Saturday, November 30, 2013

Reincarnation at Nokia: Planning the next bounceback

SAMULI SIMOJOKI knew the outcome was a formality, but he still wanted his say, “not so much as a Nokia shareholder, but as a Finn.” Mr Simojoki, a lawyer from Helsinki, was one of the 3,200 who attended the company’s extraordinary general meeting on November 19th. He voted against the only motion, the proposed sale of Nokia’s mobile-phone division to Microsoft for €3.8 billion ($5.4 billion) in cash. More than 99% of votes were cast in favour. When the deal is sealed early in 2014, Nokia, once the world’s biggest maker of mobile phones, and still its second-biggest, will be out of the business.
Nokia has reinvented itself before. It began in pulp, in 1865. It switched into power generation, stretched into rubber goods and cables, and tuned in to televisions that in the 1980s were among Europe’s best sellers. But its consumer-electronics division fizzled, made deep losses and was sold, as were rubber and cables, in the 1990s. Mobile phones were Nokia’s future then. Soon they will be its past, and 32,000 Nokians—including the former chief executive, Stephen Elop—will be Microserfs. Mr Elop, an ex-Microsoft man, declared Nokia’s own mobile-phone platform to be “burning” in 2011 and leapt onto Microsoft’s instead. He may soon be his old firm’s new boss.
The next incarnation of Nokia, though much shrunken after parting company with its lossmaking devices division, will be no minnow. It will still have 56,000 employees, more than 6,000 of them in Finland. Thanks to the proceeds of the sale, plus €1.65 billion from a ten-year patent-licensing deal with Microsoft and a €1.5 billion loan from the American firm, Nokia will have a stronger balance-sheet and plenty of cash to finance a fresh start—although Third Point, a hedge fund with a stake, has said it wants much to be paid to shareholders. Since the sale was announced in early September, Nokia’s share price has doubled to nearly €6.
Unfinnished business
The new Nokia will have three parts. By far the biggest will be Nokia Solutions and Networks (NSN), which sells equipment, software and services to telecoms operators in competition with Ericsson of Sweden, Huawei and ZTE of China and Alcatel-Lucent of France (see chart). NSN accounts for about 90% of the new Nokia’s revenue. Under Rajeev Suri, its boss, it has been turned from a lossmaking joint venture with Germany’s Siemens into a profitable, wholly owned subsidiary. Its sales in the first nine months of the year, at €8.2 billion (just over half of this from services), were almost as big as those of the handset business, though that largely reflected the phone division’s troubles. NSN’s revenue has been falling too—but partly out of choice, as it has got out of unprofitable lines of business.

Mr Suri says that networks are a less volatile business than handsets, because “you don’t just sell to the customer and get out,” but build “sticky” relationships with telecoms operators. However, he expects only “flat to modest growth” in the industry. So he has made NSN leaner and has specialised in one area, mobile broadband, in which carriers have to invest if they want to serve a data-hungry world. NSN has sealed deals in America, China, Japan, South Korea and elsewhere. NSN has cut 26,000 jobs and more than €1.5 billion of annual costs in two years.
The carrier-networks industry has already undergone painful consolidation. There may be more. Alcatel-Lucent, the product of a Franco-American merger in 2006, has consistently lost money. In June it unveiled its umpteenth restructuring plan. If Alcatel-Lucent becomes prey, NSN could devour at least part of it.
Pierre Ferragu, an analyst at Sanford C. Bernstein, reckons that Ericsson and Alcatel-Lucent each have about 40% of the American wireless-infrastructure market, making the Swedes improbable buyers. Huawei is frozen out of American networks on political grounds. So Mr Ferragu thinks a sale to NSN is “quite likely”, but he considers it likelier that Alcatel-Lucent will survive for some years. Stéphane Téral of Infonetics Research says that a purchase would build NSN’s market share in America and China, taking it past Huawei and close to Ericsson. But he cautions that “the integration will be very difficult” and any deal will be “a distraction”.
Nokia is also keen to talk up its other two businesses. The larger is HERE, its highly regarded maps division, which has most of the market for navigation systems built into cars. The smaller, Advanced Technologies, will have the job of licensing Nokia’s thousands of patents and coming up with more bright ideas. Risto Siilasmaa, the chairman and acting chief executive, calls it “our innovation engine”. Most of the uncertainty about Nokia’s future has to do with how well this engine fires.
The combined patent-licensing revenues of Advanced Technologies and HERE are currently around €500m a year. (NSN runs its own portfolio.) The “vast majority” of this, says Paul Melin, Nokia’s chief intellectual-property officer, comes from licensing “standard-essential” patents, or SEPs. These are ones covering technology that any phone, from any maker, must incorporate in order to function. Since these patents are spread across lots of companies, cross-licensing agreements are common, and the firms end up paying each other lots of fees. Nokia, once it stops making handsets, will no longer have to pay such licensing fees, but will keep receiving them on its own SEPs. Furthermore, it has other patents that it has so far kept back for its own devices, and it will be able to earn money on these by licensing them out.
By the time the Microsoft deal closes, the board must set a corporate structure, outline a strategy and choose a chief executive. Mr Suri, having knocked NSN into shape, may look the obvious choice, but Timo Ihamuotila, the chief financial officer, is also said to be in the running.
Mr Siilasmaa enthuses about the possibilities for the new Nokia in a world packed with connected devices—even though it will not be making any of them. He hints that the company might even return, one day, to making consumer goods. That may seem an odd thing to say right now, but for a firm that has gone from pulp to power to cables to televisions to handsets to telecoms equipment, maps and patent-licensing, anything seems possible.
(Source: The Economist)

Gold trade in Thailand: Bullion backwash

THE two gold biscuits an Indian man in Bangkok’s Chinatown holds in his right hand are no bigger than a Swiss army knife. He has just bought them on Yaowarat Road for $15,000, but in his native Mumbai they are worth $16,500. They can travel in a computer bag or “if you are really worried about customs”, he says pointing at a shop which sells plain golden necklaces, “you buy those and put them around your wife’s neck."
Earlier this year the Indian government imposed quotas and increased taxes on gold imports, but it takes more than that to limit Indians’ love of gold. Although the country’s statisticians report that Indians officially buy a lot less of the precious metal—148.2 tonnes from July to September, a third less than in the same period last year—there has been a surge in gold smuggling.

