This Threat Will Smack Your Company in the Face - The 5 Minute WrapUp by Equitymaster
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This Threat Will Smack Your Company in the Face

Apr 26, 2016
In this issue:
» Is the US Fed waging a war?
» Will Flipkart survive?
» The Equitymaster iOS App is here!
» Today's market roundup...
» ...and more!

00:00 Chart of the day

Devanshu Sampat, Research analyst

There are over 1.32 billion people in India. Half of them are less than 20 years old. That makes India a very young nation indeed.

A decade from now, this figure will likely fall to 42%. In other words, a large number of people will join the workforce by 2026. And an estimated 13 million will enter the job arena every year. That's massive.

The service sector's share of the economy is rising each year, and jobs will largely come from this space. But with a large segment of the population looking to move out of the agricultural sector, demand for jobs will only increase. An absorption of this scale is only possible if more manufacturing jobs come on board.

The NDA government's proposed solution is the 'Make in India' initiative. But here too, the vision gets clouded by the onslaught of technology innovations. The automation and robotics trend is very real. And it is perhaps the biggest threat to India.

Earlier this year at the World Economic Forum, it was stated that the fourth industrial revolution is underway. Where does it lead? To the elimination of millions of jobs over the next five to ten years.

This is in sync with the report released by Bank of America-Merrill Lynch, which expects 47% of US jobs to be taken over by technology over a five to ten year period.

What are the threats to India? Well...here are some of them according to The Economic Times:

  • The agriculture space will witness a lot more mechanisation...led by rising costs and smaller land parcels leading to more demand for cost effective solutions. With half of India's population working in this space, it is a humongous concern.
  • The manufacturing space can expect more use of robotics. 1,500 robots have replaced 10,000 jobs in Japanese auto factories. This trend can easily move to other sectors as well.
  • India employs a large number of people in the call centre and BPO space. But with virtual agents with artificial intelligence (and fluency in up to 20 languages) in trial mode, the number of people employed in this industry is expected to decrease by a big chunk.
  • New technologies such as 3D printers, drones, and driverless cars are real threats across industries.

Another very interesting point The Economic Times highlights is this:

  • In 2013, percentage of wages as a share of US GDP was 44%, the lowest ever, while corporate profits were highest at 11%. This indicates that companies and countries are able to grow with fewer jobs for individuals.

So...are Indian companies gearing up for this trend? Here, I'd like share a recent discussion with a company's management.

A colleague and I met the management of a sanitary ware company a few months ago. When the topic of competition came up, we asked why the large global players were not successful in making a dent locally.

'Due to their high manufacturing costs,' was the response.

Turns out that this business is labour intensive in this part of the world. Automation at this juncture would lead to higher manufacturing costs. He did add, however, that high wage inflation would eventually lead companies to move towards automation, a trend he expects to hit the industry a decade from now.

It's clear that automation will rise rapidly in India. In fact, it has already begun in some spaces. The software sector for instance. India's large IT firms are no longer hiring employees the way they were five years ago, as today's chart of the day depicts...

Indian IT Sector: Churning out More with Less...


And there's nothing to stop India's manufacturing sector from getting in to the act too. We believe this will prove to be a massive challenge for the government. After all, can one label the 'Make in India' initiative successful if a large number of people remain unemployed?

From what we have been seeing in our travels to various parts of the country, companies have begun to embrace automation. The India Letter team, for instance, travelled to a small town in the state of Kerala to visit a company that has invested heavily in automation in the otherwise labour intensive textile space.

Not only should this help scale up its business, keeping costs low and quality levels high, but it should also make the company a preferred employer in a sector that is otherwise not known for the best work atmosphere.

While it may still be too early, we believe investors should start thinking about how new technologies can impact companies and sectors. After all, the aim is to stick with companies that keep up with the times.

How do you expect the 'Make in India' initiative to play out at a time when automation is the name of the game? Let us know your comments or share your views in the Equitymaster Club.

