LIC money: Is it for investors’ benefit, or Rahul's election?


Vivek Kaul

“We’re slowly learning that fact. And we’re very, very pissed off.”
—Lines from the movie Fight Club
The government’s piggybank is in trouble. Well not major trouble. But yes some trouble.
The global credit rating agency Moody’s on Monday downgraded the Life Insurance Corporation (LIC) of India from a Baa2 rating to Baa3 rating. This is the lowest investment grade rating given by Moody’s. The top 10 ratings given by Moody’s fall in the investment grade category.
Moody’s has downgraded LIC due to three reasons: a) for picking up stake in the divestment of stocks like ONGC, when no one else was willing, to help the government reduce its fiscal deficit. b) for picking up stakes in a lot of public sector banks. c) having excessive exposure to bonds issued by the government of India to finance its fiscal deficit.
While the downgrade will have no impact on the way India’s largest insurer operates within India, it does raise a few basic issues which need to be discussed threadbare.
From Africa with Love
The wives of certain African dictators before going on a shopping trip to Europe used to visit the central bank of their country in order to stuff their wallets with dollars. The African dictators and their extended families used the money lying with the central banks of their countries as their personal piggybank. Whenever they required money they used to simply dip into the reserves at the central bank.
While the government of India has not fallen to a similar level there is no doubt that it treats LIC like a piggybank, rushing to it whenever it needs the money.
So why does the government use LIC as its piggybank? The answer is very simple. It spends more than what it earns. The difference between what the government earns and what it spends is referred to as the fiscal deficit.
In the year 2007-2008 (i.e. between April 1, 2007 and March 31,2008) the fiscal deficit of the government of India stood at Rs 1,26,912 crore. Fiscal deficit is the difference between what the government earns and what it spends. For the year 2011-2012 (i.e. between April 1, 2011 and March 31, 2012) the fiscal deficit is expected to be Rs 5,21,980 crore.
Hence the fiscal deficit has increased by a whopping 312% between 2007 and 2012. During the same period the income earned by the government has gone up by only 36% to Rs 7,96,740 crore. The expenses of the government have risen more than eight and half times faster than its revenues.
What is interesting is that the fiscal deficit numbers would have been much higher had the government not got LIC to buy shares of public sector companies it was selling to bring down the fiscal deficit.
Estimates made by the Business Standard Research Bureau in early March showed that LIC had invested around Rs 12,400 crore out of the total Rs 45,000 crore that the government had collected through the divestment of shares in seven public sector units since 2009. The value of these shares in March was around Rs 9,379 crore. Since early March the BSE Sensex has fallen 7.4%, which means that the LIC investment would have lost further value.
Over and above this the government also forced LIC to pick up 90% of the 5% follow-on offer from the ONGC in early March this year. This after the stock market did not show any interest in buying the shares of the oil major. The money raised through this divestment of shares went towards lowering the fiscal deficit of the government of India.
News reports also suggest that LIC was buying shares of ONGC in the months before the public issue of the insurance major hit the stock market, in an effort to bid up its price. Between December and March before the public offer, the government first got LIC to buy shares of ONGC and bid up the price of the stock from around Rs 260 in late December to Rs 293 by the end of February. After LIC had bid up the price of ONGC, the government then asked it to buy 90% of the shares on sale in the follow on public offer.
This is a unique investment philosophy where institutional investor managing money for the small retail investor, first bid up the price of the stock by buying small chunks of it, and then bought a large chunk at a higher price. Stock market gurus keep repeating the investment philosophy of “buy low-sell high” to make money in the stock market. The government likes LIC to follow precisely the opposite investment philosophy of “buying high”.
Estimates made by Business Standard suggest that LIC in total bought ONGC shares worth Rs 15,000 crore. The stock is since down more than 10%.
The bank bang
LIC again came to the rescue of the cash starved government during the first three months of this year, when it was force to buy shares of several government owned banks which needed more capital. It is now sitting on losses from these investments.
Take the case of Viajya Bank. It issued shares to LIC at a price of Rs 64.27 per share. Since then the price of the stock has fallen nearly 19%.
The same is case with Dena Bank. The stock price is down by almost 10% since allocation of shares to LIC. The share price of Indian Overseas Bank is down by almost 19.7% since it sold shares to LIC to boost its equity capital. While the broader stock market has also fallen during the period it hasn’t fallen as much as the stock prices of these shares have.
There are more than a few issues that crop up here. This special allotment of shares to LIC to raise capital has pushed up the ownership of LIC in many banks beyond the 10% mandated by the Insurance Regulatory and Development Authority of India, the insurance regulator. As any investment professional will tell you that having excessive exposure one particular company or sector isn’t a good strategy, especially when managing money for the retail investor, which is what LIC primarily does. What is interesting is that the government is breaking its own laws and thus not setting a great precedent for the private sector.
If LIC hadn’t picked up the shares of these banks, the fiscal deficit of the government would have gone up further. The third issue here is why should the government run so many banks? The government of India runs twenty six banks (20 public sector banks + State Bank of India and its five subsidiaries).
While given that banking is a sensitive sector and some government presence is required, but that doesn’t mean that the government has to run 26 banks. It is time to privatise some of these banks.
Gentlemen prefer bonds
As of December 31, 2011, the ratio of government securities to adjusted shareholders’ equity in LIC was 764%. This is understandable given that the subsidy heavy budget of the Congress led UPA government has seen its fiscal deficit balloon by 312% over the last five years. Again basic investment philosophy tells us that having a large exposure to one investment isn’t really a great idea, even if it’s a government.
The Rahul factor
But the most basic issue here is the fact that the government is using the small savings of the average Indian who buys LIC policies to make loss making investments. This is simply not done.
LIC has turned into the behemoth that it has over the years by offering high commissions to its agents over the years. It sells very little of “term insurance”, the real insurance. What it basically sells are investment policies with very high expenses which are used to pay high commissions to it’s the agents. The high commissions in turn ensure that these agents continue to hard-sell LIC’s extremely high cost investment policies to normal gullible Indians. The premium keeps coming in and the government keeps using LIC as a piggybank.
The high front-loading of commissions is allowed by The Insurance Act, 1938. The commission for the first can be a maximum of 40 per cent of the premium. In years two and three, the caps are 7.5 per cent, and 5 per cent thereafter. These are the maximum caps and serve as a ceiling rather than a floor.
The Committee on Investor Protection and Awareness led by D Swarup, the then Chairman of Pension Fund Regulatory and Development Authority, had proposed in September 2009 to do away with commissions across financial products. “All retail financial products should go no-load by April 2011,” the committee had proposed in its reports.
The National Pension Scheme(NPS) was already on a no commission structure. And so were mutual funds since August 1, 2009. But LIC and the other insurance companies were allowed to pay high commissions to their agents. “Because there are almost three million small agents who will have to adjust to a new way of earning money, it is suggested that immediately the upfront commissions embedded in the premium paid be cut to no more than 15 per cent of the premium. This should fall to 7 per cent in 2010 and become nil by April 2011,” the committee had further proposed.
Not surprisingly the government quietly buried this groundbreaking report.
While insurance commissions have come down on unit linked insurance plans, the traditional insurance policies in which LIC remains a market leader continue to pay high commissions to their agents. These traditional insurance policies typically invest in debt (read government bonds which are issued to finance the fiscal deficit).
This is primarily because the Congress led UPA government needs the premium collected by LIC to run LIC like a piggybank. The piggybank money can and is being used to run subsidies in the hope that the beneficiaries vote for Rahul Gandhi in 2014.
Is the objective of LIC to generate returns and ensure the safety of the hard earned money of crores of it’s investors? Or is it to let the UPA government run it like a piggybank in the hope that Rahul baba becomes the Prime Minister?
The country is waiting for an answer.
(This post originally appeared on Firstpost.com on May 15,2012. http://www.firstpost.com/politics/lic-money-is-it-for-investors-benefit-or-rahul-election-309545.html)
(Vivek Kaul is a writer and can be reached at [email protected])

