Friday, August 31, 2012

Shipyards struggle to stay above water

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When China Rongsheng Heavy Industries announced in December that it had received a big order to build crude oil tankers, it raised fears among many of the world’s shipowners.
Many thought the order might signal the start of a concerted Chinese effort to boost employment in the country’s shipyards and build up its merchant fleet – and further flood oversupplied, depressed shipping markets.
Yet last week, the same shipyard’s first-half figures illustrated how shipbuilders face substantial problems of their own.
Rongsheng, one of China’s biggest, announced it had taken just $58m in orders in the first half, against $725m in last year’s second half, as the worst shipping slump in 25 years deterred owners from placing orders.
Its decline reflects a wider fall in orders. According to Clarkson, the shipbroker, orders worldwide in the first half this year were 46 per cent down even on last year’s depressed first half.
Rongsheng’s two announcements highlight how the interdependent shipowning and shipbuilding industries are suffering together, which has pushed earnings for many ship types to below their operating costs.
Shipowners fear desperate shipyards will slash prices or find some other means to secure new orders, worsening the existing glut. Shipyards fear struggling shipowners will hold off ordering for so long that their cash runs out.
The question for both sides is how to survive until an upturn.
Harald Serck-Hanssen, head of shipping for Norway’s DNB Bank, says it may in the short term make sense for some yards to offer to build vessels at less than cost prices. But he goes on: “The fact of the matter is – whatever way you look at it – there are too many shipyards for any foreseeable future.”
The sharp fall-off in orders comes in the aftermath of the 2002-08 shipping boom, which prompted shipowners worldwide to order vast numbers of vessels and led to a significant ramp-up in shipbuilding capacity, particularly in China.
Delivery of vessels ordered during the boom has flooded most shipping markets with capacity, sending ships’ earnings plummeting.
Erik Nikolai Stavseth, an analyst at Oslo-based Arctic Securities, says it is “no wonder” owners are no longer ordering vessels.
“I think that the entire shipping community sees that if they keep ordering vessels, even though prices have come down significantly, they know that it will only postpone the upturn,” he says.
Yet, even though all shipbuilders complain about the slump’s effects, not all the big Asian shipbuilding nations – Korea, China and Japan – are affected equally.
Korea’s shipyards – the world’s busiest by compensated gross tonnage, a measure of a ship’s size and complexity – continue to win orders for some complex oil drilling ships and liquefied natural gas carriers.
Demand for drill ships remains strong because of the high oil price, while Japan’s strong post-tsunami demand for gas has pushed up rates for LNG carriers.
Kim Moon-joo, a spokesman for Hyundai Heavy Industries, the world’s largest shipbuilder by CGT, says the company is trying to boost its competitiveness in drill ships and offshore facilities.
“We expect new orders for drill ships and large offshore facilities to increase at the end of this year or early next year,” he says.
Sophisticated shipbuilders in Japan, who rely predominantly on domestic shipping companies for orders, have suffered over the past year from the strengthening of the yen. The increase pushed Mitsubishi Heavy Industries, the country’s largest shipbuilder by CGT, into a Y7.7bn operating loss for 2011, against a Y1.8bn profit the previous year.
I think we’re going to see a fair amount of bankruptcies
- Erik Nikolai Stavseth, Arctic Securities
Shipbuilders in China, which builds mainly straightforward oil tankers, dry bulk carriers and container ships that are in most serious oversupply, appear set for the biggest problems.
Many of the Chinese yards opened only in the past decade after the shipping boom encouraged entrepreneurs to turn spare waterfront land into shipyards.
“In China, where there is serious overcapacity, many shipyards have had no work at all this year,” says one Hong Kong-based analyst.
There remains the possibility that Chinese state-controlled companies will place further significant orders with the yards, such as that for at least 10 Suezmax tankers placed last year with Rongsheng. Sinotrans, one of China’s biggest state-controlled transport companies, says it is considering placing orders soon.
However, the likelihood, according to most analysts, is that many shipyards in China and elsewhere face going out of business.
“I think we’re going to see a fair amount of bankruptcies,” Mr Stavseth says. “I think there’s going to be a good shake-up in the shipyard industry.”

Still driven by cash, black money

The use of cash in financial transactions continues unabated, pointing to the prevalence of the black economy at the higher end of the income spectrum and the absence of financial inclusion at the lower end.
The recent movements engineered by social activists run along two parallel lines. One group steered by Anna Hazare demands a Lok Pal Bill to wipe out corruption in the realm of government, and the other steered by Baba Ramdev, calls for unearthing of black money.
There are two dimensions of the black economy which are talked about -- the money stacked abroad in foreign bank accounts, especially Swiss banks, and the money accumulated or floating around in the internal economy.
Assuming that internally, the black money is accumulated through transactions which are not captured by the organised banking system, such transactions must be cash-based. The other alternative may perhaps be gold.
On the above ground, one of the demands of Baba Ramdev is to ban use of higher denomination currencies of Rs 500 and Rs 1,000. Is there any ground to believe that a large volume of cash transactions in the economy is shifting in favour of high denomination notes? We attempt to examine this point.

High Denomination Notes

On the composition of bank notes, the recently released Annual Report of the Reserve Bank says the following about the trend during the year ending March 2012, which fared badly in terms of economic growth: “At 12.5 per cent, the growth in value of banknotes outpaced the growth in volume terms (7.4 per cent) in 2011-12. Notes of denomination 500 and 1,000 together accounted for 82 per cent of the total value of banknotes in circulation.”
During the last three years, the growth in high denomination notes of Rs 500 and Rs.1,000 was 20.5 per cent, 24.1 per cent and 14.9 per cent, respectively. This was much higher than the growth in total bank notes over the same period, viz., 15.7 per cent, 18.7 per cent and 12.5 per cent. Accordingly, the share of high denomination notes to total bank notes increased from 76.4 per cent to 81.6 per cent over the last three years.

Decadal Trend

The trend in the composition and growth of high denomination notes since 2002 shows that the situation in 2011-12 is no exception.
The compositional shift has been a continuous process, indicating that almost the entire value of bank notes at one stage may be held in high denominations (see table).
The growth in high denomination notes was significantly higher every year than the growth of bank notes as a whole.
And the growth in total bank notes also was perhaps larger than the GDP growth, indicating a high elasticity of bank notes to real GDP.
This is perhaps a sign of financial inclusion not succeeding and a larger volume of transactions still being handled in cash.
Between the years ending March 2002 and 2012, the total bank notes in circulation jumped from Rs.2.45 lakh crore to Rs.10.52 lakh crore, growing annually in the range of 12.4 per cent and 18.7 per cent.
On the other hand, the value of high denomination notes galloped from Rs. 0.75 lakh crore to Rs.8.60 lakh crore between the same years, growing annually in the range of 14.9 per cent and as high as 45.0 per cent.
In the very recent past, there has been some softening of growth rates in both total bank notes and that of high denomination notes. The former may be attributed to success of financial inclusion combined with slower economic activity.
Should the latter be attributed to the Anna Hazare or Baba Ramdev effect, or is it a reflection of substitution of currency with gold by hoarders of unaccounted money? It is anyone’s guess.

