Monday, June 30, 2014

Delayed monsoon hits dairies, souring inflation outlook

Jai Prakash Sharma looked gloomily into the chilling tanks at the Mewat milk cooperative: they are only half full these days, thanks to a delay in India's annual monsoon rains that has robbed cattle fodder of nutritious moisture.
"If there are not sufficient rains in the next few days, some farmers may start selling animals for slaughtering," said Sharma,manager of a cooperative in Haryana that supplies milk to the capital, New Delhi.
As dairy farmers fret over the risk to earnings due to the vagaries of the monsoon, the squeeze in supplies of milk is adding to inflationary pressures that Prime Minister Narendra Modi's government inherited when it came to power in May.
Even without unpredictable weather, ensuring supplies of dairy products is emerging as a long-term policy headache in a country of 1.2 billion people where a sustained period of rising incomes has changed diets and lifted demand for protein.
India's much-acclaimed dairy co-operative model helped it to emerge as the world's largest milk producer in what became known as a "white revolution".
But a system that relies on millions of farmers each owning a few low-yielding cattle, is now not enough, as India's cows' average milk yield of 2 to 3 litres per day is about one-tenth of the global average.
Earlier this month the government imposed export restrictions on a raft of farmcommodities and ordered a crackdown on hoarding to control rising food prices, after wholesale price inflation hit a five-month high.
Soaring prices of basic goods such as milk and potatoes lifted retail food inflation in May to 9.40 percent and there are fears of worse to come, with rains so far 42 percent below normal due to the sluggish progress of the monsoon towards agricultural belts in the northwest.
Prices for dairy products, which account for nearly one-sixth of the goods in the retail food price index basket, rose by more than 11 percent in May from the same month a year earlier.
High food inflation could persuade the Reserve Bank of India's (RBI) to prolong its hawkish monetary policy even if weather conditions eventually improve and supply pressures ease, HSBC said in a recent research report.
"To be sure, the RBI cannot address food inflation via interest rates," it said. "But the RBI still needs to contain inflation expectations in the interim, and prevent second-round effects from driving up core prices."
According to dairy industry estimates, India is facing a 1.5-2.0 percent gap between supply and demand this summer despite total milk production increasing to 140 million tonnes in financial 2013/14, up 6 percent from the previous year.
At the Mewat cooperative outside the capital, Sharma said that his dairy has been unable to meet demand, even after raising prices paid to farmers by 30 percent.
Amul, the country's largest dairy cooperative with an annual turnover of more than $3 billion, raised retail prices by 5 percent in May, but still can't match supply and demand.
"We are again considering raising procurement prices in a week or so, as there has been almost zero increase in milk supplies due to the delay in the monsoon," K. Rathnam, managing director of Amul Dairy, told Reuters by phone from the company's headquarters in the prime minister's home state, Gujarat.
Some government officials have suggested cutting the import duty on skimmed milk powder to 15-20 percent from 60 percent to curb rising prices, but such a step would be politically difficult because it would introduce competition for dairy farmers who are already struggling with a jump in fodder costs.
India's dairy market, of which cooperatives and companies like Nestle control about one quarter, with a host of smaller dairies supplying rural areas and small towns, has been tightening for years.
Amul says it has raised milk prices 19 times since 2006.
Farmers in Aakera village, one of the largest suppliers of milk in Mewat district, are now selling their milk to Sharma's cooperative for 41.10 rupees ($0.68) a litre, up from 30.80 a year ago.

"We need big cattle farms with high-yielding cows to meet the growing demand," said Sharma. "Otherwise, we may find it difficult to buy milk even at 50 rupees a litre from farmers."
(Source: Reuters)

Daily Iron Ore Mine Closures in China Make Citigroup Bullish

Iron ore prices, heading for a second straight quarterly loss, will rebound as the daily closure of mines supplying high-cost output in China boosts demand for seaborne shipments, according to Citigroup Inc.
Local suppliers in Asia’s largest economyare cutting production even as mills increase steel output on improved margins, according to analyst Ivan Szpakowski. An iron ore mine in China is being shuttered every day, with closures seen in all main producing regions, he said in an interview from Shanghai.
Producers in China, the world’s largest user, face a rising challenge of lower-cost supplies from BHP Billiton Ltd. (BHP)Fortescue Metals Group Ltd. (FMG) and Vale SA (VALE5) after the biggest miners inAustralia and Brazil expanded output and spurred a global glut. While benchmark prices in China are poised for the biggest three-month loss since 2012, they have risen in June and are heading for the first monthly advance since November.
“We’re one of the most bullish people in the market,” said Szpakowski, reiterating a forecast for prices to average $100 a ton in the fourth quarter and $104 this year. “Imported ore is much cheaper than domestic ore, so the shift in buying has moved to imported ore. That’s supporting imported prices.”
Ore with 62 percent iron content delivered to Tianjin fell 0.4 percent to $94.90 a dry ton on June 27, according to data from The Steel Index Ltd. So far this quarter, the commodity has lost 19 percent, following a 13 percent decline between January and March. Prices advanced 3 percent last week, the most since the period ended August 16.