“Marlboro is probably the best example of the power of a visual hammer”


Laura Ries is a globally respected marketing consultant. Ries has run Ries & Ries, a consulting firm with her partner and father, Al, since 1994. Together they consult with Fortune 500 companies on brand strategy. Her new book Visual Hammer is just out. “The critical missing piece in most marketing programs is a powerful visual that can drive a brand into the mind,” says Laura. This book outlines the steps a brand needs to take to develop a visual hammer.
In this interview she speaks to Vivek Kaul.
Excerpts:
You talk about marketing messages from companies ignoring half of the prospect’s brain. What do you mean by that?
Everyone has two brains, a left brain and a right brain, plus the corpus callosum connecting the two brains. The left brain is associated with verbal messages; the right brain with visual messages and is also the site of your emotions. If a marketing message is totally verbal, it ignores the right brain and especially the right brain involvement with “emotion.” What things do people remember the best? Those things that have an emotional connection. The day you got married. The day you had an automobile accident. The day you graduated from college. Etc. A totally verbal message is usually flat and unemotional. That greatly hinders the memorability of the message.
Could you explain this through an example?
The old-fashioned Coca-Cola bottle (which the company calls a “contour” bottle) communicates the fact that Coke is the original cola, the authentic cola, the real thing. Coca-Cola has also used the verbal (“the real thing”) but it just doesn’t have the same emotional impact of the bottle itself. Of course, the best strategy to use would be both. The Coke bottle (the visual hammer) and the verbal nail (“the real thing.”) They reinforce each other.
You say that most marketing messages are abstract ideas built around concepts like good consumer service, superior reliability, dependable performance etc. Why is that?
In general, a major corporation would first develop a verbal strategy for a brand. Then the company would “sell” the verbal idea to top management before they bring in an advertising agency to develop the idea. And since most corporate executives are left brainers, they readily accept verbal ideas. There is a lot of evidence that top management is dominated by left brainers. Right brainers are usually introverts and not very talkative. Left brainers usually are extroverts and very talkative. Now which type is likely to make it to the top of any organization? A quiet, introverted left brainer. Or a talkative, extroverted right brainer. When a CEO makes a speech, he or she usually stands behind a podium and reads from a Teleprompter or from a script. Totally word-oriented and a sure sign of a left brainer.
But exceptions are always there…
There are exceptions. Steve Jobs of Apple was a right brainer, but of course, he was once fired from Apple. After he returned to Apple, his “speeches” involved a screen 40-feet wide and enormous visuals, not exactly the type of speech a left brainer would make.
Could you share some of the most abstract marketing messages with us?
Here are some recent slogans from major global corporations. starting with the letters A and B.
ABB: “Power and productivity for a better world.”
Accenture: “High performance. Delivered.”
Acura: “Advance.”
Air France: “Making the sky the best place on earth.”
Audi: “Truth in engineering.”
BlackBerry: “Be bold.”
Bridgestone tires: “Your journey, our passion.”
British Airways: “To fly. To serve.”
None of these slogans can serve as verbal nails because they are not specific enough. They are typical abstract ideas that need to be brought down to earth before they can be visualized. I could go through the rest of the alphabet and give you dozens of similar slogans. All abstractions.
You write “Words are what they use the most and are most familiar with. Yet there is a lot of evidence that visuals play a far more important role in marketing than do words”. Why do you say that?
The reason Visual Hammer is such a helpful concept is that very few companies are actually using visual hammers. That’s why successful examples are few. The lime in the top of a Corona beer bottle. There were dozens of Mexican beers imported into America, but until the arrival of Corona none used a visual hammer. The lime help to communicate the fact that Corona is an authentic Mexican beer. Thanks to its visual hammer, Corona went on to become the best-selling imported beer in America and the best-selling Mexican beer on the global market. It also was ranked by Interbrand, a branding consultancy, as the 86th most valuable brand in the world (and the only Mexican brand on the list) worth $3.9 billion. The last time I was in Mumbai, a diner at the table next to us ordered a Corona beer. And sure enough, the waiter served the beer with a lime on top of the bottle.
Any other example?
The red soles of, a French designer who regularly tops The Luxury Institute’s index of “most prestigious women’s shoes.” In 1992, he applied red nail polish to the sole of a shoe because he felt the shoes lacked energy. “This was such a success,” reported Mr. Louboutin, “that it became a permanent fixture.” The red sole was the hammer, but what was the nail? It was the stiletto (heel heights of 120mm or more) which Louboutin helped bring back into fashion in the last two decades. To build a brand you need both: The red sole and the stiletto. Let me give you another example. BMW, for example, owns the word “driving,” an achievement that lifted the brand from nowhere into the world’s largest-selling luxury-car brand. But what put the “driving” idea into the minds of consumers? What’s was BMW’s visual hammer? It was a long-running, consistent series of television commercials showing happy owners driving their BMW vehicles over winding roads. “The ultimate driving machine” was the nail. But it was the visual hammer was put that idea into the mind.
You write in your new book “Unless there is an instant connection with a verbal idea, a visual becomes nothing but wasted ammunition in a marketing war.” Can you elaborate on that through an example?
There is a lot more to say about how visuals are received by the brain and how verbal messages are received. For example, you are driving down a street and a stoplight in front of you changes to “red.” Your foot hits the brake . . . without conscious thought on your part. That’s the right brain at work. If a stoplight used words (Stop, Caution, Go) instead of visuals, your left brain would have to first translate those type-set words into “aural” sounds that your mind could understand. That takes time and effort. You might be reading an article and you get to the end of a paragraph and suddenly think to yourself, What was that all about? In other words, it takes effort for your left brain to understand printed words. With a visual, however, your right brain can almost instantly understand a visual and react to it.
