing to be completely out of place and a let-down. It appeared as a half-baked effort – like a ‘Finance/ Marketing for Dummies’ – and was neither elementary nor in-sightful, and certainly far from comprehensive in its coverage. You will be well advised to skim through these sections.
This book is not comprehen-sive, but then no book can be. I found its attempt to address the current environment and specifi -cally new-age business as want-ing. It does not touch upon any of the specifi c competencies required in today’s business environment (“Building your tech quotient” sounds superfl uous). How do you partner, build industry networks or cross-leverage alternate business models? These are some aspects that cannot be addressed through “5-slide strategies” or simple “busi-ness mantras”.
The book appears to have been culled out from the thousands of seminars and talks that the au-thors (especially Jack, after retire-ment) have given. So, if you hap-pen to be one of the (half million or so, as the authors tally) people who have heard him or read one of their earlier books, you will fi nd quite a few common topics.
However, if this is a fi rst time for you in the world of Jack & Suzy Welch, go ahead and start. You will not be disappointed. Real-Life MBA is easy and impactful. I managed to read it over two days of incessant noise and fi reworks. The book has a few fi reworks of its own. Hopefully, you will fi nd two to three nuggets to employ in your workplace, with your team, or on yourself and seek better results. ~
The reviewer is Founder & CEO of PRB Partners, a strategic advi-
sory firm. He is also visiting faculty & professor of strategic marketing
for innovation & new businesses at IIM Ahmedabad,
Bangalore & Calcutta
BUSINESS BESTSELLERS*
Arise, Awake By Rashmi Bansal Westland Books Price: ̀ 200
Arise, Awake By Rashmi Bansal Westland Books Price: ̀ 200
Steve Jobs By Walter Isaacson Little, Brown Book GroupPrice: ̀ 550
Steve Jobs By Walter Isaacson Little, Brown Book GroupPrice: ̀ 550
Elon MuskBy Ashlee Vance Virgin Books Price: ̀ 699
The Mystery ManualBy Robin Sharma Jaico Publishing House Price: ̀ 199
Elon MuskBy Ashlee Vance Virgin Books Price: ̀ 699
The Mystery Manual
yy
y Robin Sharma aico Publishing House rice: ̀ 199
Thinking, Fast and SlowBy Daniel Kahneman Penguin BooksPrice: ̀ 499
*Top books by sales for Dec 20, 2015 - Jan 2, 2016; Includes only books released after January 1, 2015; Information provided by
By James Montier WileyPrice: ̀ 299
The Little Book of BehavioralInvesting
Written in a straightforward style, the book will enable you to eliminate behavioural traits that can hinder your investment endeavours and shows you how to achieve superior returns.
THE FORTNIGHTLY
PICK
The Real-Life MBA
Books.indd 2-3 01/08/2016 10:37:25 PM
The Real-Life MBABy Jack and Suzy Welch
PAGES: 256PRICE: ̀ 803 HarperBusiness
The book provides an insight into the world of Jack Welch, and how he ran GE
January 31 2016 BUSINESS TODAY 113112 BUSINESS TODAY January 31 2016
When the “great-est manager of the last century” (Jack Welch, For-tune 1999) and a
successful ex-editor of “the world’s most infl uential business magazine since 1922” (Suzy Welch, Harvard Business Review 2002) get together to publish their second book, you can expect an engrossing read. And The Real-Life MBA: Your No-nonsense Guide to Winning the Game, Build-ing a Team, and Growing Your Career does not disappoint.
Amidst the profusion of business literature on innovation, disrup-tion, uncertainty and everything else, The Real Life MBA emerges as a refreshing read. It’s simple in mes-saging, pointed in focus and action-oriented in guidance, despite being aggressive in tenor. Business is like a game, and winning matters. Fol-lowing a few key principles can yield success for the company, for the team and for the leader.
There are a few recurring themes across each of the sections. Leadership is about truth and trust (and integrity and ethics are non-negotiable). The authors are clinical in their recipe to deal with employees – reward and retain per-formers, and ease out non-perform-ers (re-iteration of the controversial ‘rank and yank’ philosophy, but what else would you expect from its creator?). Money is the best mo-tivator and the only effective way to ensure ‘alignment’, results and, thus, “happiness” (don’t be stingy with it)! There is a lot of heart in
the book. The authors don’t mince words defending their stance. They are self-confessed workaholics and they love it. Their disdain for those who are not is obvious!
