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Central Bank Balance Sheet Reductions – Will Anyone Follow the Fed?

Colin Lloyd

Macro

The next wave of QE will be different, credit spreads will be controlled:   The Federal Reserve may continue to tighten but few other CB’s can follow ECB balance sheet reduction might occur if a crisis does not arrive first Interest rates are likely to remain structurally lower than before 2008   The Federal Reserve’s response to the great financial recession of 2008/2009 was swift by comparison with that of the ECB; the BoJ was reticent, too, due to its already extended balance sheet. Now that the other developed economy central banks have fallen into line, the question which dominates markets is, will other central banks have room to reverse QE?   Last month saw the publication of a working paper from the BIS – Risk endogeneity at the lender/investor-of-last-resort – in which the authors investigate the effect of ECB liquidity provision, during the Euro crisis of 2010/2012. They also speculate about the challenge balance sheet reduction poses to systemic risk. Here is an extract from the non-technical summary (the emphasis is mine):   The Eurosystem’s actions as a large-scale lender- and investor-of-last-resort during the euro area sovereign debt crisis had a first-order impact on the size, composition, and, ultimately, the credit riskiness of its balance sheet. At the time, its policies raised concerns about the central bank taking excessive risks. Particular concern emerged about the materialization of credit risk and its effect on the central bank’s reputation, credibility, independence, and ultimately its ability to steer inflation towards its target of close to but below 2% over the medium term. Against this background, we ask: Can central bank liquidity provision or asset purchases during a liquidity crisis reduce risk in net terms? This could happen if risk taking in one part of the balance sheet (e.g., more asset purchases) de-risks other balance sheet positions (e.g., the collateralized lending portfolio) by a commensurate or even larger amount. How economically important can such risk spillovers be across policy operations? Were the Eurosystem’s financial buffers at all times sufficiently high to match its portfolio tail risks? Finally, did past operations differ in terms of impact per unit of risk?… We focus on three main findings. First, we find that (Lender of last resort) LOLR- and (Investor of last resort) IOLR-implied credit risks are usually negatively related in our sample. Taking risk in one part of the central bank’s balance sheet (e.g., the announcement of asset purchases within the Securities Market Programme – SMP) tended to de-risk other positions (e.g., collateralized lending from previous – longer-term refinancing operations LTROs). Vice versa, the allotment of two large-scale (very long-term refinancing operations) VLTRO credit operations each decreased the one-year-ahead expected shortfall of the SMP asset portfolio. This negative relationship implies that central bank risks can be nonlinear in exposures. In bad times, increasing size increases risk less than proportionally. Conversely, reducing balance sheet size may not reduce total risk by as much as one would expect by linear scaling. Arguably, the documented risk spillovers call for a measured approach towards reducing balance sheet size after a financial crisis. Second, some unconventional policy operations did not add risk to the Eurosystem’s balance sheet in net terms. For example, we find that the initial OMT announcement de-risked the Eurosystem’s balance sheet by e41.4 bn in 99% expected shortfall (ES). As another example, we estimate that the allotment of the first VLTRO increased the overall 99% ES, but only marginally so, by e0.8 bn. Total expected loss decreased, by e1.4 bn. We conclude that, in extreme situations, a central bank can de-risk its balance sheet by doing more, in line with Bagehot’s well-known assertion that occasionally “only the brave plan is the safe plan.” Such risk reductions are not guaranteed, however, and counterexamples exist when risk reductions did not occur. Third, our risk estimates allow us to study past unconventional monetary policies in terms of their ex-post ‘risk efficiency’. Risk efficiency is the notion that a certain amount of expected policy impact should be achieved with a minimum level of additional balance sheet risk. We find that the ECB’s Outright Monetary Transactions – OMT program was particularly risk efficient ex-post since its announcement shifted long-term inflation expectations from deflationary tendencies toward the ECB’s target of close to but below two percent, decreased sovereign benchmark bond yields for stressed euro area countries, while lowering the risk inherent in the central bank’s balance sheet. The first allotment of VLTRO funds appears to have been somewhat more risk-efficient than the second allotment. The SMP, despite its benefits documented elsewhere, does not appear to have been a particularly risk-efficient policy measure.   This BIS research is an important assessment of the effectiveness of ECB QE. Among other things, the authors find that the ‘shock and awe’ effectiveness of the first ‘quantitative treatment’ soon diminished. Liquidity is the methadone of the market, for QE to work in future, a larger and more targeted dose of monetary alchemy will be required.   The paper provides several interesting findings, for example, the Federal Reserve ‘taper-tantrum’ of 2013 and the Swiss National Bank decision to unpeg the Swiss Franc in 2015, did not appear to influence markets inside the Eurozone, once ECB president, Mario Draghi, had made its intensions plain. Nonetheless, the BIS conclude that (emphasis, once again, is mine):   …collateralized credit operations imply substantially less credit risks (by at least one order of magnitude in our crisis sample) than outright sovereign bond holdings per e1 bn of liquidity owing to a double recourse in the collateralized lending case. Implementing monetary policy via credit operations rather than asset holdings, whenever possible, therefore appears preferable from a risk efficiency perspective. Second, expanding the set of eligible assets during a liquidity crisis could help mitigate the procyclicality inherent in some central bank’s risk protection frameworks.   In other words, rather than exacerbate the widening of credit spreads by purchasing sovereign debt, it is preferable for central banks to lean against the ‘flight to quality’ tendency of market participants during times of stress.   The authors go on to look at recent literature on the stress-testing of central bank balance sheets, mainly focussing on analysis of the US Federal Reserve. Then they review ‘market-risk’ methods as a solution to the ‘credit-risk’ problem, employing non-Gaussian methods – a prescient approach after the unforeseen events of 2008.   Bagehot thou shouldst be living at this hour (with apologies to Wordsworth)   The BIS authors refer on several occasions to Bagehot. I wonder what he would make of the current state of central banking? Please indulge me in this aside.   Walter Bagehot (1826 to 1877) was appointed by Richard Cobden as the first editor of the Economist. He is also the author of perhaps the best known book on the function of the 19th century money markets, Lombard Street (published in 1873). He is famed for inventing the dictum that a central bank should ‘lend freely, at a penalty rate, against good collateral.’ In fact he never actually uttered these words, they have been implied. Even the concept of a ‘lender of last resort’, to which he refers, was not coined by him, it was first described by Henry Thornton in his 1802 treatise – An Enquiry into the Nature and Effects of the Paper Credit of Great Britain.   To understand what Bagehot was really saying in Lombard Street, this essay by Peter Conti-Brown – Misreading Walter Bagehot: What Lombard Street Really Means for Central Banking – provides an elegant insight: –   Lombard Street was not his effort to argue what the Bank of England should do during liquidity crises, as almost all people assume; it was an argument about what the Bank of England should openly acknowledge that it had already done.   Bagehot was a classical liberal, an advocate of the gold standard; I doubt he would approve of the nature of central banks today. He would, I believe, have thrown his lot in with the likes of George Selgin and other proponents of Free Banking.   Conclusion and Investment Opportunities   Given the weakness of European economies it seems unlikely that the ECB will be able to follow the lead of the Federal Reserve and raise interest rates in any meaningful way. The unwinding of, at least a portion of, QE might be easier, since many of these refinancing operations will naturally mature. For arguments both for and against CB balance sheet reduction this paper by Charles Goodhart – A Central Bank’s optimal balance sheet size? is well worth reviewing. A picture, however, is worth a thousand words, although I think the expected balance sheet reduction may be overly optimistic:   Come the next crisis, I expect the ECB to broaden the range of eligible securities and instruments that it is prepared to purchase. The ‘Draghi Put’ will gain greater credence as it encompasses a wider array of credits. The ‘Flight to Quality’ effect, driven by swathes of investors forsaking equities and corporate bonds, in favour of ‘risk-free’ government securities, will be shorter-lived and less extreme. The ‘Convergence Trade’ between the yields of European government bonds will regain pre-eminence; I can conceive the 10yr BTP/Bund spread testing zero.   None of this race to zero will happen in a straight line, but it is important not to lose sight of the combined power of qualitative and quantitative easing. The eventual ‘socialisation’ of common stock is already taking place in Japan. Make no mistake, it is already being contemplated by a central bank near you, right now.   Originally Published in In the Long Run     (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

