Vivek Kaul
It is that time of the year when the media goes on an overdrive making top 10 lists on various things that happened in the year that was. So here is my list for the top 10 books in the non fiction category for this year (The books appear in a random order). Also, let me confess at the very beginning that this list is slightly biased towards books on economics and finance, which is what I love reading the most.
1) The Undercover Economist Strikes Back – How to Run – or Ruin – an Economy – -Tim Harford (Little, Brown Rs 599)
Tim Harford is my favourite writer when it comes to the non fiction category. His entire focus in anything that he writes is to ensure that the reader understands what he is trying to say. Not many writers make that kind of effort. And that possibly explains why Harford’s books like The Undercover Economist, The Logic of Life and Adapt, have been bestsellers.
In his new book, Harford tries to explain macroeconomics and the financial crisis that is currently on to the lay reader, in very simple English. In fact, Henry Hazzlit’s Economics in One Lesson (first published in 1946) remains my favourite book, when it comes to books which explain the dismal science in a language that everybody can understand. Harford’s The Undercover Economist Strikes Back now comes a close second.
2) Calcutta – Two Years in the City – Amit Chaudhuri (Hamish Hamilton, Rs 599)
My favourite Bengali author is Mani Shankar Mukherjee. His translations in English, appear under the name of Sankar. I discovered Sankar’s writing a few years back when someone recommended his book Chowringhee to me. Since then I have read a few other translations that have appeared in English. But I have read close to seven or eight translations of Sankar in Hindi. In fact, whenever I discover a bookstore which has Hindi books, the first thing I tend to ask them is do you have any books of Sankar? Nobody writes about life and its frailties like Sankar does.
Amit Chaudhuri, I feel comes a close second to Sankar, when it comes to writing books set in Calcutta. I have tremendously enjoyed reading his novels over the years. His new book Calcutta -Two Years in a City is about the Calcutta that was, the Kolkata that is and the Kolkata that will be. Given the fact that Chaudhuri hasn’t lived in Calcutta all the time (he spent a large part of his childhood in what was Bombay and since then has lived a lot in Great Britain) and neither has he left it completely, only to come back during Durgo Pujo, the book doesn’t get overtly nostalgic (like a lot of Bengali authors tend to) about the city. So, for example you will find very little of Satyajit Ray and Mother Teresa in the book. But you will find a lot about Bihari labourers who come to the city hoping to make it in life.
Chaudhuri also chronicles the change in Kolkata quite well. Older British buildings being demolished to make way for newer apartments. Oxford Book Store, the city’s most famous book store, now storing fewer books and more of CDs and stationery. The famous city eatery Flurry’s also makes an appearance.
If there was a book that I would want to read on a relaxed rainy afternoon (or a chilly foggy morning) with a cup of tea and a couple of samosas by my side, this would be it. (Another book that I would like to mention here is Amitava Kumar’s A Matter of Rats – A Short Biography of Patna. Having grown up in erstwhile Bihar I loved reading the book. My only complain with the book is that it ended just as I was starting to enjoy it)
3) Who Owns the Future? – Jaron Lanier (Allen Lane – Rs 850)
This is a fascinating book which raises many questions about the digital revolution that is currently on. One of the major questions that Lanier asks is what makes a few websites like Facebook, Instagram, Google, Twitter etc, so valuable? As he writes “its value comes from the millions of users who contribute to their network without being paid for it. Networks need a great number of people to participate in them to generate significant value. But when they do, only a small number of people get paid. That has the net effect of centralising wealth and limiting overall economic growth.”
Lanier also asks whether we are becoming too dependant by concentrating our digital lives around a few companies. As he writes “Suppose Facebook never gets good enough at snatching the ‘advertising’ business from Google. That’s still a possibility as I write this. In that event, Facebook could go into decline, which would present a global emergency…If Facebook starts to fail commercially, suddenly people all over the world would be at the risk of losing old friends and family ties, or perhaps critical medical histories.”
The same argument stands true for Gmail as well. For most of us it is a repository of a large amount of information, communication and documentation, that we need to keep going back to time and again. In that sense, these websites are becoming more like electric utilities as every day goes by. Who Owns the Future raises some fundamental questions that do not have easy answers.
4) Gandhi Before India – Ramachandra Guha (Allen Lane, Rs 899)
Mahatma Gandhi’s autobiography – The Story of My Experiments with Truth, was one of the first non fictions books that I happened to read. And as a young adult I found it very boring. Over the years I have been told that the Gujarati original is inherently more interesting and the translation in English, doesn’t quite work as well as the original (Gandhi translated the book himself). Also, the other complain that I had with Gandhi’s autobiography was that it does not get into much detail about his years in South Africa.
Ramachandra Guha’s Gandhi Before India addresses both the issues that I had with the autobiography. Guha’s research is top notch and he establishes in great detail that it was the years that Mohandas Karamchand Gandhi spent in South Africa, was what made him Mahatma Gandhi. Interestingly, Guha also tells us that Rabindranath Tagore was not the first man to call Gandhi a Mahatma. It was his doctor turned jeweller friend Pranjivan Mehta. The book also talks about the sacrifices made by Gandhi’s immediate family to help his struggle in South Africa. His eldest son Harilal regularly went to jail. Even his wife Kasturba went to jail for the cause. His nephews were also a part of his struggle.
This book is a must read for every Indian in order to realise how great Gandhi really was.