Money Velocity

With increasing financialisation, one would normally expect that currency will be substituted by higher-end assets like bank deposits and other forms of financial assets.
Taking only the transactions demand for money, say, the currency and demand deposits, the ratio of currency to demand deposits should reflect a secular declining trend.
But, the currency to demand deposits ratio, after declining from 2.69 in 1961-62 to 1.00 around 1977-78, increased to 1.58 in 1978-79 and since 2001-02, it is hovering mostly in the range of 1.2 to 1.4.
From another angle, the velocity of currency, measured as a ratio of nominal GDP to currency, should reflect economising of currency in terms of a secular increase.
However, the velocity after increasing from 7.7 in 1955-56 to 12.92 in 1975-76, gradually decreased over the years and in the recent period, ruling in the range of 9.0 and 9.7 (See graph). This is despite the fact that a large volume of transactions has shifted to debit/credit cards in the last decade.
Yet another dimension of the same problem is how far the financial savings are still in the form of currency.
This is reflected in the variation of currency every year as percentage to change in total financial assets, including currency. Instead of decreasing over time, the saving in the form of currency to total financial saving of the household sector remained rather stubborn at around 10 per cent or above over the last decade.

Financial Inclusion

The above trends overall would show that financial inclusion should address both lower and the higher end of the economic spectrum.
At the lower end, it is true that about half the households are excluded from banking, and much more from other financial services like insurance and pensions.
At the higher end, it is not that they are not covered by the banking system, but there seems to be a huge volume of financial activity carried on cash basis which should be brought within the purview of the banking or the organised sector.
The other dimension of the problem is, of course, that of the external wealth hidden by domestic households abroad, which is a hidden reserve of the country not available due to capital flight.
(Source: Business Line)

Squeezing sugar mills

The Commission for Agricultural Costs and Prices has suggested that the government should do away with the “levy quota” on sugar mills, in which they need to set aside 10 per cent of their output for the public distribution system (PDS). Since it’s meant for poor households, this sugar sells at a price that is significantly below the market price. This, in the Commission’s opinion, has crimped the mills’ ability to adequately compensate sugarcane farmers. Instead, it has said that the central government should either buy sugar from the mills at market prices for the PDS or let the state government buy it and reimburse the difference between the market price and the subsidised price. The idea is to transfer the subsidy burden from the mills to the government (one who gets the credit for the initiative must pay for it) and end the dual-pricing regime.
There is merit in the argument. Indeed, the sugar mills have for far too long carried the burden of the government’s welfarism. The subsidy to consumers, which is borne fully by the mills, was calculated at Rs 7,000 per tonne by the Commission. As close to 2.7 million tonnes of sugar was supplied to the PDS, the loss to the mills was close to Rs 1,900 crore. Given the rampant leakage from the PDS, it would be incorrect to assume that the mills’ loss was the consumers’ gain. Indeed, direct transfer of the subsidy to the accounts of the poor households could plug this leak. On the other hand, the arrears to sugarcane farmers in Uttar Pradesh, where you have the largest number of private sugar mills, stand at Rs 493 crore — Rs 461 crore from private mills and the rest from public sector mills.
The Uttar Pradesh mills are carrying stocks from the last sugarcane crushing season, when their production cost on average was Rs 32,000 per tonne. When they sell this sugar for the PDS, they get paid Rs 18,500 per tonne. So their current loss, at Rs 13,500 per tonne, is much higher than what has been calculated by the Commission as the national average. The central government also tightly controls the supply of sugar in the open market (it specifies how much stock each mill can release every month) and uses the import and export levers frequently so that prices remain under check. As a result, the mills face difficulty in making enough money in the open market to compensate the losses in PDS sale. For instance, the current market price of Rs 33,000 per tonne gives a profit of Rs 1,000 per tonne to the mills, compared to the loss of Rs 13,500 per tonne on PDS sale.

In fact, mills get it from both ends. To keep consumers happy, the Centre keeps prices on a tight leash. At the same time, to keep sugarcane farmers happy, the states insist on raising support prices. Mayawati, the former chief minister of Uttar Pradesh, last year raised the price at which mills could buy sugarcane by Rs 400 to Rs 2,500 a tonne. With a crop of 66.5 million tonnes, this caused an extra burden of at least Rs 2,660 crore on the mills. Mayawati’s gift to the four million or so sugarcane farmers of the state was funded fully by the mills. This cannot be allowed to go on forever. Accepting the Commission’s recommendations should be the first step to cleanse the system of political interference.
(Source: Business Standard)

Driving into future: Ashok Leyland

From all accounts, Ashok Leyland (AL), one of India’s leading bus makers, is in cruise control. It has an oversized share of the market at 41.78 per cent, and, along with Tata, which has 41.94 per cent, rules the universe of buses in India.
Moreover, Ashok Leyland has a considerable advantage over the smaller players — especially from abroad, like Volvo or Isuzu — with its strong distribution network of 420 nationwide dealers, enviable brand identity, good relations with state transport corporations as well as local sourcing partners.
Yet, AL has decided it needs to push the envelope in products and technology. It has done so by buying a 75 per cent stake in British bus manufacturer Optare, in December 2011, with the intention of bringing its flagship bus, Solo, described as a low-floor midibus, to the Indian market. The bus will hit Indian roads in the next few months.

This could turn out to be a savvy move. Sometimes, proactive policies while in a position of strength can do wonders to check problem spots that often germinate into full-fledged disasters. And, it is not as if Ashok Leyland hasn’t had its share of problems. For instance, amidst the 2008 recession, the company’s bus sales took a dip from FY07 to FY09 in arguably one of the fastest growing markets for buses in the world. Recently, it was unable to win important bids for contracts with two state transport corporations.
The bus market in India — which saw 98,673 units (including big buses and small ones) sold in 2011-12 versus 92,754 in the previous year — is undergoing a significant transformation. Earlier, travellers in India primarily considered cost as the fundamental determining factor in the decision-making process of which bus to board. Now, comfort, along with safety and reliability is a priority, says Abdul Majeed, analyst with PwC India, which explains Volvo’s rise to prominence in the luxury end of the spectrum. The key driver for all of these is technology, something that industry observers say both AL and as its competitor Tata are not up to speed with, at least vis-a-vis their global competitors.
The main advantage Optare will give AL is in the intra-city space, say industry observers. This is an important category to cater to. No longer like the rickety buses of yesteryear, buses today are fancier and are more comfortable, and commuters are increasingly getting used to them. Tata, for instance, has tied up with Brazil’s Marco Polo and South Korea’s Daewoo, and its sleek buses are now ubiquitous on Delhi roads. AL, too, does not want to be left behind. “We recognise the need to maintain cost competitiveness for the end-customer and consequently our focus would be to see how we can hold on to the prices and offer a match in the market for a value proposition. I do believe that we would not be left behind in terms of the product offerings which are more relevant for the domestic market. From all these fronts we should be able to give a fight,” says K Sridharan, CFO of AL.
Optare’s Solo will provide a product that would compete in this area — traditionally categorised as lying between the normal and luxury segments. “If Solo fits in this space, then AL has got big scope, since STUs (state transport undertakings) want to upgrade from the normal to the next level and AL has all the advantages including brand, long-term relationship and cost,” said the analyst.
AL is also planning to introduce the JanBus, a single-step, front-engine, fully-flat floor bus for which the company has 16 patents. The bus has an automated manual transmission and is targeted at STUs. Meanwhile, AL’s foreign subsidiaries are already offering products for the luxury segment, including buses built in Vietnam, Turkey, Egypt and Peru on 8XX Chassis,in Singapore on AVIA chassis and in Ukraine on the Falcon Chassis. AL is also looking at bringing Hybrid versions of Optare’s electric buses. Since the electric buses may be too costly for Indian markets, the company is evaluating hybrid options to start with.

