The only way for India Inc to have 'Apple' like status... - The 5 Minute WrapUp by Equitymaster
Investing in India - 5 Minute WrapUp by Equitymaster
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The only way for India Inc to have 'Apple' like status... 

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In this issue:
» Have interest rates in India peaked?
» Woes for the cement cos. doubled
» India would beat China in terms of growth?
» Will the Middle East crisis lead to another oil shock?
» ...and more!


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00:00
 
The December quarter result season is nearly over. Most companies have reported pressure on margins. And they have blamed inflation related higher input costs for the same.

At this point of time, it would be good to take a step back and analyze the main reason for shrinking margins for India Inc. True that input costs have been going up. This is partly the result of supply side constraints and partly the result of the influx of easy money. This has led prices of essential commodities like steel, copper, etc. to reach dizzying heights. The result being that the companies have witnessed lower margins.

But we ask as to why these companies have been unable to just increase their selling prices in line with the increase in input prices? Why have they allowed margins to shrink? The answer from most of the managements would be that they cannot do so as their products will lose their competitiveness. So does that mean that the only edge that the Indian companies have for their products is their lower costs?

No wonder India Inc is cribbing about higher input costs. Instead they should be looking inwards. They should target product innovation so that they can gain pricing power. If they have pricing power then higher input costs would stop impacting margins so drastically. Take the case of Apple. Apple products are priced much higher than its competitors. But it is still able to grow its top-line consistently as customers are willing to pay the higher price. The reason – product innovativeness. The products are technologically far superior to that of the competitors'.

So if India Inc wants to succeed and insure its margins, then product innovation is the only way. Only then will they have the pricing power that will protect them against all odds.

Do you think product innovation would help combat margin woes for India Inc? Share your comments with us or post your views on our Facebook page.

01:30  Chart of the day
 
There has been a lot of talk on how India's 'demographic dividend' would be driving its growth in coming years. Demographic dividend is defined as the population in the working age limit, i.e., the population falling in the age bracket of 15 to 64 years. Today's chart of the day shows the percentage increase in the working population for the BRIC countries from 2010 to 2015. Clearly, India emerges as a top winner, even ahead of China. Russia's working population is actually expected to decline as its population base is ageing.

Data source: US Bureau of Census estimates
* Growth from 2010 to 2015

02:05
 
Inflation and interest rate worries have clouded the minds of emerging market investors in recent months. Quite understandably. Together these two have the potential to erode company margins and make even governments go bankrupt. But with the US and other developed markets showing no signs of fiscal prudence the options are few. Most emerging market central banks including the RBI are in the defensive mode to evade risky asset bubbles. At the same time, supply side constraints are playing havoc with food prices. Thus one might conclude that it will be long before interest rates here start cooling off. But the chief of India's largest bank does not belong to this school of thought. SBI chairman Mr Bhatt has in fact opined that interest rates are at near peak. What we can conclude from his opinion is that Mr Bhatt seems to have some radical expectations from monetary markets. Either he expects the US to stop QEII and start raising interest rates. Or he believes that the asset bubble risks are overdone and expects RBI to refrain from further rate hikes. Whichever way, lower interest rates will certainly help the consumption and investment scenario in India.

02:35
 
Commodities cannot escape business cycles. During a typical down-cycle, almost everything seems to be going wrong for them. The Indian cement industry is going through exactly such a phase. It is getting beaten on all fronts. Demand growth has remained subdued. On the other hand, excess cement capacity has kept prices under pressure. The industry had already been reeling under the impact of high input costs. To add further, Coal India has recently hiked coal prices by nearly 30%. Given that the cement industry gets nearly half of its coal requirements from domestic coal mines, this is going to give another severe blow to profitability. And there's still more. Even the Union Budget 2011-12 didn't spare the sector. The FM gave a whip on the excise duty front by imposing an additional Rs 160 per tonne on cement bags above Rs 190 per bag duty on top of the 10% ad valorem duty. Let's see how long the tough times last.