When Government Interest Rates Go Lower than GDP Growth Rate

Colin Lloyd

Macro

Sustainable government debt – an old idea refreshed.   New research from the Peterson Institute suggests bond yields may fall once more Demographic forces and unfunded state liabilities point to an inevitable reckoning The next financial crisis may be assuaged with a mix of fiscal expansion plus QQE Pension fund return expectations for bonds and stocks need to be revised lower   The Peterson Institute has long been one of my favourite sources of original research in the field of economics. They generally support free-market ideas, although they are less than classically liberal in their approach. I was, nonetheless, surprised by the Presidential Lecture given at the annual gathering of the American Economic Association (AEA) by Olivier Blanchard, ex-IMF Chief Economist, now at the Peterson Institute – Public Debt and Low Interest Rates. The title is quite anodyne, the content may come to be regarded as incendiary. Here is part of his introduction:   Since 1980, interest rates on US government bonds have steadily decreased. They are now lower than the nominal growth rate, and according to current forecasts, this is expected to remain the case for the foreseeable future. 10-year US nominal rates hover around 3%, while forecasts of nominal growth are around 4% (2% real growth, 2% inflation). The inequality holds even more strongly in the other major advanced economies: The 10-year UK nominal rate is 1.3%, compared to forecasts of 10-year nominal growth around 3.6% (1.6% real, 2% inflation). The 10-year Euro nominal rate is 1.2%, compared to forecasts of 10-year nominal growth around 3.2% (1.5% real, 2% inflation). The 10-year Japanese nominal rate is 0.1%, compared to forecasts of 10-year nominal growth around 1.4% (1.0% real, 0.4% inflation).   The question this paper asks is what the implications of such low rates should be for government debt policy. It is an important question for at least two reasons. From a policy viewpoint, whether or not countries should reduce their debt, and by how much, is a central policy issue. From a theory viewpoint, one of pillars of macroeconomics is the assumption that people, firms, and governments are subject to intertemporal budget constraints. If the interest rate paid by the government is less the growth rate, then the intertemporal budget constraint facing the government no longer binds. What the government can and should do in this case is definitely worth exploring.   The paper reaches strong, and, I expect, surprising, conclusions. Put (too) simply, the signal sent by low rates is that not only debt may not have a substantial fiscal cost, but also that it may have limited welfare costs.   Blanchard’s conclusions may appear radical, yet, in my title, I refer to this as an old idea. Allow me to explain. In business it makes sense, all else equal, to borrow if the rate of interest paid on your loan is lower than the return from your project. At the national level, if the government can borrow at below the rate of GDP growth it should be sustainable, since, over time (assuming, of course, that it is not added to) the ratio of debt to GDP will naturally diminish.   There are plenty of reasons why such borrowing may have limitations, but what really interests me, in this thought provoking lecture, is the reason governments can borrow at such low rates in the first instance. One argument is that as GDP grows, so does the size of the tax base, in other words, future taxation should be capable of covering the on-going interest on today’s government borrowing: the market should do the rest. Put another way, if a government becomes overly profligate, yields will rise. If borrowing costs exceed the expected rate of GDP there may be a panicked liquidation by investors. A government’s ability to borrow will be severely curtailed in this scenario, hence the healthy obsession, of many finance ministers, with debt to GDP ratios.   There are three factors which distort the cosy relationship between the lower yield of ‘risk-free’ government bonds and the higher percentage levels of GDP growth seen in most developed countries; investment regulations, unfunded liabilities and fractional reserve bank lending.   Let us begin with investment regulations, specifically in relation to the constraints imposed on pension funds and insurance companies. These institutions are hampered by prudential measures intended to guarantee that they are capable of meeting payment obligations to their customers in a timely manner. Mandated investment in liquid assets are a key construct: government bonds form a large percentage of their investments. As if this was not sufficient incentive, institutions are also encouraged to purchase government bonds as a result of the zero capital requirements for holding these assets under Basel rules.   A second factor is the uncounted, unfunded, liabilities of state pension funds and public healthcare spending. I refer to John Mauldin on this subject. The 8th of his Train-Wreck series is entitled Unfunded Promises – the author begins his calculation of total US debt with the face amount of all outstanding Treasury paper, at $21.2tr it amounts to approximately 105% of GDP. This is where the calculations become disturbing:   If you add in state and local debt, that adds another $3.1 trillion to bring total government debt in the US to $24.3 trillion or more than 120% of GDP.   Mauldin goes on to suggest that this still underestimates the true cost. He turns to the Congressional Budget Office 2018 Long-Term Budget Outlook – which assumes that federal spending will grow significantly faster than federal revenue. On the basis of their assumptions, all federal tax revenues will be consumed in meeting social security, health care and interest expenditures by 2041.   Extrapolate this logic to other developed economies, especially those with more generous welfare commitments than the US, and the outlook for rapidly aging, welfare addicted developed countries is bleak. In a 2017 white paper by Mercer for World Economic Forum – We Will Live to 100 – the author estimates that the unfunded liabilities of US, UK, Netherlands, Japan, Australia, Canada, China and India will rise from $70trln in 2015 to $400trln in 2050. These countries represent roughly 60% of global GDP. I extrapolate global unfunded liabilities of around $120trln today rising to nearer $650trln within 20 years:   Source: Mercer Analysis   For an in depth analysis of the global pension crisis this 2016 research paper from Citi GPS – The Coming Pensions Crisis – is a mine of information.   In case you are still wondering how, on earth, we got here? This chart from Money Week shows how a combination of increased fiscal spending (to offset the effect of the bursting of the tech bubble in 2000) combined with the dramatic fall in interest rates (since the great financial recession of 2008/2009) has damaged the US state pension system:   Source: Moneyweek   The yield on US Treasury bonds has remained structurally higher than most of the bonds of Europe and any of Japan, for at least a decade.   