Coal row: firms face ambiguous future

Will all of the 57 coal blocks mentioned in the recent Comptroller and Auditor General (CAG)’s report be de-allocated by the government? If so, what ramifications will it have on the companies mentioned in the report, and the customers they serve? This is the question that is foremost on everybody’s mind, as the latest imbroglio concerning India’s natural resources unravels. This time, Prime Minister (PM) Manmohan Singh finds himself directly in the line of fire for being the coal minister twice during the period in which the alleged gains of Rs 1.86 lakh crore were passed on to private coal miners.
In some ways, the beginnings of an answer lay embedded in the 32-paragraph speech delivered by the PM amidst a raucous din in Parliament. In it, two lines carried huge import for the industry — Singh revealed that his government had initiated action to cancel the allocations of allottees who did not take adequate follow-up action to commence production. Some 25 mines have already been de-allocated for not beginning production or showing few signs of progress.
Singh also mentioned that the Central Bureau of Investigation (CBI) is scutinising “allegations of malpractices”. While, it is not clear what exactly the CBI is looking into, a senior coal ministry official says, “CBI is asking questions on all 57 blocks and we are answering them.” Suddenly, just when the country had put the 2G spectrum auction scam behind it and readied itself for fresh auctions, another fiasco involving allotted natural resources threatens to become the next big scandal.
Listed below are companies mentioned in the CAG report that risk having to relinquish their mines
SectorCompanies with captive blocks
Sponge & Pig IronAbhijeet Infrastructure, Usha Martin, Bhushan Steel, Rungta Mines, Neelanchal Iron,
Bajrang Ispat, Electrosteel Castings,
Domco Smokeless Fuel, Tata Sponge,
Nalwa Sponge Iron, Topworth Urja & Metals,
Power Essar Power, Hindalco, JSPL, DB Power, Monnet Ispat, Tata Power, Adani Power, CESC Ltd, JAS
Infrastructure, Jindal Photo, Gagan Sponge Iron,
SKS Ispat & Power, Prakash Industries,
Adhunik Thermal Energy, Tata Steel,
Himachal EMTA, JSW Steel, Madanpur South,
ArcelorMittal, Navabharta Power, Reliance Energy,
Sterlite Energy, Kohinoor Steel, Lanco, GVK Powers,
AES Chhattisgarh Energy
Coal-to-liquid Jindal Steel & Power, Strategic Energy Tech System
Cement Gujarat Ambuja Cements, Lafarge India
Steel Tata Steel, Jayaswal Neco, Mukund Ltd,Vini Iron & Steel, JSW Steel, Usha Martin

194 coal blocks with aggregate geological reserves of 44,440 million tonne were allocated to different government and private parties till March 31, 2011. Now, coal blocks never had a value attached to them whenever they were allotted. Coal cannot be mined and sold except by the government’s own company, Coal India, and state mining companies. The law allows only captive use of coal in notified sectors such as iron and steel, power, cement, and coal to liquid projects.
None of the natural resources, in fact, are priced in the country when handed out to private companies for development and production. The logic is simple: The government encourages production of these resources, whether coal, iron ore or oil for use as inputs in other goods and services. No mineral acreage is allotted either through bidding or committment of a share to the government, except in the case of crude oil and coal bed methane. Coal has been coming at no cost to companies with domestic mines. All they had to do was to mine the coal and pay a royalty to the state governments.
Coking coal mines were nationalised in 1972 followed by the nationalisation of non-coking ones in 1973. Private companies continued to hold the leases of some mines
1976 Coal Mines Nationalisation (Amendment) Act was enacted, terminating lease of private lease holders except those of iron and steel producers who were allowed captive use of coal
Jul 1992 A screening committee under the chairmanship of the coal secretary was set up to consider applications for captive mining of coal. Some 143 coal blocks of Coal India and Singareni Collieries where production plans had not been made were put up for captive miners
Jun 1993 The Act was amended again to include power in captive mining category
Mar 1996 Cement, too, was notified as an end-use by inserting an enabling provision
Feb 1997 The Cabinet approved a proposal to amend the Coal Mines (Nationalisation) Act to allow non-captive mining by Indian companies but the Bill is still pending after being introduced in the Rajya Sabha in April 2000
Feb 2006 Captive mining was opened up to 100 per cent FDI under automatic route
Jul 2007 Coal gasification and liquefaction was notified as specified end-use for captive mining
Sept 2010 Mines and Minerals (Development and Regulation) Act was amended to make competitive bidding applicable to all minerals
Feb 2012 Ministry of Coal notified auctioning of coal mines