Mine Closures

“Supply in China has been decreasing,” Szpakowski said June 27, adding that there is robust support for the commodity at about $90 a ton, with prices unlikely to drop below that level. “Basically, every day there’s a new iron ore mine shutting down, so supply will continue to fall,” he said.
Between 20 percent and 30 percent of the iron ore mines in China have closed down, according to the China Metallurgical Mining Enterprise Association. Local production will decline 16 percent to 310 million tons this year and contract to 275 million tons in 2015, Credit Suisse Group AG said on June 23, citing projections for supply in 62 percent content terms.
“Chinese producers find it difficult to generate profits and justify production if prices stay below $100,” Gavin Wendt, founder and senior resource analyst at Mine Life Pty in Sydney, said in an interview today. Iron ore in Tianjin has been below that level since May 19, dropping to a low of $89 on June 16. “This in turn will provide some level of price support.”

‘Cease to Exist’

The Chinese market is becoming saturated with lower-cost imports from Australia and Brazil, Morgan Stanley said in a report today, forecasting lower prices even as Chinese mines shut down. The bank sees a second-half average of $95 a ton, and a drop to $90 in 2015.
“We believe cost support provided by higher-cost Chinese operations will cease to exist as Chinese mines see widespread closures leading to a decline in prices,” Morgan Stanley analysts including Joel Crane wrote.
The biggest closures of Chinese supply may be in Hebei as the province is the largest producer and has some of the highest costs, according to Goldman Sachs Group Inc., which sees prices averaging $108 this year and $80 in 2015.
China will need to cut about 64 million tons of output this year, and a further 85 million tons by 2017, JPMorgan Chase & Co. analysts including Daniel Kang wrote in a report yesterday. While the 2014 estimate was cut to $105 from $118, there’s scope for a better second half on record Chinese steel output and as most new supply growth in Australia has already begun, he said.

Fortescue’s View

Fortescue expects that prices will recover to about $110 a ton, Chief Financial Officer Stephen Pearce told the Australian newspaper in an interview, citing strengthening economic data in China and the decline of stockpiles at ports. The market has adjusted to increased supply from major producers, Pearce said.
A Chinese manufacturing index released last week showed that factory activity rose to a seven-month high in June, supporting Premier Li Keqiang’s contention that the economy will avoid a hard landing as the government steps up efforts to spur growth. The country buys about two-thirds of the world’s seaborne iron ore, according to Morgan Stanley.
Stockpiles at Chinese ports fell 0.9 percent to 112.65 million tons in the week to June 27 from arecord 113.65 million tons a week earlier, according to Shanghai Steelhome Information TechnologyCo. Inventories have expanded 30 percent this year.
“Every significant ore-producing province has mines shutting down,” said Szpakowski. “We think prices will continue to go up.”
(Source: Bloomberg)

Sunday, June 29, 2014

How far can Amazon go?

WHEN Jeff Bezos left his job in finance and moved to Seattle 20 years ago to start a new firm, he rented a house with a garage, as that was where the likes of Apple and HP had been born. Although he started selling books, he called the firm Amazon because a giant river reflected the scale of his ambitions. This week the world’s leading e-commerce company unveiled its first smartphone, which Amazon treats less as a communication device than an ingenious shopping platform and a way of gathering data about people in order to make even more accurate product recommendations.
The smartphone is typical of Amazon. There is the remorseless expansion: if you can deliver books and washing machines, why not a phone? There is the ability to switch between the real world of atoms and the digital world of bits: Amazon has one of the world’s most impressive physical distribution systems, even as it has branched out into cloud computing, e-books, video streaming and music downloads (see article). There is the drive for market share over immediate profits. And there is the slightly creepy feeling that Amazon knows too much about its users already. So far its insatiable appetite has helped consumers; but as it grows in size and power the danger is that it will go too far.