The third factor is the fractional reserve banking system. Banks serve a useful purpose intermediating between borrowers and lenders. They are the levers of the credit cycle, but their very existence is testament to their usefulness to their governments, by whom they are esteemed for their ability to purchase government debt. I discuss – A history of Fractional Reserve Banking – or why interest rates are the most important influence on stock market valuations? in a two part essay I wrote for the Cobden Centre in October 2016. In it I suggest that the UK banking system, led by the Bank of England, has enabled the UK government to borrow at around 3% below the ‘natural rate’ of interest for more than 300 years. The recent introduction of quantitative easing has only exaggerated the artificial suppression of government borrowing costs.   Before you conclude that I am on a mission to change the world financial system, I wish to point out that if this suppression of borrowing costs has been the case for more than 300 years, there is no reason why it should not continue.   Which brings us back to Blanchard’s lecture at the AEA. Given the magnitude of unfunded liabilities, the low yield on government bonds is, perhaps, even more remarkable. More alarmingly, it reinforces Blanchard’s observation about the greater scope for government borrowing: although the author is at pains to advocate fiscal rectitude. If economic growth in developed economies stalls, as it has for much of the past two decades in Japan, then a Japanese redux will occur in other developed countries. The ‘risk-free’ rate across all developed countries will gravitate towards the zero bound with a commensurate flattening in yield curves. Over the medium term (the next decade or two) an increasing burden of government debt can probably be managed. Some of the new borrowing may even be diverted to investments which support higher economic growth. The end-game, however, will be a monumental reckoning, involving wholesale debt forgiveness. The challenge, as always, will be to anticipate the inflection point.   Conclusion and Investment Opportunities   Since the early-1990’s analysts have been predicting the end of the bond bull market. Until quite recently it was assumed that negative government bond yields were a temporary aberration reflecting stressed market conditions. When German schuldscheine (the promissory notes of the German banking system) traded briefly below the yield of German Bunds, during the reunification in 1989, the ‘liquidity anomaly’ was soon rectified. There has been a sea-change, for a decade since 2008, US 30yr interest rate swaps traded at a yield discount to US Treasuries – for more on this subject please see – Macro Letter – No 74 – 07-04-2017 – US 30yr Swaps have yielded less than Treasuries since 2008 – does it matter?   With the collapse in interest rates and bond yields, the unfunded liabilities of governments in developed economies has ballooned. A solution to the ‘pension crisis,’ higher bond yields, would sow the seeds of a wider economic crisis. Whilst governments still control their fiat currencies and their central banks dictate the rate of interest, there is still time – though, I doubt, the political will – to make the gradual adjustments necessary to right the ship.   I have been waiting for US 10yr yields to reach 4.5%, I may be disappointed. For investors in fixed income securities, the bond bull market has yet to run its course. Negative inflation adjusted returns will become the norm for risk-free assets. Stock markets may be range-bound for a protracted period as return expectations adjust to a structurally weaker economic growth environment.   Originally Published in In the Long Run     (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Budget Afterthought: Power to the People?

Nikhil Arora

Budget

An effective way to detect a Budget’s underlying message is by tracking moments during the Finance Minister’s (FM) speech when the Opposition’s murmur becomes an incessant wail. Today was no different.   In the end, the present government’s last Budget before Elections was what many had expected. But also, what many hadn’t.   Firstly, let us assess what came in-line. This wasn’t a Vote-on-Account; but a chronicle of achievements, a roadmap for the future envisaging the return of NDA, garnished with expected pre-poll Populism. Farmers were kept in mind second year running. Not through any structural measures (like MSP which, let’s face it, did not reap any brownie points for the government)…but rather a straightforward INR6,000 annual cash sop hitting bank accounts of all with less than 2 Hectares of land. Considering the first installment of INR2,000 may hit this financial year, the General Elections is clearly a factor.     Benefits around Fertilizers, Animal Husbandry, and Fisheries were again more “direct” in nature, in the form of higher subsidy allocations and a 2%-5% interest rate subvention for distressed Farmers. Contrast this to the ambitious broader vision which was sold twelve months back whose only remnant was a new Fisheries Department.   Commentators were on-the-money (including yours truly) in expecting the return of the Middle Class. The FM confirmed market rumours around a new threshold for tax-free income i.e. INR5L annually. Higher deductions around specified investments, benefits for Home-owners and Tenants, as well as TDS rationalizations only reinforced the Middle Class narrative.   Private Sector like last year, was forgotten again, barring minor respite for the Unorganized Sector in the form of a New Social Security Cover. Considering only INR500cr could be allocated for this year, that Scheme will for the moment operate in pilot mode. Whilst one cannot approve an almost continuous ignore of industrial reforms, at this stage in any case it would have been a case of too little and too late.    So what eluded expectations?   One can say that the government opted for sops but stopped short of defying logic, at least from a realpolitik standpoint. Fiscal Deficit breach stopped at 3.4% (vs. the initial target of 3.3%) and below the 3.5% market expectation for FY18-19. Aside from the INR20,000cr allocation for the Farmer cash inflow scheme, the remainder was a rather solemn affair. Loan write-offs and soft credit was thankfully avoided. Yes, SC/ST Welfare each received a near 30% plus envisaged increase in allocation, but for FY19-20, not the immediate present. One may term it as political grandstanding, but still not an offence worthy enough to express much fuss.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Budget Drum Roll: Presumptions at Play vs. their Underlying Probabilities