How is that linked to building a brand?
In building a brand, however, visuals are only effective if they “say something” about the brand. Advertising is filled with visuals, but very few visual hammers. It’s only things like the Coke bottle (authentic cola), the lime on top of a Corona (authentic Mexican beer), the TV commercials showing happy BMW owners (the ultimate driving machine), which hammer the nail in.
You have repeatedly talked about the visual hammer hammering the verbal nail. What do you mean by that?
The Marlboro story is probably the best example of the power of a visual hammer. We don’t like to feature it, however, since smoking is such a health hazard. Before Marlboro was launched, there were four exceptionally strong cigarette brands in America: Lucky Strike, Camel, Chesterfield, Winston. All of these brands were “unisex,” in the sense that they appealed to both men and women. In general, they pictured both men and women smoking.
Marlboro narrowed the focus to men only. (Another strategic concept that we strongly recommend for an also-ran brand.) In other words, Marlboro wanted to become a masculine cigarette. And the cowboy is perhaps the best visual to use to communicate the masculinity idea.) In America today, Marlboro outsells the next 13 cigarette brands combined. Marlboro is also the largest–selling global cigarette brand.
Why is it very difficult today to put a verbal idea into a consumer’s mind without a visual hammer?
The world is awash in words. This is especially true because of the Internet. Consumers are drowning in Emails, Tweets, Facebook pages and other web-oriented media. To cut through the clutter with a verbal message only is extremely difficult unless you have a revolutionary development. And if you have a revolutionary development, you probably don’t need much marketing help. In 2010, the five largest advertisers in America were AT&T, Verizon, Chevrolet, Ford and Toyota. Together these five brands spent $6.9 billion on advertising. What was the verbal idea, or slogan, used by each of these brands? I’ll guarantee that few consumers would remember. Here they are.
AT&T . . . “Rethink possible.”
Verizon . . “Rule the air.”
Chevrolet . . . “Chevrolet runs deep.”
Ford . . . . “Drive on.”
Toyota . . . “Moving forward.”
None of these slogans can be effectively visualized into a hammer. That’s why, in spite of the $6.9 billion, most consumers don’t remember them.
Could you share some marketing messages from companies which have good visual hammers and why do you think they are good?
In general, it is difficult to create a memorable visual hammer. One exception is for leader brands. Any simple visual used consistently with a powerful leader brand can become a visual hammer.
The “Golden Arches” of McDonald’s.
The “Swoosh” of Nike.
The “Tri-Star” of Mercedes-Benz.
What these visual hammers are communicating is “leadership,” and leadership is probably the most important verbal idea for a brand. If consumers perceive your brand to be the leader in a category, your brand can maintain that leadership for decades. Hertz in rent-a-cars. Kleenex in pocket tissue. Heinz in ketchup.
You say that unlike a verbal idea, a visual hammer can cross International borders with no translations necessary. Could you explain that through an example?
The Coke bottle, the Marlboro cowboy, KFC’s Colonel Sanders, Mercedes-Benz’s Tri-Star, Corona’s lime are all global visual hammers that say something about the brands. Coca-Cola is sold in 206 countries and 74 percent of the company’s revenues come from outside the United States. Coca-Cola can use the same contour bottle visual in every country, but trying to translate a single slogan into dozens of different languages would be very difficult. And sometimes a verbal slogan just cannot be translated into another language. For example, my dad (marketing guru Al Ries) wrote a book called “Bottom-Up Marketing,” a verbal idea that works well in English. But the Spanish translators of the book couldn’t find any Spanish words that could capture that idea. (They were all vulgar expressions not suitable for a book title.)
Coca-Cola’s exceptionally-strong visual hammer puts its major competitor in a difficult position. What should Pepsi-Cola do?
Narrow its focus. In general, you cannot find a visual hammer with a broad conceptual idea. You have to narrow that idea. For example, BMW could have used “performance” as its verbal strategy, but how would you visualize that verbal idea? Instead, they narrowed the focus to “driving,” an aspect of performance. That allowed them to run “driving” TV commercials to drive in the idea to prospects.
So what is Pepsi-Cola’s new verbal strategy, just announced last week. “Live for now.” How can you visualize a conceptual idea like that? You can’t. Years ago, Pepsi-Cola had a verbal idea that could be visualized. “The Pepsi Generation.” In other words, Pepsi was appealing to the youth market, the Pepsi generation, a narrow-the-focus concept. That idea could have been easily visualized. As a matter of fact, even today, most consumers remember The Pepsi Generation, but none of the dozens of other slogans the brand has used.
You write “Today, “The real thing” lives on in newspapers, magazines, books and television shows in spite of the fact that Coca-Cola used the slogan only once, for just two years, more than 40 years ago.” The real thing was a slogan that Coke used just once for two years, 40 years ago. But it lives on. So why does the company keep coming up with all these different slogans which no one can remember?
The dominate concept in the advertising field is “creativity.” Ideas are evaluated based on how creative they are. But what is creativity? An idea is usually considered “creative,” if it’s “new and different.” An old idea used before can never be considered “creative.” That’s why Coca-Cola refuses to use it. There’s also the influence of the advertising agencies that handle big accounts like Coca-Cola. Advertising agencies live or die based on their abilities to win awards in the annual creative contests. And you can’t win an advertising award if your advertising is not creative. Take Marlboro which has used cowboy visuals ever since its launch in 1953. I don’t believe Marlboro has ever won an advertising award because its advertising is not “creative” in the usual sense of the word.
(The interview was originally published on May 14,2012, in the Daily News and Analysis (DNA). http://www.dnaindia.com/money/interview_marlboro-is-probably-the-best-example-of-the-power-of-a-visual-hammer_1688368).
(Vivek Kaul is a writer and can be reached at [email protected])