5) Battles Half Won – India’s Improbable Democracy – Ashutosh Varshney (Penguin Viking, Rs 599)
The book’s subtitle tells us what the book is all about. As Varshney puts it “the odds against democracy in India were extremely high”.
Democracy came to West after the industrial revolution which ensured that incomes had reached a substantially high level. In the Indian case, democracy as a form of government was adopted when only around 15-17% of the population was literate and the per capita income was very low. In fact, many countries that emerged from decolonization adopted democracy as a form of government. But of these countries democracy survived only in India, Mauritius, Belize, Jamaica, Papua New Guinea, Solomon Islands and Vanuatu. Each of these countries other than India are very small and have a higher income than that of India.
Also, research shows that democracies that have an economic growth rate of lesser than 5% per year collapse at a higher rate than democracies that have an economic growth rate of higher than 5%. As Varshney puts it “India’s economic growth rate has been higher than 5% per annum since 1980, but in the period 1950-1980, Indian economy grew at only 3.5% per annum.” Given these reasons, it is very surprising that democracy in India has not only survived, but is thriving. The recent success of the Aam Aadmi Party clearly proves that.
To know the reasons behind why democracy has survived in India, Varsheny’s book is an excellent read.
6) Emergency Retold – Kuldip Nayar (Konark Rs 295)
The only period since independence when India has not been a democracy was the period between June 26, 1975 and March 21, 1977, when the then prime minister Indira Gandhi, got the president Fakhruddin Ali Ahmed to declare a state of emergency.
Veteran journalist Nayar writes about the period in Emergency Retold. The book was first published in 1977 under the name The Judgement. The paper back edition was released this year. Nayar’s book reads like a political thriller. It starts on June 12, 1975, when Justice Jagan Mohan Lal Sinha found Indira Gandhi guilty on the charge of misuse of government machinery for her election campaign in the 1971 Lok Sabha election. Two weeks later Indira Gandhi got the President Ahmed to declare a state of emergency.
Nayar goes into great detail about how this was done. One of the interesting things he points out was that a copy of the censorship rules and details of the machinery required to implement them in Philippines, was provided to Sanjay Gandhi, by a businessman fried of his Kuldip Narang, who in turn had got it from his friends in the American embassy. The book is full of such interesting trivia from those times. In the end, it is also a grim reminder of the cost that India has had to pay for keeping the Nehru-Gandhi dynasty in power for large periods of time since independence. My only complain about the book is that there are just way too many typos.
7) 40 retakes – Bollywood Classics You May Have Missed – Avijit Ghosh (Tranqubear, Rs 395)
This book is really the joker in the pack. I read it early October on a day I was very bored and finished reading it under four hours. 40 Retakes is a book on 40 brilliant movies which flopped or did not pass the critics’ test over the years. Given the number of Hindi movies that get made every year, it would have been very difficult to arrive at the list.
I am no expert on the Hindi cinema of the 50s, 60s and 70s, but have watched a fair bit since the 1980s. Some of my favourite movies like Prakash Jha’s Hip, Hip, Hurray set in Ranchi and Vidhu Vinod Chopra’s Khamosh set in Pahalgam are a part of the list.
Kabir Kaushik’s Sehar and Tigmanshu Dhulia‘s Haasil, probably two of the finest movies set in the badlands of Uttar Pradesh, also make the cut. Ketan Mehta’s terribly underrated Aar ya Paar, a movie which I fell in love with when I first saw it, even though it was a rip off of a James Hadley Chase novel, is also a part of the list. Anurag Kashyap’s Gulal, Shimit Amin’s Rocket Singh and Sudhir Mishra’s Is Raat Ki Subah Nahi make it to the list as well.
A movie which should have been on the list is Kundan Shah’s Kabhi Haan Kabhi Naa, which I feel is the best Shah Rukh Khan movie till date. At the risk of getting booed I would like to say that Kabhi Haan Kabhi Naa is Kundan Shah’s finest film. Jaane Bhi Do Yaaro was made on the editing table.
Also, Navdeep Singh‘s Manorma Six Feet Under, should have been a part of the list. It’s a terrific re-working of Roman Polanski’s China Town.
8) When the Money Runs Out – The End of Western Affluence – Stephen D King (Yale University Press, Price not mentioned)
Economists who work for financial institutions are expected to be optimistic about things. But doesn’t seem to be the case Stephen D King, who is the Group Chief Economist at HSBC. In When the Money Runs Out, King points out that there is a lot that is wrong with the way the financial systems all over the Western world have evolved. The fundamental point that he makes in the book is that the ability of the developed countries to keep generating a reasonable economic growth has gone down. There are economic and political implications of the same. When the West was growing the governments promised a lot of benefits to its citizens. They are no longer in the situation where they can afford to pay off these benefits.
Most developing countries instead of getting used to the new low growth scenario have responded to it by printing huge amounts of money, in the hope of creating more economic growth. King calls them stimulus junkies. He discusses in great detail why its not so easy to suddenly stop or go slow on money printing, something which the Federal Reserve of United States has been trying to do for a while.
Anyone looking to understand how the current financial crisis will evolve in the years to come, should be reading this book.
9) Money – The Unauthorised Biography – Felix Martin ( The Bodley Head, Rs 599)
Over the last few years, the history of money has fascinated me a lot and I have read scores of books trying to understand how money actually evolved. But my journey on the history of money ended with this book. It’s a must read for anyone wanting to understand on what money really is?