Customs officials at airports in India, Nepal and Bangladesh are reporting a spike in seizures of gold originating from places such as Abu Dhabi, Bahrain and Dubai. What happens along India’s 15,000km land border and 7,500km coastline is anyone’s guess. But the effects of India’s attempts to curb gold imports are most widely felt in Thailand.
With India’s market ring-fenced, more physical gold has made its way to Thailand. In the most recent quarter demand from Thai consumers surged 125% compared with the same period last year, to nearly 36 tonnes—faster than in any other country. And demand from investors has grown more than 80% this year. The World Gold Council attributes the increase “in no small part due to Thailand being used as a route to channel gold into other markets, notably India and Vietnam.”
But other factors play a role too. Gold has become cheaper recently, the Thai economy and the baht are wobbling, and real short-term interest rates are close to zero. In addition, a period of relative political stability has come to an abrupt end: Thailand has recently seen the biggest street protests since 2010.
Thailand has its own experience with interventions that create unwanted side effects. The Thai government pays high prices for rice produced by local farmers, who are an important political constituency. But their colleagues in Cambodia, Myanmar and Laos have long figured out that by shipping their rice across the border to Thailand, they can pocket a multiple of what it is worth back home.Thai gold smugglers now play this trick on India.
Business has been swift on the top floor of one of Bangkok’s glitziest shopping malls where gold traders and banks make their case for investment in gold. Trading screens outnumber gold bars, of which a few are on display to remind investors of the stuff. But this should count as progress compared to the days when gold shops made a killing in trading gold bars bartered for opium 850km north of Bangkok where Thailand, Myanmar and Laos meet—an area which still is called “Golden Triangle”.
(Source: The Economist)

Mexico's car industry: Steaming hot

MEXICO, it seems, is an automotive backwater. The country’s consumers are expected to buy barely 1.06m cars and light trucks this year—down nearly 10% from the already weak 1.15m in 2005. Put another way, this is barely one new vehicle for every 150 Mexican residents, compared to more than one for every 20 citizens in America.
So why did Nissan, the Japanese carmaker, this week open a new $2 billion assembly complex in the city of Aguascalientes? And why are manufacturers such as Mazda, Honda and Audi racing to set up factories in Mexico, while General Motors, which already has operations in the country, is set to invest another $700m?

Mexico, it turns out, ranks eighth among the world’s carmaking nations—and is likely to be seventh soon, as Enrique Peña Nieto, the country’s president was quick to point out when he dedicated the new Nissan plant (see picture, with Carlos Ghosn, the firm’s chief executive, to the right). What is more, Mexico is already number four in car exports, behind Germany, South Korea and Japan. Mr Ghosn this week predicted that Mexico could soon be a bigger export hub for his company than its home base Japan.
With the launch of the new plant, its second in Aguascalientes and its third in Mexico, Nissan hopes to boost its production in the country to 1m cars by 2016, of which 70% will be shipped abroad. The other makers have similar plans: the capacity of the country’s car industry, which produced 2.9m vehicles this year, is expected to reach 4m soon. Mr Peña’s government has hinted to local media that two more automakers are planning to build Mexican operations.  
What is Mexico’s appeal for carmakers?  Low labour costs are a major factor. Wages and benefits are running at an estimated $10 an hour for assembly-line workers. This is high by Mexican standards, but barely 20% of the prevailing wage in neighbouring America.
The proximity to the world’s biggest car market also helps, as does the rapid growth of car sales in other parts of Latin and South America. In fact, vehicles made in Mexico were such a success in Brazil that the country upped its duties on Mexican imports. That did not make much of a dent, however: Mexico’s government has negotiated dozens of free trade agreements, reportedly more than any other country but Israel.
There may be bumps in the road for Mexico’s car industry. The drug war continues. Some carmakers and suppliers do not allow executives to visit facilities in certain parts of Mexico.  Nissan and other firms say that they have not experienced any problems, but officials privately acknowledge that they have been careful not to put operations where they could have to deal with drug violence and corruption, which is chronic in Mexico.
The hope is that carmaking will help stimulate Mexico’s economy—and create a domestic market for the cars being built on the country’s assembly lines.  For that to happen, however, Mexican banks will have to loosen their lending practices. Like in much of Latin and South America, first-time buyers often have to resort to what is known as consorcios, groups of motorists who pool their resources and then hold a lottery to see who will next get a car as their collective savings build.
Nissan has tried to jump-start more traditional lending with its own finance subsidiary. This is one reason, it claims, that it is now the market leader, with nearly 25% of market share, compared with GM’s 19%. But even if the number of domestic buyers does not grow rapidly, the Mexican industry is not likely to slow down. The new Nissan plant is located in a town whose name means “hot waters” in Spanish. And as far as the carmaker is concerned, the Mexican auto industry is steaming hot.
(Source: The Economist)

Dubai Air Show: Up and away

TEN years ago, as he announced record orders of $19 billion of aircraft from Boeing and Airbus for the Emirates airline at the Paris Air Show, the ruler of Dubai told the world that the aviation industry was about to change. Last weekend’s Dubai Air Show revealed how true that prediction was: the big three Persian Gulf carriers (Emirates and the smaller Etihad and Qatar Airlines) ordered more than 320 long-haul planes worth hundreds of billions of dollars.
Most notable was Emirates's order for 150 of the 777X, the latest version of Boeing’s best-selling long-haul plane, in a deal worth $76 billion. The aircraft maker also landed orders for another 75 of the 777X from Etihad and Qatar, taking the total to $130 billion. No other model in the category of twin-engine planes ever had a faster launch. Airbus trailed in total orders, but secured an unexpected boost with sales of 50 more of its super-jumbo A380 planes to Emirates and 50 of its long-haul A350s to Etihad, the Abu Dhabi airline.

Deals like these cement the position of the Gulf Big Three as the leading force in global aviation, leaving the European and American flag carriers far behind. Emirates is already the biggest customer for the A380, for Boeing’s current 777 champion and now for the new version. The Gulf carriers also dominate purchases of the new Airbus A350.
Emirates operates out of two giant airports outside Dubai City. It already has a fleet of 200 wide-body aircraft and runs services to Europe, Asia, the Americas and Africa. Its has boosted its image in Europe by sponsoring football teams such as Arsenal, Paris St Germain and AC Milan. In its latest financial year it netted a profit margin of 4% on sales of $21 billion—which makes it twice as profitable as most network carriers.
The home hubs of Emirates and its smaller Gulf rivals are ideally located between Europe, the Americas and the growing markets in Asia. Few passengers visit the Gulf (although Dubai is still furiously building artificial ski slopes, duty-free malls and posh artificial islands for millionaire’s mansions to lure tourists). But long-haul aircraft that fly for up to 18 hours can reach any big airport in the world from Dubai, Abu Dhabi or Doha. Using the latest mini-jumbos such as the 777X and the A350, along with the double-deck A380, brings down costs per seat-mile. And using a hub system makes it easier to fill such big aircraft.
Struggling European rivals, such as Lufthansa, regularly complain that the Gulf carriers are bankrolled by their governments. That may be true of Etihad and Qatar—but not of Emirates. It began in the mid-1980s with only $10m capital from the government and has since generated much of its capital from retained profits. However, it does benefit from being in a low-tax, low-wage economy where a supportive government lays on any infrastructure needed to support the airline. Dubai has long passed the point where it could live off its small oil and gas fields: travel, tourism and trade are now at the heart of its economy.
Such industrial policy aside, the real secret of the Gulf Big Three’s success lies elsewhere: in the open-sky deals that the United Arab Emirates signed with countries happy to allow in its airline startups. Used to competition, Emirates, Etihad and Qatar were ready when America, Europe and others started liberalising their air space ten years ago. Yet the beneficiaries have not just been the new Gulf carriers, but travellers. They can now fly more cheaply to anywhere in the world, provided they are happy to break the journey in Dubai, Abu Dhabi or Doha. 
(Source: The Economist)

Inside Business: Online anonymity to be confined to virtual history

It is 20 years since the publication of the famous The New Yorker cartoon that summed up the essential anonymity at the heart of the internet. One canine, perched in front of a computer, says to another: “On the internet, nobody knows you’re a dog.”
It’s a pretty safe bet they do by now. The medium itself may have anonymity baked in, but most of what happens online these days is tied to making inferences about someone else’s identity, from the behavioural targeting of online adverts to socialising on Facebook and forging professional connections on LinkedIn.

