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.


Indians and the funda of materiality

In a recent issue of the Economist, I came across an article on the Chinese takeover of global companies. What caught my attention was this offhand comment quoting an unnamed business exec, about the relative difference between negotiations with Indian and Chinese bidders

One oil executive ran an auction of a firm that ended with an Indian and a Chinese bidder (both were state-controlled). The Indians had “no concept of materiality”, he says, and were mired in nit-picking. In the final stages they returned the draft contract riddled with amendments. The Chinese firm returned it clean, and won.

Why is that? Why is it that Indians (and now, people of Indian ethnicity living everywhere) are being projected as a community of nit-pickers? Could it be true that Indians truly lack a sense of materiality in our legal dealings?

Fetish for detail + One-Upmanship + Failing grade in Negotiations 101. This seems to be the formula Indian companies seem to be taking to the negotiation table. The lawyers seem hand selected for their bookish knowledge, and their ability to parse legal documents in order to write length academic arguments. As they approach their deals, they could consider it their primary responsibility to red-line every term in the contract. Never mind that the negotiations are meant to be  win-win exercise and all that BS. No, No! Any dialog is an opportunity to score points, and the more red ink I piss on the other person’s contract, the bigger my score-card.

As India and Indians acquire a more stable and prominent position on the world business and political stage, I am sure desis will learn to let go of petty schoolboy taunting, and focus on the big prize.

Till then, everyone will just have to tolerate our eye for detail as a cultural trait. Sorry, Sir…what to do, we are like that only!

I’m looking at you, PowerPoint!

Sometimes I feel that there are only two things people picked up from their MBA programs. Making 2x2s, and making presentations.

In the real world, of course, everything is not biaxial. There are some things that you can put into a 2×2, and then there are others that you can’t. Smart people know when then need to move from 2x2s to simple binary choices. Either you get it, or you don’t! 😉

But for today’s post, I’m looking at you, PowerPoint! PowerPoint presentations have become all the rage at the modern workplace. It’s a skill that takes time to master, but no time to fake. Most people fake it. Death by PowerPoint is the weapon of choice for the white collar crowd. Ask my friend, Dilbert!

Last week, there was a famous case of a US Army Colonel who was pulled up for airing his view on “Management by PowerPoint”. Tell me how your workplace differs from the US Army when it comes to the “battle rhythm” described below: (Article called “PowerPoints R’Us” here).

Each day is guided by the “battle rhythm,” which is a series of PowerPoint briefings and meetings with PowerPoint presentations. It doesn’t matter how inane or useless the briefing or meeting might be. Once it is part of the battle rhythm, it has the persistence of carbon 14.

And you can’t skip these events because they take roll — just like gym class.

The start and culmination of each day is the commander’s update assessment. Please ignore the fact that “update assessment” is redundant. Simply saying commander’s update doesn’t provide the possibility of creating a three-letter acronym. It also doesn’t matter that the commander never attends the CUA.

The CUA consists of a series of PowerPoint slides describing the events of the previous 12 hours. Briefers explain each slide by reading from a written statement in a tone not unlike that of a congressman caught in a tryst with an escort. The CUA slides only change when a new commander arrives or the war ends.

I want to see that note in presentation format in next class.

Abject poverty and extremism in India…

In an earlier post, I had talked about the growing Maoist-Naxalite pressure on rural India as a possible Black Swan event. Here is a fantastic article on the subject of growing Naxalite violence in India. This is perhaps one of the best articles I have seen on this subject in the western media. I have some comments on the issue which are below the blurb, so read on…

Fire in the Hole: How India’s economic rise turned an obscure communist revolt into a raging resource war.

But plenty of Indians have missed out. Economic liberalization has not even nudged the lives of the country’s bottom 200 million people. India is now one of the most economically stratified societies on the planet; its judicial system remains byzantine, its political institutions corrupt, its public education and health-care infrastructure anemic. The percentage of people going hungry in India hasn’t budged in 20 years, according to this year’s U.N. Millennium Development Goals report. New Delhi, Mumbai, and Bangalore now boast gleaming glass-and-steel IT centers and huge engineering projects. But India’s vast hinterland remains dirt poor — nowhere more so than the mining region of India’s eastern interior, the part of the country that produces the iron for the buildings and cars, the coal that keeps the lights on in faraway metropolises, and the exotic minerals that go into everything from wind turbines to electric cars to iPads.