10) Mofussil Junction – Indian Encounters 1977-2012 (Penguin Viking, Rs 599)
As they say, save the best for the last. If there was one book that I would have read this year, it would have to be Ian Jack’s Mofussil Junction. The book is a fantastic collection of short write-ups and essays on India. In fact, Jack’s prose at times makes you feel that you are reading some classic fiction.
My favourite essay in the collection is Somewhere to Call Their Own. The essay deals with Anglo Indians who decided to settle down around 1500 feet up in the Chota Nagpur hills, in this town called McCluskiegunje, near Ranchi. The most interesting character in this essay is an Anglo Indian girl called Kitty Memsahab, who actually sells fruits at the McCluskiegunje railway station to make a living.
As the concluding lines of the essay go “Down at the station I saw Kitty again…Now she was preparing a basket of oranges for the evening train and joking in Hindi with brewers of country liquor. She seemed to have made her peace – perhaps not with India, which is too large and complicated an idea, but at least with that small part of it where she was born.”
Reading about Kitty reactivated an old memory about a story that the India Today magazine had done around her sometime in the late 1980s. I have vague memories of the magazine carrying a photograph taken from inside a train showing a white woman selling bananas. This 2013 story that appeared in the Mint suggests that Kitty might still be selling bananas.
I also loved the epilogue of the book tremendously. Here Jack talks about a person called Major that he used to know in what was Calcutta. As the concluding lines of the book go “I got divorced soon after and with no in-laws to visit I didn’t see Kolkata again for nearly twenty years. The Major died – I’m not sure how. Smoking while walking could have been a contributory cause, it being a rule he often ignored. I miss his uncomplicated, upcountry curiosity: why, how, where, when? I miss his mischief. I mourn those figures slithering in the Hooghly’s mud, happy to make fools of themselves, once upon a time.” As I said, fantastic prose.
PS: If I could extend this list, the two books that I would put in are Jagdish Bhagwati and Arvind Panagariya’s India’s Tryst With Destiny and Jean Drèze and Amartya Sen‘s An Uncertain Glory: India and its Contradictions. Another book that I would like to add to the list Neil Irwin’s The Alchemists – Inside the Secret World of Central Bankers.
An edited version of this article appeared on www.firstpost.com on December 27,2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
India
“ India should have been after Pakistan to start talking after 26/11”
Vivek Kaul
Stuart Diamond has taught and advised on negotiation and cultural diversity to corporate and government leaders in more than 40 countries. For more than 90% of the semesters over the past 15 years his negotiation course has been the most popular at the Wharton Business School, based on the course auction. He is also the author of Getting More – How You Can Negotiate to Succeed in Work and Life. In this interview he speaks to Firstpost on why India and Pakistan need to negotiate, how the soldiers negotiate with tribal leaders in Afghanistan and why the lack of people skills is proving costly for technology firms.
What is the most important point in any negotiation?
Almost any negotiation worth doing with anybody, whether its a billion dollar deal, diplomacy or my kid wants an ice cream cone, is a high stakes negotiation to that person. So almost every negotiation that is done in the world begins as an emotional negotiation. When stakes are high people get emotional and listen less.
That’s a very perceptive point you make….
Hence, unless you deal with that in the beginning you are not going to get the response you like. Also, I’d like to point out that we have begun to study the cost of conflict i.e. the cost of not collaborating. It turns out that India is in a fair amount of trouble when it comes to this. Only 20% of the people in India, trust each other, 80% don’t. If India had the same amount of trust as Sweden, its GDP would be $95 billion higher, which is twice as much as the defence budget, ten times the education budget, fourteen times the health budget and equal to the entire budget shortfall. In addition to that it would have 38 million more jobs, which is twice the population of Mumbai. Therefore the lack of trust in this country is a significant social and economic issue.
Why would that be? Isn’t trust also a function the amount of equality in the country? Like you gave the example of Sweden. Sweden has one of the highest equality levels in the world…
I would phrase it differently. I would say that trust occurs when someone thinks you want to do something for them, even if you are unequal. It begins with the notion of do I care about them? For example, when we had terrorist attacks in Mumbai around five years back, that’s when India and Pakistan should have started talking non stop. That’s part and parcel of the problem, which is even if Pakistan wanted to stop talking, India should have been after Pakistan to start talking, because you cannot solve a problem by not talking. In other words, if we mistrust each other, that’s the time to start talking. So this is counter-intuitive to many people because it says that the less I trust you the more I need to talk to you.
Can you elaborate on that?
For example, instead of India threatening to clean out terrorist cells in Pakistan, and instead of Pakistan putting people on the border, India should say to Pakistan, do you like terrorism? If you don’t like terrorism, we don’t. You want us to be able to do something about it? Let’s start small. What’s the worse problem we can solve in the easiest way? How do we start? Have a discussion about it. As opposed to do it my way. Or I demand this. There needs to be discussion. Even my 11 year old son, when he breaks something on the floor, I don’t blame the floor, I say Alexander how can you prevent this from happening again? Even a 11 year old kid understands that. How do we fix the process?
Not many people would buy that argument these days…
So much time is being spent arguing over yesterday instead of fixing the process for tomorrow. Yesterday adds no value. It is done and you can’t fix it and you can’t do anything about it. Tomorrow is what we can add value to. Too many people are backward facing when they should be forward facing.
One of the interesting examples that I came across was where you allowed your son to watch Scooby Doo for every minute that he played the piano. What was that all about?