De-allocation damage
Captive mines are the lifeblood of several industries and de-allocation could severely impede their future projects. A large portion of the country’s steel production, for instance, comes from captive iron ore and coking coal mines. The major beneficiaries of such captive resources, merely because of first mover advantage, have been Tata Steel and the government’s own, Steel Authority of India, though they, too, have to import coal.
Even in the case of ArcelorMittal, which is yet to start production in India, steel making would be backed by captive iron ore and coal mines. The Rampia and Seregarha coal blocks were allocated to ArcelorMittal for power generation at its proposed integrated steel plants in Odisha and Jharkhand, respectively. “We have invested money towards mine development and have completed prospecting at Seregarha and are awaiting allocation of a prospecting licence for Rampia (along with other partners),” a company spokesperson said in response to emailed queries. Coal mines are expected to generate 750 Mw each from the two power plants. This is also the case with JSW Steel Ltd, which has two mines allotted to it in West Bengal and Jharkhand, which it shares with other companies.
In the power sector, which uses over 80 per cent of the country’s coal production, 85 per cent of the 76,000 Mw additional capacity targeted to come up in the next five years will be based on coal. Among the 57 blocks, 20 have been allotted for power projects belonging to companies like Essar Power, Bhushan Power & Steel and Tata Power. Sponge and pig iron producers have another 25 blocks allotted to them either alone or in a consortium with other companies.
No science to allocation
The allocation of coal mines has been done through the screening committee route where representatives of various ministries go through applications that have recommendations from the state governments. There are no set criteria for selection. At the core of the CAG calculations lies the criticism that the 57 captive blocks did not start production, resulting in 1,302 million tonne of extractable reserves which are under lease to companies that got them without going through a competitive bidding process. While 20 of these blocks lie in the no-go areas where environment clearances were restricted, officials in the government and some of those companies maintain that it was not possible to develop the mines so quickly.
NTPC, which is not part of the CAG list because it is a government company, had also received de-allocation notices for five mines of which the government has agreed to return three. “The way coal mining is allocated to us is only a piece of land which is shown. There is no geotechnical investigation, no survey of land, no environmental clearance and no land acquisition. Unlike a UMPP (ultra-mega power project), we have to do everything. Coal India in its mines has not been able to do these activities in 12 years. International mines take a minimum of seven years to start mining,” says Arup Roy Choudhury, NTPC chairman and managing director, while questioning the charges of delay in production.
Do industries gain?
The financial gains that have been ascribed to the the 57 allottees based on the coal reserves are actually an estimate of the coal input cost in the end product. As Roy Choudhury points out, there is no gain in the case of power plants that operate under the regulated regime of the Central Electricity Regulatory Commission simply because the cost is passed on to the consumers. “There cannot be a loss to the country but a benefit to the ultimate consumer. The regulator fixes cost and bills accordingly. Whatever the cost, whether coal is priced or comes from a captive mine, is a pass-through,” he says.
Even in the case of Essar, the company has plans to produce about 3000 Mw with an investment of about Rs 16,000 crore on the back of captive coal from one power plant each in Jharkhand and Madhya Pradesh. Around 75 per cent of this power is to be sold under power purchase agreements with state governments. Of the remaining, around 12 per cent power from the Jharkhand unit has to be sold at just the variable cost and another 12.5 per cent at 15 per cent return on equity to the state government since the coal mine is situated in that state.
In its defence, the coal ministry had told CAG that 17 blocks were allotted to the power sector, where tariff is regulated on the basis of input costs and the transfer price of coal is assessed on actual cost basis. Even in the case of steel and cement, the ministry says a competitive market ensures the best benefit for consumers. Though most companies that figure in the CAG list and to which Business Standard spoke did not comment on the importance of blocks to their end-use projects, a senior executive in one of the companies says that the whole idea of getting private players into the business of coal mining is to get a larger quantity of products, whether it was power or steel, into the market at cheaper rates.
Even if bidding is introduced, higher price of coal is something that does not bother private players as much as the availability and access to raw material and fuel through stable contracts. The market, after all, gets adjusted to a higher price as the entire industry reacts to it. Regardless of how the CAG report plays out, the fact is that a natural resource that was once taken for granted now has a considerable value attached to it, changing its economics for times to come.
(Source: Business Standard)

Bajaj - king of motorcycle universe?

With the introduction of a 375cc motorcycle, and the help of his technology partners, Rajiv Bajaj wants to revolutionise Indian motorcycles again and dominate all its categories.
Despite decades of socialism during which there was no access to products available in international markets, India has had its fair share of legendary motorcycles, from the iconic home-grown Enfield Bullet, to the Czech-engineered, twin-exhaust Yezdi Roadking. However, the two bikes that set a new bar for performance, in the 1980s and early 90s were Yamaha’s RX 100 — a stylish, hi-rev two-stroke thoroughbred — and its 350cc older brother, the astonishingly quick and powerful RD 350. Owning — or even just riding — either gave you an instant cool factor. Both eventually had their engines made in India in a joint venture with Escorts, and both left their competition far behind, in the dust.
No manufacturer was able to come up with anything completely indigenous on two wheels that truly floored the motorcycling community like the above two. That is, until Rajiv Bajaj came out with the Pulsar.
  • Pulsar (5 models)
    Race-inspired, performance-oriented brand, promoted for the young
  • Discover (4 models)
    Promoted as a sober brand for the fuel conscious customer with added extra styling
  • Platina (entry-level commuter)
    Ageing model, designed to please the fuel conscious customer, basic styling
  • Avenger (cruiser)
    India's only affordable cruiser but ageing with no competition

The Pulsar — both the 150cc and the 180cc versions — quite simply blew the competition away. Prior to it, the motorcycle community in India had, by and large, preferred fuel-efficient, smaller bikes. Suddenly, here were two stylish, state-of-the-art Indian motorcycles with disc brakes — unheard of at the time — and plenty of pep. The bar had been raised to a new high, but, this time by an Indian company.
The next big bet
Today, nearly five million Pulsars have hit Indian roads but Rajiv Bajaj, managing director, Bajaj Auto, is itching to kickstart yet another revolution in Indian motorcycling. His research and development (R&D) centre at Akurdi, Pune is working at a furious pace to dominate a lucrative, if lower-volume segment in the market in which it doesn’t yet feature the 350cc-and-beyond category. Bajaj’s most powerful model presently is the 220cc Pulsar.
With it, the company aims to rule the universe of Indian motorcycles, from the entry-level with Discover to the premium-performance segment like with in-development 375cc Pulsar. But, is there a market for such premium bikes in India, where more than half of the 13.4 million sales last year came from bikes having engines lower than 125cc?
Unit sales, 250cc and above
Royal Enfield50,09854,47578,546
Harley Davidson--716