…and another from the same article…

In a sense, however, India has already lost this war. It has lost it gradually, over the last 20 years, by mistaking industrialization for development — by thinking that it could launch its economy into the 21st century without modernizing its political structures and justice system along with it, or preventing the corruption that worsens the inequality that development aid from New Delhi is supposed to rectify. The government is sending in Army advisors and equipment — for now, the war is being fought by the Indian equivalent of a national guard, not the Army proper — and spending billions of dollars on infrastructure projects in the districts where the Maoists are strongest. But it hasn’t addressed the concerns that drove the residents of Chhattisgarh and Jharkhand into the guerrillas’ arms in the first place — concerns that are often shockingly basic.

So, as ultra-educated and semi-resident Indians, what are we to do about this? I used to think earlier that this was a propaganda war, and it was just a question for the Delhi Sarkaar to build out an outreach and communication program. After all, what could be wrong with progress in the form of mining jobs and development? Who would argue with that, and why would people come in the way of progress in such a violent manner.

Damage caused by mining: If you want to read up on the damage caused by mining, check out this latest article in Wired Magazine, which brilliantly outlines the problems faced by a Superfund site after the mines have dried up. It’s not online yet, but I will post the link when it’s live.

My views have changed. Unfortunately, this is an armchair expert’s view, formed by watching movies like Avatar, Peepli [Live] and Hazaaron Kwhahishen Aisi. It is clear that development and industrialization has asymmetric benefits. People who “donate” their land rarely get much good out of the exercise. Does that mean I support the Naxals? No! But I can understand them better.

Apple and it’s money

Sometime back I’d blogged about the global and local tendency for companies to hoard cash.  Tech companies in the US have an average cash to asset ratio of 27%.  Apple has $ 46 Bn in cash reserves.  To put the magnitude of that number in context, there are more than 100 countries who have a GDP less than that, and 450 out of the S&P 500 have a lower market capitalisation.

People have spoken about it for a long time.  But one analyst has now gone one step further and written an open letter to Apple.  Full text of the letter available on ZDnet here.  It’s worth reading the whole piece, but if you’re starved of time – here’s the gist:

  • Current cash levels are excessive relative to what Apple requires to run its operations.  The estimated requirement for Apple is $ 10 Bn, leaving a surplus of $ 36 Bn
  • Prevailing returns on cash are very low, destroying shareholder value. Apple earned 0.76% interest on its cash reserves vs. an implied expected return of ~11% on the stock
  • A return of cash would create financial discipline and alleviate investor concerns about a potentially imprudent acquisition. Apple’s burgeoning cash balance creates the perception that the company may spend it on large acquisition(s) that shareholders believe might be value-destroying longer-term
  • A return of cash to shareholders could attract a new class of investors.  Some investors are ideologically opposed to investing in companies that lack a clear policy on cash usage
  • Three broad options exist for a return of cash: (1) a one time dividend; (2) ongoing dividends, and (3) share repurchases. The belief is that investors’ bias – even in the face of changing tax laws – is for Apple to institute a regular dividend coupled with buybacks

Hmm.  I think the argument would be relevant to a whole bunch of Indian companies.  Are there any analysts writing letters out there?

Games countries play

As most people in India already know, the Delhi government is shakily preparing to host the Commonwealth Games 2010. Shakily because the city doesn’t seem any more close to being ready than when I visited in April, and January before that. While the closet is barely built, skeletons have already started to pop out. At an alarming rate. The joys of being the host to multi-national games. Woo hoo!

There are two events this past week that caught my attention. Number One was the past Sports Minister wishing for the rains. Why, you ask? Because, “firstly it will ensure a good agriculture for the country and secondly it will ensure that the Commonwealth Games are spoilt”. God bless the last remaining free-speaking-politician in India, but this is hilarious. Of course, the Commonwealth Organizing Committee Chief was quick to get the party brass to pull a gag order on his errant colleague, and has this to say about him… (had he) “continued as the sports minister, India could never have hosted the Game”. Political intrigue. Where would we be without it!?