Nikhil Arora

Budget

Come Friday and last of this regime’s Budget orations - part substance-part spiel, part assessment-part conjecture, would be behind us. Facing a General Election and close misses in recent Assembly polls, the government’s intentions are naturally encumbered by Electoral forces, in addition to the usual vagaries of Markets and the Economy. High expectations from stakeholders, who royally ignore the possibility of a mere Vote-on-Account, is testament to the Budget’s essential narrative as a balancing act of sorts.   Nevertheless, it may be apt to understand the presumptions at play vs. their underlying probabilities.   Despite the Budget in general being perceived as a forward-looking vehicle, it is as much an incremental planning tool. Extrapolations from the past shouldn’t be understated. Let us hence rewind twelve months back.     Last year’s account weighed towards Farmers and Welfare at-large - aggressive push towards Minimum Support Price (MSP); enhancement of farmer credit; commitment to fisheries, horticulture, aquaculture; tribal education; medical colleges; and lastly, universal healthcare through Ayushmaan Bharat. Need I say more?   Major ignores were Private Sector and the Middle class. Personal income taxes were untouched and Mutual Fund investments were hit thanks to the return of the dreadful Long-Term Capital Gains (LTCG) for equities, which was a true travesty especially in a post RERA and demonetization world.   What has transpired since? Firstly, the areas of last year’s focus (i.e. Farmers, Welfare) have come across as blanks so-far: the implementation of MSP has failed to create a dent considering low market prices even post a good monsoon and a bumper crop, farmer distress has not really muted (least of all in popular narrative), and Ayushmaan Bharat four months in is still in pilot project mode.   Second, the areas which were anyways ignored last year (i.e. Private sector and Middle class), haven’t recovered on their own. Indian Industry is stressed, as demonstrated by record low IIP data coming out in 2018 year-end. So are markets and investment, with high crude prices wreaking havoc on and off, a continued interest rate differential w.r.t. US driving capital outflows (which would only increase with a rate cut as expected now from RBI), wide internal uncertainties driven by the NPA crisis, and external concerns thanks to the ongoing US-China trade war.   And yes, did I mention the Assembly polls misses?   Considering all these factors, and the limited time left prior to hitting Election mode, I see only one thing incoming: populism, populism, and populism!   The government is incentivized to now serve its lowest common denominator i.e. reinforce the Farmer and Welfare themes from last year with a vengeance through populist measures, and this time not omitting the Middle class. For the latter, expect income tax rationalizations, higher deductions for healthcare and investment, perhaps even removal of LTCG!? For the former…considering a rather muted to-date rise in the government’s overall subsidy bill (less than 4% over last five years), increases in fertilizer, petroleum, and wage subsidies under the rural employment guarantee scheme shouldn’t come as a surprise. Lastly, get ready for soft loans for the farm sector. Never mind the lack of requisite allocations characteristic of Interim Budgets…the “plans” will be nevertheless be announced.   Private sector, forgotten last year, shall be forgotten again – only paid lip service through the all-too-familiar chain of buzzwords i.e. ‘Make in India’, ‘Smart Cities’, ‘Startup India’ - schemes which have garnished standees at industry events but failed to mobilise real change.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

In a World of Rising Debt: Who Possesses the Greatest Risk?