The need to know exactly who you are dealing with online is about to get much greater. That is partly a result of the crisis in online security: the fact that packets of information cannot be traced to a verified source has made cyberspace perilous. But there are also big commercial opportunities that some companies are racing to grab.
One sign of the times was the news earlier this week that Airbnb, the site where people can rent out their homes to complete strangers, has plans to vet all 4m of its users to make sure they are really who they say they are.
The next phase of the internet’s development – the deeper integration of the offline and online worlds – will make this kind of verification increasingly important as reputation and trust built up in the virtual world starts to influence real-world transactions. It will also hand an advantage to any company that can set itself up as the repository of real identity.
Mechanisms for establishing trust have been around for as long as the internet itself, though they were not initially linked to any corollaries from the physical world. The web’s self-policing communities, for instance, have always tried to use peer pressure. The ultimate sanctions have involved expulsion from the community, which may have little deterrent value against the antisocial behaviour of some anonymous users.
It took Facebook to change everything. Suddenly it became essential to be known online for who you are. Yet Facebook, while officially requiring its members to cleave to their “real” identities, can’t guarantee they do so.
Full verification is the next step. Airbnb’s attempt to push all 4m of its users to show hard evidence of who they are, like a passport or driver’s licence, is designed to give it a leg-up over less-trusted sites where ordinary people transact with strangers.
If Airbnb is right and people crave reassurance about real-world identity, a race to the top will follow. One of the early hopes of the internet visionaries – that the virtual world could exist separate from and in parallel to the real one – will have been disproved.
There are drawbacks to the pursuit of verification. One is that it stands to make the costs of online identity theft much greater. When verified accounts are hacked, the higher level of trust invested in them can make the costs all the greater – as when the officially sanctioned Twitter account of news service AP was taken over by a group calling itself the Syrian Electronic Army.
Another potential drawback is the impact that the increase in verified traffic will have on the shrinking amount of truly anonymous communication. The ranks of the unknown will be made up largely of political dissidents, criminals and anyone paranoid about online surveillance. Particularly in politically repressive parts of the world, freedom of expression could get squeezed out along with other forms of illicit activity.
The commercial value of being the leader in verified identity, however, could be significant. Issuing this stamp of online approval could turn a company such as Airbnb into the equivalent of a virtual passport office, if others chose to trust its authentication system.
That would be of particular value in the world that Airbnb inhabits. The “sharing economy”, as it has become known, is a place where people rent out their homes, use their cars to give rides or carry out small tasks for others.
The eventual scale of this economy is hard to assess. As clever-sounding new apps run into real-world regulation – some forms of ride-sharing, for instance, could contravene taxi regulation – some will fall away. Others will fail because of the difficulty of maintaining high enough levels of quality in a world of personally-delivered services.
At some level, though, individuals on sites such as Airbnb have already voted with their feet. A new infrastructure will be needed to support this spreading economy, and trust will lie at the heart.

Gillette’s ‘Shave India Movement’

The story. While Procter & Gamble’s Gillette safety razors have become the dominant brand in nearly every developed market, sales of its flagship product – the three-blade Mach3 – in India were disappointing.
Yet there was a huge potential market in India, where most of the 400m-plus men of shaving age used double-edge razors. By 2008, years of traditional marketing had failed to increase sales of Gillette razors. Sharat Verma, brand manager for Gillette India, decided it needed to adopt radical new tactics to expand its 20 per cent market share in the razor category
The challenge
Mr Verma’s team assessed that 80 per cent of men in India who shaved were using a traditional double-edged razor, a technology so ingrained that cuts and razor burn were considered a part of everyday life. Also, men were generally shaving less: from Bollywood celebrities to IT consultants, the designer-stubble look was spreading. It seemed consumers were unaware of Gillette’s promise of a clean, smooth shave, did not believe it, or simply did not care.
Pricing and distribution were also factors. The Mach3 was up to 50 times the price of a double-edge blade, which deterred men from trying the brand for the first time.
Gillette products such as the Mach3 were sold through licensed, registered retailers, but these were small in number and concentrated in more affluent urban areas. The difficulty was getting into the 12m small independents that made up 95 per cent or so of India’s retailers, largely in rural areas.
The strategy
Gillette needed products that appealed both to the urban elite and the rural poor to persuade a significant number of men to adopt the brand. The Mach3 would target more affluent consumers, but the retail price had to be realigned to no more than three times the cost of a double-edged razor. To do this, Gillette India cut manufacturing costs by paring down the components, except the all-important blades.
Gillette also needed a separate, more affordable razor to appeal to those at “the bottom of the pyramid” – the mass market of consumers on low incomes. The result was the Gillette Guard, designed with emerging market consumers’ needs in mind, addressing factors such as lack of running water and affordability. It aimed for a razor system that sold for 33 cents and replacement blade cartridges that sold for 8 cents. This would make it equivalent to the cost of using a double-edged razor.
Packaging was reduced to lower costs and make it easier for small vendors to stock the items. Gillette also organised wholesalers to deliver to small retailers.
However, what really caught the public’s imagination was an innovative marketing campaign, the Shave India Movement, featuring infomercials, social media and stunts such as a world record for shaving.
It began in 2009 when Gillette publicised a study showing that 77 per cent of women in India preferred clean-shaven men. This was followed with a campaign, “India votes: to shave or not”, that generated media buzz in urban areas. In 2010 Gillette sponsored “Women Against Lazy Stubble” . The media carried opinion polls and featured clips in which female celebrities condemned stubble. Debates raged on Facebook. In eight weeks Gillette’s sales of the Mach3 increased by 500 per cent and market share for razors reached 40 per cent.
The success of the campaign led to a spin-off in the US: after Gillette’s “Kiss and Tell” campaign in February 2013 reported that women preferred kissing clean-shaven men, the debate went viral.
By 2013 the Gillette Guard accounted for two out of three razors sold in India.
The lessons
Word-of-mouth campaigns influence opinion at all levels of society at low cost.
With the right product, big profits can be derived from the bottom of the pyramid.
Finally, skills learnt in devising campaigns in developing markets can be applied in developed ones.

BMW’s car-sharing innovation

The story. By the end of 2008, German carmaker BMW was feeling the effects of the global financial crisis as sales of new cars fell significantly. With a 90 per cent drop in profits year-on-year in 2008, and new emission regulations imposed on manufacturers in the EU, the carmaker was under pressure to rethink its strategy. In addition, young people were shifting away from car ownership because of rising costs and improvements in urban public transport.