For the moment, admiration should count for more than fear. Many things the world now takes for granted were introduced by Mr Bezos. Typing your credit-card number into a web browser was once considered a sign of insanity until Amazon showed how easy and safe buying things online could be. Once people had bought a book, they tried other things. Today the global e-commerce market is worth $1.5 trillion.
Customers who bought this item also bought…
Amazon also fostered the emergence of customer reviews. From the start it let buyers rate and review books. This still irks some professional critics, and some of the most fulsome five-star ratings may be from spouses of authors. But overall they provide valuable advice to buyers. Today everything from apps to hotels to hoses can be rated online, and retail websites seem incomplete without customer reviews.
Then there are the industries it has upended. Books came first. Amazon has changed publishing twice—first by making any book in the world quickly available and then by making e-books mainstream. Before Amazon launched the Kindle in 2007, e-readers were fiddly gadgets that few people used. The Kindle was easy to use, worked anywhere and allowed instant delivery straight to the device (rather than via a PC). Amazon also pioneered a new model for cloud computing. In 2006 it began renting out computer capacity by the hour. The option to rent rather than buy computing power greatly reduced the cost and complexity of launching a new company. Amazon’s cloud services have since been used by startups including Netflix, Instagram, Pinterest, Spotify and Airbnb, and have spawned a whole new industry.
Apple may be better known as an innovator, but Amazon may have had just as big an impact on the workings of the digital world. And it keeps on experimenting. Unconstrained by a self-image as a company that does a particular thing, Amazon has dabbled in areas from internet search to robotics to film and television development.
Indeed, if your glasses are particularly rose-tinted, Amazon seems to have put the “long term” back into Anglo-Saxon capitalism. At a time when Wall Street is obsessed by quarterly results and share buy-backs, Amazon has made it clear to shareholders that, given a choice between making a profit and investing in new areas, it will always choose the latter. While other technology giants sit on record piles of cash, Amazon still has plenty of ideas about where to invest and innovate. And investors seem happy with it: Amazon’s price-to-earnings ratio has exceeded 3,500 at times. It aligns top executives’ interests with those of shareholders by paying them largely in stock: its highest salary is $175,000 a year.
Giant selection, tiny tax bill
The problem is that many of these virtues come with accompanying vices. Amazon stands accused of unfair competition—of being a lousy employer, dodging tax and bullying its rivals. Amazon says median pay in its American warehouses is 30% higher than in large retail stores. On tax, the picture is a little more nuanced. The main reason its tax bill is so low is that it does not make profits, but Amazon has also been extremely aggressive in (legally) booking profits to low-tax countries. Having campaigned against sales taxes for online transactions for many years, it has lately changed its tune, and now collects sales taxes in a growing number of American states.
As for bullying competitors, most of this is just the savage magic of capitalism. Amazon has crushed local bookshops but only in the same way that Tesco and Walmart crushed grocers—by providing a cheaper, easier way to shop. However antitrust regulators must ensure it is not abusing its market power, on a case-by-case basis. For instance, Amazon’s current dispute with Hachette, a large publisher, may largely be a standard tussle between retailer and supplier. But when the dominant seller of e-books removes pre-order buttons and makes delivery times longer for Hachette books, that hardly squares with Mr Bezos’s professed emphasis on customer service.
Perhaps the biggest concern about Amazon is, paradoxically, a consequence of its long-term vision. It is hard to compete with a company whose shareholders do not expect it to make a profit. Its vast scale and willingness to operate at zero or negative margins represent high barriers to entry for potential competitors. This cannot go on for ever. The concern is that Amazon is merely waiting for rivals to go out of business before raising its prices. If that happens, regulators should jump on it hard. That would provide an opportunity for another firm—China’s Alibaba, say—and some investors might rue the Amazon earnings that never came. But consumers would once again win, as indeed they generally have done as Mr Bezos’s scrappy startup has expanded its reach into so many aspects of everyday life.
(Source: The Economist)

Saturday, June 28, 2014

Titan Looking Beyond Tanishq To Fast-Track Growth

It was late February when Forbes India met Bhaskar Bhat, managing director of Titan Company, in Bangalore. This was only a month after the third quarter results of the last fiscal were declared. The expectation was that the 59-year-old would be preoccupied, even on edge. The numbers had been devastating for the company. Net sales were down to Rs 2,675 crore, a 12 percent dip over the same period last year. 

The disappointment was exacerbated because the October-December period marks the festive season during which consumer spending peaks. Jewellery and watches are inevitably in demand; these are product categories in which the company has a dominant brand positioning. But the double whammy of falling gold prices and weakening consumer sentiment had not spared even the mighty Titan, jointly owned by the Tata Group and the Tamil Nadu Industrial Development Corporation. 

It follows that Bhat should have been retooling strategy. Instead, he showed no intent of moving a single piece on his well thought-out chessboard. “Strategy is not based on the outcomes of a couple of quarters,” he pointed out. “Once sentiment improves in a year, we should be back to high growth.” 

Fast forward to the quarter just gone by and Bhat’s optimism has been validated. There has been a marked improvement in consumer confidence resulting in increased footfalls at Titan’s stores. Even watches—something people buy less and less these days—grew by 12 percent. Overall sales for FY2014 ended 8 percent higher at Rs 10,916 crore and profits were up 2 percent to Rs 741 crore. Aided by a hopeful market, the stock, too, rallied 25 percent since May 6, when its annual results were declared, to Rs 325 as on June 4, 2014.

Industry watchers are bullish. According to them, there is little doubt that once economic recovery kicks in, Titan will be well-positioned to grow at a brisk 20 percent clip. Investor Rakesh Jhunjhunwala, who owns 7 percent of the company, also said in a recent interview to CNBC-TV18 that “Titan is undoubtedly the best play on consumption in the country”. This confidence stems from hard facts: Titan is the fifth-largest watch manufacturer in the world; it sells 13 million watches a year, out of a total 42 million watches sold in India, and is still enjoying healthy growth in a category that is often written off as mature.

The real trigger for growth, though, has come from the jewellery business which contributed 81 percent to the company’s topline in FY2014. Tanishq, it is widely acknowledged, has never had a stronger brand proposition. This is a marked change from 1996 when the first Tanishq store was set up and from 2001 when the board, dissatisfied with its performance, threatened to pull the plug. 

Cut to the present, and an impressed investor community is wondering if Titan can possibly incubate another Tanishq. Eyewear retail chain Titan Eye Plus, launched in 2006, may never play in the same league (scale-wise, because of the smaller size of the market) as Tanishq, but it is on track to break even this year. 