Bajaj says there is no point in figuring out what the customer wants. “Till you do it, you will never know. So, the reality is that only God knows the future and nobody else,” says Rajiv Bajaj. “Yes, we are taking a chance else you cannot push the envelope. So, we don’t have to worry if there is a market there or not — if it is not there, it will get there,” he adds.
Bajaj is onto something. According to data provided by the Society of Indian Automobile Manufacturers (Siam), the motorcycle segment with engine capacity above 250cc, last year grew 74 per cent to 94,698 units, against 54,566 units sold in 2010-11. However, 83 per cent of the total sales in this segment belonged to Chennai-based Royal Enfield, whose Classic series of retro-styled 350cc and 500cc bikes have started a mini revolution of their own. Honda, Harley Davidson, Suzuki and Yamaha make up the rest.
The ‘K’ effect
This time around, Bajaj has equipped himself with two heavyweights in the motorcycling world: Austrian company KTM, famous for its Paris-Dakar traversing dual-sports bikes, in which Bajaj currently holds 47 per cent stake; and Kawasaki, which arguably has the most famous brand of motorcycle in the world — the Ninja — and with which Bajaj has a 28-year-old partnership. Design and styling details from KTM and technology assistance from Japan’s Kawasaki are fuelling the futuristic-looking motorcycle concepts made by young Bajaj engineers.
According to KTM’s annual report, in addition to the new 375cc bike that the Indian and Austrian companies are developing, the two are also trying to bring back the glory of twin-cylinder technology, which was a rage in the 1970s, but was subsequently phased out, due to the invasion of cheaper and more fuel-efficient bikes. Besides being visually attractive, an additional cylinder, arranged at some angle to the other — and usually patented — provides a big boost in torque. Harley Davidson’s motorcycles, for instance, have twin cylinders placed at 45-degree angles to each other. Could Bajaj join the ranks of legendary motorcycle manufacturers around the world – such as Ducati, Aprilia, Harley Davidson, Triumph, BMW, Honda, Yamaha, Kawasaki and Suzuki? That depends on how the 375cc bike turns out, to begin with.
So far, tapping into a three-way alliance for design and technology has been a smart move. The recently launched Pulsar 200NS from Bajaj Auto shares most its components and specifications with KTM Duke 200, including the engine platform, however, both remain distinctly different in performance and handling. Another version of the Duke, strapped with a smaller 125cc engine, goes to the export markets in Europe.
Here’s how important a strong alliance with a world- class bike maker can help: Only last month, an engineering team at the Pune-headquartered company ran into some technical glitches over the development of one of its bikes. A call to Kawasaki later led to a dispatch of a Japanese team comprising engineers who flew down to Akurdi to troubleshoot the problem in no time.
“At Bajaj Auto, we have been very fortunate to have partners like KTM and Kawasaki,” says Bajaj.
“A lot of people think we have invested in KTM for their technology and I have always said that’s not the truth. We have invested in KTM from the marketing point of view. From the east, where we have Kawasaki, we are benefitting from stuff like Kaizen, product development and how to achieve lower PPM (parts per million). The Japanese are masters of this, it is in their culture,” he adds.
The heat is on
Bajaj isn’t the only one in a hurry to up the ante with new motorcycles. Hero MotoCorp, for instance, is desperate to boost its back-end operations like product development, technology and other R&D, ever since it ended its partnership with technology-leader Honda. While Hero — which has more than double Bajaj’s market share in motorcycles, at 55.7 per cent — is not known for its technology (as most of it has been sourced from Honda), what works for it is its brand image of being a maker of fuel-efficient bikes such as Splendor and Passion.
Yet, it too, has decided to gravitate towards making performance bikes by joining hands with Erik Buell Racing, an all-American, road-racing company. The partnership will produce high-performance, large-capacity motorcycles, an area completely alien to Hero as of today. In order to do so, Hero is setting up a Rs 400-crore integrated R&D centre in Jaipur, which includes labs for components, engine and vehicle testing, a design studio and test tracks. The company claims this centre will be the largest in India amongst two-wheelers, with 500-plus engineers.
With the Apache 180cc being the biggest bike in its line-up, Chennai-based TVS Motors is also keen on moving up the value chain and is exploring a partnership with German company BMW for a technology alliance which could be along the lines of the Bajaj-Kawasaki tie-up. Both Hero and TVS are sure to give Bajaj a run for his money.
For all that Rajiv Bajaj has accomplished, many say that in the race to achieve supremacy in the bike segment, he has completely ignored the fastest- growing market in two-wheelers today – scooters. Ironically, it was Bajaj that rode the demand wave for scooters in the 1980s and 1990s, with geared scooters such as the iconic Chetak and Priya. Today, Honda commands the lion’s share of the domestic gearless scooter segment which saw sales of 2.5 million units last year. Bajaj has consistently maintained it does not see itself as a scooter manufacturer and would instead channel its energies to motorcycles.
This may well be the right strategy. Being a jack-of-all-trades doesn’t necessarily work to your advantage. Abdul Majeed, analyst with PricewaterhouseCoopers, said, “It is better to concentrate on one segment and build your brand than trying to cater to every segment. Bajaj’s strategy has been a success with the motorcycles and of course, a company can always come back to scooters”.
Knowing Bajaj, he may just do so in order to reinvent himself, yet again.
(Source: Business Standard)

Commerce Ministry moots phasing out 15-year-old trucks to drive CV sales

The Commerce and Industry Ministry is proposing phasing out of trucks which are older than 15 years to drive sales of new ones in the wake of a demand slump in the domestic market.
"In the last quarter, production of heavy commercial vehicles have fallen. So, we will request the minister (Heavy Industries Minister Praful Patel) to think of an incentive scheme for replacing trucks which are more than 15 years old," Secretary in the Department of Industrial Policy and Promotion (DIPP) Saurabh Chandra said here today at a CII function.
Patel was also present at the CII Manufacturing Summit.

Chandra also asked the industry to join hands with the government in this initiative by providing "part funding".

According to Society of Indian Automobile Manufacturers (SIAM) production of medium and heavy commercial vehicles (M&HCV) declined by 21.2% in the April-July period this fiscal to 93,016 units as against the same period last fiscal.

The same for light commercial vehicles (LCVs) were, however, up by 8.27% to 1,71,719 units during the period.

Total commercial vehicles (CV) production was down by 4.30% to 2,64,735 units during April-July this year as compared to the same period last fiscal.

In terms of sales, during April-July period M&HCV clocked 89,226 units, down 12.75% compared to the same period last fiscal.

However, sales of total CVs grew marginally by 4.74% during the period to 2,48,223 due to good performance from LCVs which stood at 1,58,997 units, up 18.02% as compared to the same period last fiscal.
(Source: Business Standard)