How the bastardisation of Keynes is still haunting us


Vivek Kaul

“So how does it feel to be an educated unemployed?” she asked.
“Shikshit berozgar sounds much better,” I retorted. “Plus you are making a pot load of money anyway.”
“Ah. Where has the male ego gone?”
“Well, as long as you keep the money coming, ego can take a backseat.”
“On the subject of money I was reading somewhere about some Western economists recommending negative interest rates,” she said.
“ The idea is to charge people who let their money lying idle in a bank account,” I explained.
“Charge?”
“Yes. Say if you keep $1000 in your bank account and the negative interest rate is 2%, then at the end of the year your account will have $980 ($1000 – 2% of $1000).”
“Oh. But why?”
“So that instead of letting the money lay idle in the bank account people take it out and spend it.”
“And how will that help?”
“Well when people spend the money the demand for goods and services will go up. This in turn will mean more profits for businesses, which in turn may recruit more people and decrease unemployment.”
“Interesting. Where does this idea come from?”
“It comes from the concept of paradox of thrift which was first explained by John Maynard Keynes, an economist whose thinking had the most influence on economists and politicians of the twentieth century.”
“But why call it a paradox? Isn’t being thrifty or saving money a good thing?”
“Keynes thought that when it comes to saving what makes sense for an individual may not work for the economy. If an individual saves more he cuts down on his expenditure. If one person does this, it makes sense for him because he saves more money. But more people doing it creates a problem.”
“What problem?”
“What is expenditure for one person is income for someone else. When you buy your fancy makeup, a lot of people earn money. The shop you buy it from. The company that makes the brand you buy and so on. When you don’t the entire chain earns lesser.”
“Ah. Never thought about it that way.”
“So as everybody spends less, businesses see a fall in revenue. To stay competitive they start firing people, which leads to a further cut in spending. The unemployed obviously spend less. But so do others in the fear that they might be fired as well.”
“And all this is not good for the economy,” she said. “But how is it linked to negative interest rates?”
“Since the financial crisis started in 2008, people in Europe, America and even Japan, are not spending money. Hence the idea of negative interest rates has been put forward. People would rather spend the money than see its value go down.”
“But is that what Keynes suggested?”
“No. What Keynes had said was that consumers and firms would be unwilling to spend money in an environment where jobs are falling and demand is falling or is flat or growing at a very slow rate. So the government should become the “spender of the last resort” by coming up with a stimulus package.”
“Hmmm.”
“Keynes also said during recessions the government should not be trying to balance its budget i.e. match its income with expenditure. The logic being that taxes collected would anyway fall during a recession, if the government tried to match this with a cut in expenditure, it would squeeze the economy even more.”
“So Keynes advocated that governments run fiscal deficits,” she concluded.
“Not at all. Keynes believed that on an average the government budget should be balanced. This meant that during years of prosperity the governments should run budget surpluses i.e. earn more than what they spend. But when the economy wasn’t doing well governments should spend more than what they earn and hence run a fiscal deficit.”
“Okay. So the money saved during the good time could be spent during the bad times.”
“Yes. Keynes came up with this theory in his book The General Theory of Employment, Interest and Money in 1936. This book had ideas based on the study of the Great Depression. During those days it was not fashionable for governments to run fiscal deficits as it is today. As Franklin Roosevelt, the then President of America put it “Any government, like any family, can, for a year, spend a little more than it earns. But you know and I know that a continuation of that habit means the poorhouse.” But then attitudes changed.”
“How was that?”
“As governments around the world got ready to fight the Second World War they spent a lot of money in getting ready for it, which meant they ended with fiscal deficits. Economies around the world which were still in the doldrums because of the Great Depression, suddenly started rebounding,” I explained.
“And so the star of Keynes shone?”
“Yes. But the politicians over the decades just took one part of Keynes’ advice and ran with it. The belief in running deficits in bad times became permanently etched in their minds. In the meanwhile they forgot that Keynes had also wanted them to be running surpluses during good times. So they ran deficits in good times and bigger deficits in bad times. This meant more and more borrowing. And this how the Western world has ended up with all the debt which has brought the whole world to the brink of a huge economic disaster.”
“But what about negative interest rates?” she asked. “Will they help?”
“Not really.”
“Why?”
“See the thing is other than government debts increasing in the Western world, the debt of individuals has also gone up over the years. So right now they by not spending they are saving money so that they can repay their debts.”
“Hmmm. But do you see negative interest rates coming in?”
“On the face of it I don’t think that will happen,” I replied. “But then you never know. Politicians have bastardised Keynes in the past. They can do it again.”
“How sure are you of this?” she asked.
“Let me answer your question with a couplet written by Javed Akhtar “main khud bhi sochta hoon ye kya mera haal hai, jiska jawab chahiye wo kya sawal hai.”
(The interview was originally published on May 14,2012, in the Daily News and Analysis (DNA). http://www.dnaindia.com/analysis/column_how-the-bastardisation-of-keynes-is-still-haunting-us_1688370).
(Vivek Kaul is a writer and can be reached at [email protected])

What Ramdev, Biyani, Mallya and Govt can learn from Buffet



Vivek Kaul

So what is common to Baba Ramdev, Kishore Biyani, Vijay Mallya and the government of India, other than the fact that they have all been in the news lately? To put it simply, they all like operate in areas where they lack expertise and in the process make a mess of it.
Let us start Baba Ramdev who became a household name by selling the benefits of Yoga to the masses. He claimed that even diseases like cancer could be cured through yoga. Those who have seen his yoga DVDs will recall the line “karte raho, cancer ka rog bhi theek hoga”.
So far so good. Then he decided that he had enough of preaching yoga and wanted to get into politics and vowed to get all of India’s black money hoarded abroad, back to India. The politicians in the government clearly did not like this (for obvious reasons) and went hammer and tongs after him. Stories were leaked to the media about the wealth he had accumulated over the years and that damaged his credibility as a yoga guru as well. Ramdev has continued in his attempts to establish himself as a politician but with very little success.