Last quarter same-store sales growth was 21 percent while overall growth was 35 percent. These businesses, along with the Fastrack range of accessories, are enough to power Titan to its target 20 percent year-on-year growth, say senior management officials. And, for a company that almost collapsed in its effort to make Tanishq viable, this is a fair ambition.

In the early 1980s, Tata veteran Xerxes Desai had decided to take on the challenge of founding India’s third homegrown watch brand after HMT and Allwyn. Titan, when it was launched in 1983, found unexpected—the Tatas had not seen much success in consumer-facing businesses—acceptance in the market. The company set unprecedented benchmarks in design, quality and retailing. For instance, it launched with five times the number of watch models than its nearest rival HMT. “We were the first to have a national selling price, something unheard of in those days,” says HG Raghunath, CEO of the watches & accessories division. By the late 1990s, one-time market leader HMT was perceived as an also-ran, as Titan became a brand to aspire to.

Success bred confidence. Titan sought its next challenge—jewellery, a natural extension to the watch business. The branded jewellery market, now pegged at Rs 1 lakh crore, was a significant opportunity even then. But the path to Tanishq had an ambitious and expensive detour, selling jewellery in Europe in the mid-1990s. High-end designers, retail space and management bandwidth came at a high cost and with little to no returns. Very quickly, Titan retraced its steps back to India and, finally, to the first Tanishq store in Chennai in 1996.

But Desai and the freshly-minted Tanishq brand struggled with a viable business model. For one, the westernised designs did not appeal to Indian consumers. However, the serious concern was the low margins which were—and continue to be— less than half of what the watch division makes. With robustness in profits a distant dream, by 2001 the board started questioning the rationale of staying in this business. 

The threat, however, was warded off by Desai, a larger-than-life personality. His retirement, though, soon followed, and the onerous task of proving Tanishq’s worth to the promoters was handed over to Bhat who took over as managing director in 2002. 

It helped that Bhat was a founding employee. He had joined the business at a nascent stage when it was known as the Tata Watch Project. Over the next two decades, he worked across various verticals including sales and marketing, HR and international business. 

Bhat had cut his teeth and was trained to fix Tanishq. And the right steps were taken. By the end of the decade, the division had become a lean machine capable of consistently clocking high rates of growth. (His success was in no small measure aided by the rising gold price, which rose from Rs 4,400 for 10 gm in 2000 to Rs 31,799 in 2012. It has since fallen to Rs 26,354 as of June 4, 2014.)

To counter the low margins in the jewellery business, Tanishq showed immense working capital discipline. This resulted in over Rs 1,000 crore in free cash each year.


This was also helped by Tanishq’s ability to lease gold from various nominated agencies. The gold was then forward sold for a period of six months, during which time the jewellery found customers. Titan, thereafter, was able to pay for the gold. (In June 2013, in order to reduce the current account deficit, the government clamped down on this practice and asked companies to pay upfront. This elongated Tanishq’s working capital cycle. However, the curbs have since been lifted.)

Further, even though it is among the country’s largest retailers with 1,078 stores and 1.5 million sq ft of retail space, Tanishq’s franchisee-led model meant the business was very asset light.
“They really are the masters of 2,000 sq ft retail,” says Nikhil Vora of Sixth Sense Ventures in a December 2013 interview to Forbes India. But on a hot afternoon in April 2011, Titan was busy disrupting its own strategy. In the Mumbai suburb of Andheri, the company inaugurated a 22,000 sq ft Tanishq store, just a few months after a similar large format store was launched in Chennai. In true Titan style, it pulled out all stops for the event. Bollywood icon Amitabh Bachchan was called upon to cut the red ribbon.

Spread over four floors, the store showcased the finest jewellery designs for its customers. It even had a secluded room to provide privacy to diamond shoppers. In case a customer was in the mood to make an impulsive splurge, the store had a range that retailed for just under Rs 5 lakh, the upper limit for transactions without a PAN card.

However, despite the bells and whistles, the Andheri store and six others like it around the country did not achieve any great success. As consumer spending slowed, so did expectations from these outlets. High fixed costs, including rentals and a staff strength of 70 to 100 people, meant they had to sell substantially more to break even. It was a conundrum: To pull the plug or not. But Bhat decided to back the idea and his team. As a former employee describes it, “Bhat may not always agree but he gives his people a free hand and then internalises their actions.” However, while Titan persisted with the stores, it decided to also utilise them as consumer laboratories.

This exercise underscored the significance of these stores as brand showcases: The company realised that size had a disproportionate impact on the consumer’s mind, to the extent that the buyer would often be influenced into spending more than budgeted. Also, average ticket sizes were much higher.

Though Titan declined to state the exact figure, industry watchers say it is safe to assume there is a 20 percent jump in ticket prices at the large format store over the average ticket price of Rs 70,000 at the 2,000 sq ft stores. Additionally, according to CK Venkataraman, chief executive of the jewellery division, diamonds accounted for 37 to 40 percent of sales at the larger stores compared to the standard outlets where they stood at 27 to 40 percent.

