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

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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

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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

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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”.

Contemporary Love story – Emerging Markets and Companies

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“Think Rich, Grow Rich” is growing into an effervescence vitriol of “Think Emerging Markets, Grow Rich” for many companies. At least at this point in time, the statements seem to be right. MNCs such as Walmart, Amazon, Microsoft, Google and a plethora of them have been venturing into the “realm of emerging markets (EM)”. So, why are these companies venturing into these nations? And, what makes these gain brownie points over the rest?

These are the countries whose growth has been largely stable, thanks to the financial easing and complementing economic policies. The countries such as China, India, South Africa, Brazil, Russia (BRICS) and Nigeria are touted to be the few countries to step on a constant growing trajectory. So, the fuelling prospects are due to the raise in Education qualifications, administration ease, FDI norms and cultural acceptance. Of course to enhance the top line is the prime motto of the Cos. These aforementioned countries have been constantly growing from the past decade at an average of 5%. The growth has stagnated in the West and so in the Far East. Thus, the large honchos are looking for opportunities elsewhere.

The shift in the mindset of emerging markets amongst other economic indicators enable these companies to establish the footprint in the emerging markets. One of the statistics also reveals that roughly 38-40% of global GDP is contributed by the emerging markets. The companies have also understood the need for “Glocalization” and have tailor made resources for the same. The “Love story” started in the early 2000s when the Companies realized that as the global stability would enhance. The market size that lies vacant for them to latch onto. So till what extent should these countries continue to venture into the EMs?

The answer is difficult to predict. The customer specifications in developing and developed markets are heading towards “convergence”. The drivers here are cost and bottom line. Many Companies in China are now focusing to reduce their “solitudinal” export growth by encouraging domestic consumption. The overtly reliance on emerging markets is not really expected from these companies. The customer satisfaction in developed countries is one aspect that these Cos should consider as the market is stagnant in most developed countries. Customer once lost is difficult to gain. Whereas in an emerging markets, the scenario is a different ball game altogether. The customer acquisition and retention are required for long term growth.

Thus, is it really advisable for Cos to invest a 100 Crore or a billion dollar Capex and expect positive cash flows after 15 or 20 years?

This is where the “Cassandra Complex” (Ruchir Sharma: Breakout Nations) and Catch-22 situation would be of some use. The infusion of technology into emerging markets is rapid and the agile style is making the decision processes void in less than 5 to 7 years. Thus, the fundamental question is, shouldn’t Companies re-think “long term” as 7-10 years instead of trying to predict GDP and other economic policies with their financial statements as well. Some of the Companies are poised and braced for takeovers, M&A, amongst all odds. Stability of the country is measured with a certain leeway as it is. No one knows what the scenario might be like 10 years down the line. The prediction comes with certain T&Cs! So, should countries continue the same investing pattern in EMs in the future?

The answer is, yes. Technology, demography and politics are going to be the key drivers of economics in the next few decades till the growth plateaus out. The BRICS are no wonder more stable than many countries, but these magnates should focus on their markets through innovation for obtaining technology & cost arbitrage and garnering control in both the spaces of developed markets and EMs. The growth of EMs are also expected to hit a roof amidst the next two decades or so. So, over-reliance with long term orientation by focusing on EMs is not really a smart move. Of Course India and China are exceptions due to their large population and consumption. All in all, Emerging markets of today need not be the emergent markets of tomorrow. These markets are viable for next few years, hence the love story would prevail for at least a decade!

Originally Written by Adithya N

Walmart – A Global powerhouse in Retail

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The undisputed emperor and the biggest honcho in the world in the field of retail is, Walmart. The company has overtaken the petroleum companies, online e-commerce companies and other huge behemoths to be at the pinnacle of this planet in terms of top line with a staggering amount nearing 500 billion USD. This is more than Gross Domestic Product of some countries. The retail chain has nearly 6400 outlets in the world. The Company is known for its splendid and near flawless Supply Chain Management System. Walmart has a special docking system, called the “Cross Docking”, where the loading of products takes place directly into other containers rather than queuing them up.

What is the core value of Walmart? Walmart is primarily a retail store that provides everyday FMCG products, durables and other domestic products for the user. Its focus is to sell goods in large volumes. Walmart started in the USA and has grown into a mature family business. Economies of Scale is the key driver for Walmart. It has never deviated from its core offering, which also attributes to its list of accolades. Walmart set-up its stores a little away from cities with an excellent foresight. The team knew that urbanization is going to kick in and all the sub-urban areas would be encompassed within the city.

Walmart has grown into a large size by expansion and by acquiring dealership across the USA. They have more than half of the stores located in USA. They expanded into most of the markets by either acquisition or by setting up their own stores. They directly source their products from the manufacturer as and when the demand props up.