Shop till you drop: Retailers open stores early, close late to boost sales

From opening stores at 7 in the morning to shutting down well after midnight, several big retailers now work overtime to increase their sales amidst weakening consumer sentiment by wooing joggers and night owls.
Reliance Retail, for instance, has advanced opening timing for some of its supermarkets in Maharashtra by two hours to 8 am to attract joggers and office goers, while Future Group's KB Fair Price stores open even earlier at 7.
"We are already seeing good sales in the live bakery section as many consumers have started having daily breakfast at our stores after their morning walk," said a senior Reliance Retail official who did not want to be named because he is not authorised to speak to media.
It's not just joggers who shop in the morning. Consumers prefer fresh stock especially for fruits and vegetables segment. Damodar Mall, director for food strategy at Future Group, says KB Fair Price sells almost 40% of fresh produce by 10 am, its earlier opening time. "Many residents shop for fresh produce first thing in the morning," Mall said.
Industry watchers say the change in store timings shows that retailers now recognise the heterogeneity among consumers.
"The idea is to understand what the 'primetime' during the day and during the week is for various segments of shoppers even as retailers synchronize themselves with their existing buying cycles for various categories," Adrian Terron, executive director, retail and shopper practice, at Nielsen India. "As a strategy it helps draw new footfalls and cater to niche segments," he said.
Retailers Association of India, a lobby group of branded stores, has requested several state governments to allow modern retailers to open stores 365 days without the hassle of renewing such licences on an annual basis. The group has so far petitioned 15 different states including Andhra Pradesh, Tamil Nadu, Karnataka, Gujarat and Maharashtra. Madhya Pradesh implemented it in June.
Indian retailers seem to be taking a cue from global counterparts. World's largest retailer Walmart Stores Inc opens its outlets in the US as early as 6 am. In fact, several shops in the West remain open 24 hours a day.
In India too, global retailers open their stores early albeit they sell their wares to resellers and not end consumers. Bharti-Walmart's Best Price Modern Wholesale stores and France's Carrefour SA open their stores at 7.00 am while some Metro Cash and Carry stores open at 6 in the morning.
But extended shop timing means higher costs-something several retailers want to check at a time when there is slowdown in consumer demand.
"If we open our stores early, there is a substantial cost involved in terms of manpower and electricity," a senior official at Aditya Birla Retail said on condition of anonymity. "We feel that the profit we could earn during the extra hours will not offset our costs," the person added.
Some retailers open stores for longer hours only on days when higher sales are almost guaranteed. In February, Korum Mall at Thane near Mumbai kept its mall open until mid-night for two nights in a bid to cash-in on Valentine Day celebrations. Other days, it closes at 9:30 pm.
Buoyed by the response, the mall again kept it open until 12:00 am on the eve of the Independence Day as retailers chipped in with flat 50% off between 10:00 p.m. and mid-night, dubbed as happy hours. Gaurav Kumawat, retail manager at Korum Mall, said sales that night was 350% more than normal weekdays.
In Delhi, Select Citywalk mall at Saket has requested cafes, restaurants and the food court operators to open at 8 am in the morning to serve breakfast for people visiting the gym in the mall and other office goers. R City Mall in Mumbai too plans to open its doors early and invite residents in the vicinity to use the mall for morning walks. Coffee shops will open early for joggers to have snacks and breakfast.
(Source: Economic Times)

Eight mantras with which CavinKare's Ranganathan has taken on HUL, P&G

''There are no money problems, only idea problems," Chinni Krishnan Ranganathan says, in between bites of his omlette. We are sitting in the restaurant of a Mumbai hotel and Ranganathan is regaling us with stories from his past.

Like the one about being a backbencher through school and college ("Don't underestimate us back-benchers," he says with a grin) or how CavinKare grew right under the noses of Hindustan Levers and P&G and continues to be a thorn in their side. Despite being at a fraction of the size and scale of those giants, for the last three decades, ideas are what have sustained the company he founded in Cuddalore, Tamil Nadu, in the face of innumerable crises.

Ranganathan walked away from Velvet Shampoo, which was controlled by his brothers after his entrepreneur father's demise. An associate remembers how despite being devastated by the loss of his father, 19-year old Ranganathan kept his emotions tightly under control. It is the same stoicism that helped him transform Beauty Cosmetics, the company he founded in 1983 with one shampoo called Chik, into a Rs 1100 crore firm called CavinKare.

And now, Ranganathan radiates self-assurance as he talks about fuelling future growth with a Rs 500 crore private equity infusion, for which the company will start talks in the next couple of months. So how did the boy from Cuddalore become a low-cost warrior? With liberal doses of consumer insight, business savvy and by following these 8 rules:


After breaking away from his brothers, Ranganathan toyed with various business ideas, but finally decided to compete with his brothers and manufacture shampoo. By his own admission, Chik, the brand he named after his father Chinni Krishnan, was a me-too product. "Velvet had a flavour called 'Lime', so I called mine 'Lemon'. Similarly, 'Henna' was called 'Heena' and 'Doctor' was called 'Tonic'," he laughs.

But when he went to retailers to show them his products, they called him a copycat. "I then realised I didn't understand the true meaning of differentiation. It took me some time to learn it from retailers and distributors. And that was the starting point of our growth." Ranganathan then 'invested disproportionately' in imported fragrances that helped him shake the 'me-too' tag.

The idea to launch a 50p Chik sachet, in a market full of Re 1 sachets, was pure gut feel. The early adoption was driven not just by the sheer affordability, but the fact that many Indian women washed their hair once a week — and a single-dose low cost product was perfect for it. Not only did the 50p shampoo do well, the 1 Re shampoo did even better. Today the Chik brand is worth Rs 250 crore.

Over the years, CK added new products to its kitty, including some that worked and others that didn't. Former Hindustan Levers executive director Dalip Sehgal, who worked for the FMCG giant between 1982 and 2007, acknowledges that Ranganathan possessed strong insights into the mind of the consumer.

"The Fairever fairness cream used saffron and milk, considered by South Indian consumers as skin whitening products." He adds, "But it didn't work in the North because those consumers didn't feel the same way."

In recent times, analysts have commented on the company's inability to focus on its core brands and innovate. Ranganathan admits that CK was 'caught in the sachet game for a long time'. But CavinKare has changed tack again and is now looking at market gaps where it can achieve easier growth with higher margins. It is also investing about 2.5% of its revenues in research and product development.


There was also a liberal dose of luck involved. All said and done, making a dent in Velvet's dominance was no easy task. In fact, Velvet was doing so well it had become the generic name for 'sachet shampoo'.

Ranganathan then thought up a scheme — buyers could exchange five empty shampoo sachets and get one Chik sachet free. His sales staff told him this would never work and the company would have to shut down. Ranganathan recalls, "Chik had barely half a percent of the shampoo market. And sales had started to dwindle. We needed a radical idea to get people to try our product." The great surprise wasn't that the idea worked; the reason was the shocker.
A sales representative who met a retailer reported back to Ranganathan saying that collecting empty sachets and exchanging them for Chik was getting so profitable, he actually started feeling guilty! So he bought more Chik sachets and would hand them to buyers who asked for Velvet.

As this picked up — and also, as people began appreciating the new fragrances — the market exploded. "From being present in one out of 10 outlets, we were now present in nine. That's when I knew we were in business," says Ranganathan.

The second bit of luck was being off the radar of the large FMCG companies like Hindustan Lever and Procter & Gamble, which Ranganathan says refused to compete with him on price or packaging because it didn't suit their image — a claim contested by Sehgal, who says, "There was no mental barrier that prevented us from taking on smaller players like CK on their own turf. In fact, Lever pioneered the use of sachets and launched a Re 1 Surf sachet in the seventies. We knew accessibility and affordability was the way to penetrate the market."


If the HULs and P&Gs of that time penetrated the market with sheer muscle, CavinKare was doing everything in small doses. This lesson also extended to distribution.

The company outsourced all of its manufacturing, until 2006 to keep its costs low. It also entered no-credit deals with distributors. This automatically precluded large distributors like ITC that demanded 45 days of credit, which Beauty Cosmetics (as CK was known then) could ill afford. His team then identified people who gave bicycles on hire.

