Growth of Middle Eastern Economies: What’s the next growth driver?

middle-east (1)

It is the wonderland of the world, where oil is literally the growth engine of most of the countries. The region is beautiful with vast stretch of glaring brown deserts and sand dunes with a puddle of oasis amidst them. This article would provide a brief overview of how MENA (Middle East and North Africa) or the MEA (Middle East Asia) would be an excellent spot in the years to come.

Analyzing numerically, the data from reputed sources such as World Bank and IMF suggests that the GDP of all Middle Eastern countries have grown in a healthy manner. Apart from that, the per capita of most of the countries are quite high. To complement that, Qatar has one of the highest per capita GDP close to 60,000 USD in 2016 (World Bank). This is on par with the developed countries of the world such as US and Singapore. The UAE (United Arab Emirates) has seen a substantial change in the aura of the scenario making it a dream for many people in the world.

The tangential growth of expats and the ever-growing Airlines such as the Emirates and Etihad has contributed extensively to travel industry and investments. The duty free zones of Dubai have made it lucrative for the entire world and is one of the largest Airport retailers. On the other hand, Saudi has also grown equally with the help of Aramco which is one of the largest energy companies in the world. The countries such as Syria, Iraq and Iran are yet to recover from the internal conflicts. But these countries have the potential to be the hubs for trade in the future.

Israel is also constantly growing tackling some of the domestic issues. Bahrain and Kuwait are growing steadily (Based on Last analyzed Growth Data i.e., in 2015, nearly 2% for Kuwait and almost 3% for Bahrain). Egypt has the potential to be an amazing tourism center for the entire planet and the forecast of WTTC (World Travel and Tourism Council) are positive on most of the indicators. Oman has also seen a huge jump in numbers during the 1990s due to the rise in exports of oil and other commodities. It also possess a controlled rate of inflation nearing 1%. All other countries in the region are in the track for growth in the long term, with a need for efforts from business and government equally.

So, what is the next growth factor for MEA apart from oil? The recent news suggest a lot of positive changes emanating from Middle East. The appointment of Minister of Happiness in Dubai, shows the positive mindset accumulating in the UAE. The presence of service industries and hospitality industries is a testimony of a growing economy in Dubai as the number of tourists are increasing and Dubai is becoming one of the most favorite places on Earth. Apart from the modern Dubai, Abu Dhabi is also garnering popularity among the foreigners as one of the places in their bucket list.

Elsewhere, Saudi has started its efforts in planning investments of trillions of dollars into infrastructure development and connectivity. This is a huge improvement along with the news of freedom for women to drive cars. The countries have realized that oil is not a lone sustainable business for the world to thrive in the future, due to the extensive use of alternative sources of energy. Germany is one of the countries who might meet almost 50% of their requirement with renewable sources.

The recent news of Saudi Arabia willing to grant citizenship to Robot suggests that the importance of AI, latest technologies and robotics is vital for them. The world has seen a paradigm shift in terms of usage of new technologies and energy. Apart from these, companies like Emirates, Qatar Airways and Etihad are investing abroad, thus diversifying the portfolios, which would help the growth of Middle East in terms of global presence.

One such example, is the sponsoring of events and sport clubs such as Real Madrid or Arsenal or Barcelona. The future would likely see the countries improving on connectivity amidst them, sorting out temporary tensions in the region. The diverse culture among the neighbors can be one to savor. The region can act as channel/logistic centers for transporting the goods which would earn them a fortune. The demography is an advantage for MEA as almost 30-35% of the population is young, which indicates that the drive for growth is immaculate and could be prospective in the future. Thus, MEA can be an exciting part of the world in the future and a lot depends on the policies as well.

If you have any ideas/opinions, kindly comment. Let’s discuss!!