As can be expected, most of the advice in the book is steeped in decades of corporate wisdom and hands-on experience. Simplicity is essential in strategy, in dealing with people, in your actions as well as your career plans. Use resources ap-propriately: don’t distribute, focus. How to manage a crisis? Remem-ber, it will pass!
The authors bring a few unique perspectives and, of these, the ones that resonated most with my thoughts were around business risk, using HR (human resources function) as a growth driver, glo-balisation and focus on (the right) measures. Risk is addressed in its manifold hues, as against the tradi-tional approach of looking at it as a fi nancial theme only. They discuss the touchy issue of expatriate man-agers including whom to bring and why. Anyone who has experienced the infl ux of expatriates with two to three-year stints – which are lost be-tween long acclimatisation periods and longer return planning – will identify with the perspective. They call out the need to focus HR’S efforts in identifying and retaining the right talent, thereby building a winning team. This can only be achieved if HR is freed of administrative respon-sibility and limited to a few people with the right “street cred” (experi-ence of hands-on business). Dealing with fi nance should not mean pour-
Corporate Wisdom on TapThe book is an incisive guide, though not comprehensive, to creating winning businesses and forging fulfi lling careers. By PRAKASH BAGRI
EX-LIBRIS
ing over reams of spreadsheets and charts, but should instead be attending to meaningful meas-ures with variance (vs. plan) as the theme of analysis.
I found the section on manag-ing one’s own career very inter-esting. Many a middle-aged and successful corporate leader will be able to identify with it (I certainly did, having found my own “Area of Destiny” some years ago). I also loved the piece of advice for the multitude of budding entrepre-neurs: It starts with a great idea. Having had similar discussions with a few hundred students my-self, I now look forward to referring them to this part of the book.
The book also provides an in-sight into the world of Jack Welch, and how he ran GE. Many of the experiences mentioned revolve around his erstwhile staff and col-leagues who went on to head a diverse spectrum of companies, given GE’S role as the CEO incu-bation factory of the world. The language of the book is pleasing with a splattering of humour (of-ten at the authors’ own expense), which makes it an enjoyable read. It is well laid out, with common themes running across the three sections, action plans in bulleted form and emphasised in italics, fol-lowed by a summary at the end of each chapter.
However, if you are a fresher or young executive and were planning to jettison your MBA plans post reading this book, think again. And if you are a senior pro-fessional, it is likely you’ve heard it all before and experienced it too. In fact, The Real-Life MBA is a bit schizophrenic in nature. At times, it is talking to newly anointed CEOS or leaders striving for the top job, and at other times it appears to be talking to fi rst-time managers as also to everyone else.
I particularly found the two chapters on Finance & Market-
ing to be completely out of place and a let-down. It appeared as a half-baked effort – like a ‘Finance/ Marketing for Dummies’ – and was neither elementary nor in-sightful, and certainly far from comprehensive in its coverage. You will be well advised to skim through these sections.
This book is not comprehen-sive, but then no book can be. I found its attempt to address the current environment and specifi -cally new-age business as want-ing. It does not touch upon any of the specifi c competencies required in today’s business environment (“Building your tech quotient” sounds superfl uous). How do you partner, build industry networks or cross-leverage alternate business models? These are some aspects that cannot be addressed through “5-slide strategies” or simple “busi-ness mantras”.
The book appears to have been culled out from the thousands of seminars and talks that the au-thors (especially Jack, after retire-ment) have given. So, if you hap-pen to be one of the (half million or so, as the authors tally) people who have heard him or read one of their earlier books, you will fi nd quite a few common topics.