It was a trade. First of all life is about a trade. Even a relationship. Quid pro quo. If you don’t need each others needs, soon you won’t have a relationship. And parents expect kids to do things for nothing, when they themselves would never do things for nothing. I wanted to teach my child the value of the trade. I paid money for the piano. I knew he would grow out of Scooby Doo, but he still plays the piano.
What is the lesson?
I wanted to know what do we trade. It teaches people to be responsible. That’s a really good thing to be thinking about with kids and others. What do they value? It doesn’t have to be monetary. It can be something intangible. It can be a letter of reference.
Letter of reference?
Let me tell you an interesting story. About three months ago one of Google’s senior negotiators went to do a deal in the Southern United States where they doubled the fibre optics capacity. The first tranche cost $6 million and it closed two years ago. The vendor wanted $6 million for the second tranche. Instead of asking for a discount this Google negotiator said what can Google do for you? And the vendor said you can write us a letter of reference, so we could build our business.
That’s interesting…
The Google negotiator said fine we will do that. And then he said, what can you do for Google? The vendor decided to offer a discount to Google. And the vendor charged Google $6000 for an installation of $6 million, a 99.9% discount. This happened because they made the human connection and it wasn’t just about the money.
Can you give us another example of where an intangible played an important part in a negotiation?
My models are not only used by Google but by Special Operations in Afghanistan. If they make a connection with the tribal leaders, which may be something as simple as praising the fact that he(i.e. the tribal leader) was a war hero against the Soviets, the tribal leader will tell them where the bombs are buried and where the Taliban are. People say negotiations are complicated. No they are that simple. I like to watch kids negotiate. Kids are very simple. I am happy. I am sad. I am hungry. We are not getting along. A lot of what passes for negotiation is too complicated. Its just a conversation about what’s going on. The thing is it is not rocket science. But unless you know how to do it, it’s completely invisible. These tools are obvious when you see them, but are invisible unless you know them.
The Afghanistan example was interesting..
Let me give you another example. In Afghanistan, you have got tribal leaders interested in co-operating with the Allies. So, I teach the soldiers to say, think your kid is going to be sick next year? It takes some months to get medicines in Afghanistan. Your kid might die. We can get the medicine the same day. Who cares about that in your village? Whether they are a hard bargainer or a soft bargainer, it will be very hard for them(i.e. the tribal leaders) to turn down the alliance. So the more you can create a vision for someone, the more they are likely to buy in.
Any other example?
Here is one. Google wanted to put cigarette advertising and liquor advertising on cell phones. The legal department of Google did not want to do this because there was danger of kids getting access to it. We realised that whenever people think this is risky if you are more incremental you can be more persuasive. So then what was proposed was a limited experiment. We try with cigarette advertising in Britain and liquor advertising in the US for a small portion of the market and see if it can protected from under age people. Google would use that as a test to see how people self regulate. Google would be a leader in the industry as opposed to someone trying to get a heads up. So you can completely turn something around by being more incremental and by re-framing it in a way to capture the imagination of people.
In complicated situations do outsiders tend to be the best negotiators?
In fact, somebody without an emotional history is often the right negotiator. There are times when you can do it yourself but by the time it gets to a situation where the husband and wife are fighting with each other, you need a marriage counsellor. Before that point you can often do it yourself. But it is also true that sometimes the best negotiator with my wife is my son. So the right negotiator is the person who can make the best connection with the other side. The right negotiator is not the smartest, the most skilled and the most experienced. It might be the weakest member of your team.
That’s interesting. Can you give us an example?
I told this to the senior management of Morgan Stanley last month and they said that this flies in the face of a 100 years of investment banking experience. They are going to think of changing this. For 100 years, the most senior person did the negotiation. And that’s not often the right negotiator.
Because he has got too many things to do anyway. You need someone who does not come with a baggage…
Yes. Exactly.
“Men better do better at negotiations than women” you point out. Why is that?
And that’s only because men practice more. Women are instinctively better negotiators than men. They listen more. But they don’t practice enough and so they are not trained enough. And some training is better than no training. As soon as they get trained at negotiations they do very very well. In fact, 30% of the people in my classes are women and they get more than half the highest marks.
One of the things that you write about is that the lack of people skills is proving costly to technology firms…
Absolutely. I gave a talk four years ago to 400 people from Microsoft from the business development and legal departments. I started the talk by saying that this morning I googled Microsoft. I typed “Europe hates Microsoft”. Why did I get 10 million hits in a tenth of a second? I said you are thinking it costs you money because people don’t like you. People investigate you because they don’t like you. The notion is that it is not just about the technology, if people don’t like you they will find a way not to buy your products and services.
Hmmm. And that’s impacting technology firms?
The FBI in Washington tells me that they use Oracle. They hate Larry Ellison and they are trying to find a way to use something else. And of course if you have got $12 billion like Larry Ellison has, you can be an SOB, but the problem is when you get to an America’s Cup race, only two people show up, including you. So there are costs to that even if you can get away with it for a short period of time.
True…
Around 25 years ago I read a really an interesting quote from a treatise called The Myth of US Industrial Supremacy. though I am not sure of it.“There is no human organisation, institution or civilization, that cannot given enough time be ruined”. So I worry about it. However, powerful I am, if I make myself the issue over and over again, people are going to run away. The lack of people skills is the Achilles’ heal for the technology industry because it is not just about the technology. It is about how people feel about the technology.