The challenge.
BMW’s eventual goal was to diversify both its product and its service portfolios while also finding new business models and revenue streams.
In addition, it wanted to capitalise on its reputation as a leader in innovation and to be in the forefront of bringing environmentally friendly car technologies and new ideas about transport to the market.
The strategy. Based on research at its internal think-tank, BMW launched a separate unit that it named “project i”. The unit aimed to develop new ideas about cars and transport in general that would reduce the environmental impact along the whole value chain, from raw materials to after-sales support.
The unit focused mainly on the needs of densely populated areas. Under the leadership of Ulrich Kranz, the team interviewed researchers, architects and urban planners globally about how transport might evolve. The team also worked closely with battery manufacturers and utilities as it envisaged electric-powered vehicles as the key to developments.
In 2009, BMW conducted extensive field trials by leasing 590 Mini E electric cars to private customers in Germany, the US and the UK. The tests provided valuable insights into how electric mobility could work in everyday situations.
Other electric vehicles were introduced, culminating in the launch of a new sub-brand, BMW i, in early 2011. At the same time, BMW set up BMW i Ventures, with a remit to make strategic investments in innovative service providers aiming to solve transport challenges in densely populated cities. Projects explored included making an electric car from carbon fibre in a factory powered by wind turbines.
Against this backdrop, in June 2011, BMW partnered with Sixt, the global car rental company, to launch DriveNow, a premium car-sharing service in Munich. Car-sharing was growing fast: drivers hire a vehicle that they pick up from a designated spot, usually for a short period of time. The European market is expected to reach €2.6bn in 2016, up from €220m in 2009. The joint venture hoped to benefit from combining BMW’s prestigious technology with Sixt’s car-rental expertise. BMW would provide its new premium-class electric vehicles to differentiate the scheme; Sixt would provide rental knowhow and IT infrastructure.
Because car-sharing is both affordable and environmentally friendly, BMW hopes to expand its customer base substantially by attracting new and younger customers. Ultimately, it expects initiatives such as DriveNow to benefit the entire group because all the business units gain access to the new customer base and cross-selling opportunities. DriveNow operates more than 2,200 vehicles in five German cities and San Francisco. It is acquiring an estimated 10,000 new customers a month.
BMW has also introduced extra DriveNow services, such as ParkNow, a San Francisco-based app that allows users to book free parking spaces at short notice, or ChargePoint, a charging station network for electric vehicles. Both were backed by BMW i Ventures.
The lessons. When companies are experiencing performance issues and facing external pressures, innovation in products, services and the overall business model can help remedy the situation.
By not losing sight of the bigger picture, BMW is changing its traditional role as a luxury vehicle maker to become a provider of sustainable transport products and services.

Biotech advances fail to convince GM’s critics

Genetically modified crops are spreading – and so is the controversy surrounding them.
Farmers are generally, though not universally, enthusiastic. Most plant scientists are keen and many development experts believe GM will help feed the world’s growing population. The area planted globally last year increased by 6 per cent to 170m hectares.
But there remains a global anti-GM movement with strong political support locally. Although Europe has historically been the hotbed of opposition, the latest anti-GM action took place in August in the Philippines, where protesters destroyed a field trial of “golden rice”, which is genetically engineered to produce vitamin A.
The destruction provoked outrage among those who regard golden rice as a new type of biotech crop bred for superior nutritional properties – in contrast to GM varieties created to fight weeds and pests (and make money for companies such as Monsanto) but offering nothing to consumers.
Professor Denis Murphy of the University of South Wales, a biotech adviser to the UN Food and Agriculture Organisation, was one of many plant scientists to express anger.
“Golden rice was developed 20 years ago by a Swiss-German group of university researchers and is now being trialled at the International Rice Research Institute, a public crop improvement organisation funded by charities. It is not a commercial venture and is not owned by multinationals,” he says.
Prof Murphy compared the antipathy to golden rice with the more favourable response to another form of improved rice called New Rice for Africa (Nerica) that was developed “by highly artificial cell culture and embryo rescue methods”.
“This produced an unnatural hybrid of two species that is now feeding millions of poor farmers in west Africa,” he says. “There has been no outcry about Nerica, despite its unnatural origins, whereas golden rice has been stigmatised simply because of its GM origins.”
Many opponents reject on principle the deliberate transfer of genes between species and put their faith in conventional breeding aided by genetic analysis.
They argue that tackling the structural inefficiencies and inequalities of agriculture and food distribution would do more to feed the world without the environmental risks posed by GM.
There is no doubt that plant breeders are improving crops without GM.
According to a study at Wageningen university in the Netherlands, non-GM varieties of wheat, barley, potatoes and sugar beet introduced over the past 30 years show a sustained and continuing increase in yield.
“The most striking finding was that the yield increase by breeding has not levelled off,” says Bert Rijk, the study co-ordinator. “New varieties are better than their predecessors to the same extent today as they were in the early 1980s.”
But GM advocates insist technology can provide a boost unavailable through conventional breeding. This year saw the introduction in the US of the first commercial crops engineered to tolerate drought. They are aimed first at farmers on the drier western side of the Great Plains where yields are normally lower than in the wetter states further east.
According to Monsanto’s field trials, the technology increases yields by about 5 per cent in dry growing conditions, but long-term monitoring under commercial conditions will be needed.
DroughtGard maize contains a gene for “cold shock protein B” from a bacterium called Bacillus subtilis, which protects against environmental stress including drought.
The technology has also been transferred to a public-private partnership, Water Efficient Maize for Africa, which aims to release a drought-tolerant variety for sub-Saharan Africa in 2017. Similar modifications might make crops more tolerant of frost and salinity.
GM opponents maintain that clever conventional breeding, assisted by the growing knowledge of genetic markers can achieve similar effects.
However there is no independent evaluation of how well non-GM crops are performing and whether GM versions could do better.
For GM enthusiasts such as Clive James, chairman of the International Service for the Acquisition of Agri-biotech Applications, the greatest endorsement is the willingness of farmers to plant GM.
“There is one overwhelming reason that underpins the trust and confidence of risk-averse farmers in biotechnology: biotech crops deliver substantial and sustainable socioeconomic and environmental benefits,” he says.
Maybe – but it will be a long time, if ever, before the world accepts the wonders of GM.

Demand rises for locally produced food

In the mid 1990s, in the wake of the BSE crisis, Jane Kallaway, a mother of four from Wiltshire, became so concerned about the quality of the food she was feeding her family, she decided to produce her own.
Having always kept a handful of sheep, and grown up in a village with local food shops, she set about expanding her flock. She researched rare breeds and took courses on subjects from lambing to butchery. She even helped out at local farms to gain more lambing experience.