Kishore Biyani brought the retail revolution to India, having been inspired by Sam Walton who started Wal-Mart. His retail businesses were doing decently well till he decided to get into a wide variety of businesses from launching an insurance company to even selling mobile phone connections. When times were good he accumulated a lot of debt in trying to grow fast. Now he is in trouble in trying to service the debt and rumors are flying thick and fast that he is planning to sell Big Bazaar, his equivalent of Wal-Mart. This after he sold controlling stake in the cloths retailer, Pantaloons.
Vijay Mallya started Kingfisher Airlines in 2005, going beyond his core business of alcohol. Kingfisher now has accumulated losses of over Rs 6000 crore, and has never made money since its launch. The lack of focus has hurt Mallya’s core alcohol business and United Spirits is no longer India’s most profitable alcohol company. That tag now belongs to the Indian division of the French giant Pernod Ricard.

And finally the government of India, which has been bailing out the troubled airline Air India over and over again. The pilots of the airline keeps going on strike and the government keeps putting a few thousand crores every few months, to keep running the airline.
So the question that crops up here is what is Baba Ramdev doing in politics? Why is Kishore Biyani trying to sell insurance and mobile phone connections to you? And why are Vijay Mallaya and the government of India trying to run an airline?
They would be better off concentrating on things they are good at. These are things they shouldn’t be doing. It is not their area of expertise or what they are good at. The days when individuals, businesses and even governments could be an expert at many things at the same time are long gone.
In the last 100 years there have been only two individuals who have won the Noble prize twice for two different subjects. Marie Curie won the physics prize in 1903 and the Chemistry prize in 1911. Linus Pauling won it twice, the Chemistry Prize in 1954 and Peace Prize in 1962.
So in the strictest sense of the term, Marie Curie is the only person ever to have won a Noble prize in two different subjects and that happened almost 100 years back. This is primarily because as more and more things have been invented and discovered, subjects have become more complex requiring full time attention and expertise.
What is true about individuals is also true about businesses. The expertise and the attention required to run a business has increased over the year. Hence, the moment a businessman tries to go outside its area of expertise, he loses focus, and the chances of the new business doing well are remote.
Let’s take the case of DLF, the biggest real estate company in the country. It tried getting into the insurance and mutual fund business. It had to sell its stake in the mutual fund business and if news reports are to be believed it is trying to lower its stake in the insurance venture by selling its stake to HCL. Now why is a computer major trying to buy into an insurance business which is losing money, is beyond me?
Satyam was in good shape till it remained an IT company. The moments its owner developed aspirations beyond IT and got the company into real estate and infrastructure space, trouble cropped up. Real estate companies have tried unsuccessfully to get into the luxury hotel business and hotels have tried unsuccessfully to get into the luxury apartment business.
Reliance Industries attempts in the retail business haven’t gone anywhere. Anil Ambani who had build a good business in Reliance Capital is struggling with Reliance Communications and Reliance Power. Subrata Roy’s attempts to diversify into the film and television business have come a cropper, with the film business of Sahara, more or less being shutdown. NDTV, a premier English news channel, tried getting into the entertainment channel business with NDTV Imagine. It had to sell out. Cigarette major ITC has been trying to establish itself in the FMCG business for years now. Though it has had some success at it, the business hardly throws up any money in comparison to its cigarette business. All kinds of entrepreneurs have gone into the insurance business in India and are now struggling. This includes Kishore Biyani. At the same time the Tatas have been struggling with their telecom business for years.
There is a thing or two all these guys can learn from internationally renowned investor Warren Buffett. During the period of 1994-2000, the United States saw a whole lot of dotcom companies coming up with their initial public offerings. Some of these shares achieved astonishing highs. The shares of Netscape Communications Corporation, an internet browser company which controlled 75% of the browser market, were sold to investors at $28 per share. When the stock was listed on August 9,1995, it went to $74.75 during the course of the day and finally closed at $58.25, doubling in a single day. Another stock booksamillion.com went up by 973% to $47 in the course of just three days in November 1998. theGlobe.com which listed on November 13,1998, gained 606% during the course of the day and closed at a price of $63.50.
Despite these humungous gains Warren Buffett did not invest a single penny in these stocks. He did not understand the business models of these stocks and remain focused on his investment philosophy of “value investing”. Not surprisingly he had the last laugh as dotcom and technology stocks started crashing after they had peaked in March 2000.
Buffett did not abandon his core philosophy of value investing just because there was “easy money” to be made somewhere else. And he came out on top, for the simple reason that he chose to remain focused on what he knew.
But this is rarely the case. When times are good and there is a lot of easy money floating around every entrepreneur likes to “expand” his business and get into other things. But in this day and age, when things are as complicated and competitive as they are, diversification into different businesses rarely works.
Businesses these days need full time attention from entrepreneurs. Let’s take a look at the airline business. As Warren Buffett put it in a letter he wrote to the shareholders of Berkshire Hathaway “The worst sort of business is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines. Here a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favor by shooting Orville down…The airline industry’s demand for capital ever since that first flight has been insatiable. Investors have poured money into a bottomless pit, attracted by growth when they should have been repelled by it.”
The reason airline businesses burn capital endlessly is for the simple reason that airlines have very little control over their cost. The major expense in running an airline is oil (the company can lease the aircraft it doesn’t have to always buy them). And oil prices have been over $100 per barrel for a while now. Airline companies have no control over this price, though they can hedge themselves by buying derivatives. But that can be a risky business as well.