The interview originally appeared on www.firstpost.com on October 1, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)
Building Global Brands from Emerging Economies
Big ideas often come out of small conversations. This seems to be the case with marketing guru Nirmalya Kumar’s latest book Brand Breakout: How Emerging Market Brands Will Go Global, which he has co-authored with Jan-Benedict EM Steenkamp.
“This book started one evening in my apartment [in London] when I was sitting with my friend JB [Jan-Benedict]. The latest Interbrand [a brand consultancy] 100 global brands list had come out. Not a single brand from the emerging markets was on it,” says Kumar, a professor of marketing and co-director at the Aditya Birla India Centre at London Business School.
“JB and I started talking about why things are the way they are. First we came up with reasons why there were no emerging market brands on the Interbrand list. Then we started to figure out how, if emerging market brands had to go global, they would need to go about it.”
Kumar and Steenkamp found one part of the answer in the list of the top 500 companies in the world. China has 73 companies on it—the second largest after the US. And here’s the nub: Most of these are business-to-business [B2B] companies, or those in the business of extracting natural resources, or those like China Mobile that are monopolies in their local markets.
B2B CAN DO WITHOUT BRANDING
“In B2B marketing, brands play a very small role,” says Kumar. “You go to the man on the street and ask him to name any of the top B2B brands. Chances are he won’t be able to name any. You ask people about ABB, nobody knows about ABB. Before it became Sony-Ericsson, nobody knew of Ericsson either.”
Nevertheless, there are some B2B companies that have been able to build big brands. But they are exceptions. “General Electric gets a branding because of being in washing machines and other electronic goods. Shell gets a name because of gas stations. IBM has a brand name that is consumer-oriented because they were in PCs and they have been around for 100 years or more. Otherwise IBM would not be a known brand,” says Kumar. “There are companies like Tetra Pak in packaging or Intel with its ‘Intel Inside’ campaign, which have been able to build brands.”
Companies from emerging markets don’t need to build global brands because most of them are not in consumer-facing businesses. Take Indian IT companies, for instance. They have concentrated on IT services, and not built products where they would have needed to create brands. “I suspect that the logic of a product company is very different from the logic of a service company,” says Kumar.
This is precisely why contract manufacturers in emerging markets haven’t developed brands. “Their existing business model is very successful. To evolve into a new business model with uncertain chances of success and doubtful profitability is unlikely,” he says.
Kumar cites the example of contract manufacturers in Bangladesh. “No country owns contract manufacturing like Bangladesh. When I was in Bangladesh, they told me, we have to have our own brands; we are tired of manufacturing for others. But their existing business model is so profitable, the question is do they need to develop brands?”
Also, to build a global brand in the business-to-consumer (B2C) space, companies need to create awareness among Western consumers through advertising and marketing—that may be an expensive proposition for emerging market countries. “The United States, Europe and Japan are probably the three most expensive places in the world to advertise. Given that, no emerging market can rationally make a case for advertising investment,” says Kumar.
Besides this, the country-of-origin effect [a psychological effect on customers when they are unfamiliar with a product] is also at play. “All Western consumers, when asked what they think of a brand that comes from India or China or any other emerging market, say it will be of poor quality,” says Kumar.
The irony, of course, is that consumers from emerging markets think the same about brands from their own countries. “Even Indian and Chinese consumers would say that brands coming from emerging markets, including their own, are of poorer quality than Western and Japanese ones.”
BUT BRANDS CAN BE BUILT
The dearth of global brands from emerging markets can be corrected in the time to come. There are a number of strategies that companies in these countries can follow in order to build brands in the West.
One is to use the diaspora route. “This strategy involves companies targeting immigrants from their own country and building enough scale and sales to support a brand push. You see a lot of brands doing that, including Pran [Foods] from Bangladesh, Dabur, ICICI Bank and, to some extent, SBI, Nando’s from South Africa, and Corona from Mexico,” says Kumar.
The second is the cultural resources route. Even though brands from emerging markets are considered to be of inferior quality by Western consumers, there are certain things that are regarded positively. “Even though Brazil has a poor image for any brand that comes out of it, nobody questions Brazil for fun, beach, sun and sand. That’s why they have a brand called Havaianas that sells flip-flops,” says Kumar.
Similarly, China is known for its ancient medicine and silk. India is known for ayurveda, a culture of history, yoga and religion. If a brand from an emerging market country positions itself around these things, it has a good chance of being accepted.
BRANDING COMMODITIES
Another route, which is very important for India, is through branding commodities. India has several such opportunities from Darjeeling tea and Mysore coffee to Basmati rice and Alphonso mango.
Once countries are able to brand commodities, they are able to get a price premium on that. “We have shown it with Columbian coffee (in our book). Even when coffee prices dip, Columbian coffee prices don’t dip as much. And Columbia is not even the largest producer of coffee. It is Brazil,” says Kumar.
First, the geographical region where a particular commodity is produced needs to be defined properly. “I have not seen any effort on this front in India. I know there is a Tea Board [of India] but there is a need for a Darjeeling tea board that authenticates things,” says Kumar.
Second, the production process needs to be tightened. “There are 14 steps that go into making some kind of wine in France. I bet you that even nine of them are not necessary. But it’s a way to show people that a lot of care is being taken in producing the wine to give it special qualities.
