Brands … What matters the most

 

Brands!!! Companies spend billions of dollars in creating and establishing brands. Every product has a market leader with strong brand presence. Products with top brands dominate the sales in each sector. That makes me wonder why brands are so important and why they are relevant.

I am not a big fan of branding as a consumer. I believe many times established brands charge more just because of brand name. The brand associates itself with certain lifestyle and hence those products are priced higher than other products with similar application without offering any significant technological or material advantage. But still people buy those brands with huge price premiums. May be one reason is knowledge.

Compare two products a digital camera and soap detergent. Assume that you are buying these two products for same dollar value ($1000 each). What is your thought process? Do you care which brand to buy for soap? I personally do not care that much but I do care which digital camera I am buying. I am thinking why? As said if I am having same dollar value to spend then I must be spending same time on both the products. There comes the part of knowledge. We all know from years of experience that there is no special technology in Soap. Manufacturers may claim 100 different reasons but basic product is same and even if you buy unknown brand you are certain to get a usable product. (Provided you really don’t search for a bad one).

Digital camera is different. There are so many specification differences, feature sets and minute details that consumer is not aware of. You are not comfortable and confident to judge the product based on specifications only as you are not having detailed knowledge of the product. So the best way is to go for popular brand and assume market is right.

So brands benefit from lack of knowledge on part of consumer. If consumer is extremely knowledgeable then he will look at specifications, components used to build the equipment and decide which product to buy. This is another reason why brands usually do not work well in business to business environment. Businesses have skilled purchase managers who knows exactly what they want, who knows from experience what specs product should have and what performance is expected. 

So as consumers get more knowledgeable, the process of establishing your brand will get difficult, companies have to come out with truly innovative products to win over consumers and price premiums enjoyed by established brands will certainly come under pressure.

Signing off

Nikhil Parchure

Land Fights Part 2

I am really happy to read the following article in Mint.

http://epaper.livemint.com/ArticleImage.aspx?article=21_07_2011_010_001&mode=1

Tata steel has looked at land acquisition as a challenge and not a problem. I am delighted with the approach also requesting all readers to take a look at earlier post http://nikhilparchure.blogspot.com/2011/06/land-fightshurdle-or-challenge.html and comment.

Thank you

Authority

 

Recent events have prompted me to write my views about authority. Supreme Court in India ordered setting up of an investigation agency to investigate black money scandals. Now that according to me is overriding authority. It may sound rosy and nice but according to me it is clear case of taking decisions beyond someone’s authority. Courts have responsibility to make decisions based on rules created by government. Primary function of court is to judge the cases which are presented in-front of it and give verdicts. It cannot order actions which are not prescribed by law, court cannot control investigation agency. If the power to appoint agency or investigate is with government then it is not right for court to interfere in the matter. There is clear conflict of interest with the fact that the court which is judging the matter is also investigating the matter.

This problem is faced in business as well. The issue of overriding one’s decision making powers. Let me give an example. Rob (Fictitious name) is a plant manager at a company facility. He is at middle level management where workers report directly to him and he takes day to day decisions on his own. His plant is doing good but top management decides to shuffle some things, bring in new processes and systems. Rob really cannot understand why management is doing it and thinks decision at top level is fuelled by greed for more profits, misinformation and not by logic. As it happens with many mid-level managers, he does not know the whole story. He starts to look at things as hostile and starts to do all types of work-around. He starts taking decisions which are above his pay grade. He becomes instant hero in his plant. Everyone admires him for quick decision making and quick resolution of the issues. (By now you may be thinking what is wrong with this.) But some issues arise after 6 months. Company faces law suit from consumer groups. Later top management understands that Rob was by passing rules and was taking decisions which were above his authority level. End result is Rob gets fired, company pays heavy fines and eventually many more lose their jobs because company burdened by fines and charges decides to shut the plant.

So on the surface quick decision making and populist decisions may look good but there are some hidden dangers. Such decisions may work wonders but there is also equal chance of blunder. I covered similar topic in earlier blog post as well (Read Systems Thinking here: http://nikhilparchure.blogspot.com/2010/10/system-thinking.html ). For companies it is not worth to take this gamble. Amount of money required for defending lawsuits, paying fines and settling claims is very large. The cost is just too much compared to benefits that can be provided by autonomy to mid-level management. So now companies are becoming more and more restrictive and it is difficult to find the balance between freedom required for growth and restrictions required for survival.