New Age Business Models

asset

The new age mode for most of the businesses is the asset-light format and the marketplace model. This is an astonishing change that one observes around. Let’s consider a big brand, say, Uber. Uber has Intellectual Property and acts as an aggregator model for the world of travel. “Uberization” has become a new word among the current generation. This has been the impact of asset-light models around the world. If we look critically, many companies are yet to breakeven, even when their businesses are flourishing.

The old model of own, acquire and produce has taken a paradigm shift. Globalization has been the major vitriol for this. The opening of economies, FDIs, FIIs, lowering of interest rate and “a partially convergent cultural change” has contributed positively towards the companies outsourcing the so called “core product”. The tie-ups between the countries, trade treaties and an ardent potential in emerging economies have propelled the new business models. Franchising still persists, but the asset-light model has become a fad. The likes of Amazon, Flipkart, Ola, Urban Clap and many other service industries have become aware of the advantages of asset-light models. The advantages are multi-fold. The company can clearly focus on the core value proposition of delivering the service rather than wondering what is to be done on all fronts. This would also reduce costs, as an established veteran player well ahead in the learning curve would embrace the opportunity to tie up with the company.

Apart from the above, the chances of service failure would drop substantially. The Build Operate and Transfer (BOT) model is also a positive transformation of mindset in the Indian subcontinent. The positive footprint of the same is observed in a host of highways across the country. The major question one needs to ponder is whether the Indian Railways needs to go for a BOT, BOOT or a BOO model? There is a huge scope for improvement in the same and that would help a great deal to the country.

Another astounding move has been made by the Indian government on the procurement of supplies. The Government has embarked on creating a portal for itself called “Government e-marketplace” (GeM). This system would help the Indians to wean out corruption from the system to a great extent. There are more than 2 lakh products available on the website and it will be an end to end online process. There are thousands of buyer and seller organizations participating in the GeM process. The prices are available in the portal and thus, guzzling of money is reduced enormously. The buyers are the ministries and the offices at the state and federal (central) level.

As the business opportunities are expanding, there is a sense of consolidation in some markets where the same players have managed to gain huge market share. Apart from all these, the world is changing at a rapid pace. The competitive prices from the export-oriented countries are unmatchable. Thus, expertise is being given prominence and this is altering the landscape to the maximum. Diversification on one side (for the big companies) and asset-light model on the other, has proven to be a stunning bazooka to conquer the world of business! Albeit every rule has an exception, the growing trend suggests that the gap between a product business and a service business is reducing enormously.

Valuation of a Company v/s Valuing a Person

A wide range of models exists in the market to value a company. May it be the evergreen Discounted Cash Flow Model (DCF), which considers the future cash flows of the company or more advanced RE and AEG Models. On the other hand, we would value a person based on her Net worth. The underlying assumption for all the models is that the value is dependent on money generated. However, in the real world, neither the value of a firm is assigned based on fundamental analysis nor a person’s worth is based on the amount hidden in her wallet. The Price-Earnings (P/E) Multiple is at all-time high (28x) when the economy is in doldrums and ofcourse Abdul Kalam is valued way higher than Subrata Roy.

Indeed, the value of the company and the person depends on the intangibles they possess. For a company, it is in the form of Intellectual Property, the expertise of employees, the brand perception among the customers etc., never can these intangibles be completely measured. And these factors contribute to the growth of the firm which drives the share price in the market. Similarly, the worth of a person is measured using the value system she is adhered to. Which also reflects the potential of the person thereby leading to her growth. Moreover, the growth of the person or company is dependent on the efficiency through which the investments are utilized.

The worth also depends, both, on the returns the company gauges for itself and also to its shareholders. For a person, the value is derived both from her ability to develop herself and the capability to contribute to others development. Return on Operating Assets (ROOA) reflects the core capabilities of the firm to generate wealth for itself with the assets employed. In the above case, only the operating income is considered which mostly eliminates the external interactions. Likewise, the value of a person is attached to the efficiency through which she could generate higher returns with low resources. The whole Tata Group is worth around $126 Billion and Facebook alone is worth around $350 Billion. The difference in the assets employed by both companies is well known. With minimal resources, Nelson Mandela could eliminate apartheid and with all the available resources Vijay Mallya escaped to London.