Colin Lloyd

Macro

A world of debt – where are the risks?   Private debt has been the main source of rising debt to GDP ratios since 2008 Advanced economies have led the trend Emerging market debt increases have been dominated by China Credit spreads are a key indicator to watch in 2019   Since the financial crisis of 2008/2009 global debt has increased to reach a new all-time high. This trend has been documented before in articles such as the 2014 paper from the International Center for Monetary and Banking Studies – Deleveraging? What deleveraging? The IMF have also been built a global picture of the combined impact of private and public debt. In a recent publication – New Data on Global Debt – IMF – the authors make some interesting observations:   Global debt has reached an all-time high of $184 trillion in nominal terms, the equivalent of 225% of GDP in 2017. On average, the world’s debt now exceeds $86,000 in per capita terms, which is more than 2.5 times the average income per-capita.   The most indebted economies in the world are also the richer ones. The top three borrowers in the world—the United States, China, and Japan—account for more than half of global debt, exceeding their share of global output.   The private sector’s debt has tripled since 1950. This makes it the driving force behind global debt. Another change since the global financial crisis has been the rise in private debt in emerging markets, led by China, overtaking advanced economies. At the other end of the spectrum, private debt has remained very low in low-income developing countries.   Global public debt, on the other hand, has experienced a reversal of sorts. After a steady decline up to the mid-1970s, public debt has gone up since, with advanced economies at the helm and, of late, followed by emerging and low-income developing countries.   The recent picture suggests that the old world order, dominated by advanced economies, may be changing. For investors, this is an important consideration. Total debt in 2017 had exceeded the previous all-time high by more than 11%, however, the global debt to GDP ratio fell by 1.5% between 2016 and 2017, led by developed nations.   Setting aside the absolute level of interest rates, which have finally begun to rise from multi-year lows, it makes sense for rapidly aging, developed economies, to begin reducing their absolute level of debt, unfortunately, given that unfunded pension liabilities and the escalating cost of government healthcare provision are not included in the data, the IMF are only be portraying a partial picture of the state of developed economy obligations.   For emerging markets, the trauma of the 1998 Asian Crisis has finally waned. In the decade since the great financial recession of 2008 emerging economies, led by China, have increased their borrowing. This is clearly indicated in the chart below:     The decline in the global debt to GDP ratio in 2017 is probably related to the change in Federal Reserve policy; the largest proportion of global debt is still raised in US$. Rather like the front-loaded US growth which transpired due the threat of tariff increases on US imports, I suspect, debt issuance spiked in expectation of a reversal of quantitative easing and an end to ultra-low US interest rates.   The IMF goes on to show the breakdown of debt by country, separating them into three groups; advanced economies, emerging markets and low income countries. The outlier is China, an emerging market with a debt to GDP ratio comparable to that of an advanced economy.   At 81%, China’s private debt is much greater than its public debt, meanwhile its debt to GDP ratio is 254% – comparable with the US (256%). Fortunately, the majority of Chinese private debt is denominated in local currency. Advanced economies have higher debt to GDP ratios but their government debt ratios are relatively modest, excepting Japan. The Economist – Economists reconsider how much governments can borrow – provides food for thought on this subject.   Excluding China, emerging markets and low income countries have relatively similar levels of debt relative to GDP. In general, the preponderance of government debt in lower ratio countries reflects the lack of access to capital markets for private sector borrowers.   Conclusions and Investment Opportunities   Setting aside China, which, given its control on capital flows and foreign exchange reserves is hard to predict, the greatest risk to world financial markets appears to be from the private debt of advanced economies.   Following the financial crisis of 2008, corporate credit spreads narrowed, but not by as much as one might have anticipated, as interest rates tended towards the zero bound. The inexorable quest for yield appears to have been matched by equally enthusiastic issuance. The yield-quest also prompted the launch of a plethora of private debt investment products, offering enticing returns in exchange for illiquidity. An even more sinister trend has been the return of many of the products which exacerbated the financial crisis of 2008 – renamed, repackaged and repurposed. These investments lack liquidity and many are leveraged in order to achieve acceptable rates of return.   The chart below shows the 10yr maturity Corporate Baa spread versus US Treasuries since March 2007:   Source: Federal Reserve Bank of St Louis   The Baa spread has widened since its low of 1.58% in January 2018, but, at 2.46%, it is still only halfway between the low of 2018 and the high of February 2016 (3.6%).   The High Yield Bond spread experienced a more dramatic reaction into the close of 2018, but, since the beginning of January, appears to have regained its composure. The chart shows the period since September 2015: Source: Federal Reserve Bank of St Louis   Nonetheless, this looks more like a technical break-out. The spread may narrow to retest the break of 4% seen on November 15th, but the move looks impulsive. A return to the 3.25% – 3.75% range will be needed to quell market fears of an imminent full-blown credit-crunch.   If the next crisis does emanate from the private debt markets, governments will still be in a position to intervene; the last decade has taught us to accept negative government bond yields as a normal circumstance. Demographic trends have even led long dated interest rate swaps to trade even lower than risk-free assets.   A decade after the financial crisis, markets are fragile and, with an ever increasing percentage of capital market transactions dictated by non-bank liquidity providers, liquidity is ever more transitory. Credit spreads have often been the leading indicator of recessions, they may not provide the whole picture this time, but we should watch them closely during 2019.   Originally Published in In the Long Run     (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

How Vulnerable are Emerging Markets to Rising US Interest Rates?

Colin Lloyd

Macro

Emerging Market Sensitivity to US Monetary Policy – What does the Fed think?   Emerging market currencies have suffered from US interest rate increase The Dallas Fed proposes reserve/GDP ratio as a simple indicator of stress If tightening is nearly complete there may be buying opportunities in EM stocks.   In Is US Leading The Global Economy Towards A Recession?, I speculated on whether US tightening of monetary policy and the reversal of QE was causing more difficulty for emerging markets – and even perhaps Europe – than it was for the domestic US economy. I was therefore delighted to receive an update on 9th December from the Federal Reserve Bank of Dallas, entitled, Reserve Adequacy Explains Emerging-Market Sensitivity to US Monetary Policy. The authors, J. Scott Davis, Dan Crowley and Michael Morris, remind readers that ex-Chairman Greenspan made the following observations after the Asian crisis of 1997/98:   In a 1999 speech to the World Bank, Greenspan summarized the rule stating that countries should manage their external assets and liabilities in such a way that they are always able to live without new foreign borrowing for up to one year.   Personally I find the choice of one year to be a conveniently arbitrary time period, but the remark was probably more concerned with prudence, after the event, than an attempt to model the sudden-stop over time. It also ties in with the generally agreed definition of a country’s short-term debt, that which has to be repaid or rolled over within a year.   The authors go on to discuss reserve balances:   Reserves are a safety net to guard against currency instability when major advanced economy central banks tighten policy.   The burning question is, what level of reserves is necessary to insure the stability of one’s currency? The authors suggest that this should be the following equation:   FX reserves – Short-term Foreign-Currency Denominated External Debt + Current Account Deficit   Their solution is to observe daily changes in the interest rate spread between the Corporate Emerging Market Bond Index (CEMBI) and 12 month Fed Fund Futures. To relate this to the level of central bank reserves an ‘interaction term’ is constructed which describes the relationship between reserve levels and credit spreads. An iterative process arrives at a level of reserves relative to a country's GDP. One may argue about the flaws in this simple model, however, it arrives at the conclusion that a 7.1% central bank currency reserve adequacy to GDP ratio is the inflection point:   To that end, a range of possible threshold values is tested—from reserve adequacy of -10% of GDP to 20% of GDP. The threshold value most supported is 7.1% of GDP. When reserve adequacy is less than that, the sensitivity of the CEMBI spread to changes in Fed funds futures is proportional to a country’s reserve adequacy, with the CEMBI spread becoming more sensitive as reserve adequacy declines. Reserve adequacy above 7.1% doesn’t much affect CEMBI sensitivity to expectations of US monetary policy— sensitivity is similar whether reserve adequacy is 9% or 29%.   The chart below shows the level of reserves for selected EM countries since 2010, the colour coding shows in red those countries with reserves less than 7.1% of GDP and in blue those above the threshold: Source: International Monetary Fund; Bank for International Settlements; World Bank; Haver Analytics   China has maintained extremely high reserves despite maintaining fairly tight currency controls. The table above shows PBoC reserves gently declining but they remain well above the 7.1% inflection point.   Observations and Recommendations   The Fed model is elegantly simple, it would be interesting to investigate its applicability to smaller developed economies; I imagine a similar pattern may be observed, although the reserve requirement inflection point might be lower, a reflection of the depth of their domestic capital markets. I also wonder about the effect of the absolute level of interest rates and the interest rate differential between one country and its reserve currency comparator – not all emerging markets peg themselves to the US$.   This study could also be applied to frontier economies although it may not necessarily be so effective in measuring risk when the statistical basis of GDP and other statistical measurements is suspect – consider the recent upward revisions of the economic size of countries such as Nigeria and Ghana. This paper from World Economics – Measuring GDP in Africa – March 2016 – has more detail.   As part of an initial screening of EM markets for potential risk, the central bank reserve to GDP ratio is easy to calculate. It will not reveal the exact timing of a currency depreciation but it is an excellent sanity check when one is tempted, for other reasons, to invest.   Last year Turkey and Argentina both saw a sudden depreciation, but, with the Federal Reserve now indicating that its tightening phase may have run its course, now is the time to look for value even among the casualties of the Fed. India is, of course, my long-term EM of choice, but as a shorter-term, speculative, recovery trade Turkish or Argentine bonds are worthy of consideration. With inverted curves, shorter duration bonds are their own reward. Argentine 4yr bonds spiked to yield 36% in November and currently offer a 33% yield. Turkish 1yr bonds are even more beguiling, they spiked to a yield of 32% in October but still offer a 22% return. Momentum still favours a short exposure so there is time to take advantage of these elevated returns.   Originally Published in In the Long Run     (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