I have experienced this struggle very closely; temptation to bypass processes and do quick fixes is very high. It does not back fire most of the time but when it does then it’s a costly one.

Signing off

Nikhil

Cloud Computing and Energy Use

 

Cloud has arrived to tech world as a storm. Google, Apple, Amazon, Microsoft, HP, Dell all have jumped on the bandwagon. Cloud music, cloud office and cloud storage everything is available on click of a button. Most of these services are offering free 2 GB to 10 GB of data storage. Google has gone one step further and launched the Chrome OS based computer which will store everything in the cloud. Companies are adding massive amount of server space everyday. Companies like Intel, EMC are manufacturing even more chips and storage devices to meet the demand.

Cloud is a good concept but I am worried about the fact that people are not giving up their current machines to move to the cloud. When the prices of storage devices are falling each day it has become affordable to buy 1TB or more of hard drive space. People are having multiple copies, backups of the same data on local machines, portable hard drives and now on the cloud. From my own example, I can say I am using 4 times the amount of storage space I need. It is not a big deal if storage is on a local machine but when you are talking about the cloud it is indeed a big deal.

Amount of energy needed to run these massive servers is enormous. Bad part is that these servers are running 24X7. Each server has 2 synchronized back up servers. So assume you create a 1 MB file on your computer. You take a back up on portable hard drive. You have synced your hard drive with cloud and cloud server itself has 2 back up servers so total storage you are using is 1+1+3= 5MB. When you are not working on these files, your computer and hard disk is not consuming any significant energy but that 3 MB in cloud is still running. It is still consuming power 24X7.

I am not sure how they manage the server energy cost and whether these servers are better in energy conservation than local machines but cloud is certainly creating more carbon footprint for you. Server energy consumption is just one part. Bandwidth needed to work on these files, uploading and downloading the files also takes a lot of energy. Storage in cloud plus the bandwidth needed to process them every time you access is too much for energy needs I guess. But industry is moving to the cloud because it offers many advantages over normal systems. So you have to find energy efficient way to run these servers and deliver the bandwidth. People are not talking too much about these implications and companies are not disclosing what will be environmental impact of their fancy new music in cloud services. Many will be surprised to see how much unnecessary emission these services can cause.

Signing off

Nikhil

Land Fights–Hurdle or Challenge

 

As India transforms itself from agriculture dominated country to industry power house the biggest problem that is coming up is land acquisition for industrial projects. There are many examples starting from Tata Motor’s Nano plant in West Bengal to recent protests against Posco Steel.

It is totally expected but industry is not looking at this as a challenge instead it is looking at it as a “Hurdle”. Instead of finding solution by themselves they are involving government into it and according to me this is the biggest mistake. As soon as you involve government into your business it is bound to face problems, hurdles and delays. Industry thinks they can simply offload the “dirty” work to government.

We see police force being used to oust people from villages, their livelihoods and their land, which they are using for past many generations. The clash is imminent but we have to find way to reduce the conflict, it can never be avoided.

The problem as I see currently is the pace at which industry wants to execute its projects. CEO’s and Chief ministers sign pacts and MOMs, so called one window clearance gives all clearances like environmental clearance, financing arrangements, legal clearances etc. Govt. issues ordinance and takes control of the land. The rate given is always less than present market rate so the land owners do not get any advantage of their land being at a prime location for some multi billion dollar project. Do you need any other reason for a conflict? And then there is the Politics. People are used to gain political advantages and often the losers of the game is the common man as we have seen in case of Tata Nano plant in West Bengal.

I see only one solution for the problem. Giving ownership to people. This may sound crazy but this is the way to go forward. Forming special purpose vehicle for the project and giving people the preferred stock worth value of the land  with some premium to existing prices. If you calculate land costs are generally less than 10 to 20% of total project costs so if you are giving preferred stock to the people you are not losing any control and they are earning fixed income for lifetime. Giving common stock is even better but I guess it is not possible for many companies.  (Difference between Preferred and common stock : http://www.investopedia.com/ask/answers/182.asp)

By this way people get to participate in your growth, get security of payment for lifetime. The biggest worry currently people face is losing their livelihood. It is far easier to convince people once you remove that worry. Once convinced they may help in reducing local issues and problems. I see two advantages of this approach. First if local communities are on your side there is lesser chance of disruptions in operations. Uninterrupted operation is very important for efficiency of the plants. Second brand value and respect for company will increase many folds. People will experience that company cares for them and not here only to stock their banks with cash. This will lead to faster execution of future projects and far less resistance from people.