The other component which exemplifies the value is the Return on shareholders or well-wishers investment. Return on Common shareholders’ Equity (ROCE) demonstrates the ability of the firm to satisfy its investors. A firm is punished when it could not reach the expectations of its shareholders. Infosys had to forcefully opt for a Buyback as it could not please the investors. Similarly, a person’s social capital is shattered if the return on emotions invested is not satisfactory. Tiger Woods had to face the brunt of his wife for blatantly cheating her and Arvind Kejriwal was contended by people, for he could not reach their expectations.

In the first case, as the Asset turnover and Profit Margins are important for a company so does the discipline and hard work for a person. In the second case, as the Dividends payment and customer relationship are important for a firm, so does the person’s capability to instil trust among her well-wishers.

Book Review: Breakout Nations- In search of next economic miracles

Breakout-Nations

Ruchir Sharma is known for his outstanding business acumen. He is also known to be one of the most influential and powerful persons on the planet. His study on the emerging markets as per the current scenario is well explained in the book. The book is to be read in retrospect as it was written in 2012. Nevertheless, many things have changed its shape or have become crystalline from the natural nebulous state such as price wars, demonetization in India and addition of Renminbi (Chinese Yuan) to the currency basket. The book dwells into the geo-political and economic foray in a lucid and eloquent manner.

The approach of analyzing every country separately with comprehensive insights on its history helps the reader to understand the chapter thoroughly. The length of each chapter is also relatively small. The book is intriguing and extremely informative. The analysis of Turkey, Sri Lanka and the Five Tigers of Asia were appalling to me. The curiosity zoomed to heights after reading the initial few pages. The book talks on various economic factors like currency level, GDP, per capita income, Gini Coefficient and technology infusion. The blend of history with the present and Ruchir’s assessment of the future is a fantastic approach, as it becomes a complete learning experience to the audience.

The metaphors such as “morphic resonance” helps the reader understand the pervasion of knowledge among different economies in the world. The book emphasizes on the underlying causes rather the facts that can be obtained online from many sources. For example, the comparison of Indian “Hindu Rate of Growth” with the South African rate of growth in the nascent years of post-independence is well elaborated instead of just comparing them. Another landmark example that I loved was, the discussion on the uprising of Turkey with the integration of secularity and religious orientation. The basics are laid out clearly so that the reader could understand the dynamics of the MEA (Middle East Asia) with respect to the entire world.

The book also talks about other important countries in the global arena and their confrontations in striving to make their country a developed one. The description on all countries are crisp and it is an easy read for the audience. I would urge all the students interested in basic economics and geo-politics to definitely give it a solid read. I was lured by Fareed Zakaria’s statement about the book, “This book is one of the most interesting ones on economic landscape” and trust me, it is that good!

I would rate the book a 4.5 out of 5. I personally felt that the book was short with minimalistic yet optimal details. Perhaps, many would feel this itself to be heavy, as it is loaded with insights and information! I am eagerly waiting to start reading the next book of Ruchir which is also on the same lines, called as “The rise and fall of Nations”.

Hello Corporates !! It’s time to pay your taxes at the Right place

All through the decades Big Corporates escaped paying taxes by operating from tax havens. This process is called Base Erosion and Profit Sharing (BEPS), wherein the Multi-National Companies (MNCs) could exploit the variations in tax structures across nations. Organisation of Economic Cooperation and Development (OECD) and G20 have been rigorously working to prevent this phenomenon using BEPS project. One of the outcomes of these efforts is Multilateral Convention to Implement Tax Treaty Related Measures to Prevent Base Erosion and Profit Sharing (Multilateral Instrument or MLI).