I was just worried about what was in the supermarkets; what we were eating; where it came from,” she says.
She decided on the Manx Loaghtan sheep, a rare breed whose meat is high in flavour and, today, she and her husband, Bill, own Langley Chase Organic Farm in Wiltshire.
Mrs Kallaway rears all the sheep slowly and organically, to ensure full traceability. She supplies senior chefs, premium hotels and retailers as well as customers who buy the lamb and mutton online or direct from the farm.
“People are more interested in where food comes from these days,” says Mrs Kallaway. “Also, with something like the horsemeat scandal, it illustrates that, with these very big companies, how can people check what is going into their lasagne?”
Mrs Kallaway’s story points to the growing trend for small-scale and local production. Farmers’ markets are evident on both sides of the Atlantic. Around the world, there is a growing demand for locally sourced food, where customers know exactly where their food has come from, even down to the name of the farmer.
Food scares – from baby milk in China to horsemeat contamination in the UK and Ireland – have highlighted the need for greater transparency in the supply chain.
At the forefront of this movement has been the Bi-Rite market in San Francisco, a food and grocery store that specialises in organic produce and goods from Californian farms. “We pride ourselves on being like a farmers’ market every day,” the company says.
Supermarkets and food manufacturers are fast becoming aware of consumer demands for more locally produced food.
The Anglesey Sea Salt Company, run by David Lea-Wilson and his wife, Alison, was approached this year by Tesco, Britain’s biggest retailer, to supply sea salt for the relaunch of its premium Finest range. Tesco Finest pure sea salt, produced by Mr Lea-Wilson, went on sale in October.
During the negotiations on the agreement, Mr Lea-Wilson says he was determined not to compromise on price, because sea salt production is labour-intensive, with the company employing 17 staff. “It is produced by hand, and that makes it both good quality and expensive. We can only be at the top of the pyramid,” he says.
To make the salt, which Mr Lea-Wilson supplies under the Halen Môn name, he first pays the Queen for the seawater. This is pumped ashore, checked for quality and evaporated. The salt is then harvested, at the same time every day, in a way that Mr Lea-Wilson researched on a year-long scholarship. He took inspiration from the Museum of Salt in Tokyo, and even attended chemistry classes at Bangor university to understand the science of salt.
The high cost of production underlines one of the challenges faced by small-scale producers. Indeed, while customers are demanding clear provenance for their food, they must also be prepared to pay for this.
Research from Jefferies, the US investment bank, and consultants AlixPartners found that Americans born between 1982 and 2001, called the millennials, were prepared to pay for freshness and food provenance.
Jefferies and AlixPartners found that, across seven food categories, buying natural and organic was far more important to millennials than it was to the baby boomer generation (Americans born in the immediate postwar years). These trends were especially true for fresh food categories, including fruit and vegetables, meat and seafood.
Food provenance is most important for the young, educated millennial mother, or “Yemmie”. She is prepared to use mainstream stores for ubiquitous brands, and shop online for baby needs. But she will also shop loyally for organic foods and those with higher health properties, particularly fresh produce, at specialist retailers.
J Sainsbury, the British supermarket chain, recently went a step further with local production, launching a pitching process for smaller food businesses in partnership with the StartUp Britain campaign. James Bailey, business unit director of chilled and frozen food at Sainsbury, says it wants to find the innovative products demanded by its customers.
“It can be difficult to reach out to start-up businesses, because often they are wary of getting in touch with supermarkets,” he says.
Out of the 10 final pitches, Sainsbury chose two outright winners, Mallow & Marsh, a premium marshmallow, and Yolly Lolly, a frozen ice-cream made from Greek yoghurt. They will receive a year’s contract with Sainsbury. It is in talks with two other finalists, Vini & Bal’s fresh Indian sauces, and Kiddyum, children’s frozen ready meals, about a trial with the supermarket.
“We didn’t know quite what to expect,” says Mr Bailey. “[But] we were pretty blown away by the quality of the product and the pitches.”
Back in Anglesey, Mr Lea-Wilson is preparing for the next phase of growth. The Anglesey Sea Salt Company will next year open a £1m building, which will incorporate visitor facilities for consumers keen to see the process.
“We are going to build on this provenance issue,” he says.

Farmers tackle climate change

Toby Torkelson’s family has farmed land in Canada’s southern Saskatchewan for more than 40 years. Three years ago, the family planted its first crop of maize.
Mr Torkelson would not describe himself as a “proponent” of climate change, but he has noticed more “unpredictable” weather patterns in recent years.

The reason he now plants maize on 1,500 of his family’s 6,000 acres is because “good yields, high prices make corn very appealing” and because seed companies such as Monsanto and DuPont Pioneer have bred corn that can mature during southern Canada’s short growing season.
But climatologists say it is clear that Mr Torkelson’s new planting regime is partly driven by the effects of global climate change. Rises in global temperatures have changed where crops can be successfully grown around the world, including the expansion of the US corn belt northward into Canada.
Extreme weather caused by climate change has led to roughly 40m tonnes in global grain losses and $1bn in losses in Asian rice production annually, according to the World Bank. It creates price volatility, according to Juergen Voegele, director of agriculture and environmental services for the World Bank. “Climate change is already here and it is having an impact. We see this globally,” he says.
“We see shifting production patterns and we see that every year the frequency of extreme weather events is increasing.”
The North American drought of 2012, by some estimates the worst since the 1930s, is an example of the havoc that climate change has wrought, driving maize prices to near-record highs and crippling production in the US heartland. Last month, a freak blizzard in South Dakota killed tens of thousands of livestock.
“In the 1950s and 1960s, there were fewer [extreme weather events], but in the past two decades, there has been an increased frequency of these,” says Mr Voegele.
Flooding and earthquakes tend to grab headlines, says Marc Sadler, an agricultural commodity expert for the World Bank. But climate change works in more insidious ways too.
“You do not need very big changes in precipitation or temperature to have quite a big impact in agriculture,” he says.
The domains of some pests have also expanded. Mr Sadler points to la roya fungus , also known as coffee rust, which destroyed between 25 and 30 per cent of coffee trees in some Central American countries this year.
“What drove that was a slightly longer rainy period, and a slightly warmer temperature at the same time, which created humidity in which la roya ... spread rapidly,” Mr Sadler says. “If you’d asked a farmer at that time if they noticed an extreme event, no one would have said ‘yes’.”
David Hightower, who runs a commodity research firm, says the effect of erratic weather is felt more keenly than before, because of higher prices and higher production. “A 10 per cent loss of production in the 1990s was a lot smaller deal than a 10 per cent loss today,” he says.
Last year’s drought hit the US corn crop badly. Yield was 16 per cent down on 2011 and the harvest was 24 per cent below forecasts.
Mark Rosegrant, director of the environment and production technology division at the International Food Policy Research Institute, says that, while the science is still developing, it is obvious that temperatures have increased over the past century and there is evidence of more, longer and more severe droughts.
“You can’t say one-to-one that climate change caused those droughts, but the probability of those extreme droughts has certainly increased because of climate change,” he says.
The long-term effects are only going to become apparent in the next decade, says Mr Rosegrant.
The institute forecasts that, if temperatures continue to rise apace, global production of corn, rice and wheat will drop by roughly 15 per cent by 2050, and by 20-30 per cent by 2080 as the effects of higher temperatures are felt.
Considering that global yield increases on average by 1 per cent a year, such decreases will make it more difficult for food producers to meet demand if, according to UN estimates, the global population grows to 9bn by 2050.
Seed companies are developing seeds that are drought-, heat- or flood-resistant, and seeds with traits that combat weeds and pests that occur in new environments.
So-called “precision agriculture” – the application of data analytics, advanced GPS and remote sensing to farming – has become all but standard among tractor and seed companies, as they seek to help farmers increase yields efficiently.
Systems that allow a tractor to map fields and precisely calibrate its movements to minimise wasted fuel, fertiliser or seed are widely available in the west. Increased productivity, the development of crops that are more resilient and a reduction in the carbon footprint will be crucial to development, says Mr Voegele.
“I think we are just at the beginning of a process to rethink how we take our food production forward,” he says. “I think we still have a long way to go.”