So it is important that industry looks at this issue as a challenge not as a hurdle. It should consider this in the feasibility process and should tackle it on its own. Relying on government and thinking of outsourcing the dirty work will only lead to more clashes and failed projects

 

Signing off

Nikhil Parchure

Mad Rush for Solar

 

Everyone around the world is talking solar. Solar photovoltaic, thin film solar and other solar technologies. Few years back it was wind. Government all across the world are giving generous grants to companies that are setting up solar power plants.

India also started its solar mission where it is offering Rs17 (USD 0.35) per kWh for generation. And it wish to set up 10,000 MW capacity. Government is collecting this money by levying surcharge on coal and gas. The strategy looks nice on paper. You are charging surcharge on fossil fuels to encourage renewable energy sources. Everyone will think that is great strategy and government is doing an excellent job.

I beg to differ. You can “encourage” in many ways. Giving incentive to generate power is the most bad way to do it. What is going to happen is Companies are going to set up 100 MW projects, get into 25 year power purchase agreements and then sit back and relax. Half of the companies who have dived into the scheme are just opportunity hunters, looking to take advantage of price difference. As many companies start their solar plants what is India going to get is huge amount of power generation capacity of old soon to be outdated technology.  Renewable energy sector is changing rapidly and today’s impressive technology can be obsolete within few years. The proper approach is to incentive technology developers and equipment manufacturers and not power producers.

For example Currently to set up a 1 MW solar power plant Rs 15 Crore (USD 3.4 million) are needed. instead of giving grant to power producer Govt. can give grant to make equipment cheaper. This will encourage competition and developers will get choice of many technologies. Also you will not be acting against market to setup a market.

Such approach will allow innovation and will develop new technologies. According to me giving grants to old technology is the last thing to do. Considering speed at which Govt. approves projects, banks provide loans and problems faced in land acquisition, the technology selected to set up a plant will be old by the time developer passes all the hurdles. Throwing cash at problem such as global warming is not going to solve it. To solve such problems you need innovation and cutting edge technology. I fail to understand how current solar incentive schemes used all across world are going to achieve that.

 

Signing off

Nikhil Parchure

Retail investors in Commodity Trading--- No Stay Away

I read a report showing participation of retail investors is increasing in commodity trading and commodity exchanges are doing all they can to attract more investors. But I think it is a disaster in the making.

Retail investors are always at the receiving end of major downturns, their inability to react and understand global economic relations create huge losses when markets take a tumble. But these investors if patient and wise enough earn a very good return on the long term. But that is the point there is no long term in commodity trading.

Only commodity you will ever think of buying and holding is Gold and Silver. No one is going to store 1MT of copper in his house. so the retail investor will be trading in future contracts. Which expire or need to be rolled over every month.

Retail investor has no synergy with these trades like big corporations have.  For small retail investor commodity trading is just speculative investment drive more by hope than by analysis.

I can just see retail investors loosing lot of money in near future. commodity cycles and fluctuations are driven by demand supply relations, unexpected events such as natural disaster, government regulations and in my opinion the relationship between all these is too complex to understand for small investor.

So now there come so called financial advisors. Retail investors keep blind faith on them and will invest in whatever the advisor says. This can give good returns but..yes there is this but. If advisor is not competent enough then retail investor will loose all the money.

Unlike dividends, right issues, bonus shares, coupons given by companies to their shareholders these commodity contracts earn nothing. So it is not good on part of commodity exchanges to do wide scale retail investors. Unless retail investors know what they are getting into what you will have at the end of the day a pool of failed investors and stagnant market till then cheers.

 

Signing off

Nikhil Parchure

AT&Tmobile….Sorry I mean AT&T and T Mobile.

 

Disclaimer : Thoughts mentioned below are directly influenced by class discussion and reading different opinions about the case. 

The announcement of merger between AT&T and T Mobile USA is creating huge debate in US. Whether industry is moving towards duopoly where AT&T and Verizon will be only players and both using different technology. This merger is interesting because it means now there will be only one GSM player. Wow, so if you have a GSM phone then you are almost done. For my friends back home its like having only Airtel for GSM…Scary isn’t it.

So everyone firing bullets and bombs and everything they can find at AT&T and wanting government to disallow the merger. The merger process will take over a year and if Government disallows the merger then it will be advantage to no one. There are few reasons I am saying it.