So higher the oil price, higher is the cost of running an airline and given the lure of owning an airline, the sector remains a very competitive one, all over the world. Hence companies cannot always pass on an increase in their costs to the end customers though higher ticket prices. Given these reasons airlines are a specialised business, which require full time attention. It is definitely not a business which Vijay Mallya can look to successfully manage, busy as he is running his diverse businesses of alcohol and real estate, indulging in expensive hobbies like IPL and Formula 1, and cheaper ones like commenting regularly on Twitter.
The government of India falls in the same category. Its primary area of activity is governing the nation(which it is anyway making a mess of) and not running an airline. It simply doesn’t have the expertise to run one. Southwest Airlines is successful because it has remained focused on the airlines business. It did not suddenly decide to launch a new beer just because their airline business was constantly throwing up cash over the years.

Kishore Biyani should learn from his inspiration Wal-Mart. The company did not get into the insurance business. They did not say “now that we have so many people coming to our stores, let’s try and sell insurance to them along with fast moving consumer goods”. Or as Warren Buffett puts it ” If you buy things you don’t need, you’ll soon sell things you need.”
That leaves Baba Ramdev. He can learn from his more famous predecessor the Sai Baba of Puttaparthi. Given the following he had he could have easily gotten into politics. But that would have put him at the same pedestal as the politicians who looked up to him as their guru. And thus rightly he did not.
Marketing guru Al Ries has said in the past “Focus is the essence of marketing and branding.” I guess it’s time to rephrase that phrase. “Focus is the essence of marketing, branding and business”. And its time Ramdev, Biyani, Mallya, the government and many others learnt that lesson.

(The article originally appeared on May 10,2012 at http://www.firstpost.com/business/what-ramdev-biyani-mallya-and-govt-can-learn-from-buffett-304770.html).

(Vivek Kaul is a writer and can be reached at [email protected])