This is vital because diamonds have three times the margins as gold jewellery. Consider Titan’s long-standing quandary: While the jewellery business accounts for the majority of revenue, at 7 percent post-tax margins (with 10 percent as its outer limit), it is only half as profitable as the watch business. The projection is that as the economy recovers, the large stores could prove to be the sharpest weapon in Titan’s arsenal. The math is simple. For the first 15 years, Tanishq was largely a small format store. But when consumer sentiment is on a high, one large 20,000 sq ft store will inevitably be more profitable than ten 2,000 sq ft stores. The small format stores will continue to do their job but the larger ones, with their incremental diamond share, will account for the kicker.
Titan’s attention is now also on another opportunity—a Rs 30,000 crore market—that the company is struggling to exploit: Small-town India’s jewellery demands.

Goldplus, a brand created for this purpose, has (by the company’s own admission) not done very well. Titan has found it difficult to complete with smaller jewellers who operate on lower margins. Venkataraman admits, “We haven’t been able to play out the difference between our brand and others.”

At the other end of the market, Titan has also created a premium brand, Zoya, targeting the buyer who “vacations in Peru and buys Rs 5 crore villas”. It has proved ineffective so far; with just two stores, it is too small to have an impact on sales and profits. However, despite the smaller scale, it is a high-margin category and should Titan reach an optimal business model, this could prove margin accretive in the future.

While jewellery grapples with margins, the watch business operates on the robust end of the spectrum. High-end watches that retail for Rs 10,000 yield gross margins of 53 percent. This doesn’t dip below 40 percent even for cheaper watches. At 15 percent post-tax, watches comprise the company’s most profitable segment.

The problem here is that of a shift in consumer need. As Raghunath puts it, “The cellphone is gradually replacing the watch.”

To counter this challenge, enter Fastrack. The brand, which falls under the watches division, has rolled out a host of products in the last decade—sunglasses, bags, belts, wallets and helmets. A range of perfumes, Skinn, has also been introduced. 

At 13 to 14 percent margins, both these businesses are as profitable as watches and a natural fit for this division. Interviews with senior management suggest that the company is banking on them to contribute significantly to profits in the years to come. Jhunjhunwala, too, believes these categories will allow the company to maintain a robust pace of growth.

The Fastrack business, in fact, has a significant role in Titan’s future strategy. The plan is to increase the number of its stores from the current 142 to over 500 in the next few years. 

Bhat’s philosophy of taking Titan into categories that have a large mass of unorganised players, and where design plays an important role, has also led it to the prescription eyewear business. The idea of Titan Eye Plus initially came from the watch division while they were working on sunglasses under the Fastrack brand. But on deeper exploration, they realised it was an under-penetrated category with unreliable service quality. And it had obvious synergies with Titan’s strengths in the retail and design space.

A survey showed while 450 million Indians needed vision correction, only 25 percent used optical lenses. Urban customers were willing to pay a premium for reliable testing and error-free frames. Using this framework, the company started crafting a business plan. Every ophthalmologist working for Titan Eye Plus has to undergo a four-month training programme at its facilities in Hosur.

The company has since also set up a unit to produce lenses that are resistant to water, dust and scratches.

This journey, since 2007 when the first Titan Eye Plus store was set up, was marked by the hardships typically faced by an organised player which enters a segment traditionally dominated by unorganised retailers. For example, inability to provide ad-hoc discounts which are meaningful for customer loyalty. The board was initially reluctant to enter this category. But the plans and the prospect of breaking even in six to seven years convinced them. Plus, though the addressable market (at Rs 3,500 crore) may not be of the same scale as jewellery, but S Ravi Kant, CEO of the eyewear business, says, “I cannot share the exact margin but can tell you that this is the highest gross margin business in the company.” 

In a short time, Titan Eye Plus has built a solid brand name. It is also on track to break even once it reaches Rs 300 crore in turnover (it is currently at Rs 200 crore) a year from now.
What’s next? That’s the question that typically follows any success story. In Titan’s case, the jury is still out. Some observers say that Titan can well become a victim of its own success. No matter how hard it tries, it will always be disproportionately dependent on Tanishq, they point out.

Interviews with several investors who have tracked Titan for a long time led to another perspective: Since Tanishq has been so successful, why not focus exclusively on it? It’s an argument Bhat dismisses. “The company would be hugely risked as it was when consumer sentiment weakened last year. Plus watches and accessories have higher margins than jewellery,” he says. Very clearly, Titan is a company that operates in the lifestyle space and Bhat intends to keep it that way.

His eyes are fixed on the numbers. A 15 to 20 percent growth in the medium term is par for the course but that would be a climb down from the 23 percent growth in topline and 30.5 percent growth in bottomline since 2001. But as Bijou Kurien, former chief executive (lifestyle) of Reliance Retail, explains, none of the new categories the company has entered are of substantial size. And he’s uncertain if people will pay more for the stylish helmets being produced by Fastrack. “The company needs to look for big ideas. These small fledgling ideas are a distraction,” he says.

A July 2013 amendment to the memorandum of association of the company says Titan could look at manufacturing, selling and retailing items as diverse as apparels, sarees, kitchen utensils, chimneys and solar panels. 

However, the reality is none of these categories have the heft and scale of Tanishq. For now, the opportunities provided by an economy on the mend and Titan’s spruced up business lines will keep Bhat busy for the next five years.