Number two, the skeletons. The routine fare of desi anti-corruption brigade. The leaky roofs. The stinky pools. The “friendly” tennis court contract. It’s all showing up exactly two months before the actual event. Read this. If the corruption surrounding the IPL is any indication, this episode would get murkier very soon.

That calls for a separate post on the faulty economics of hosting multi-national games. Scores of research papers have been written about the lack of a “business case” for countries to play host to these expensive shows. The same debate is playing out as we speak in London, which is host to the 2012 Summer Olympics.

Here’s a summary of one report: (link here)

Cities vigorously compete to host sports mega-events because they perceive that doing so will enhance their image and stimulate their economies. International sporting events require substantial expenditures on infrastructure, organization and security and critically depend, therefore, on public subsidization. The ability of event promoters to secure public funds often depends on convincing a sometimes skeptical public that hosting the event generates economic profit. A motive for exaggerating the impact of a mega-event clearly exists. Our own previous examinations of mega-events, as well as the research of other independent scholars suggest that the true economic benefits are typically far less than the numbers touted by  promoters. Cities and countries would be well advised to more thoroughly evaluate booster promises of a financial windfall from hosting a sports mega-event such as the World Cup and Olympics before committing substantial public resources to such an event. Indeed, hosting these premier events may be more of a burden than an honor.

Here’s the IMF’s take on the story playing out in UK around the 2012 Olympics. (Link here)

London expected its 2012 Games to cost less than $4 billion, but they are now projected to cost $19 billion (Sports Business Daily, 2009). As expenses have escalated, some of the projects have been scaled back—for example, the planned roof over the Olympic stadium has been scratched—but the stadium will still end up costing more than $850 million, against the initial projection of $406 million. The government has been unsuccessful in its effort to find a soccer or rugby team to be the facility’s anchor tenant after the 2012 Games. This will saddle British taxpayers with the extra burden of millions of dollars annually to keep the facility operating. It is little wonder that London Olympics Minister Tessa Jowell said, “Had we known what we know now, would we have bid for the Olympics? Almost certainly not” (Sports Business Daily, 2008, citing the London Telegraph).

These events are white elephants. The facilities created for these events are rarely used again with the same vigour. Instead, the cities are saddled with a maintenance bill that they cannot afford.

Should have paid for another airport in India. Or a dozen. Just a suggestion!

Independent directors

In a wonderful piece today, Prof Raghunathan argues that the concept of independent directors is an oxymoron.  And, that given their current state of involvement in the company, it isn’t reasonable to hold them accountable for the performance of the company

The very term independent director is a laugh! You can either be independent or a director ; rarely both!…many independent directors open their mouths in the meetings only to pop in a cashew…

When an independent director acts truly independent on a board, his infamy spreads fast, and not only is he out after his first term, he also finds himself unwelcome in other boards as well. So Darwinian adverse selection has mostly rooted out that breed already. Thus, if you are an independent director , chances are you are either a yes man, or a kin of the promoters, or a one far too busy in your empire to care much about what’s happening on one of the many boards sit on, or one who has self actualised because you are in a board room!

Thus, it is true that most independent directors will have little clue on what’s going on in a company. To hold such souls responsible for the affairs of the companies seems unfair.

Full text here

It’s a complex issue though.  You could argue that an Independent Director who toes the line, actually does a disservice to the shareholders and therefore must be held accountable.  Carter and Lorsch have argued that the core issue is with how board selections and operations are managed


Outsiders who are genuinely independent find themselves at an enormous information disadvantage.  Paradoxically, the more independent the board, the more it must rely on management for information about the business. 

 The average U.S. director spends only about 100 hours per year on the job. (European directors spend even less time.) So how to ensure that independent doesn’t just mean ignorant?

Sadly this is true for many Indian boards too.  Prof Raghunathan proposes one solution – an independent rating of boards by a credit rating kind of agency.  But I think the real awakening has to come from within.