The pain in Spain will get us too; so forget market rallies


Vivek Kaul

If you are the kind who reads the pink papers religiously, you would have come to conclusion by now that good times are back again for the stock market investors in India, now that the finance minister has deferred the implementation of GAAR to next year. But before you open that champagne bottle and say cheers, here are some reasons why the stock market will remain flat or fall in the days to come.
Pain in Spain:
The gross domestic product (GDP) of Spain grew at the rate of 8% every year from 1999 to 2008. This primarily happened because Spain went all out and promoted the Mediterranean lifestyle. As Jonathan Carman points out in a presentation titled The Pain in Spain “Millions flocked to its sun-drenched shores, buying houses along the way. As the demand for houses increased, construction became the industry. Housing prices exploded, tripling in just over a decade.”
So far so good. The trouble was Spain ended up building way too many homes than it could sell. Even though Spain forms only 12% of the GDP of the European Union (EU) it has built nearly 30% of all the homes in the EU since 2000. As John Mauldin and Jonathan Tepper point out in Endgame – The End of the Debt Supercycle and How It Changes Everything “Spain had the mother of all housing bubbles. To put things in perspective, Spain now has as many unsold homes as the United States, even though the United States is six times bigger”.
All this building was financed through the bank lending. Loans to developers and construction companies amounted to nearly $700billion or nearly 50% of the Spain’s current GDP of nearly $1.4trillion. With homes lying unsold developers are in no position to repay. And Spain’s biggest three banks have assets worth $2.7trillion or that is double Spain’s GDP.
What makes the situation more precarious is the fact that the housing prices are still falling. Carman expects prices still need to fall by 35% from their current levels if they are to reach normal levels. This will mean more home loan defaults and more trouble for Spain. The Spanish stock market is already taking this into account and IBEX-35, the premier stock market index of the country is down a little more than 10% in the last one month. Banking stocks have fallen much more.
While countries like Greece may be in more trouble, they are not economically big enough to cause a lot of trouble worldwide. But if Spanish banks go bust, there will be a lot of trouble in the days to come. Spain has now emerged the basket case of Europe, but other countries in the European Union are not doing well either and this means trouble for China.
China’s After Party:
If things are not well in Europe, it has an impact on China because Europe is China’s biggest trading partner. The Chinese exports to Europe in March were down 3.1% in comparison to last year. Chinese exports had ranged between $475billion and $518billion in the last three quarters of 2011. In the first three months of this year the number has fallen to $430million. Falling exports are not the best news for China.
There are other things which aren’t looking good either. As Ruchir Sharma writes in Breakout Nations – In Pursuit of the Next Economic Miracles “In the last decade the main driver of China’s boom was a surge in the investment share of the GDP from 35% to almost 50%, a level that is unprecedented in any major nation…The investment effort focused on building the roads, bridges, and ports needed to turn China into the world’s largest exporter, doubling its global export market share to 10% in the last decade.”
This spending spree which was responsible for its fast growth is now slowing down. New road construction is down from 5000miles in 2007 to 2500 miles. Railway spending is down by 10%.
The other major factor likely to pull down growth is wage inflation i.e. salaries are rising at a very fast rate. In 2011, the average wage was rising at a rate of 15%, in a scenario where the consumer price inflation was around 5%. As Sharma points out “In fact hourly wages are now rising twice as fast productivity, or hourly output per worker, which is forcing companies to raise prices just to cover the cost of higher wages.” This has led to manufacturers moving to cheaper destinations like Bangladesh and Indonesia.
Given these reasons it is highly unlikely that China will continue to grow at the rates that it has been. Since 1998, China’s economic growth has averaged around 10% and it has never fallen below 8%. As Sharma points out “China’s looming shadow is about to retreat to realistic dimensions.” Sharma expects Chinese growth to slowdown by 3-4% percentage points in comparison to its current growth rate over the next decade.