02:55

We came across an interesting article by a gentleman named Tom Hutchinson. He is a financial journalist based in the US. He compared Fed's strategy to that of a military intervention. He refers to how it was easy to send the troops to war; but the difficult part is how to get them back. He writes:

  • After the conflict ends, the removal of these forces disrupts the new power structure that was created. Withdrawing the troops threatens the new peace and stability and could undo the very reason for the intervention in the first place.

The easy bit for the Fed was to lower interest rates and inject over US$ 4 trillion into the system by buying bonds. All of these efforts led to a very favourable outlook - the stock markets rose very sharply, touching their all-time highs. However, the hard part comes now - that of normalizing the rates. With the markets correcting sharply with the announcement of the plan to hikes rates four times in the current year, the Fed decided to take it easy.

In other words, the Fed has reached a point where it has become very influential in the market movement. What would really lead the Fed to take prompt decisions in this regard is rising inflation - the occurrence of which will leave it with no option but to disappoint the market and up the rates; as containing inflation would become its priority.

Is there a way out of this? Well...Bill Bonner doesn't think so. His solution is to just pop the bubble and pick up the pieces and move on from there.

But that would seem an unlikely choice for the US Fed. But what can individuals do? Just prepare for it. Charlie Munger recently said:

  • I remember coffee for 5 cents and brand new automobiles for $600. The value of money will continue to go down. Over the past 50 years, we lived through the best time of human history. It is likely to get worse. I recommend you prepare for worse because pleasant surprises are easy to handle.
03:50

Yesterday's hot news was the trouble of Flipkart. Their former chief product officer was all over the news slamming it. The company is facing a tough task in the face of competition from Amazon. Senior management seems to be jumping out. Investors are getting nervous.

Flipkart's business troubles do not surprise us. We have written about it many times before. However, their internal corporate problems have taken everyone by surprise recently. Clearly, if this trend continues, Flipkart will have trouble hanging on to its US$ 15 billion valuations.

In our view, the root of the company's woes lies in its business model. Its losses seem to increase along with its sales. Heavy discounting can get you a lot of customers but not a lot of profits. Without profits any business will eventually die.

Will Flipkart meet this fate? Perhaps not.

It has enough cash to stay afloat for now. But certainly not for more than a year in our opinion. The company has reached an inflexion point. Flipkart will have to change its business model drastically or face the inevitable day of reckoning.

04:20

By the way, it's finally here... The Equitymaster iOS App!

After the huge success of the Equitymaster Android app, it gives me great pleasure to share with you that we have just released the Equitymaster App for iOS!

Our Apps are an even more convenient way for you to access our honest views and opinions on investing in India!

And the iOS app makes that possible for even more of our readers. And that's what makes it super exciting for us!

Go ahead, download the Equitymaster iOS App here...

We look forward to your feedback and suggestions on the iOS app!

Have an Android phone?

In case you also have an Android phone, you can join over 10,000 users of the Equitymaster Android app here...

04:40

At the time of writing, the Indian markets were trading higher. The BSE-Sensex was trading higher by about 360 points (up 1.4%). Metal and realty stocks were leading the gainers. Stocks from the mid and smallcap spaces were trading strong, with their representative indices trading higher by about 0.9% and 0.7% respectively.

4:50 Today's Investing Mantra

"One of the biggest mistakes is to focus on a stock price instead of its value" - Warren Buffett

This edition of The 5 Minute WrapUp is authored by Devanshu Sampat (Research Analyst).

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2 Responses to "This Threat Will Smack Your Company in the Face"

KD

Apr 28, 2016

I have same kind of review about computers in 1995. Does jobs decreased in USA?

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MUKUND JAEEL

Apr 28, 2016

Hi,

Automation is bound to take over 'Make in India' industry in years to come. This is bound to cause huge unemployment problems for largest available young labour force which is also unskilled. Thus automation is coming at the most inopportune time in India. However, if the cost of production is going to increase due to automation as stated in your article, then why not pay higher wages to the labour force ? The Government should mandate at least 80-90 percent employment by prohibiting large scale automation in industry. Otherwise, if automation is preferred, then the Government should provide unemployment wages to the labour force by taxing the industry.

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