“Also, a very tough enforcement scheme needs to be put in place. If you try to put champagne on any sparkling wine produced anywhere else, it cannot be called champagne. Only sparkling wine from the Champagne region in France can be called champagne,” says Kumar. And any company using ‘champagne’ for sparkling wine gets sued by the French.
“Even the Americans had to remove the word champagne from their California sparkling wine,” says Kumar.
WHY CHINA IS AHEAD
Kumar is of the view that companies in China are better poised than those in other emerging markets when it comes to creating global brands.
“When Japan, South Korea and Taiwan started going down the path of globalisation, their quality of products was poor. Over time they put in R&D investments to improve the quality. China is the only exception as an emerging market; they have world-class manufacturing and nobody questions the quality of Chinese products when they are produced to Western specifics,” he says.
And it is easier to brand a product that is already high on quality. Kumar explains this with a thought experiment from his book. “Assume there are 1,000 Chinese manufacturers on contract for Western product companies and brands. They are manufacturing iPads and iPods for the world. So they can’t be bad. Out of those 1,000, let’s say 100 decide to build their own brand and try to diversify out of the low-margin contract manufacturing business where they are always at the mercy of Western companies. Out of the 100 who decide to do their own thing, 10 succeed. That means you will have 10 global brands coming out of China in the next decade.”
What also aids Chinese companies is that they think long-term. Indian companies don’t.
“Chinese companies have a long-term orientation, which comes from Confucius. They are playing for the next 100 years. They are not playing for the next 10,” says Kumar.
“And there is a reason for that: Indian companies are borrowing at very high rates from the capital markets. The major Chinese companies have state banks that are supporting them to some extent. So they are not paying the same interest rates, and can play the longer game much better,” he adds.
The Chinese government, too, has an eye for the future. “We might complain that the Chinese state is oppressive, but I have to grant one thing to the Chinese government—they do make big bets for the future,” Kumar says.
Take, for instance, their bet on urbanisation: “China knew 30 years ago that urbanisation is going to take place and they needed to have the infrastructure in place. They built that infrastructure. Today you can say that the Shanghai-Beijing train looks half empty. Yes, maybe it does. But they are not building it for today. You have to build the infrastructure for the next 20 years. I am sure it is going to be full some day,” says Kumar.
He adds, “The same thing is true for Shanghai and Beijing airports. They realise that they are building infrastructure for the next 20 years. We can’t be building an airport every two years.”
This interview was done when Nirmalya Kumar was professor of marketing at London Business School. He is now a member of the Group Executive Council, Tata Sons
The interview originally appeared in the India edition of the Forbes Magazine, dated August 23, 2013
The Almighty Dollar and the Fallen Rupee
“I am not an economist. I am an old bond trader,” said Drew Brick, who leads the Market Strategy desk for RBS in the Asia-Pacific region, when Forbes India caught up with him for breakfast on a recent visit to India. “We trade the noise,” he added emphatically.
Right now, the noise is about what US Fed Chairman Ben Bernanke said or didn’t say about his bond-buying. And this is why one needed to know what the “old bond trader” had to say about why the rupee was falling against the dollar. “What is happening now is really not a function of anything really specific to India, although India has an inclination to have problems,” explained Brick. Finance Minister P Chidambaram should welcome at least the first part of his statement, since he has been defending the “fundamentals” of the economy to anybody who would listen.
The foreign exchange market hasn’t been one of them, for it has been cocking a more attentive ear to what Bernanke had to say. And on June 19, he said that the Fed would go slow on its money printing operations in the days to come as the US economy started reviving. “If the incoming data are broadly consistent with this forecast…it would be appropriate to moderate the monthly pace of purchases later this year…And if the subsequent data remain broadly aligned with our current expectations for the economy, we would continue to reduce the pace of purchases in measured steps through the first half of next year, ending purchases around mid-year,” Bernanke said at a press conference that followed the meeting of the Federal Open Market Committee (FOMC).
That statement impacted the bond markets most—and the carry trade. The carry trade is about investors who borrow in low-yield currencies to invest in assets in other markets, presumably with higher yields. Bernanke’s statement signalled that bond yields may go up, and that meant carry-trades would have to be unwound. Brick confirmed this: “We are seeing the unwinding of a lot of carry trades that have been taking place across the globe in the chase for yield.”
Brick, who bears a striking resemblance to Hollywood actor Richard Gere, had worked with BNP Paribas, Morgan Stanley and legendary bond kings Pimco before he joined RBS last year. He explained why the dollar is holding up even though US growth isn’t exactly something to write home about. “Some people think that the United States is the least dirty shirt in the drawer. And it has got growth, though not a very high trajectory of growth,” said Brick.
It is this minor revival that is creating problems for carry trade investors who have borrowed and invested money across the world on the assumption that US interest rates will rule close to zero in the foreseeable future.
The return of economic growth in the US has pushed up 10-year treasury bond yields. The yield, which stood at 1.63 percent in the beginning of May, has since risen to 2.5-2.6 percent.
Said Brick: “A bond works by a simple method. It measures three fundamental variables. What are they? Everybody who trades bonds thinks about where is growth going? Where is inflation going? And what is the risk premium?”
And what do we get if we apply this formula to calculate the yield on 10-year US treasuries? Explained Brick: “If the 10-year yield today is around 2.2 percent [it was so, on the day the interview was conducted], what would you say the US nominal growth is? Around 2 percent. What do you think inflation is? Around 1 percent. What do you think the risk premium is in the market place? Clearly it’s risen a little, so maybe it is 30 basis points.” (100 basis points make 1 percent).