(Source: Forbes)

Mobile Gaming: The New Battleground of China's Internet Economy

This is the lead of the second edition of the Chinese mobile game Carrot Fantasy II: Ice World. As cheesy as it sounds, this tower defense game is making big waves in China with its fun journey of tower discovery and carrots with special abilities. The game registered more than 200,000 downloads on each of the first two days of its launch and more than 1 million in the first week, according to figures from China’s independent Android app store and mobile search engine Wandoujia’s App Index.

But making it to the top of charts is not the best measure of a mobile game’s success in China’s free-to-download mobile internet ecosystem, where users play for free but have to pay for upgrades and premium content. “The freemium model has a lot to do in terms of how to create good content with in-app purchases and engaging users over a period of time. This is what everyone is trying to figure out,” explains Tyler Cotton, lead author of Wandoujia’s China App Index. 

Online games have huge strategic value for internet companies in China as one of their major revenue sources. It’s one of the largest markets in the world with over 490 million users and worth RMB 83 billion ($13.7 billion) in revenues. 

“Games are an important part of the internet economy because entertainment is the best way to make money,” says Will Tao, Analysis Director at iResearch. Due to its universal content, online games are powerful drivers of internet traffic. They have the potential of bringing in new users, enlarging the user base and fostering interaction between users. 

A case in point is Tencent Holdings, China’s largest internet company by revenue, which recently incorporated mobile games into its social messaging mobile app WeChat (known as Weixin within China) as a strategy to monetize its 355 million monthly active users. “WeChat is a whole new distribution channel that is social in nature,” says Zhang Kaifu, Assistant Professor of Marketing at the Cheung Kong Graduate School of Business (CKGSB). It’s able to create the same model of internet traffic that attracted game developers when Facebook opened to mobile gaming.  

WeChat enjoys an advantageous position as a subsidiary of Tencent Games, China’s largest online game community and a global game developer and operator.  Barclays estimates that in the year 2014 WeChat will bring Tencent RMB 2.95 billion in revenues, with mobile games expected to make up 73% of that.

Alibaba Group, China’s leading e-commerce platform, also announced the launch of a mobile gaming platform as part of their broader strategy to push into the mobile sector. “Online gaming is [a] service with the highest stickiness. And if you get more users, there’s a better chance you can offer more services,” explains Tao. 

From PC to Mobile: A New Online Gaming Era
China’s mobile games market, though very fragmented, is considered one of the fastest growing in the world, with an expected 100% growth of RMB 17.85 billion ($2.8 billion) this year alone.  It’s quickly stealing market share from traditional PCs as users shift to smartphones and tablets to discover new and engaging content. Nearly 460 million people (75% of the country’s netizens) are going online through mobile devices instead of desktop computers, according to figures from iResearch. 

The growing popularity of app stores facilitated this transition four years ago. According to iResearch’s 2011-2012 China’s Mobile Gaming Report, app stores have changed the entire structure of the mobile gaming industry. They’ve made the industry more open as they provide developers with critical services like a distribution channel and payment tools.  

“It’s good for us because as game developers we don’t necessarily want to run all these supporting services, it’s not our core competence. Our core competence is making fun and innovative games,” says entertainment entrepreneur  and CEO of Argine Consulting Alexander Rivan Ronalds.  

Creating engaging content remains the major challenge. “With app stores we can all publish our games and be out there. The challenge is creating products for mobile that we are able to monetize,” he adds. 

This is a big deal in China’s highly fragmented and overcrowded mobile games market, which has more than 80,000 developers release more than 100 games each day, according to estimates from the Asian Games Market Intelligence firm Niko Partners. “The problem with mobile games in general is that the lifecycle is very short. If the content is too simple or not well localized or not engaging enough, very quickly people move on to another game. It’s not like in the PC era,” adds Cotton from Wandoujia.  

More and Better Users
“When integrating with an app store, the key thing I look for is that they have enough traffic,” says Ronalds. Games, on their part, bring app stores a golden opportunity to monetize their user base and boost user acquisition. 

CKGSB’s Zhang points out that app stores are becoming increasingly competitive in bringing in more and better users. 

Developing company Luobo Interactive owes the initial success of its sequel Carrot Fantasy II to an exclusive launch deal and promotional campaign it forged with China’s third-largest app store Wandoujia. The campaign went viral. It featured a video of a girl imitating the sounds of the game’s tiny little monsters–users could win several prizes by sharing the video. As a result, pre-orders soared. After the initial two weeks, daily downloads fell to 50,000 but the well-orchestrated buzz allowed Carrot Fantasy II to have a sustainable flow of higher-quality users able to drive increasing daily revenues. “‘In–depth’ content keeps users [motivated] to play on and on until a point where they are willing to pay and they start to pay [for premium content and upgrades],” says Cotton. 

To ensure this level of stickiness, Wandoujia says it only partners with high-quality games and top developers. “We try to create an ecosystem that creates game value,” explains Cotton. The Game Launcher platform helps Wandoujia increase the value of its users for the games they work with by building a more sophisticated system for recommending games players might enjoy. 

The Social Factor
Social platforms like WeChat games have very different value than traditional app stores and therefore they both have different goals and face different challenges, explains CKGSB’s Zhang. “WeChat is not building their business model around selling apps. They are essentially a social network company and games are adding value to their social networking functionality,” he adds. Users can play for free and share scores with friends, while they keep all the other mobile social activities within the same platform.