How Much Choice Should Consumers Have?

INSEAD Knowledge

Consumer Behaviour

Amitava Chattopadhyay, INSEAD Professor of Marketing.   The retail sector bends over backwards to give the consumer an inordinate number of product choices, and yet, does the consumer want so much variety?   Variety packs are everywhere, whether they’re multi-coloured sock packs, multi-flavour yoghurts or multi-packs of chocolate bars. Retailers believe that bundling different items together is answering consumer demand, but the reality is something else. In fact, they would do better to offer more of the same in bundled packs. We all have preferences, whether it is in terms of our favourite colour, flavour or song, and when we find ourselves in the supermarket aisles, buying in bulk, these preferences make themselves no less felt.     However, as our research shows, a lot of it has to do with how many choices we are actually making when we stand in front of the supermarket shelf.  In my paper, “The Offer Framing Effect: Choosing Single versus Bundled Offerings Affects Variety Seeking” co-authored with Mauricio Mittelman, Eduardo B. Andrade and C. Miguel Brendl, we show that when there is only one choice act to make, participants were systematically less interested in seeking variety in their product choices.    This is the case when we are looking at, for example, a six-pack of soft drinks — in order to purchase six cans, we only have to make one choice if they are packaged together — compared to buying six cans individually where we are making a choice six times over.  The implication for retailers is that you don’t have to indulge in price promotion on multi-packs because by offering consumers more of the same, they will get what they want and be happy to pay the price.   Variety is the Spice of Life   As individuals, when we have the option of making more than one choice, we tend to seek variety.   In our first experiment participants were presented with cans of Coca-Cola and Sprite and asked to select two. Of those that were asked to make two separate decisions – choosing one can each time - 62% chose two different drinks.  However when participants were asked to make one decision and choose between two packaged drinks (either two Coke, two Sprite or a can of each) only 32% chose the mixed option.   What was most interesting in our research was that of the participants who were given two choices, 12 out of 41 who had expressed a strong preference for either Coca-Cola or Sprite, made a different selection in their second choice. While none of the participants who had a strong preference and were asked to choose from the two-packs selections chose the mixed option.   In a further experiment to determine how strongly the wish to make a different choice made itself felt, we went as far to pit the amount of variety possible in the choice process against the amount of variety the participants would end up with in their set of chosen items.  Here, there was once again a comparison made between having one choice to make or two choices. One set of students was asked to choose between a high variety candy selection or a low variety candy selection, where only one decision was needed. A second group of students was asked to choose six candies in two stages. In the first stage, they were given a high variety consisting of one cherry, grape and apricot candy and then in the second stage, they had to choose between a high variety bundle of cherry, grape and apricot candies (the same as they already had) or a low variety bundle of three cherry candies.     As expected, participants avoided choosing the same thing they already had and preferred to choose something different even though ultimately it meant they had less variety in the candies they owned at the end. In the first bundled option where only one decision was made, 66% of participants ended up with the high variety offering, whereas in the two-stage decision process, only 36% of participants ended up with the high variety option.   This strong desire to feel that a different choice has been made during the choice process is good news for smaller stores and for retailers hoping to introduce new products to the market.  Customers who tend to shop in smaller stores are generally buying in smaller quantities and can more easily be captured as they will be more inclined to seek variety.   24/7   A further implication is for online retailers as our findings hint that more sales of the same item are likely to be made online compared to shopping in-store. This is because when purchases are made online, only one choice is needed per item — that of typing the number of required items in the designated spot on the screen.  This simplifies the purchase process compared to an in-store experience where multiple choices are made when purchasing single offerings. For bricks-and-mortar retailers, the emphasis should be on offering single serves, whereas online retailers should expect to sell more bundled items.   So, whether we’re looking at the question of how the products are packaged from a retailer’s point of view, or from the consumer’s point of view, one thing is clear, choices will always be there.  The important understanding for retailers is that they have the ability to bundle or separate items depending on what they want to push —and without the need to discount as originally thought.   For consumers, you should know that if you’re buying in large quantities, you can take comfort from knowing you’d be better to buy more of the same in a bundled pack with the added benefit that those pineapple-flavoured yoghurts you weren’t too keen on anyway in the multipack, will not go off in your fridge. And for consumers who tend to buy in smaller quantities, be reassured that our desire to seek variety is often stronger than our logic telling us what our preferences are.  Do we want so much variety in our shopping experience? The answer is yes and no.   Amitava Chattopadhyay is The GlaxoSmithKline Chaired Professor in Corporate Innovation at INSEAD. He is also co-author of The New Emerging Market Multinationals: Four Strategies for Disrupting Markets and Building Brands. You can follow him on Twitter @AmitavaChats.   Follow INSEAD Knowledge on Twitter and Facebook   This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2018.   (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Can A Social Beverage Save Your Life: The Good, The Bad, and The Ugly Side of Alcohol