MLI also prevents abuse of bilateral treaties by the third parties. The abuse is basically done in the form of Treaty Shopping by the MNCs. I would explain this with an example. Suppose, India and Mauritius have entered into a bilateral treaty to prevent double taxation. If this treaty is used by Chinese citizen for tax savings in capital gains, then it comes under Treaty Shopping. To prevent this, MLI has introduced the Principle Purpose Test (PPT) and Limit of Benefit (LoB) clauses. So, if a bilateral treaty is signed under PPT, then that treaty will be implemented under MLI. It restricts the usage of bilateral treaty to particular country citizens. Also, if the treaty is utilises for anything other than the intended purpose (spirit) of the treaty, then that transaction comes into question. Thus, the abuse of bilateral treaties could be prevented.

This landmark Convention was signed by 68 countries including India. India deferred implementation of General Anti-Avoidance Rules (GAAR) from 2015. At this particular juncture, it is unclear whether it would go ahead with GAAR or MLI. GAAR provisions are more stringent compared to MLI. It may also have a huge dent on Foreign Portfolio Investors (FPIs). Each and every International transaction can be traced in case of GAAR whereas the MLI allows questioning of those transactions which are in conflict with underlying treaties. India is yet to decide on the same.

However, Mauritius and Singapore are yet to sign the treaty. Investments from these two countries are huge and needs to be tracked and traced back for effective implementation of any anti-tax abuse policy. With the recent changes to Double Taxation Avoidance Agreement signed between Singapore and Mauritius, there have been even more investments. Tracking them is crucial for India’s development. We should wait and watch to see which way the ball would roll.

B2B Marketing – Treasure Unveiled

During the World Wars, Companies had a mind boggling time inventing new methods to supply arms, medical requirements and other essentials to the markets. The most fruitful time was during World War-II. The innovation pertaining to Operations Management, Logistics, Operations Research and Supply Chain was at its peak. This was coupled with the great minds of economics such as Keynes and Hayek. The only piece left in the jigsaw was the brain-child of Marketing and Psychology, i.e., “Marketing.”

During the wars, speed, quality and reliability will be the prima donna. How could the conquerors of the country arrange everything in a jiffy? Main reason was the industrial relationship between their colonial countries for both the Axis and Allies. The important question is, was there Ads or any fancy marketing like current day scenario? Did countries have time for the same? Back then, ‘Industrial Marketing’ was the most used form of Marketing.

The growth of B2B marketing has been phenomenal. Social Media has played a major role in B2B marketing and LinkedIn is one of the most preferred sources of B2B marketing. Also, marketers are now inducted into Facebook for the same. Almost 75% of enterprises in Germany use Social media for B2B marketing (https://qymatix.de/en/b2b-sales-interesting-facts ). The importance of B2B is on the rise due to the growth in importance of industrial relations in current scenario.

The major portion of B2B is focused on rational purchase and reduction in complexity. The role definition, role clarity and the effervescence of converting a commodity into a product has increased the size of the B2B arena. Analytics and AI has empowered the whole number crunching process.
Developing Countries like India, Philippines, South Africa and Brazil would see a rise in the infrastructure in the coming future (Refer the link for the data). Industrial marketing would be on the boom during the same, which has an enormous role to play in the entire episode of a purchase or a sale. The boost in infrastructure triggers various demands in different sectors right from RM to Logistics.

One of the articles on B2B marketing was published by Forbes in 2012. The link has been shared. Overall, if anyone is looking at B2B marketing as the new “Golden Egg” of today, the treasure needs to be unleashed with full potential. Steps are being taken with the advent of IOT, AI and Machine learning to empower business marketing to its fullest potential.

Links:

Why Tesla needs to enter India

A series of tweets by Elon Musk over the months have excited as well as disappointed fans over the entry of Tesla in India. Let’s take a look at why Tesla needs to enter the Indian market

Tesla is an American automobile manufacturer known for its electric-powered vehicles. The company is also known for power backup systems for homes and businesses. The whole excitement over Tesla’s entry began when Elon Musk replying to a tweet, about a question over Tesla’s India entry, Musk said, “Hoping for summer this year.”