This gives us a 3.3 percent yield on 10-year US treasuries. “And when the 10-year treasury is trading at a yield of 2.2 percent, what do you do as a trader? You sell that freakin’ thing. And that’s the risk,” said Brick.
When lots of bonds are sold at the same time, the price of the bond falls and thus the yield, or the return, goes up. And that is precisely what has been happening with 10-year US treasuries, with the yield shooting up by nearly 60 basis points from 1.63 percent in early May to nearly 2.2 percent on June 18, 2013. After Bernanke’s press conference on June 19, the yield shot up dramatically. On June 24, it stood at nearly 2.6 percent.
“The 10-year US treasury is extremely important,” said Brick. This is because it sets the benchmark for interest rates on all other kinds of loans in the United States, from interest rates charged by banks on home loans and home equity loans to interest at which carry trade investors can borrow money. More important for the rupee’s health, when the 10-year US treasury yield goes up, carry trades become less attractive. “The days of quantitative easing-sponsored carry trading are about to be pared, perhaps significantly. Remember, as volume rises, the cost of carry rises and so, too, does market illiquidity,” said Brick.
This is why investors have been selling a lot of the assets they have invested in and repatriating the money back to the United States. The Indian debt market has been hit by this selling and foreign institutional investors (FIIs) have pulled out nearly $5 billion since late May. In fact, stock markets all over the world also fell in the aftermath of Bernanke announcing that he will go slow with his money printing operations in the days to come.
The Federal Reserve has been printing $85 billion every month. It uses $40 billion to buy mortgage-backed securities, and $45 billion to buy long-term American government bonds. By doing so, it has been pumping money into the financial system and keeping interest rates low in order to spur growth.
But the growth did not come. Said Brick: “The truth is that central banks are running up their monetary bases but they are not necessarily getting any bang for the buck in terms of the turnover of the cash that they are creating into the system.”
Bernanke did not say he was going to withdraw all kinds of quantitative easing, or even that he would start withdrawing the easy money. That would require him to sell all the bonds he bought. The market though is getting ready for that to happen. “The market is already trading this. Forward pricing in the markets is already adjusting for this,” said Brick.
Low interest rates in the US after the 2008 Lehman crisis led Asians to borrow a lot in cheap dollars. “All across Asia, non-financial corporations, and even households to a small extent, have been taking out huge amounts of dollar funding,” said Brick. And this may cause some major problems in the days to come. “Right now we are seeing an unwinding of the dollar carry trade but at some point the dollar is going to turn and then the servicing cost of that debt is going to be all the more tricky. Every crisis that I have ever read through, and I am an old man, has always been born on the back of rising rate cycles that move higher with the dollar in tow. This makes the financing cost of debt in emerging markets more expensive. That’s across the board. That’s probably true here in India as well,” he added.
Brick suspects that there are problems lurking in the woodwork. “Corporates are relatively sanguine with a weaker rupee. But where are the cockroaches in the system? Where has the dollar funding been taken on offshore? Have Indians thought about what it means to have a rupee possibly at 65 to a dollar? And what would that possibly mean for the financing cost of banks that have almost certainly been taking on relatively cheap quantitative easing-sponsored cash in their offshore operations to be able to finance lending?”
If the rupee gets to 65 to a dollar, our oil bill will go for a toss. And will gold have a rally in rupee terms, assuming that its price stays stable in dollar terms? “Gold is a zero interest, infinite maturity, inflation-linked bond. That’s all gold is,” Brick responded. The supposed end of quantitative easing in the United States has taken some sheen off the yellow metal. “But it’s possible that we may have another move higher. The selloff has been rather pronounced. But it’s not the core issue here. Gold is a symptom of the larger issue,” said Brick.
Brick also feels that the bond market in the United States might be getting a little ahead of itself.
He reminded us about March 2012, when the 10-year US treasury yield had moved up to 2.4 percent. “Then, Ben Bernanke showed up on the tapes 10 straight trading days, running it back down [i.e. the yield]. My guess is that something like that will occur this time. The market is way ahead of itself.”
The broader point is that if yields rise at a fast pace, they will push up interest rates on loans. This will slow down some of the economic growth that seems to be returning to the United States. And that situation may not be allowed to play out.
So where does that leave Asia? “If quantitative easing gets tapered off as a consequence of relatively strong growth, then quite frankly Asian equities probably will hold in pretty well,” explained Brick.
And then came the but. “But if treasuries sell off massively as a consequence of technical reasons and a marketplace getting well ahead of itself, and dollar funding and interest rates get higher, then equities will get wasted out.”
“What is another scenario? I can give you millions of scenarios. But the truth is we don’t know in the opening stages, the first minutes of a three-hour movie, how it is going to play out. It’s going to be like a Bergman movie. I don’t know how it is going to play out but it is going to be weird at times,” Brick said.
Weird it will be, for “even the end-point of tapering [of Fed bond purchases] leaves the Federal Reserve with a still-gargantuan 25 percent-of-US-GDP balance-sheet. Pressures will sustain, even with reprieves,” Brick concluded.