A Chinese slowdown will mean disaster for nations which have been thriving by exporting commodities to China. In 1998, when China was a $1trillion economy, to grow by 10% meant it had to expand its economy by $100billion. This could have been done by consuming 10% of the world’s industrial commodities, raw materials like oil, steel and copper. In 2011, China is a $6trillion economy. If this economy needs to grow by 10% or $600billion, more than 30% of the world’s commodity production would be needed. With growth slowing down, China’s commodity requirements will come down as well. As Sharma puts it “It’s my conviction that China – commodity connection will fall apart soon”.
China’s stock markets remain largely closed to international investors. But the Hang Seng index listed in Hong Kong has a lot of Chinese companies. This index has gone up 0.9% over the last one month.
The Kangaroo Won’t Jump:
In fact the Aussies are already feeling the heat with a slowdown in Chinese exports. Australian exports to China in 2011 stood at A$72billion (Australian dollar), up 24% from 2010, or around 26% of total exports. An ever expanding China bought coal, iron ore and natural gas from Australia, driving up Aussie exports. But exports for the month of February fell to A$24.4 billion, the lowest in an year. Coal exports were down by 21% to A$3.4billion. The S&P ASX/200 one of the premier stock market indices in Australia, has been flat for the last one month.
Brazil – God’s Own Country:
The rise of China has led to huge demand for Brazilian commodities. As Gary Dorsch an investment newsletter writer points out in a recent column “Brazil has been enjoying an economic boom based on soaring prices for its natural resources including crude oil, agricultural products, such as soybeans, corn, and cattle, and metals such as iron ore and bauxite-aluminum.”
The rise of Brazil was captured very well by Glenn Stevens, governor of the Reserve Bank of Australia. Stevens pointed out that in 2006, money received from shipload of iron ore could buy 2,200 flat screen TVs. In 2011, the same shipload could buy 22,000 flat screen TVs.
Since the start of the financial crisis a lot of money printed by Western governments to revive their economies has flowed into Brazil. This has driven up the value of the real, the currency of Brazil, and made Brazil one of the most expensive countries in the world. As Sharma points out “Restaurants in Sao Paulo are more expensive than those in Paris. Hotel rooms cost more in Rio than French Riviera”.
An expensive currency has meant that imports rising faster than exports. This situation is expected to get worse as China’s slowdown and the demand for Brazilian commodities falls. In fact the impact is already being felt. As Dorsch points out “Brazil’s economy stalled out in the past two quarters, showing near zero growth in Q’3 of 2011 and Q’4 of 2012. Factory output in February was -3.9% lower than a year ago.” The premier stock market index Bovespa is down 4.5% over the last one month.
On a totally different note the most popular television serial in Brazil is a soap opera called “A Passage to India” shot in Agra and Jodhpur and which has Brazilian actors playing Indian roles and as Sharma puts it, they could “pass easily for North Indians”.
India- Done and Dusted:
The economic problems of India deserve a separate article. But let me list a few. In the year 2007-2008 (i.e. between April 1, 2007 and March 31,2008) the fiscal deficit of the government of India stood at Rs 1,26,912 crore. Fiscal deficit is the difference between what the government earns and what it spends. For the year 2011-2012 (i.e. between April 1, 2011 and March 31, 2012) the fiscal deficit is expected to be Rs 5,21,980 crore.
Hence the fiscal deficit has increased by a whopping 312% between 2007 and 2012. During the same period the income earned by the government has gone up by only 36% to Rs 7,96,740 crore. The targeted fiscal deficit for 2012-2013 is Rs 5,13,590 crore. This is likely to go up given the fact that the rupee is depreciating against the dollar and thus our oil bill is likely to go up, pushing up our fiscal deficit. This would mean that higher interest rates will continue to prevail.
The stock market obviously realizes this and hence has fallen by 1.8% over the last one month, yesterday’s brief rally notwithstanding.
Over the last few years stock prices all across the world have moved in a synchronized fashion because the international investors like to move in a herd. Whenever there has been trouble in the United States or Europe it has led to emerging markets all across the world falling. Now we are in a situation where the emerging markets themselves are in a lot of trouble. So it is a no brainer to say there will be no rally in the stock market in the near future. Unless of course a certain Mr Ben Bernanke decides to open up the money tap again and go in for Quantitative Easing Round Three or to put it in simple English, print some more dollars. If that happens, then investors can get ready to have some fun.
(This article was originally published on May 8, 2012 at http://www.firstpost.com/economy/the-pain-in-spain-will-get-us-too-so-forget-market-rallies-302278.html. Vivek Kaul is a writer and can be reached at [email protected])