“WeChat is no doubt the number one mobile [social messaging] app in China and will be in the future—no other apps can challenge that. WeChat will become a platform for everything,” says Tao of iResearch. Its main competitor, Alibaba Group is trying to catch up with WeChat before it’s too late. It’s confident that its large user base of online shoppers will help its mobile ecosystem gain some traction. 

Alibaba’s new mobile games platform aims to broaden the user base by using the inherent ability of games to attract diverse demographics. The platform has been integrated into the mobile apps of its customer-to-customer marketplace, Taobao, and the social messaging mobile app Laiwang. Liu Chunning, President of Alibaba Digital Entertainment Group, was quoted on Alizila saying, the mobile gaming platform will provide users and developers a unified platform where payment options, virtual currencies and game data can be secured [and] stored. Tao says these features alone are not enough to compete against WeChat to attract developers, woo users and boost its social networking functionalities. “The only thing Alibaba can offer to developers is its cloud computing services, so that they can save costs. But their problem is that they don’t have the same amount of traffic as WeChat to attract players,” he adds.

 Attracted by the size and quality of Tencent’s user base the UK-based King Digital Entertainment picked WeChat as the distribution platform for the Chinese version of its popular mobile game Candy Crush Saga. “Tencent has the largest mobile social network in China and is a great partner to work with. I look forward to working together to make Candy Crush Saga as popular in China as in the rest of the world,” King Digital Entertainment CEO, Ricardo Zacconi, said in an official statement. It’s a win-win: the international popularity of Candy Crush might boost Tencent’s position as the main integrated mobile services platform, increase market share and help it stay ahead of Alibaba.

“Alibaba spent a lot of marketing resources to have users on their social network but people won’t use it because their activities are happening in the WeChat environment and they don’t see the need to shift,” Zhang adds.

Top Notch Games
So far only a handful of very simple and casual games are available on WeChat, and it’s the same for Alibaba. Both companies will need to invest heavily in third-party content and in-house developers to be able to offer sticky content and improve their mobile games offer. “Not all games are suitable for WeChat. The game has to be social and casual. It has to speak to the profile of WeChat users,” says Zhang. At the same time, its lifecycle has to be long enough so gamers reach a point when they are willing to pay for premium content, and thus they are able to monetize their products. 

Tencent underwent an acid test recently when it tried to use WeChat’s large user base to launch WePop, a bubble popping game. It hoped that social interaction would ensure popularity. But after the swell of the first month, popularity plummeted and search volume fell by over 66%, according to figures from Wandoujia App Index. The bottom-line: WePop’s content was too simple to make a lasting impact. 

“The industry shifts every 2-3 years. Before, we were making games for Facebook. Now we are making games for mobile,” says Ronald. Companies need to be very careful while making this transition if they want their games to stay on top. “The companies that have done well in recent years are the ones that have been able to transition into mobile through more intuitive design processes,” he adds.

The different strategies of distribution platforms may also determine user engagement and monetization. For instance, both Wandoujia and WeChat have their own version of Temple Run games but gamers’ experience might be different on each platform. WeChat regularly releases new characters, levels and content to ensure users keep playing. Whereas in Wandoujia’s version deals and rewards aim to keep users active. According to Wandoujia, putting off monetization until a point when users are willing to pay more naturally helps extend the life value of the game.  “We don’t try to reinvent the wheel or build a social network. We are trying to get users to sign into our system and get better results for search,” explains Cotton.

Traditional app stores and the new integrated gaming platforms like WeChat’s have very different models and for now they will run in parallel. “Imagine if WeChat opens up to third party developers and now users can actually download games from the platform. Could this create pressure and competition against companies like Wandoujia? It certainly can. But WeChat is not a shopping platform,” says CKGSB’s Zhang. Rather, for WeChat online gaming is a valuable tool to increase market share and keep staying ahead of Alibaba’s ambition to build its own social network. “The problem Alibaba suffers is very similar to what we saw on previous generations of social networks. It has lots of registered users but they spent little time on the platform,” says Zhang.

(Source: Forbes)