Latest petrol engines ‘more harmful than traditional designs’

New-generation petrol engines typically release around 1,000 times more harmful particles, including carcinogens, than traditional designs, according to researchers.
New gasoline direct injection (GDI) petrol engines have helped carmakers dramatically reduce emissions, and GDI-powered cars are expected to account for almost all new petrol cars sold in Europe by 2020, according to a European Commission research paper

But a study, seen by the Financial Times, by the independent technical research institute TÜV Nord finds that GDI engines release about 1,000 times more particles classified by the World Health Organisation as harmful than traditional petrol engines, and 10 times more than new diesels.
This is because the engines operate with higher pressure in their cylinders to reduce emissions, tending to produce larger numbers of the particles.
EU research suggests air pollution contributes to 406,000 deaths annually and causes more than 100m lost days of work, costing the EU economy more than €330bn.
European regulations require filters that stop particle emissions to be fitted to all new diesel cars, but there is no mandatory requirement for petrol engines. A filter can cost as little as €50.
“Cars are the largest source of air pollution in Europe’s cities and 90 per cent of European citizens are already exposed to harmful levels of particle pollution,” said Greg Archer, clean vehicles manager at Transport & Environment, a Brussels- based think-tank.
“More fuel-efficient, lower-CO2, GDI engines would be a great innovation if they did not emit harmful particles. These particles can be eliminated for the price of a hands-free kit.”
Governments in Europe have tried to drive emissions up the power-producing chain, promoting electric or hybrid car technology that essentially moves pollution outside population centres by switching it from car exhausts to power station chimneys.
But consumer uptake for electric cars has been low, and there has been little success in developing commercially viable, mass-market alternatives, such as hydrogen-powered vehicles. Instead, global carmakers have responded by fine-tuning existing oil-fuelled engines to meet ever-stricter emission norms.

Shift to 4G networks faster than previous generations

The shift to fourth-generation networks will be faster than the take-up of previous generations of mobile technology in most parts of the world, marking an unprecedented shift in mobile communications.
The number of superfast mobile internet connections worldwide is forecast to pass 1bn by 2017, according to the GSMA, the organisation that represents the interest of mobile operators worldwide.
The rapid take-up means that more than one in eight mobile connections will use superfast 4G networks within the next four years, up from just 176m connections at the end of 2013.
The technology, also known as LTE, offers rapid internet speeds rivalling fixed-line broadband networks, opening up a host of new applications and services for smartphone providers.
Almost 500 LTE networks are forecast to be in service across 128 countries by 2017, roughly double the number of LTE networks today.
The GSMA said the shift to 4G networks will be faster than the corresponding move from 2G to 3G technology over the past decade. Networks using 3G technology were initially slow to be adopted, in part owing to the expense of the spectrum acquired to use the networks in regions such as Europe and lack of smartphones and other connected devices.
The GSMA highlighted a number of factors driving the growth of 4G, such as the more efficient allocation of spectrum to mobile operators, the availability of affordable suitable devices and the implementation of tariffs designed to encourage adoption of high-speed data services.
The study calculates that about a fifth of the global population is within 4G network coverage range, which will rise to about half of the world’s population by 2017. In the US, LTE networks already cover more than 90 per cent of the population and account for almost half of global connections.
However, Asia will grow to account for almost half of all LTE connections by 2017 as networks are rolled out in major markets such as China and India.
China, the world’s largest mobile telecoms market, will be officially open to superfast mobile services next month when China Mobile begins selling 4G tariffs in Beijing, Guangzhou and Chongqing.
China Mobile, the country’s largest mobile group with about 750m mobile subscribers, is expected to be granted a 4G licence in December. The state-backed group has been running trial services in cities in China.
China’s government wants to catch up with the advances seen in countries such as South Korea, which is the most advanced mobile market in the world given half of total mobile connections are running on LTE networks.
The GSMA study also found that LTE users consume 1.5GB of data a month on average, almost twice the average amount consumed by non-LTE users. In developed markets, operators have found that LTE can generate an average revenue per user uplift of between 10 and 40 per cent.
“Since the launch of the first commercial 4G-LTE networks in late 2009 we are seeing deployments accelerate across the globe,” said Hyunmi Yang, chief strategy officer at the GSMA. “Our findings show that the global LTE market is at a tipping point.”

Thursday, November 28, 2013

50 Unfortunate Truths about Investing: Motley Fool

1. Saying "I'll be greedy when others are fearful" is much easier than actually doing it.
2. The gulf between a great company and a great investment can be extraordinary.
3. Markets go through at least one big pullback every year, and one massive one every decade. Get used to it. It's just what they do.
4. There is virtually no accountability in the financial pundit arena. People who have been wrong about everything for years still draw crowds.
5. As Erik Falkenstein says: "In expert tennis, 80% of the points are won, while in amateur tennis, 80% are lost. The same is true for wrestling, chess, and investing: Beginners should focus on avoiding mistakes, experts on making great moves."
6. There are tens of thousands of professional money managers. Statistically, a handful of them have been successful by pure chance. Which ones? I don't know, but I bet a few are famous.
7. On that note, some investors who we call "legendary" have barely, if at all, beaten an index fund over their careers. On Wall Street, big wealth isn't indicative of big returns.
8. During recessions, elections, and Federal Reserve policy meetings, people become unshakably certain about things they know nothing about.
9. The more comfortable an investment feels, the more likely you are to be slaughtered.
10. Time-saving tip: Instead of trading penny stocks, just light your money on fire. Same for leveraged ETFs.
11. Not a single person in the world knows what the market will do in the short run. End of story.
12. The analyst who talks about his mistakes is the guy you want to listen to. Avoid the guy who doesn't -- his are much bigger.
13. You don't understand a big bank's balance sheet. The people running the place and their accountants don't, either.
14. There will be seven to 10 recessions over the next 50 years. Don't act surprised when they come.
15. Thirty years ago, there was one hour of market TV per day. Today there's upwards of 18 hours. What changed isn't the volume of news, but the volume of drivel.
16. Warren Buffett's best returns were achieved when markets were much less competitive. It's doubtful anyone will ever match his 50-year record.
17. Most of what is taught about investing in school is theoretical nonsense. There are very few rich professors.
18. The more someone is on TV, the less likely his or her predictions are to come true. (U.C. Berkeley psychologist Phil Tetlock has data on this).
19. Related: Trust no one who is on CNBC more than twice a week.
20. The market doesn't care how much you paid for a stock. Or your house. Or what you think is a "fair" price.
21. The majority of market news is not only useless, but also harmful to your financial health.
22. Professional investors have better information and faster computers than you do. You will never beat them short-term trading. Don't even try.
23. How much experience a money manager has doesn't tell you much. You can underperform the market for an entire career. And many have.
24. The decline of trading costs is one of the worst things to happen to investors, as it made frequent trading possible. High transaction costs used to cause people to think hard before they acted.
25. Professional investing is one of the hardest careers to succeed at, but it has low barriers to entry and requires no credentials. That creates legions of "experts" who have no idea what they are doing. People forget this because it doesn't apply to many other fields.
26. Most IPOs will burn you. People with more information than you have want to sell. Think about that.
27. When someone mentions charts, moving averages, head-and-shoulders patterns, or resistance levels, walk away.
28. The phrase "double-dip recession" was mentioned 10.8 million times in 2010 and 2011, according to Google. It never came. There were virtually no mentions of "financial collapse" in 2006 and 2007. It did come.
29. The real interest rate on 20-year Treasuries is negative, and investors are ploughing money into them. Fear can be a much stronger force than arithmetic.
30. The book Where Are the Customers' Yachts? was written in 1940, and most still haven't figured out that financial advisors don't have their best interest at heart.
31. The low-cost index fund is one of the most useful financial inventions in history. Boring but beautiful.
32. The best investors in the world have more of an edge in psychology than in finance.
33. What markets do day to day is overwhelmingly driven by random chance. Ascribing explanations to short-term moves is like trying to explain lottery numbers.
34. For most, finding ways to save more money is more important than finding great investments.
35. If you have credit card debt and are thinking about investing in anything, stop. You will never beat 30% annual interest.
36. A large portion of share buybacks are just offsetting shares issued to management as compensation. Managers still tout the buybacks as "returning money to shareholders."
37. The odds that at least one well-known company is insolvent and hiding behind fraudulent accounting are high.
38. Twenty years from now the S&P 500 (INDEX: ^GSPC ) will look nothing like it does today. Companies die and new ones emerge.
39. Twelve years ago General Motors (NYSE: GM ) was on top of the world and Apple(Nasdaq: AAPL ) was laughed at. A similar shift will occur over the next decade, but no one knows to what companies.
40. Most would be better off if they stopped obsessing about Congress, the Federal Reserve, and the president and focused on their own financial mismanagement.
41. For many, a house is a large liability masquerading as a safe asset.
42. The president has much less influence over the economy than people think.
43. However much money you think you'll need for retirement, double it. Now you're closer to reality.
44. The next recession is never like the last one.
45. Remember what Buffett says about progress: "First come the innovators, then come the imitators, then come the idiots."
46. And what Mark Twain says about truth: "A lie can travel halfway around the world while truth is putting on its shoes."
47. And what Marty Whitman says about information: "Rarely do more than three or four variables really count. Everything else is noise."
48. The bigger a merger is, the higher the odds it will be a flop. CEOs love empire-building by overpaying for companies.
49. Investments that offer little upside and big downside outnumber those with the opposite characteristics at least 10-to-1.
50. The most boring companies -- toothpaste, food, bolts -- can make some of the best long-term investments. The most innovative, some of the worst. 
(Source: Motley Fool)