03:10
 
China has already toppled Japan to become the world's second largest economy. Is India about to make any such records? India is nowhere close in terms of matching China's GDP in absolute terms. But it could overtake the dragon nation as far as the growth rate is concerned by 2012. World Bank in its report had projected Indian economy to grow by 8.7% in 2012, faster than 8.4% expected for China on purchasing power parity (PPP) basis. China for some time now has been facing problems of an overheating economy what with inflation rising and property prices inflating. As a result, the Chinese government has been compelled to go in for interest rate hikes in a bid to cool the economy a bit. This gives India an opportunity to come on top with respect to GDP growth. But that may not mean much. Simply because the real question is whether India will be consistently able to beat China's growth in the coming years. This may not be that simple given that the latter's infrastructure is superior to that of India's. Also, India too has been battling with problems of high inflation. Hence, it may be early guns to start putting the GDP growth of China and India on an even keel.

03:45
 
Oil. It is the fuel that runs the world, but is right now threatening to blow up the entire global economy. There have been a number of oil shocks in world history. But, is the current political crisis in the Middle East one of them? There are a few reasons to worry. The MENA region produces one- third of global output. And with such geographical concentration, there is a huge risk of contagion. Oil prices are now 20% higher than at the start of the year. Economists believe that global growth may slow by a few tenths of a percentage point. But, we along with 'The Economist' fear that any serious supply shortage could send prices skyward. And rising fuel costs will increase headline inflation, which is already at peak levels due to food inflation.

Emerging markets like India are in a fix. The RBI has been raising interest rates like nobody’s business. But, further rate hikes may just stymie growth. The government has an ambitious target to reduce fiscal deficit. But, with rising fuel and food prices, subsidies will also have to proportionately increa se. Ditching subsidies will increase public anger against a government which has been shaken by various corruption scams. All in all, without sustained effort into green-technology, electric vehicles, and carbon trading, we are still at the mercy of the Arab world, and the price of one precious commodity, black gold.

04:35
 
In the meanwhile, the Indian markets continue to trade above the dotted line. India's benchmark index, the BSE Sensex was trading higher by about 47 points at the time of writing this. Stocks from the automobile and banking sectors are the main gainers. However, stocks in the capital goods and FMCG space are witnessing selling pressure. The Asian Indices are trading in the green as well with Korea and China leading the gainers' pack. The European markets have opened on a positive note as well.

04:55  Today's investing mantra
"There seems to be some perverse human characteristic that likes to make easy things difficult." - Warren Buffett
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10 Responses to "The only way for India Inc to have 'Apple' like status..."

Babu Philipose

Mar 10, 2011

Yes, product innovation would not only help combat margin woes for India Inc., but it is the best and only solution to survive in this chinese market.

Like 

Dinesh

Mar 6, 2011

But the fact remains that Indian consumer is value driven. Product like an i pad makes sense for West but not for the Indian consumer...innovation is not just adding features but actually adding value

Like 

Naren

Mar 5, 2011

Contrary to popular opinion, the country does not have adequate competition. It really is competition that drives innovation. Private enterprise and inviduals will go the extra mile to make more money. For innovation to take place, the entire ecosystem needs to improve. There has to be IP protection. Corruption has to be eradicated. There isn't level playing field for everyone. Those having connections with high offices can get preferential quotas, allocations, etc. The recent scams great examples. Now even the top officials in the judiciary and the army don't have clean records. The country has some of the greatest minds and skilled people, yet people are impoverished and poor. What a waste of talent.

Like 

jagdish sanghvi

Mar 4, 2011

You are absolutely right about innovation. India has yet to learn it when it comes to the products and services for use in India and for the Indian public. This is the pseudo socialist legacy of Nehru and Gandhi (not Mahatma) who nationalized the whole country and killed the competetive/innovation spirit which resulted in nothing but the monopoly and corrupt practices. For eg Premier Padmini, Ambassador cars and arrogance of MTNL, and Indian Airlines, etc. To top it, Indian enviornment found another very easy way out of any situatuion-- that is by corruption!! This is also one kind of innovativeness but has hardly takers abroad where the rule of law prevails.
Only those Indian businesses who are forced to compete with foreigners have learnt, and well learnt, to compete and innovate, such as Infosys, TCS etc.
It will still be a long time before monopoly and corrupt practices are erased from India and businesses learn to compete not on the basis of prices but innovation and maintain their margins--eg. Proctor and Gamble, Nestle etc.