Later, Elon Musk tweeted that the roadblock to entering the country was India’s sourcing requirements. However, the Government responded with the “Make in India” twitter account quickly clarifying that the country’s foreign direct investment (FDI) policy does not mandate manufacturers to comply with any minimum local component sourcing norm.

Elon’s Tweet on 2nd June 2017 “India commits to sell only electric cars by 2030. It is already the largest market for solar”, drew instant response even from Anand Mahindra, executive chairman of Mahindra & Mahindra group. He replied by tweeting with a challenge “Time you got out here Elon. You don’t want to leave that whole market to Mahindra do you? The more the merrier — and greener.” According to his latest tweet, Tesla is in discussion with the Indian Government about temporary relief from import penalties/restrictions for Tesla until a local factory is built.

There is still no clarity on whether Tesla is planning to enter the Indian market with cars or battery packs. If Tesla plans to enter the highly competitive Indian market, they have to ensure that customers will have access to service support and charging infrastructure to the last mile. They will also have to tackle issues with pricey import duty on vehicles from other countries. Many top companies including General Motors have failed on understanding the Indian automobile market and it’s imperative that Tesla does some ground work before investing in India.

Mahindra is the only automobile manufacturer in India producing electric cars and has managed to sell only 1,100 electric cars last year. They currently manufactures 2,000 electric cars a year and targets 5,000 units by 2018. Thus, there is a substantial need for high demand for electric cars in India and Tesla should be prepared for it. By 2030, India plans to sell only electric cars. With Air pollution a major problem in all Indian cities, people will eventually shift to electric vehicles but the transition is expected to take time.

Tesla had a disappointing run in China when it entered the market in 2014 and the company will hope not to repeat the mistakes in India. It’s unlikely that Tesla produces cars in India any time soon, but Tesla has a huge opportunity in India to build a Gigafactory that can produce lithium-ion batteries for PowerWall and cars. With the government making huge bets on solar energy – India is committed to increase the amount of electric power from clean energy resources to 40% by 2030, Tesla’s PowerWall might find its success in India. There is a huge demand in India to store energy generated from Solar panels and Tesla’s PowerWalls will have the capability to store energy that can power an entire village.

It’s also an opportunity of Tesla to build their network of SuperChargers in the country, before selling cars. The future of solar power and electric vehicles (EV) in India are closely interdependent and Tesla must be ready to make its way to make in India.

A Bit of Coins

Video: What is Bitcoin? (v2) (Source: YouTube-WeUseCoins)

Rupee, Dollar, Euro, Pound, Yen are printed currencies and it’s certain that you might have one of them in your wallet. It’s also obvious that you could have traded them for goods and services. But, how will you react if I say that there exists a currency which you cannot see?

This virtual currency which can only be stored electronically is called Bitcoin. It’s called a coin but it’s neither a coin nor a note. Main difference between normal currencies and Bitcoin is – there are institutions or governing bodies which control or regulate these currencies. But in case of Bitcoin, it is decentralized i.e. No single institution governs the bitcoin network.

So, who created it?

Satoshi Nakamoto, a software developer, proposed Bitcoin. The whole idea was to produce an instantly transferable independent currency. Bitcoins are generated by community of ‘miners’ (which anyone can join). Talking about the transaction in conventional currencies, there are few checks which a bank does before processing a transaction, like –

  • Creating and storing a proof of the payment,
  • Does the sender actually have the amount he is sending?
  • Is sender the real owner of the money? Or confirming the identity of the sender.

Similarly, a bitcoin transaction having details like – Sender’s ID, Receiver’s ID and the Amount, is converted into a cryptographic message (a math puzzle) by a hash function and is sent to entire network of miners for verification. Here, these checks are attempted by all registered miners instead of one bank. ‘Miner’ who solves that mathematical puzzle first, gets extra Bitcoins for verifying the transaction. This process of generating bitcoins is known as ‘mining’.