Monday, November 25, 2013

Japan Dismantles Rice Output Policy as Abe Targets Farming

Japanese Prime Minister Shinzo Abe’s government approved a plan to end a four-decade long policy that has helped to sustain the nation’s 1.2 million rice farms.
The gentan system, which has paid landowners to reduce crops since 1970, will be be dismantled by the end of the fiscal year through March 31, 2019, Agriculture Minister Yoshimasa Hayashi told reporters in Tokyo today.
The change may spur consolidation of small paddies into larger fields as Abe seeks to increase agricultural efficiency and remove hurdles to his pursuit of free-trade pacts including the Trans-Pacific Partnership. The subsidies support a typical Japanese farmer who is a 70-year-old man living off pension payments, part-time work and sales of the grain, data from the Norinchukin Research Institute show.
“I expect more deregulation to follow that is consistent with changing agriculture into an industry,” Economy Minister Akira Amari said at a separate briefing. Amari, who is spearheading Abe’s plans for economic revitalization, said the changes announced today would see agricultural resources shift to “capable producers.”
The government didn’t announce any changes to import tariffs, which are as high as 778 percent for rice. Sugar has a 328 percent duty while tariffs for beef and pork are 38.5 percent and 4.3 percent. The Agriculture Ministry said some subsidies for rice used as animal feed will increase.

Toshiba, Toyota

Manufacturers from Toshiba Corp. (6502) to Toyota Motor Corp. would benefit from Abe’s push to reach a TPP agreement. A government estimate in March found that joining the pact and cutting tariffs would boost Japan’s gross domestic product by 3.2 trillion yen, even as farm and fisheries production was forecast to drop by 3 trillion yen.
As many as 72 percent of Japanese rice farmers work on one hectare or less, with 42 percent on half of that, according to Norinchukin.
The average U.S. rice farm is 180 hectares and yields more than 50 percent as much grain per hectare as Japanese paddies, based on calculations using data from Norinchukin, Japan’s Agriculture Ministry and the U.S. Department of Agriculture.
Japan and 11 other nations including the U.S., Australia and Vietnam are in talks for the TPP. The U.S. and Australia are ranked first and seventh for coarse-grain exports while Vietnam is the second-largest rice shipper, U.S. Department of Agriculture data show.

2014 Changes

The Agriculture Ministry will halve gentan subsidies starting in the fiscal year from April 1, 2014, and end all payments by March 31, 2019, said Takashi Amou, a director of the policy planning division. Farmers who grow rice for livestock feed will receive subsidies that increase by as much as 31 percent under the changes announced today, according to Amou.
“Ending the gentan policy is a first step in making Japanese rice farming efficient,” said Takaki Shigemoto, a commodity analyst at research company JSC Corp. in Tokyo. “The government has more to do if it wants Japanese farmers to be competitive against agricultural exporting countries.”
Wholesale prices of the locally grown cereal averaged 276 yen a kilogram in the nine months through May, compared with 181 yen paid for milled short-grain rice from the U.S. and 152 yen for the same variety from Australia in import tenders last month. These prices included shipping and inspection costs.

Price Support

The gentan system was originally devised to support prices by setting annual output targets that matched demand estimates. As Japan grew richer and people ate less rice, the targets shrank and the state paid subsidies to farmers who agreed to sow less grain.
This year’s target was a record-low 7.91 million metric tons, compared with estimated demand of 7.86 million tons. Consumption peaked at 13.4 million tons in 1963.
Farmers who plant less in line with the plan currently receive about 150,000 yen ($1,477) for each 1 hectare (2.5 acres) under cultivation and become eligible for other benefits.
Japan, self-sufficient in rice, is the world’s largest importer of corn. It also depends on overseas shipments for almost 90 percent of its wheat.
It has capped food-rice imports at 100,000 tons a year since 2001. Total inbound shipments, including feed grain for animals, were 770,000 tons in 2012.
The Agriculture Ministry has previously outlined plans to create land banks in every prefecture to connect small holdings into larger tracts. They would pool mostly small lots from farmers ready to give up working their fields and consolidate them to lease as larger areas.
(Source: Bloomberg)

India Office Boom Turns Glut With Vacancies: Real Estate

India’s slowing economy has left its big cities with a glut of office space, pushing up vacancy rates, freezing development and prompting some builders to convert commercial projects into housing.
Vacancy rates in the financial center of Mumbai and capital New Delhi topped 20 percent in the third quarter, the highest in Asia after Chengdu, China, where 32 percent of offices are empty, according to broker Cushman & Wakefield Inc. Six Indian cities are among the 10 office markets with the worst vacancies in the region, according to Cushman.
Demand for offices in India has been declining as Asia’s third-largest economy -- labeled a “dream market” by Warren Buffett two years ago -- faces the slowest expansion in 11 years, the fastest inflation rate among large emerging markets, and the risk of its debt ratings being cut to junk. New supply in the country’s seven major office markets, including Mumbai, Hyderabad and Bangalore, fell to the lowest in almost two years in the three months to Sept. 30, broker CBRE Group Inc. said.
“India is faced with an intimidating macro-economic landscape,” said Anshuman Magazine, chairman of CBRE South Asia Pvt, in New Delhi. “Companies remained cautious, a trend which continued to inhibit office leasing activity across the country.”
India’s economic growth probably held below 5 percent for a fourth straight quarter, the longest stretch in data going back to 2005, according to a Bloomberg News survey.