Dr Arun K Chopra

Ship Shape

Alcohol is commonly perceived as a "social beverage" - a friendly drink to lighten up your mood, relieve tension, induce sound sleep, and to top it all...protect one from heart attacks! Could you have asked for more!   Alcohol has been part of our culture for nearly 5000 years (described as Sura in the Vedic period). According to the WHO Global Status Report on alcohol and health 2018, nearly a third of the population of the world (age 15 years or more) - a mind-boggling 2.35 billion people (about 39% of males, 25% of females) consume alcohol. This is nearly twice the population of India. Just slightly more, about 2.4 billion are abstainers, while just over 2/3 of a billion are former drinkers who have now quit. Over a quarter of the world’s population between 15 -19 years, and 1/3 to over 1/2 of the 20-24 year old group, currently drink.   Studies conducted across the globe have common findings - low to moderate drinking protects against heart attacks, and probably diabetes as well. Only high drinkers (> 4 drinks per day for men, > 3 drinks for women) have higher mortality, largely due to alcoholic liver diseases (fatty liver, cirrhosis, etc.) and rare higher volume drinkers risk the chance of a heart failure (alcoholic cardiomyopathy).     The common thread is the presence of a J-shaped curve, i.e., low to moderate drinkers are less prone to some diseases than always abstainers (non-drinkers). The risk rises once people start consuming high volumes of alcohol daily - the most consistent evidence being found for heart attacks or occurrence of Coronary Artery Disease (CAD). It would be interesting to note that some of the diseases apparently less likely in low-volume drinkers are deafness, hip fractures, common cold, dementia, cancers and even cirrhosis liver.   This concept came about from the so-called French Paradox. The French consumed large amounts of saturated fats and smoked regularly, yet had a much lesser risk of CAD than other populations. Wine was postulated to be one of the possible causes for this unexpected finding.   Guidelines have consistently permitted (even endorsed) low-volume alcohol consumption regularly as a protective measure against heart attacks (Coronary artery disease or CAD), while stopping short of recommending never drinkers to start drinking, as the data wasn’t solid enough. Red wine has been noted to have the maximum data, probably due to the presence of a compound called resvetarol, and some other compounds.     All-in-all, the overriding belief has been one of tangible benefits with modest regular consumption of alcohol, apart from its positive social implications.    No wonder, a recent study conducted by AIIMS, New Delhi, reported alcohol as the most common drug used for substance abuse. Nearly 15% of the adult Indian population were regular drinkers, 1in 5 being addicted to or dependent on it.   Independent analysts, however, found these conclusions problematic. Subjects reporting self-consumption generally tend to under-report the amount of alcohol consumed. Moreover, data on patterns of drinking and binge drinking are often missing, and several health problems associated with alcohol tend to be ignored (uncontrolled blood pressure, accidents, inter-personal violence, depression, etc.). Many studies had been pooling previous drinkers who gave up drinking, often due to diseases, in the same group as never-drinkers, further confounding the analysis.     Recently however, a shift has been noted. Since it is a little tricky to collect data on huge numbers of individuals (hundreds of thousands, followed up over several years, in different age groups) to conclude benefit or harm with social drinking, combining results of multiple studies with similar design is a common statistical method used in clinical Medicine (meta-analysis and systematic review). This provides a rather unique look into the outcomes of millions of individuals from different parts of the world.   A major such analysis in 2016 on nearly 4 million individuals found no evidence of a survival benefit with alcohol. Next year, they analysed the impact on CAD events, and failed to find solid evidence of a positive effect on nearly 3 million subjects. This analysis found a protection against heart attacks in Whites over the age of 55 with low to moderate consumption, but none in individuals < 55 years of age, or in Asians.   So, to drink or not to drink, that is the question!   This was the background for the largest ever study on alcohol in 2016. Funded by a neutral organisation (Bill & Melinda Gates Foundation), the investigators reported on the outcomes associated with alcohol consumption in 28 million individuals from 195 countries and territories (in age group 15 years to 95 and above) from 1990-2016 by the Global Burden of Disease (GBD) 2016 Alcohol Collaborators in August, 2018.   They found that alcohol was associated with a disturbing 2.8 million deaths in 2016 vs 5.5 million associated with smoking, making it the seventh largest contributor to disease and mortality. Further, in the age group 15-49 years, it was the leading risk factor for disease burden worldwide, including 12.2% of all male deaths and 3.8% of female deaths. Apart from alcoholic liver disease, its regular consumption also increased the risk of uncontrolled hypertension, strokes (clot formation or bleeding inside the brain), tuberculosis, road accidents and several types of cancers. Data for interpersonal violence was missing, and may further increase the morbidity than what is reported here.   Some protection against heart attack was found in females > 50 years of age, and males > 60 years. This showed a J-shape curve, with the maximum benefit being for low-volume drinkers, consuming < 1 standard drink per day (10 g of ethyl alcohol). However, this benefit was offset by the much greater increase in risk of the above mentioned diseases, ultimately leading to no beneficial effect.   The investigators concluded that the net amount of alcohol correlating with minimum risk of disease or mortality is zero. As guidelines continue to uphold the cardio-protective effects of alcohol, a revision is urgently needed to correct this fallacy and prevent a big chunk of preventable diseases, just as for smoking.   In summary, alcohol is not the panacea it is often made out to be. Occasional social drinking, < 1 drink per week may be acceptable and even beneficial for the heart. Regular drinking is not better for heart attack prevention, and in fact, increases the risk of multiple other health issues, totally reversing all the putative cardiac benefits.   This is a recurring column published every Sunday. Click here to view my other articles on health, nutrition and exercise.    (We are now on your favorite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