When I see the telecom industry with huge infrastructure to manage it makes sense not to duplicate the infrastructure. AT&T and T Mobile both operate GSM services. So Synergies are huge. Cost saving will be tremendous and that saved money can be spent on upgrading the infrastructure. (I know mostly it will be distributed to shareholders rather than upgrading network). I don’t understand why people who are claiming that it will end competition accept Apple’s decision to launch Iphone and Ipad only on AT&T at the start. Was it not unfair play.

The ecosystem and devices are evolving at breathtaking pace. Devices are outsmarting the network. I believe the Industry is going towards utility approach. (I read about this in business week).  So AT&T and Verizon will be under heavy scrutiny all the time. As you have regulations, price controls in electricity industry similar regulations will start shaping in telecom industry. The biggest looser of this will be AT&T and Verizon and not consumer. You will now have 4 utilities instead of 3. Electricity, Water, Gas and Network. All other three industries are heavily regulated. Do you care who is your service provider for water? Not really as you are sure that regulations will make sure quality is in place similar thing is going to happen here. Regulation will play major role. So it is not bad for consumer but is bad for AT&T itself.

In short term of course they will gain market share, they will surpass Verizon in consumer numbers, synergies will create windfall for shareholders but in the long term that will cement its place as a Utility. That means even lower margins, no chance of innovation and heavy regulations. In the capital economy as soon as you raise the prices you will have alternatives popping up so we will have a next wave of silicon valley companies that will create new ways of communication.

So in all not allowing merger does not make sense. T mobile has already decided to sell so if you do not allow merger we will have stalemate, T mobile will start to see diminishing power and that will not help competition and infrastructure anyways. 

Signing off

Nikhil Parchure.

Future Problems……or Markets

 

Note: I read interesting article on National geographic website. The thoughts mentioned below are influenced by the article. Article talks about growing population, I thought of linking it to business.

Everyone talks about growing population of human race. Growing at astonishing pace the population of world will reach around 10.5 billion by 2050 (National Geographic study). We are already pushing available resources to its limit and this increase in population will strain the earth further. Oil, Metals, Food you name it and the prices are rising. Is it time to worry? of course it is but that does not mean you should not look for opportunities. 

Every problem presents an opportunity so which businesses will help in solving the problem but also profit from the situation. I think of three main businesses, Water, Food (Agriculture and Fishing), Environment. 

Now let me explain about that in little detail. Water, no question about it, we are already depleting ground water levels and using far more water than available. Also we are polluting large percentage of water available for use. So Water purification, water desalination, water conservation and technology to reduce water usage will be big potential. If you calculate amount of water needed to support growing population the number is mind boggling.  Changing environment, I don’t like to call it global warming, is bringing more droughts which means ever decreasing supply of fresh water. The challenge is huge and there is no clear solution in picture. Companies that come up with innovative solution in this field will succeed big way.

Food; after water, food is the second highest priority. Droughts are adding pressure on global supply of food grains. Also productivity of soil is going down every year due to excessive farming and use of huge amount of fertilizers. So companies that make organic fertilizers & new generations of seeds will benefit a lot. The world needs path breaking innovation in this field to feed all the human race. Another big source of food is fisheries. Again there is problem of excessive fishing and pollution. Amount of catch is reducing every year and that will put more pressure on food supply. Companies in the field of developing fast growing breeds of fish, fish with high nutritional values and developing breeds that can resist polluted waters will have big opportunity. Pollution control and mitigation companies will also play a major role.

Third major trend of course the environment. Pollution control, pollution reduction and pollution cleaning these three fields will be critical. Pollution control contains all activities such as waste disposal, recycling, purification and treatment etc. Pollution reduction contains developing new technology for more efficiency, you may consider clean-tech (but clean-tech covers many other industries too). pollution cleaning will also be a big industry. Considering the fact that we have already polluted air, water and other resources we will need to clean them some time.

People may argue there are many industries that will benefit from population growth. I agree but I wanted to highlight industries that can grow fast and also make a huge impact on resolving major issues.

 

Disclaimer : Some facts are taken directly from national geographic study. I am not endorsing any industry, brand, company. The effort is to express my opinion on the future markets. There are many assumption made which are not explicitly mentioned in the post. In case you do not agree, I respect it. You can post comments with your feedback, suggestions.

Signing off

Nikhil Parchure.