Carmakers rev up discounts to clear Indonesia showrooms

Automakers in Indonesia, one of the world’shottest emerging car markets, are being forced to offer unprecedented showroom discounts as competition heightens following billions of dollars of investment from market leader Toyota and rivals including Honda,Nissan and Suzuki.
As the pace of sales growth eases amid a wider economic slowdown and the depreciation of the Indonesian currency, analysts predict that profit margins will be squeezed.
“What we’re seeing today is the result of decisions to increase production one or two years ago,” says Erwan Teguh, Jakarta-based head of research at CIMB, an investment bank. “If you produce that many cars, you can’t store them. You have to move them out of the showroom and if it means taking a hit in the short term, that’s the cost of doing business.”After several years in which customers sometimes had to wait months for the delivery of new cars at list price, Toyota and sister company Daihatsu are offering discounts of 10-12 per cent on two of Indonesia’s most popular seven-seater family vehicles.
Operating profit margins at Jakarta-listed Astra International, which controls just over half of the market through production and distribution joint ventures with Toyota and Daihatsu, could fall to 2.9 per cent this year from 3.9 per cent in 2012, says Leonardo Henry Gavaza, an analyst at Bahana Securities.
Just how much profit margins suffer will depend on how big a hit parent companies are willing to take to support their long-term strategies in Indonesia, analysts say.
Carmakers have been ramping up production in southeast Asia’s biggest economy over the past couple of years to meet rising demand from the fast-growing middle class.
Vehicle sales rose an average of 11 per cent a year between 2005 and 2012, hitting 1.2m units last year.
Automotive manufacturers invested $3.3bn over the past two years to increase production capacity in Indonesia from 1.3m units last year to 1.8m by the end of this year, according to Mr Gavaza.
Honda alone boosted production from 80,000 to 200,000 cars as it tries to break Toyota and Daihatsu’s stranglehold on the market by promoting its Mobilio family car.
Nissan selected Indonesia for the global relaunch of its cut-price Datsun brand, which is aimed at first-time car buyers in emerging markets.
Although the investment boom has been led by the Japanese companies that control more than 90 per cent of the market, new competitors such as GM have also joined the fray.
Toyota and Daihatsu vehicles are produced and distributed through a complex series of partnerships with Astra International, which is majority owned by Hong Kong trading house Jardines.
Nissan and Suzuki cars are distributed by IndoMobil, another Jakarta-listed company that is controlled by Indonesia’s Salim family and a consortium of Singapore government-linked companies.
“If the parent companies are keen to make headway against Toyota and Daihatsu, they will support their local distributors in the price war,” says Mr Gavaza.
Yet while headwinds this year are likely to weigh on car sales, which in May saw their first year-on-year decline since 2011, analysts say the medium-term outlook is strong.
The government expects annual industry car sales to grow about 10 per cent a year to reach 2m in 2018.
“Conditions are tough at the moment but the penetration of cars here is still very low so in the long term, the only way to go is up,” says Mr Teguh.

India’s Snapdeal seeks to follow Alibaba playbook

Mysterious signs reading “Mission 500” dangle from the ceiling in every room at Snapdeal’s headquarters in New Delhi, describing a quarterly target set by senior management as the online marketplace strives to step up its recent rapid growth.
Kunal Bahl, co-founder, will not be drawn on the specifics of that goal, but says that one predecessor some time ago, “Mission 100”, involved a push to raise monthly sales from Rs250m ($4.2m) to Rs1bn in three months.
“If people understand the Alibaba story. . . they will easily understand the Snapdeal story also because really it’s an identical [business],” the 30-year-old entrepreneur says.Though the online marketplace is just two and a half years old, Mr Bahl suggests Snapdeal is set to emulate China’s Alibaba, thriving in India’s fast-growing ecommerce market as internet penetration rises and the country’s middle class gets used to shopping online.
Snapdeal, a website where retailers can list their wares, counts Ebay among its investors. It offers more than 5m products from some 30,000 businesses around the country, and annual transactions on its platform will soon exceed $1bn.
Rival Flipkart has already crossed that mark judging by its sales in February and is easily the best known player in the Indian ecommerce industry – but the group is fighting hard to stay ahead. Last month, Flipkart acquired Myntra, an online fashion store, and also secured $210m in fresh funding.
While Snapdeal is much smaller than ecommerce giant Alibaba, Mr Bahl met senior executives from the Chinese group on a recent visit to Hong Kong, and says he sees the company as a ‘mentor’.
“It was like I was talking to some much larger and much more evolved version of Snapdeal,” he says.
Like Alibaba, Snapdeal is considering an initial public offering in 18 to 24 months’ time. The group was valued at around $1bn in its latest round of financing earlier this year, and Mr Bahl says that figure could rise to $5bn by the time of a listing.
Senior executives at Snapdeal are considering an IPO at home, where the brand is well known, though new rules now allow Indian groups to list directly overseas.
“It’s a very bold expectation to be able to raise money through an IPO,” says Arvind Singhal, head of Technopak, a New Delhi-based retail consultancy. “For a business which is still in an evolutionary stage I’m not sure whether the local market would be ready.”
Global internet groups from Facebook to Amazon, which launched its Indian site last year, see significant potential for growth in India, where there are just over 240m internet users out of a total population of 1.2bn.
Online retail in India will grow from 0.4 per cent of the total retail market in 2014 to between 2 and 4 per cent of total retail by 2019, estimates Technopak.
A large part of new business will come from mobile users as smartphones become more popular and data services get cheaper in India. Sites like Snapdeal are adapting to serve that demand.
Snapdeal, which launched a broad marketing campaign in recent weeks and is focusing on developing its mobile service, says some 60 per cent of orders come from mobile users, up from just 5 per cent a year ago.
Unlike peers in developed markets, ecommerce businesses in India must also come up with creative ways to handle logistics issues. Mimicking Alibaba’s model, Snapdeal has opened 40 ‘fulfilment centres’. For a small fee, sellers can leave items at these warehouses for Snapdeal to package and coordinate deliveries.
“Nobody questions the opportunity of ecommerce in India now,” says Mr Bahl. “People are now saying that this is definitely going to become a $50bn to $75bn market over the next five to 10 years.”