"My guys asked them, why are you struggling like this? Open a distribution business for us," he says. The deal was that they would give a demand draft for Rs. 2000, get trained by Beauty Cosmetics' staff and then go to the market on cycles, taking and filling orders. This gave Beauty Cosmetics a steady supply of working capital. "We kept rotating the wheel without investing; it was cash all the way," he says.

The humble cycle continues to be a potent weapon for CK. Earlier this year, CK created a rural distribution organisation with specialised rural stockists responsible for covering smaller villages in the vicinity and setting up sub-stockists there.

The idea is that you need a whole different mindset to serve the rural market. "Unlike a rural guy, an urban stockist won't wait an hour for a bus in a village. In a specialised rural system, everything is geared towards low cost, from distributors to salesmen and logistics."


JSJ Sinthanaichelvan, an old cricket field chum of Ranganathan's was one of his 'back bencher' friends who joined him in business. After struggling through his PUC (equivalent of junior college) and a B.Com, JSJ went to Chidambaram for a while.
When he came back to Cuddalore to look up his old friend Ranganathan at the Velvet Shampoo office in 1983, he learned that he was no longer working there. A few days later, JSJ managed to meet Ranganathan at Chik's office and was taken on board the new firm.

But he says that while their boyhood friendship earned him an audience, CKR was 'ruthless' about selecting only the right people. "He was clear that he wanted people who always remain updated and perform on any assignment handed to them," he recalls.
But Ranganathan was never an unreasonable or insensitive boss. JSJ recalls an incident way back in 1984, when the company faced a major financial setback. "There were 15 sales representatives and their families depending on us. But we had no money to pay them. Another entrepreneur might have sent them packing," JSJ says. But Ranganathan realised that these people had nowhere to go.

He then set up a temporary rose-flavoured shampoo manufacturing unit. This kept the turnover rolling and CKR was able to make enough to pay its sales staff.

Similarly, when erstwhile Finance MinisterManmohan Singh announced in 1993 that excise concessions for small shampoos and cosmetics manufacturers would be withdrawn, Ranganathan realised his staff would be worried about the impact it would have on CavinKare now that it would have to fight the big guys directly.

"People were wondering if I had anything up my sleeve. That year, we have the highest increments (40%) to our staff across the board to give them confidence," he says.


A senior industry veteran who requested anonymity has a different point of view on the excise duty issue. He says that Ranganathan 'flew under the radar by taking advantage of the excise exemptions for small scale industries'. "He owned many manufacturing units that made shampoo.
The moment one unit reached the permissible limit for exemption, it would pack up, move elsewhere and restart operations under a new name. We called them factories on wheels," says the veteran, acknowledging that while this may not have been illegal per se, but it was 'on the ethical borderline'.

One thing was clear: for Ranganathan, survival was key. He knew that moment he touched Rs five lakh worth of goods, he would lose his the advantages he was getting as an SSI (small scale industry).

He says, "I scouted for people to outsource my manufacturing to. But no one was interested. So I came out with a very attractive scheme — invest Rs 40,000 in the business and you will get Rs 40,000 as profit (plus capital) in 4 months. The scheme really worked. At one time I had 150 units running for us."


While Ranganathan may have taken advantage of the SSI status, the value system he tried to inculcate in the organisation stood him in good stead.

In the mid-nineties, CK got into some trouble with the authorities over shortfall in sales tax dues. Ranganathan says that because they didn't understand the nuances of taxation, they were paying tax at the old rate of 12%, as opposed to the new 18% rule. The shortfall was about 1.5 crore, but with penalties added, it came to Rs 5 crore.
My accounts person met a corrupt tax official who said he would clear the whole thing for a Rs 10 lakh bribe. The accounts executive came back happily saying 'I have saved the company so much money'," recalls Ranganathan, who was infuriated with the executive.

The company eventually went to court to pursue the dispute legally and eventually paid the Rs 1.5 crore rightfully owed by them to the government. Ranganathan doesn't feel like he did something heroic. "Though we were paying much more because of our honesty, there were advantages.

We couldn't compete with our tax-evading peers on discounts, so we were forced to differentiate our products, which grew our market share. Secondly I could attract decent talent. Respectable people come to you when they know you're not up to hanky-panky. And finally, our bank started increasing our overdraft limit and sanctioned large loans because the manager recommended us saying 'Unlike other companies, this firm pays income tax properly'."

TD Mohan, joint managing director of CavinKare, says that the firm's values have flown from Ranganathan himself. "He had no mentor, but he would read a lot of management books and attend seminars. His adherence to values was self-taught," says Mohan.


CavinKare has had its share of failures, but unlike the giants, it didn't have the luxury of pouring money and resources into them indefinitely. So it did the next best thing: failed fast and got the heck out. In the early nineties, CavinKare introduced its own mineral water brand, Minerva. But they ran into an unexpected roadblock.

The majority of the company's distributors used tricycles for delivering products to the retail outlets. And each case of mineral water weighing 18 kg earned them Rs 100. However, a shampoo case of 10 kg got them Rs 1000. Even the simplest of minds can figure out what the distributor would prefer.

"We got a rude shock," laughs Ranganathan. There was no option but to exit and the company did so promptly. There were other experiments gone wrong too, like the one in the soap category. CavinKare's soap was priced at par with competitors and it was even doing decent sales, thanks to the company's distribution network. But given the potential of the market, it wasn't adequate.
"We discarded the soap early because there was no point. It wasn't worth investing in advertising and marketing to sustain the brand. And we didn't want to stay in business just for the sake of it," he says. Something similar is happening with the restaurant business CK launched with much fanfare in July 2009.

Three years on, Ranganathan confirms that he plans to dilute CK's stake in United Agrocare, which owns its 'CK's Foodstaurant' and 'Vegnation' brands. "We have diversified (sic) the restaurant business and are getting out of it," he affirms, adding that other brands may also be pruned.
An FMCG analyst who did not want to be named says, "Though CK's success is a case study in itself, its portfolio expansion strategy was all over the place. While others like Ghadi detergent was able to grow by focusing on their core strengths, CK got into areas unrelated to its core businesses of haircare and skincare."

For many years, CavinKare has had opportunities to raise funds from the markets, or through private equity. But the company was driven by a firm policy. "One strong belief we grew with, is that there are no money problems, only idea problems," Ranganathan says. The brand's strong performance, particularly in the personal care segment in South India, enabled it to roll funds internally.

Ranganathan says that he was never in the business to make a profit and clear off. That is why, despite the opportunities to get Private Equity funds or go for market listing, CK bade its time. "We are sitting on powerful capabilities, and its taken time to build those. So there is no question of exiting in a hurry," he says.