However, if this is a fi rst time for you in the world of Jack & Suzy Welch, go ahead and start. You will not be disappointed. Real-Life MBA is easy and impactful. I managed to read it over two days of incessant noise and fi reworks. The book has a few fi reworks of its own. Hopefully, you will fi nd two to three nuggets to employ in your workplace, with your team, or on yourself and seek better results. ~
The reviewer is Founder & CEO of PRB Partners, a strategic advi-
sory firm. He is also visiting faculty & professor of strategic marketing
for innovation & new businesses at IIM Ahmedabad,
Bangalore & Calcutta
BUSINESS BESTSELLERS*
Arise, Awake By Rashmi Bansal Westland Books Price: ̀ 200
Arise, Awake By Rashmi Bansal Westland Books Price: ̀ 200
Steve Jobs By Walter Isaacson Little, Brown Book GroupPrice: ̀ 550
Steve Jobs By Walter Isaacson Little, Brown Book GroupPrice: ̀ 550
Elon MuskBy Ashlee Vance Virgin Books Price: ̀ 699
The Mystery ManualBy Robin Sharma Jaico Publishing House Price: ̀ 199
Elon MuskBy Ashlee Vance Virgin Books Price: ̀ 699
The Mystery Manual
yy
y Robin Sharma aico Publishing House rice: ̀ 199
Thinking, Fast and SlowBy Daniel Kahneman Penguin BooksPrice: ̀ 499
*Top books by sales for Dec 20, 2015 - Jan 2, 2016; Includes only books released after January 1, 2015; Information provided by
By James Montier WileyPrice: ̀ 299
The Little Book of BehavioralInvesting
Written in a straightforward style, the book will enable you to eliminate behavioural traits that can hinder your investment endeavours and shows you how to achieve superior returns.
THE FORTNIGHTLY
PICK
The Real-Life MBA
Books.indd 2-3 01/08/2016 10:37:25 PM
January 31 2016 BUSINESS TODAY 115
Indian Family Business Mantras is a very comprehensive and well researched book written by fam-
ily business expert, and a partner at Deloitte UK, Peter Leach along with Tatwamasi Dixit, a globally acclaimed Vedic scholar and one of India’s lead-ing family business consultants.
Lucidly written and well present-ed, the book focuses on family owned businesses and provides guidance in the arena of family dynamics, growth, change and transitions.
The book summarises and pro-vides mantras on how to overcome stiff challenges and achieve success in managing family businesses. It speaks about three types of issues present in the family business, namely 1. Person-ality issues, 2. Structural issues and 3. Business issues. The authors address
these three issues very comprehen-sively by dealing with family business culture, talent, succession planning and governance aspects relating to business.
It is interesting to read the views of the authors on long range thinking and succession planning of the fam-ily businesses. “Succession provides a classic example. Rather than waiting till the reading of the will to resolve questions like ‘who gets the shares?’ or ‘who is best suited to take on man-agerial leadership?’, in a family busi-ness it is possible to address such is-sues ahead of time.”
The authors clas-sify the business chal-lenges that particu-larly affect family fi rms into three categories, namely 1. Modernising outdated skills, 2. Man-aging transitions and 3. Raising capital. The book puts forward bril-liant solutions for deal-ing with these issues.
Leach and Dixit highlight how the misunderstandings, quarrels and lack of transparency among family members at home result in reduced productivity and undercurrents of re-sentment at work, which ultimately result in signifi cant impact on the business. The book points out that the disputes between siblings and cousins can lead to demolition of family busi-nesses. It also points out that Indian family businesses lack gender diversity and are generally dominated by men, although the situation is slowly and progressively changing.
The book suggests that the families have to work towards creating harmo-ny at home – a condition for success in their business. The mantra proposed by the book is “Pray together”, “Stay together” and “Eat together”.
The authors very coherently pre-sent their arguments with real life examples coupled with stories from Indian epics and carefully chosen concepts of the western management philosophy that provides guidance to Indian managers.
The authors point out that some of the family businesses have transna-
tional operations and the next-generation family members have often studied overseas. Their outlook towards the family business is thus very different from the traditional members of the family, which re-sult in differences.
The book high-lights the concepts and principles designed to
help the families to create organised accountability among the family and in the business. The book suggests a governance structure overview for a multi-generational family business in-cluding family councils.
The authors have very succinctly analysed some of the top Indian busi-ness families including the Murugap-pa Group, Ambuja Group, Haldiram Group, GMR Group, Godrej, Biocon, Ranbaxy and Termax Group among others. ~
The author is Head – Group Human Capital, Max India Ltd.