According to a Bitcoin protocol there can only be 21 million bitcoins that can ever be created by miners. However these coins are divided into smaller parts and smallest part is one hundred millionth of a bitcoin. After transactions are verified, they are recorded in the transparent public ledger called ‘Blockchain’. This also means that all of the miners record and maintain all of the transactions at the same time i.e. have access to that public ledger.

Why Bitcoin?

Bitcoins are transferred from person to person, without going through any bank or clearing house. This means, fees of exchanging bitcoins is much lower than exchanging conventional currencies. Also, bitcoins can be used in every country and your bitcoin account can never be frozen. Lastly, there are no pre-requisites or arbitrary limits to use it.

Bitcoin opens up a whole new platform for innovation as the software is completely open source and anyone can review the code. It’s changing the entire finance in the same way internet changed publishing. If everyone has easy and affordable access to a global market, great ideas flourish. It’s a great way for businesses to minimize transaction fees. It doesn’t cost anything to start accepting them. The system is easy to set up plus you get additional business from the Bitcoin economy.

Originally Written by Saurabh Arora

Saurabh Arora is currently pursuing PGDM at Great Lakes, Chennai. He was a Corporate Trainer at Infosys and carries a rich experience in technolgies managing IT infrastructure. He did his summer internship at JP Morgan. Follow him on Twitter @Saurabh_Xtro

Inflation: Part – 2

Video: Raghuram Rajan uses ‘dosa economics’ to explain inflation (Source: YouTube)

Let me continue from where I left. When the government prints excess money, the value of the money comes down. Let us take a real life example. After the World War I, to reconcile from the war and to fight inflation, Austria had run the printing press almost 24 hours, thinking that the offset can be made by just giving hot cash. The prices rose non-linearly, and at one point in time, the inflation had crossed way beyond 100%. 500,000 Crone was a denomination! This is called hyperinflation which is an inflation spiral and everything will be in tantrums. How to resolve the issue of inflation then? The answer is not that simple and has various approaches.

One way is by Government intervention. During inflation, there is an underlying excess of money circulation. To plug that the Government raises the deposit rates. So instead of spending, people would intend to save. Another approach is to control the prices of other commodities in the basket. In our example of a pen, let us say the price of food grains has come down substantially. So, the increase in the price of wheat can be transferred to the price of other food grains which have fallen below the expected value. The above solution could only be possible, if both the grains that are being are in surplus with the host country and both are complementary. The above solution is complex and hence would be avoided in most cases. There are two indices for the measurement of inflation called CPI and WPI, which will be dealt separately. Someone now may ask, what if the Government does not intervene and allow the market to stabilize on its own. This will be in the third article separately.

Another major problem, of inflation is that the supplier/manufacturers would not be able to gauge the markets to a large extent. The fluctuations can also take them on a ride and inventory management would be a difficult task. The instability will penetrate to the bottom of the economy with great viciousness.

The other major issue of inflation is the fall in exports. This is very futile and the Current Account can go for a toss. Note: Current Account Surplus/Deficit= +_ (Exports – Imports). The Current Account value may not sound impactful to some of you. Let me elaborate. The Governments borrows money from other governments for various purposes such as investments and bonds. One of the main indicators of the same is the Credit Ratings. The more instable the country is, the more hopeless the credit rating. Inflation can be a curse and hence the investments to the home country can reduce. This causes a cut down in growth and job opportunities go bust and entire economy comes to a standstill. No FDI and FII. The magnitude of the problems due to inflation is unimaginably impactful.

Dr. Rajan used “Dosanomics” (YouTube link provided below) to explain inflation to help people understand the gravity of the issue. Inflation is measured YOY (Year on Year) and this impacts the calculation of GDP. Let me not get too technical to bore further!! The main question of whether the Government has to intervene or not? Consequences of the same? Will be discussed in the last article on inflation.