Valuation of human capital

 

After an interesting discussion regarding how to do valuation of companies and how to analyze financial ratios of the companies very interesting discussion regarding valuing human capital came up. Professor rightly pointed out that the financial statements are designed to capture assets such as plant and machinery, land, inventory and liabilities such as loan payable, accounts payable etc. But what about the human capital. Peter Drucker said 40 years ago that World is moving towards knowledge economy where people will be most valuable assets of the company. And he was spot on we are living the world where people make or break companies. Software giants such as Microsoft, Google, Facebook do not have assets in form of huge machineries, land and equipment but they have human talent, brightest engineers from across the world working for them. How to value the company with such assets then.

The world has changed a lot, few people from basement office can create company with sales of more than billions of dollars so balance sheet of these companies will be asset=negligible, liabilities= negligible, revenue=astronomical and profit=you can’t believe. So if you do the same ratio analysis that you do for say steel company, airline or big retail company then you will never invest in other companies. That is a big problem and often causes overvaluation of technology companies.

So how to value human capital. I can think of only sport to look for answers. Footballers are sold and bought by clubs and valuation is done based on goals scored, previous performance, merchandise selling potential etc. But still they can not put that value on the balance sheet as accounting rule do not allow it. Some other form of statements have to be started some parameters to be defined for such companies. I was thinking of Human capital index or Human resource index a measure of IQ of the employees or Standard test scores, something to tell potential investor what they are buying.

I can not think of any perfect solution as beauty of we humans is that each one of us is unique. So it’s a big challenge to all accountants to value the company correctly.

Signing off

Nikhil Parchure

Disclaimer : The thoughts above are directly influenced by Class discussions at Drucker school MBA class. Examples used are directly taken from class discussion. Company names used are only for the sake of example.

Electric Car : Hybrid or Full electric Which suits the time.

With launch of Chevy Volt and Nissan Leaf EV market is about to explode. Higher gasoline prices and government incentives for EVs means good business for next few years. But is the Complete electric vehicle way to go forward?. It sounds a perfect solution but not in near term. Maybe once technology in battery evolves and allows to store more energy in less space then we can think of 100% electric cars. Till then we have to live with hybrids. Toyota Prius and Chevy Volt. Many others like Ford, Honda driving in with their plug in hybrids as well so 2011 will be exciting year for auto industry.

I prefer Toyota Prius like hybrid and one that they will be launching in 2012. Hybrid which can run up to 10 miles on electricity and will have full gasoline engine is wise solution for current market. The cost of such vehicle will be less as you will be having less amount of batteries and it will also help in improving overall efficiency. I believe full electric is the way to go ahead but in stage manner.

Chevy Volt is a having engine but it is used to charge the batteries and not drive the car. It is good concept but due to that the overall price of the car goes up very high. I think hybrid car that can be used as normal car will be good success in short term. Car that can run on gas even without charging will give comfort to people to shift from their existing cars to such hybrids. The cost of such cars will also be less as battery which accounts for 50% for electric car’s cost is small in size.

At low speeds and traffic situations electric motor is the best option and at highways gasoline works fine. Car that merges these two (like Prius) will be very helpful in attracting masses to such cars. (Still hybrids are less than 3% of total vehicles). Nissan claims that 100% electric is the only car which is actually totally green. I think Green and eco friendly differently. Considering cost of Nissan leaf and Chevy Volt very few will actually buy these cars. And many buyers will be second car buyers. So this will not help environment directly. A car which can improve efficiency of gasoline engine by 25% and is affordable will be far more eco friendly on sheer numbers.

Jury is still out and experts have different opinions. So let us see how 2011 brings changes in Auto and EV market.

Sources: News about Chevy Volt, Nissan Leaf and Prius from different websites, Bloomberg report on EV market, Car reviews by CNN.

Signing Off

Nikhil Parchure

Happy New year and starting 2011 series

 

Dear All

Wishing you a Happy and Prosperous New year. May 2011 bring joy and success to you.

Also I will like to thank all of you who are reading my blog and contributing via comments and feedback. I really appreciate your efforts. Thank you very much for all the encouragement.

I have complied all my blog posts of 2010 in one pdf file. you can see or download the file from below mentioned link.

http://www.box.net/shared/9secr21vo7

Once again thank you for your contribution and looking to get similar support in 2011.

Post date: 1/1/11 …wow

Signing off

Nikhil Parchure