The interview originally appeared in the Forbes India magazine edition dated July 26, 2013
Japan to India: Busting the biggest myth of investing in real estate
Vivek Kaul
Japan saw the mother of all real estate bubbles in the 1980s. Banks were falling over one another to give out loans and home and land prices reached astonishingly high levels. As Paul Krugman points out in The Return of Depression Economics “Land, never cheap in crowded Japan, had become incredibly expensive: according to a widely cited factoid, the land underneath the square mile of Tokyo’s Imperial Palace was worth more than the entire state of California.”
As prices kept going up, the Japanese started to believe that the real estate boom will carry on endlessly. In fact such was the confidence in the boom that Japanese banks and financial institutions started to offer 100 year home loans and people lapped it up.
As Stephen D. King, the chief economist at HSBC, writes in his new book When the Money Runs Out “ By the end of the 1980s, it was not unusual to find Japanese home buyers taking out 100 year mortgages (or home loans), happy, it seems, to pass the burden on to their children and even their grand children. Creditors, meanwhile, naturally assumed the next generation would repay even if, in some cases, the offspring were no more a twinkle in their parents’ eyes. Why worry? After all, land prices, it seemed, only went up.”
Things started to change in late 1989, once the Bank of Japan, the Japanese central bank, started to raise interest rates to deflate the bubble. Land prices started to come down and there has been very little recovery till date, more than two decades later. “Since the 1989 peak…land prices have fallen by 60 per cent,” writes King.
Every bull market has a theory behind it. Real estate bull markets whenever and wherever they happen, are typically built around one theory or myth. Economist Robert Shiller explains this myth in The Subprime Solution – How Today’s Financial Crisis Happened and What to Do about It. Huge increases in real estate prices are built around “the myth that, because of population growth and economic growth, and with limited land resources available, the price of real estate must inevitably trend strongly upward through time,” writes Shiller
And the belief in this myth gives people the confidence that real estate prices will continue to go up forever. In Japan this led to people taking on 100 year home loans, confident that there children and grandchildren will continue to repay the EMI because they would benefit in the form of significantly higher home prices.
A similar sort of confidence was seen during the American real estate bubble of the 2000s. In a survey of home buyers carried out in Los Angeles in 2005, the prevailing belief was that prices will keep growing at the rate of 22% every year over the next 10 years. This meant that a house which cost a million dollars in 2005 would cost around $7.3million by 2015. Such was the belief in the bubble.
India is no different on this count. A recent survey carried out by industry lobby Assocham found that “over 85 per cent of urban working class prefer to invest in real estate saying it is likely to fetch them guaranteed and higher returns.”
This is clearly an impact of real estate prices having gone up over the last decade at a very fast rate. The confidence that real estate will continue to give high guaranteed returns comes with the belief in the myth that because population is going up, and there is only so much of land going around, real estate prices will continue to go up.
But this logic doesn’t really hold. When it comes to density of population, India is ranked 33rd among all the countries in the world with an average of 382 people per square kilometre. Japan is ranked 38th with 337 people living per square kilometre. So as far as scarcity of land is concerned, India and Japan are more or less similarly placed. And if real estate prices could fall in Japan, even with the so called scarcity of land, they can in India as well.
Economist Ajay Shah in a recent piece in The Economic Times did some good number crunching to bust what he called the large population-shortage of land argument. As he wrote “A little arithmetic shows this is not the case. If you place 1.2 billion people in four-person homes of 1000 square feet each, and two workers of the family into office/factory space of 400 square feet, this requires roughly 1% of India’s land area assuming an FSI(floor space index) of 1. There is absolutely no shortage of land to house the great Indian population.”
The interesting thing is that large population-shortage of land is a story that real estate investors need to tell themselves. Even speculators need a story to justify why they are buying what they are buying.
Real estate prices have now reached astonishingly high levels. As a recent report brought out real estate consultancy firm Knight Frank points out, 29% of the homes under construction in Mumbai are priced over Rs 1 crore. In Delhi the number is at 11%. Such higher prices has led to a drop in home purchases and increasing inventory. “The inventory level has almost doubled in the last three years. In the National Capital Region, the inventory level reached 31 months at the end of March 2013 against 15 months at the end of March 2010, while in the Mumbai Metropolitan Region the inventory level has jumped from 17 months to 40 months. In Hyderabad, it reached 49 months in March 2013 as compared to 23 months in March 2010, according to data by real estate research firm Liases Foras. Inventory denotes the number of months required to clear the stock at the existing absorption rate. An efficient market maintains an inventory of eight to ten months,” a news report in the Business Standard points out.
The point is all bubble market stories work till a certain point of time. But when prices get too high common sense starts to gradually come back. In a stock market bubble when the common sense comes back the correction is instant and fast, because the market is very liquid. The same is not true about real estate, because one cannot sell a home as fast as one can sell stocks.
Real estate companies in India haven’t started cutting prices in a direct manner as yet. But there are loads of schemes and discounts on offer for anyone who is still willing to buy. As the Business Standard news report quoted earlier points out “As many as 500 projects across India are offering some scheme or the other, in a bid to push sales in an otherwise slow market. According to Magicbricks.com, an online property portal, Mumbai has the maximum number of projects with schemes/discounts at around 88, followed by Delhi with 56 and Chennai and Pune with 33 each. Kolkata has 30 such offers, while Hyderabad has 18 and Bangalore has 16. On a pan India level, Magicbricks has about 274 projects with discounts offer.”
Of course the big question is when will the real price cuts start? They will have to happen, sooner rather than later.
The article originally appeared on www.firstpost.com on July 2, 2013
(Vivek Kaul is a writer. He tweets @kaul_vivek)