What is an old economy business model?

At the time of the dot-com boom, we all started differentiating companies as being new-economy vs. old-economy.  The way we thought about these companies was a bit like this:

Old-economy stocks represent large, well-established companies that participate in more traditional industry sectors and have little investment or involvement in the technology industry. In contrast, so-called new-economy stocks are heavily involved in the technology sector and the more successful companies are able to build value at markedly higher growth rates.

But over the last decade, I think that distinction has become a little less stark.  Traditional manufacturing companies have regained some of their edge, and newer technology businesses have started looking a little less exciting.  This is probably more true in India, where technology companies are largely services oriented.

I think that today the way we think about old economy companies is more to do with the mindset of the management team, than the choice of industry. And central to that mindset is an obsession with making money.  Here is my take on how an “old economy” company thinks about money:

Cash is king, queen and knave.  P&L statements are for the birds. What matters is how much cash we generate, and how much of it flows to the owner

Profits are only one driver, and an inefficient one, of cash. After all, one has to pay corporate taxes on profits, and dividend distribution taxes thereafter.

What you don’t pay is yours to keep. An expense ain’t an expense unless you actually pay your supplier.  There are more fish where that one came from.

Tax planning, the (mucho) smarter way. Instead of paying taxes, find ways to take what the government collects from others.  Capturing those subsidies is a great starting point.

No compromises on capital investments. Especially when it flows back to my own, privately held companies.

Debt = Equity – shareholding. What if we don’t pay back the bank?  No, really.


The funda of farmer suicides

Posting [LIVE] from Peepli.

In recent years, there has been an increased awareness of the unfortunate rise of farmer suicides in rural India. By most estimates, about 200,000 farmers have committed suicide in the last 20 years, with the recent years averaging more than 17,000 a year. Grim statistics indeed. These suicides have largely been concentrated in the Indian agrarian states of Maharashtra, Andhra Pradesh, Karnataka, Madhya Pradesh and Goa.

India lives in her villages“, as Mahatma Gandhi didn’t say. About 73% of the Indian population still lives in India, and a large majority of the folks are dependent on agriculture for subsistence. Many of these farmers are poor, manual workers and uneducated- very poorly equipped to compete in the world economy as they are.

The base post on farmer suicides was written by P Sainath, who is the editor for The Hindu, a big and respectable Indian newspaper. Through his award-winning reporting, he brought attention to this subject. Here is a great update post from Sainath on this.

So why are the farmers committing suicide? I am going to focus on two competing, yet reconcilable, narratives that have been put forward. One represents the extremely successful activist community, spearheaded by Vandana Shiva, and the other representing the views of a broader “economist” community.

Simply put, the activist viewpoint is that the greedy multi-national seed and chemical companies have colluded to create monstrous patented and genetically modified monoculture of seeds that cost the farmers their livelihoods, land and, ultimately, lives. Meanwhile, the global trade in seeds creates conditions that allows heavily subsidized American grain to rush into the market, lowering the effective rates. In other words, the rapacious Americans are to blame. This viewpoint has been very eloquently articulated by Vandana Shiva, who has appeared Al Gore-like in her presentations to a shamed-western-media. Here are a couple of great reads: Vandana-on-HuffPost, and here’s an audio post.

Rapid increase in indebtedness is at the root of farmers’ taking their lives. Debt is a reflection of a negative economy. Two factors have transformed agriculture from a positive economy into a negative economy for peasants: the rising of costs of production and the falling prices of farm commodities. Both these factors are rooted in the policies of trade liberalization and corporate globalization.

The other viewpoint takes a more scholarly approach to the grim data. The best point of view I came across was this research published by International Food Policy Research Institute. I initially assumed that this is an industry-funded-one-sided piece, meant to allow greedy seed and fertilizer companies to assert their point of view. I was wrong. This is a well researched and balanced piece of work. It combines a meta-analysis of several other lines of research. The truth, in their opinion, is more nuanced, though no less grim. The multinational seed companies are, indeed, selling patented and GM seeds that are terribly expensive.  The seeds give much higher yields with a careful selection of chemicals, and under irrigated conditions. In India, the farmers are uneducated on their proper use, and still depend on the monsoons for irrigation. This means that the farmers take debt to buy seeds that are essentially a gamble. The yields turn out to be poorer than the costs would justify. Crop failure results infrequently. This created a vicious cycle which ends, sadly, in the farmers committing suicides. Here is the 64-page report, which I recommend highly. Here is the chart that lays out the situation brilliantly on page 45. Too bad they aren’t as eloquent as Vandana Shiva!

Posting [LIVE] from Peepli the next few days

Posting [LIVE] from Peepli!

Over the next week or so, Amit and I will be posting about issues that came up in the new movie “Peepli [Live]”. This isn’t a movie review site, so if that’s what you’re looking for, please check out these fine reviews here, here, here and here.

All you need to know is that the movie is a fantastic satire from the house of Aamir Khan. The issue they tackle is farmer suicides, and the story wheels around other modern Indian issues. The media circus, caste politics, general apathy and perverse incentives. Great stuff, put together in a great movie.