Lessons in Managing Family Businesses The book provides insights on how to overcome stiff challenges in managing family businesses. By P. DWARAKANATH
EX-LIBRIS
Indian Family Business Mantras By Peter Leach and Tatwamasi Dixit PAGES: 252 PRICE: ̀ 595Penguin Books India
The book points out that Indian
family businesses lack gender
diversity
Indian Family
Books.indd 4 01/08/2016 10:38:10 PM
PEOPLEBUSINESS
COMPILED BY SARIKA MALHOTRA
Woman in PowerMary Barra, the Chief Executive of General Motors, was elevated as the Chairman of the Board on January 5, making her the first woman ever to head a global auto company. Under her leadership, the largest automaker in the US has managed to drive past its worst safety-related crisis – the defective ignition switches that resulted in 124 deaths. She scripted a successful revival of the company that had gone bankrupt in 2009, thought it is far from regaining its dominant position in the international auto market. GM’s past record with heads holding both the CEO and Chairman’s position has not been very pleasant. Yet, as an insider who has risen through the ranks, Barra has a better chance to succeed.
Mary Barra Chairman & CEO, General Motors
The Challenger The Founder of Facebook, Mark Zuckerberg, is known to publicly take up a challenge at the start of every year. In 2016, he wants to build an artificially intelligent butler along the lines of Jarvis from Hollywood superhero movie Iron Man. This “simple AI,” as Zuckerberg calls it, will help him run his house and assist him at work. “I’m going to start by exploring what technology is already out there. Then I’ll start teaching it to understand my voice to control everything in our home – music, lights, temperature and so on. I’ll teach it to let friends in by looking at their faces when they ring the doorbell, to let me know if anything is going on in Max’s (his daughter) room that I need to check on when I’m not with her. On the work side, it’ll help me visualise data in VR, to help me build better services and lead my organisations more effectively,” Zuckerberg wrote on his official Facebook page.
End of an EraWith the passing away of Mufti Mohammad Sayeed on January 7, Jammu & Kashmir has lost a Chief Minister who was known for development initiatives in one of India’s most troubled states. What it means for the PDP and BJP coalition government is anyone’s guess. His daughter Mehbooba Mufti Sayeed is likely to take over as the new CM. And, if that happens, she will be J&K’s first woman chief minister.
New LeadershipHome-grown IT consulting and business processing services major Wipro and the India business of online professional networking platform LinkedIn will have new bosses in 2016. Abidali Neemchuwala, Wipro’s Group President and Chief Operating Officer, will become the company’s CEO come February. Akshay Kothari, the Principal Product Manager of LinkedIn, assumed charge as its India head recently. While Neemchuwala had joined Wipro from Tata Consultancy Services in 2015, Kothari became part of LinkedIn in 2013.
Mufti Mohammad Sayeed Late Chief Minister of J&K
Mark Zuckerberg Founder & CEO, Facebook
Scaling UpFlipkart co-founders Sachin and Binny Bansal seem to be on a fundraising spree yet again. Latest reports suggest that the company is looking to raise over $1 billion to maintain its leadership position in the fiercely competitive Indian e-commerce market. The online retailer has already raised $4 billion and plans to end 2015/16 by selling goods worth $12 billion. The Bansals, who are college friends, also have plans to diversify into online grocery delivery and mobile wallet businesses. Abidali Neemchuwala
Group President & COO, WiproAkshay KothariCountry Head, LinkedIn India
S . K U M A R
Sachin and Binny Bansal Co-founders, Flipkart
NI
LO
TP
AL
BA
RU
AH
RA
JW
AN
T R
AW
AT
January 31 2016 BUSINESS TODAY 121120 BUSINESS TODAY January 31 2016
Peoplebusiness.indd All Pages 01/09/2016 1:13:15 AM
PEOPLEBUSINESS
COMPILED BY SARIKA MALHOTRA
Woman in PowerMary Barra, the Chief Executive of General Motors, was elevated as the Chairman of the Board on January 5, making her the first woman ever to head a global auto company. Under her leadership, the largest automaker in the US has managed to drive past its worst safety-related crisis – the defective ignition switches that resulted in 124 deaths. She scripted a successful revival of the company that had gone bankrupt in 2009, thought it is far from regaining its dominant position in the international auto market. GM’s past record with heads holding both the CEO and Chairman’s position has not been very pleasant. Yet, as an insider who has risen through the ranks, Barra has a better chance to succeed.