Like 

MK

Mar 4, 2011

yes indeed it will help..as currently india is growing on cheap
labor advantage it will not last of ever.We would gradually need
to shift from cheap Labor based economy to innovation based
economy.

For this we would need a proper education system..in-spite IIT'S
and other hot shot engineering colleges we haven't yet
manufactured a simple microprocessor which would compete with
even outdated Pentium 4

--

more over we are dependent on other nations for our defense
needs..BIG SHAME
recent example 10.2 Billion $ MMRCA deal
we are struggling to complete 4th gen fighter aircraft(20 year
old project) LCA tajes
We have even failed to manufacture a Tank (Arjun) and are
continuously importing tanks from Russia(T-90)--on the other
hand even our rival nation Pakistan has made indigenously Al-
khalid tank

we are happy with moon landing but we forget that the ISRO
rockets were using Russian Cryogenic rocket engines and when
ISRO tried to use its own engine the Test failed


--

Bonus:

when some one here is comes out with a innovative product ..we
are not aware of it

eg: Adam notion ink pad

we don't promote our local search search engines
(guruji.com)MADLY GO TO GOOGLE.where as chinaese always do
searches on baidu.com


there is lots more..perhaps another time..

Like 

Shome suvra chakraborty

Mar 4, 2011

The marginal product of capital should be greater than the rental cost of capital if the financing cost is increased.Value engineering allows that only value added costs should be passed to the customers. Flexible budget and variance analysis are important measures for cost control.Sub optimization should be avoided. Whatever activities be taken in the value chain a co can't exist without product development keeping in mind that whichever segment you target there are price sensitive customers.

Like 

prem

Mar 4, 2011

Apple commands a premium because of its Brand power.
India may have fantastic products but our businessmen have never
focussed on creating world class Brands for which customers are
willing to pay a premium

Like 

ATUL PRAKASH GARG

Mar 4, 2011

India gained world attention due to its GDP growth which were unrelated to it's external trade. This surprized the world as generally countries grow piggy back on the growth of the leading economies.

After 500 years of plunder, India's wealth is coming back in the form of investments in the Capital Market of India as well as Foreign Direct Investment & Collaborations.

Even though price differential is a selling point for goods and services as compared to prevailing World prices. Innovation in products & services has always been the key in providing corporate profit multipliers.

Consultants, innovative technology, shared research in Indian Universities sponsored by the doyens of India's Industrial behemoths is ABSOLUTELY ESSENTIAL.

The United States of America prides itself in knowing how it can dominate world economics by using ALL THESE TOOLS EFFECTIVELY AND IN A CONCENTRATED FORM. We need to learn from them and not allow this Indian Growth Opportunity to be snatched away from us merely because we are short sighted in the way we run our business in India.

Education is fine, however the application of intelligent understanding of day to day situational problems is finer ! Indian Industry must innovate and keep India in the lead. We are in a marathon and not in a sprint and hence consistent outwitting the developed economies is the only answer.

The Developed economies are now forming integrated cartels of Companys & have gone to the extent of even amalgamating their Capital Markets. They have the audacity to ask India to list our company's on their Newly Integrated Exchange -----HOW CLEVER OF THEM !

Conclusion: Innovate or Perish.

Atul Prakash Garg

Like 

sagar

Mar 4, 2011

Apple like innovation for a 'segment' can be a valid reason to beat competitors and dominate. It's great because the segment has that craze for technology etc. Economical is the key to make Indians crazy. Innovation should be brought to cut down process cost. Bring better technology or invest in researches for long term benefits.

Like 

dk

Mar 4, 2011

Innovations can be the answer in the technology segment, but not always the answer in the brick and mortar business as many a times there is not much to innovate..(like a industry who manufactures Saria (Iron rods) etc. the price of iron ore and carriage cost is bound to have an impact and the margin pressure cannot be always passed on to the customer and there is very little chance to innovate. Margins have always been a matter of concern for each and every industry in an growing inflationary economy but eases out with the matter of time as the growth follows. Till then the forward or backward integration in the industry can also be an answer (obviously for the large houses ).

Like 
  
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