Reduced Demand

Until two years ago, India was a darling of global investors with the economy expanding more than 9 percent in the year ended March 2011. That spurred 55 million square feet (5.1 million square meters) of new office space across the country’s key cities in 2010, according to CBRE, which began compiling the data that year. That compares with 29 million square feet in 2011 and 30 million square feet in 2012. For the first nine months of this year, 23 million square feet were added.
The building boom ended as economic growth fell by 50 percent and companies and investors showed little confidence in a government battling corruption scandals. ArcelorMittal and Posco scrapped plans for $12 billion of investments, while global funds pulled $12.3 billion from Indian bonds in the five months to October. Buffett’s Berkshire Hathaway Inc. exited an insurance distribution venture this year.
“Developers have been delaying their projects to keep pace with the reduced demand,” Sanjay Dutt, executive managing director for South Asia at Cushman in Mumbai, said. “The economic conditions have forced fresh demand to be even more subdued than expected by most.”

Cheaper Rents

The increase in empty office space has made rents in New Delhi and its surrounding areas, known as the National Capital Region, and Mumbai less costly. Mumbai was ranked sixth and New Delhi 13th for the cheapest rents in business districts in Asia-Pacific cities, according to a report from Chicago-based Jones Lang LaSalle Inc. in August.
Average prime office rents in Mumbai’s Bandra Kurla, a business area north of the city that is home to UBS AG and Citigroup Inc., were $581 per square meter a year, while rents in Delhi were $374 per square meter, the Jones Lang LaSalle data showed. Rents in Hong Kong were the highest at $1,486 followed by Beijing at $1,004. A square meter is almost 11 square feet.
Average rents in Mumbai rose 0.5 percent in the second quarter from the previous one, while they were unchanged in New Delhi, according to Jones Lang LaSalle.

‘Price Correction’

“Indian cities have not recovered from the rental and price correction of between 20 percent and 40 percent from the peak in the third quarter of 2008, while other business districts in Asia-Pacific have performed better,” said Ashutosh Limaye, Mumbai-based head of research at Jones Lang LaSalle India. “The oversupply created in Indian cities kept rents and prices in check.”
Bangalore, the south-Indian city that has established itself as a technology hub, has the largest office market in India with about 100 million square feet, according to CBRE. The city, the National Capital Region and Mumbai account for about 65 percent of the office real estate market, according to the broker.
Bangalore -- home to Texas Instruments Inc., the largest analog chipmaker, and Qualcomm Inc., the world’s largest maker of chips used in mobile phones -- posted the steepest decline in office space added to the market, falling by about 90 percent in the September quarter from the previous three months, CBRE said. The National Capital Region had an 80 percent slide, while new office supply in Mumbai dropped by more than half, it said.

Rising Vacancies

Rising vacancies and declining rents are prompting developers to put off projects. DLF Ltd. (DLFU), India’s biggest publicly listed builder, is holding off building new office towers until it sees a recovery in demand, Ashok Tyagi, group chief financial officer of the Mumbai-based company, said on a conference call with analysts on Oct. 31.
“The uptake of leasing is slow,” Tyagi said on the call. “We have enough capacity for the next 18 to 24 months, if not longer. We have land for further construction, but we need to see how demand shapes up.”
DLF shares have declined 35 percent this year compared with the 39 percent drop by the CNX Realty Index, which tracks 10 real estate companies. DLF’s second-quarter net income dropped 28 percent to 1 billion rupees ($16 million) as higher construction and interest costs crimped profitability.

Turning Residential

To counter the decline in demand, some developers, such as Oberoi Realty Ltd. (OBER), India’s second-largest by market value, are considering converting plans to build offices into residential buildings.
“Commercial assets are struggling,” said Chairman Vikas Oberoi.
Many developers have converted their commercial projects into residential because they provide positive cash flows upfront, Oberoi said. The company will explore the option “where it’s structurally possible for us to do so,” he said.
Oberoi shares have dropped 34 percent this year, after returning 37 percent in 2012.
“The change from commercial to residential is happening across India,” said Magazine at CBRE. “As a lot of people overestimated the demand in commercial, in some places they will find it easier to convert to residential and get their cash flows going.”

Economic Outlook

DLF switched to plans for housing from office for a 17.5-acre (7-hectare) plot in central Mumbai before deciding to sell it to the Lodha Group last year, according to Cushman. The conglomerate Adani Group’s project in Mumbai and developer VRaheja Construction’s redevelopment of a slum in Mumbai’s north also are among those shifting from offices to residential, the broker said.
India’s economy may expand 4.8 percent in the year through March 2014, the slowest pace since 2003, according to a survey by the Reserve Bank of India. Gross domestic product rose 4.6 percent in July through September from a year earlier, compared with 4.4 percent in the prior quarter, according to the median of 25 estimates in a Bloomberg News survey ahead of a report due on Nov. 29.
The nation’s credit rating may be cut to junk next year unless national elections due by May lead to a government capable of reviving growth, Standard & Poor’s said in a Nov. 7 statement.

Bangalore Offices

Not all are refraining from adding supply. RMZ Corp., the largest office developer in south India, is building offices outside of the central business district in Bangalore, catering to the information technology industry and tenants looking for cheaper offices, said Raj Menda, managing director at RMZ.
RMZ, which received $300 million of investment from Qatar’s sovereign wealth fund this year, has 98 percent of its office assets in secondary business locations, Menda said.
“We are on a terrific acquisition spree,” Menda said in a phone interview. RMZ, based in Bangalore, is buying office buildings in cities including Bangalore, Chennai, Pune, Hyderabad and the National Capital Region, he said.
Bangalore is also home to Goldman Sachs Group Inc.’s third-largest office globally, while Nissan Motor Co. and Renault SA’s local units have their offices in Chennai.
Private-equity funds are favoring India’s office market because of attractive yields and an anticipated pickup in demand as the economy shows signs of stabilizing. The rupee has gained 9.5 percent from a record-low Aug. 28, while overseas investors returned to buy $17 billion of stocks this year.

GIC, Ascendas

GIC Pte, Singapore’s sovereign wealth fund, and Ascendas Pte said Nov. 19 they plan to invest as much as S$600 million ($483 million) in Indian commercial property.
Blackstone Group LP and HDFC Property Ventures Ltd., the private-equity unit of India’s largest mortgage lender, made a $367 million investment in Bangalore-based Embassy Group in February, according to data from Venture Intelligence, a research firm that tracks private-equity investments in India.
Private-equity investors are looking at assets that offer stable yields, with returns from 8 percent to 10 percent on an annualized basis, coupled with some capital appreciation at the end of their holding period, which could be seven years to 10 years, Shashank Jain, executive director of transaction services at PwC, said in a phone interview from Mumbai.
A pickup in demand enough to relieve some of the office glut may be slow in coming. Annual supply this year is estimated at about 40 million square feet, while demand will be for about 25 million square feet, according to data from Cushman.
“Every year progressively, office absorption has been declining since 2011,” Magazine at CBRE said. “The current office supply may take about two years to get occupied.”
(Source: Bloomberg)