Mary Barra Chairman & CEO, General Motors
The Challenger The Founder of Facebook, Mark Zuckerberg, is known to publicly take up a challenge at the start of every year. In 2016, he wants to build an artificially intelligent butler along the lines of Jarvis from Hollywood superhero movie Iron Man. This “simple AI,” as Zuckerberg calls it, will help him run his house and assist him at work. “I’m going to start by exploring what technology is already out there. Then I’ll start teaching it to understand my voice to control everything in our home – music, lights, temperature and so on. I’ll teach it to let friends in by looking at their faces when they ring the doorbell, to let me know if anything is going on in Max’s (his daughter) room that I need to check on when I’m not with her. On the work side, it’ll help me visualise data in VR, to help me build better services and lead my organisations more effectively,” Zuckerberg wrote on his official Facebook page.
End of an EraWith the passing away of Mufti Mohammad Sayeed on January 7, Jammu & Kashmir has lost a Chief Minister who was known for development initiatives in one of India’s most troubled states. What it means for the PDP and BJP coalition government is anyone’s guess. His daughter Mehbooba Mufti Sayeed is likely to take over as the new CM. And, if that happens, she will be J&K’s first woman chief minister.
New LeadershipHome-grown IT consulting and business processing services major Wipro and the India business of online professional networking platform LinkedIn will have new bosses in 2016. Abidali Neemchuwala, Wipro’s Group President and Chief Operating Officer, will become the company’s CEO come February. Akshay Kothari, the Principal Product Manager of LinkedIn, assumed charge as its India head recently. While Neemchuwala had joined Wipro from Tata Consultancy Services in 2015, Kothari became part of LinkedIn in 2013.
Mufti Mohammad Sayeed Late Chief Minister of J&K
Mark Zuckerberg Founder & CEO, Facebook
Scaling UpFlipkart co-founders Sachin and Binny Bansal seem to be on a fundraising spree yet again. Latest reports suggest that the company is looking to raise over $1 billion to maintain its leadership position in the fiercely competitive Indian e-commerce market. The online retailer has already raised $4 billion and plans to end 2015/16 by selling goods worth $12 billion. The Bansals, who are college friends, also have plans to diversify into online grocery delivery and mobile wallet businesses. Abidali Neemchuwala
Group President & COO, WiproAkshay KothariCountry Head, LinkedIn India
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Sachin and Binny Bansal Co-founders, Flipkart
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LEADERSPEAK R.S. SodhiFull interview with R.S. Sodhi atbusinesstoday.in/Amul-Sodhi
Vol. 25, No. 2, for the fortnight January 18-31, 2016. Released on January 18, 2016. Total number of pages 124 (including cover) 122
R.S. Sodhi, Managing Director of Amul, talks to Ajita Shashidhar about what it requires to be a delightful consumer brand and give adequate value to the 3.6 million farmers feeding milk to his organisation. What is your mantra for running a not-for-profit co-operative brand?We take decisions keeping in mind only two stakeholders – milk producers (farmers) and consumers. Dealers and distributors are not priority for us. We pay the highest possible rates to farmers for their milk; also help them with nutritious fodder for their cattle and pro-vide veterinary support. This has helped us win their trust, and they, in return, give us the best quality milk. For every litre of milk we sell, 80 per cent goes to the farmer. We partner with them to produce delightful products which we sell at the lowest possible prices. We don’t look only at returns. Most food compa-nies spend 10 to 15 per cent of their revenue on advertising; we spend less than 1 per cent, because, otherwise, the 9 per cent will have to come either from the farmer or the consumer.
What is your advice to the Indian dairy industry? There is a lot of milk for everybody, but one has to invest in the entire value chain; invest in rural India. One needs to go to villages, build collection centres and veterinary facilities. One shouldn’t just try to harvest what others have sown. Grow your own crop, harvest, process and market it.
What did you learn from Dr Varghese Kurien, the founder of Amul? We learnt that in order to build a strong milk economy, one has to invest at the grassroot level. He was particular about consistency and excellence. Shortcuts will never work. We have built in similar values of excellence.
“Don’t just harvest what others have sown”
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