The replenishment of products happens online. As soon as the customer completes a purchase transaction, the SKU details would be received by the manufacturer, who can estimate the demand depending on number of such purchases. This is a unique aspect of Walmart, which many companies have not been able to do so because of their bargaining power. The mammoth sized Organization enjoys a fair share of reduction in costs due to direct backward integration. This has been translated into customer benefits in the form of reduced prices. The target market for Walmart is middle class. The rise in the middle class enabled Walmart to incessantly grow with an excellent trajectory. The Company took huge strides in understanding the customer mindset and collecting data. The Company collected data from the customers but did not trouble the customers by either stalking them or burdening them. The data was well utilized to understand the consumer insights.

Acceding the capabilities, Walmart built their distribution warehouses in the sizes of a million to two million sq feet. Thus, the number of distribution centers required is less and the size enables them to stock more items. The shipping from China and other countries are obtained through one of the biggest container fleets in the world.

Now, let us look from a consumer angle. So, why do people buy from Walmart vis-à-vis competitors?

Customers have rated Walmart better in the price and product reviews, as compared to the service. The service of Walmart has been widely criticized, but why do people still buy? The main reason being that, price conscious and price sensitive customers are primarily driven by prices rather than service. The core offering of Walmart is low prices. Walmart usually offers a penny less or sometimes, a lot lesser than the competition for the same SKU of the product. Moreover, the size of the retail, wide variety of SKUs, Logistic Planning, avoidance of shortage and convenience of buying the EDP (Everyday Products) at a single store, makes the customer a satisfied shopper and devoid of cognitive dissonance.

The customers have also got used to the brand name and are assured of the quality. The name resonates constantly in their minds. The customers can feel the items and can purchase in an ordinary retail, which cannot be replicated in an online platform with 100% perfection (AR/VR). The Topdog attitude of Walmart and its sheer presence allows them to acquire customers through Word of Mouth and promotions. The customers also love to see variety during their purchases, which Walmart has adhered to successfully.

Apart from that, Walmart also ventured into the e-commerce space a little later than others. But the irony is that, even with the Omnipresence of Amazon online marketplace and others, Walmart has surpassed everyone like a tracer bullet! Albeit being online, the majority of the managers and even buyers are pondering over one mega question. Will Amazon beat Walmart? Will Walmart be able to sustain its model?

Walmart’s foray into India would actually be a game changer for the company in the B2C segment. The deal has not been struck with the Government yet. If the Multi-brand retailing kicks in, there are high chances of Walmart, broadening their top-line differences as Indians are well-versed with retail shopping. All in all Walmart is one Company that has done exceptionally well on a Global Arena and we believe that they will continue to do so. Amazon has penetrated into the global market almost seamlessly. The displacement from Amazon is not something which is possible in the short term. The possibility might be there if Amazon goes on to provide a stellar shopping experience for the customer, but again the fundamental question arises, will it be enough to displace Walmart?

Article Originally Written by Adithya N

Book Review – Saving Capitalism from the Capitalists

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John Maynard Keynes once said “If you owe your bank a 100 pounds, you’re in trouble, but, if you owe a million, it has.” A pristine, lucid and clean structural economic organization propels the country towards superior growth and stability. The book by Raghuram Rajan and Luigi Zingales enables the reader to thoroughly understand the astute importance of the relationship between government and policy makers.

The book starts with the introduction to the world of policy making and finance citing ancient examples from the British Empire and French Empire. The writings further illustrates the example of exploitation from the “Zameendars”, citing haciendas as examples. The strategic details of Vertical integrated organizations are described to impart a key information on how a mix of both vertical and horizontal organization can balance the see-saw of economic activity in industry domain.

The book further elicits examples from the famous Grameen Bank by Mohammed Yunus as to how implicit exploitation was controlled due to financial inclusion and co-operative action. Innovation has been a game changer ever since and evolution of Junk bonds, tops the charts in innovative thinking and a sudden shift in the thought process. The importance of free market vis-à-vis crony capitalism/ relationship capitalism is clearly elucidated. The book cities examples of cartelization, the famous Credit Mobilier in France which is one of the integral part of “Financial Revolution” and many such exclusive examples from history. The examples elucidate the role of policies, government and psychology of people in a country’s economic foray is clearly scripted.

The book further goes on to illustrate the incumbent effect on competition, centralization effect and impact of open markets on the GDP of the country. The book has also highlighted the reasons for standardizing Gold and US dollar, as to why pegging is important and what happens if each country appreciates or depreciates according to its own whims and fancies. Protectionist attitude is indirectly addressed in the book, reflected in the lines on social impact of economics on the developed versus developing countries. The authors give their inputs on the role of the government in decision making and as to how, one could perhaps throw a gleam of light on resolving the Catch-22 situation i.e., how to deal with free markets?

The book is a fantastic read. Pandas would rate it 4.5 on 5. The book, rather a tome enables a common man with a betel nut exposure in economics appreciate the scenario and ponder over the juggernaut of capitalism in the world. May it be technological disruption or any other process oriented disruption, the probability of an investor/capitalist being unemployed is virtually zilch!

Originally Written by Adithya N

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.

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