Now, almost three decades after he started the company, CavinKare is looking to raise funds. "We want to raise around Rs. 500 crore and will begin discussions with Private Equity players in the next couple of months," Ranganathan reveals.
(Source: Economic Times)

Slowdown is temporary; we will open 100 outlets this year: Ritch Allison, Domino's Pizza

Ritch Allison, Executive VP of International Operations, Domino's Pizza , here to launch the chain's 500th outlet, tells Ratna Bhushan he's not too concerned about the slowdown in sales growth, which has fallen to 22.3% in April-June, from 36.7% in the year-ago quarter, and reposes total faith in its local partner Jubilant FoodWorks. Excerpts from an interview:
How worried are you about the recent fall in sales growth?
It's not a huge concern. We had a high growth base last year, and the fact is that the consumer sentiment is muted in the current economic environment. Of course, we would like to get back to the robust growth of last year, but even 22% growth is very good. We believe the weak consumer sentiment is a temporary phase.
Are you concerned about Jubilant partnering Dunkin Donuts too?
Not at all. We have an absolutely committed team here and they are giving us results. India is now the third largest base for Domino's outside of the US and UK. It's among the top four countries, with over 50% share in the pizza segment.
What is Domino's doing to retain its market leadership?
We will continue to open new stores in existing and new cities. This financial year, we will set up 100 new Domino's stores. We are looking at many ways to keep the consumer coming - we have entry-level products at Rs 25 for our dine-in restaurants, for example.
Is the focus on volumes or profitability?
We want profitable growth. We have adopted a very attractive pricing strategy in India. Average ticket prices here are lower compared to some other developed markets, though it's not really a fair comparison because cost structures, markets dynamics, spending power - all of this varies in different markets.
Do you plan to work with Jubilant in other markets too?
Jubilant already has franchisee rights for Domino's in Bangladesh, Nepal and Sri Lanka. Jubilant is currently exploring opportunities in Bangladesh.
(Source: Economic Times)

Commerce ministry moots phasing out 15 year-old trucks to drive commercial vehicles sales

The Commerce and Industry Ministry is proposing phasing out of trucks which are older than 15 years to drive sales of new ones in the wake of a demand slump in the domestic market.

"In the last quarter, production of heavy commercial vehicles have fallen. So, we will request the minister (Heavy Industries Minister Praful Patel) to think of an incentive scheme for replacing trucks which are more than 15 years old," Secretary in the Department of Industrial Policy and Promotion (DIPP) Saurabh Chandra said here today at a CII function.

Patel was also present at the CII Manufacturing Summit. Chandra also asked the industry to join hands with the government in this initiative by providing "part funding".

According to Society of Indian Automobile Manufacturers (SIAM) production of medium and heavy commercial vehicles (M&HCV) declined by 21.2 per cent in the April-July period this fiscal to 93,016 units as against the same period last fiscal.

The same for light commercial vehicles (LCVs) were, however, up by 8.27 per cent to 1,71,719 units during the period.

Total commercial vehicles (CV) production was down by 4.30 per cent to 2,64,735 units during April-July this year as compared to the same period last fiscal.

In terms of sales, during April-July period M&HCV clocked 89,226 units, down 12.75 per cent compared to the same period last fiscal.

However, sales of total CVs grew marginally by 4.74 per cent during the period to 2,48,223 due to good performance from LCVs which stood at 1,58,997 units, up 18.02 per cent as compared to the same period last fiscal.

Natural resources: A blessing or a curse for nations?: Joseph Stiglitz

New discoveries of natural resources in several African countries - including Ghana, Uganda, Tanzania, and Mozambique - raise an important question: will these windfalls be a blessing that brings prosperity and hope, or a political and economic curse, as has been the case in so many countries?
On average, resource-rich countries have done even more poorly than countries without resources. They have grown more slowly, and with greater inequality - just the opposite of what one would expect. After all, taxing natural resources at high rates will not cause them to disappear, which means that countries whose major source of revenue is natural resources can use them to finance education, healthcare, development and redistribution.
A large literature in economics and political science has developed to explain this 'resource curse', and civil society groups have been established to try to counter it.
Three of the curse's economic ingredients are well known. One, resource-rich countries tend to have strong currencies, which impede other exports. Two, because resource extraction often entails little job creation, unemployment rises. Three, volatile resource prices cause growth to be unstable, aided by international banks that rush in when commodity prices are high and rush out in downturns, reflecting the time-honoured principle that bankers lend only to those who do not need their money.
Moreover, resource-rich countries often do not pursue sustainable growth strategies. They fail to recognise that if they do not reinvest their resource wealth into productive investments, they are actually becoming poorer. Political dysfunction exacerbates the problem, as conflict over access to resource rents gives rise to corrupt and undemocratic governments.
There are well-known antidotes to each of these problems: a low exchange rate, a stabilisation fund, careful investment of resource revenues, a ban on borrowing and transparency. But these measures, while necessary, are insufficient. Newly-enriched countries need to take several more steps in order to increase the likelihood of a resource blessing.
First, these countries must ensure that their citizens get the full value of the resources. There is an unavoidable conflict of interest between (usually foreign) natural-resource companies and host countries: the former want to minimise what they pay, while the latter need to maximise it. Well-designed, competitive auctions can generate much more revenue than sweetheart deals. Contracts, too, should be transparent and should ensure that if prices soar, the windfall gain does not go only to the company.
Unfortunately, many countries have already signed bad contracts that give a disproportionate share of the resources' value to foreign companies. There is a simple answer: renegotiate. If that is impossible, impose a windfall-profit tax.
All over the world, countries have been doing this. Of course, natural-resource companies will push back, emphasise the sanctity of contracts and threaten to leave. But the outcome is typically otherwise. A fair renegotiation can be the basis of a better long-term relationship.

Botswana's renegotiations of such contracts laid the foundations of its remarkable growth for the last four decades. Moreover, it is not only developing countries such as Bolivia and Venezuela that renegotiate; developed countries like Israel and Australia have done so as well. Even the US has imposed a windfall-profits tax.

The money gained through natural resources must be used to promote development. The old colonial powers regarded Africa simply as a place from which to extract resources. Some of the new purchasers have a similar attitude.

Infrastructure like roads, railroads and ports has been built with one goal in mind: getting the resources out of the country at as low a price as possible, with no effort to process the resources in the country, let alone to develop local industries based on them.

Of course, today, these countries may not have a comparative advantage in many of these activities, and some will argue that countries should stick to their strengths. From this perspective, these countries' comparative advantage is having other countries exploit their resources.

That is wrong. What matters is dynamic comparative advantage, or comparative advantage in the long run, which can be shaped. Forty years ago, South Korea had a comparative advantage in growing rice. Had it stuck to that strength, it would not be the industrial giant that it is today. It might be the world's most efficient rice grower, but it would still be poor.

Companies will tell Ghana, Uganda, Tanzania and Mozambique to act quickly, but there is good reason for them to move more deliberately. The resources will not disappear, and commodity prices have been rising. Meanwhile, these countries can put in place the institutions, policies and laws needed to ensure that the resources benefit all of their citizens. Resources should be a blessing, not a curse.
(Source: Economic Times)