The Amazing Power of Long-Game Plan

RichifyMeClub

Investment

In 1964, Gary Flandro stated that the outer planets – Jupiter, Saturn, Uranus, and Neptune – would align in a rare pattern in the late 1970s. And NASA scientists really wanted to catch hold of such an event that occurred only once in 2 centuries - 176 years to be very precise. But how? By launching a mission that would take a road trip towards these giant marbles. In less time. With less costs involved.     Determined to not let go of this opportunity, they approached the then President of The United States, Richard Nixon, and apprised him of their plan. To their utter surprise, they received the green signal for the mission but with limits. A limit that would restrict them to visit just 2 planets at a time. That too for a short period of time. But NASA had other plans. A long-game plan.   Finally, in 1977, their eagerness came into existence.   One-by-one, two space probes were launched. Voyager 2 followed by Voyager 1 after 16 days. The former was intended to visit all 4 planets while the latter would follow a different trajectory covering Jupiter and Saturn.     Initially, these twins were commissioned for planetary exploration. But later on, their missions were extended. To explore the outer limits of the solar system. To find the traces of extraterrestrial life deep into the interstellar space. Space where no man-made object, in the history of mankind, had stepped in. NASA’s long-game plan had planned a mission within a mission.   It’s been 41 years now. Under the influence of ungrateful radiations and insane temperatures, they’re invading the deep space like never before. Beating the Sun’s gravitational pull, a lovely small space probe is still going strong at a speed of 15km/s in an insanely huge universe. By the time you scroll down to read further, it’ll complete a full marathon.   But how did NASA’s long-game plan help? Well, what the mission has uncovered so far was unknown to humans for the past many centuries. It’s the long-game plan that reported the presence of an active 350-years old giant cyclone on Jupiter, projected Saturn’s polar regions to the world, and found an answer to the unsolved mysteries that baffled even the great astronomers Galileo and Copernicus.   Let us now talk about its relevance in the field of investing.   When we start a SIP (Systematic Investment Plan), the initial contributions will never create something enormous instantly. In fact, nothing changes drastically during the initial few weeks, months, or even years. Rather, it turns out to be extremely boring. And whosoever loves staying monotonous throughout the journey!   And that’s why we love playing short games. The games that produce immediate results. Going through a summary instead of reading The Intelligent Investor. Tweeting rather than writing a blog post. Munching a Bournville instead of running on a treadmill. Short games are extremely addictive. Believing that just Rs. 5,000 a month is not going to make us rich tomorrow, we convert it into something that makes us really happy on-the-spot. We tend to overlook the potential of a paltry amount of money ribboned with a long-game plan.   The problem with the short game is that the costs are small and never seem to matter much on any given day. Saving $5 today won’t make you a millionaire. Going to the gym won’t make you fit. Reading a book won’t make you smart. Since the results are not immediate, we revert back to the short game.  ~ Shane Parish, Farnam Street   For instance, when we increase our monthly SIP amount by 5%, 10%, or even 12% every year, the end result will cease to change during the initial years of compounding. The difference in the end result between an increment of 5% and 12% seems irrelevant. In fact, it stays neck-to-neck for the first 7-10 years.   But as the game gets elongated further, this difference starts exploding. The end results start taking the shape of a snowball. The variance that looks minimal in the first place, starts growing bigger and bigger. In a long-game plan of 40 years, an annual step-up of 12% instead of 5% in a SIP of Rs.5,000 a month makes your corpus bigger by Rs.10cr. A huge disparity.   On the contrary, this variation reduces to just Rs. 4 Lakh with a short-game plan of 10 years. And much less if planned even shorter.    Source: RichifyMeClub   When days are turned into months, months into years, and years into decades, the compounding treadmill starts accomplishing higher speed. The little and tiny contributions that look unbelievably small initially, become enormous after decades of compounding. What looks extremely meaningless in a short game, becomes something that is difficult to avoid in a long-game plan.   James Clear, the author of The Atomic Habits, has written on a broad scale about forming habits with a long-game plan. As per the book, we grossly miscalculate the importance of small and little efforts that contribute towards achieving our goals. If we swim for 40 minutes for a week, we still don’t get lean. If we cook for a week, we still don’t become a skilled chef. If we write for a week, we still don’t become a prolific writer. But when continued for months and years, the results turn out to be worthy. Certainly, the long-game plan works in forming a habit too.   If we wrap our mentality of getting better with just 1% every day, we’ll end up getting 37-times better at the end of the year. And this keeps compounding year after year. The below equation by James proves that following a system with a long-game plan does benefit us immensely. Unquestionably!!!   1% better every day for 1-year: (1.01)365 = 37.78 1% worse every day for 1-year: (o.99)365 = 00.03 James Clear, The Atomic Habits   Kathleen Magowan, despite being a teacher for 35 long years, amassed a fortune of $6 million. Throughout her life, she never attracted anyone’s attention. She lived frugally in the same inherited house. Sweet. Compassionate. She always preferred to maintain a low-key profile. Surprisingly, after her death in 2011, it was revealed that even her Quaker Oats boxes were worth $183K as they contained the savings bonds of the 1940s and 50s. Yes, she invested with a long-game plan.   Same goes for Anne Scheiber, who built a massive corpus of $22 Million despite living on a pension of $3,100. Yes, she invested with a long-game plan. And just like Voyager 2, Warren Buffett is still going strong even at the age of 88. Yes, he has been investing with a long-game plan since the age of 11.   Originally Published in RichifyMeClub.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Storytelling: More Than a Presentation Tool

INSEAD Knowledge

Culture

By Roger Jones, CEO, Vantage Hill Partners   How a Story Can Make a Strategy Come to Life.   We all love a good story. Perhaps for you it’s the suspense and rollercoaster of emotions of an action movie or the page turning intrigue of a novel. We can’t wait to see what happens next as we immerse ourselves and drift into another world.   Many executives too have discovered the power of leadership storytelling, but most only see stories as a tool to bring presentations to life. And many leaders find greater comfort just using logic. However, when used wisely stories can be employed to engage with your stakeholders emotions, change attitudes and behaviors, and, importantly, make change happen.   Learning Stories   I recall Sandra (not her real name), a recently appointed CEO of a technology company. When we first met she expressed her frustration that the changes she needed to make were not happening as smoothly or as quickly as she’d hoped, everything from getting her senior managers to implement the culture change needed through to her top team supporting her future plans.   Sandra then shared her plans with me. They looked really well thought through: detailed analysis of competitors, market trends and financials, a clear customer value proposition. To her it was all reassuringly data driven and she wondered why resistance to them was so rife.   I then asked her how her children learnt about the world when they were young. She was silent for a few moments and I think a little perplexed why I should ask such a question when what was top of her mind was getting things done in her business. Her response was one word: stories. Sandra then rattled off the names of a number of books she remembers her children reading, Topsy and Tim Go To The Dentist and Peppa Pig: Recycling Fun.     We then spoke about why these and other stories helped her children develop. We explored topics such as how stories helped her children put their world into context, showing them how things work, how we relate to each other and feel comfortable with new experiences. A broad smile appeared on Sandra’s face when she told me how one day when her son was four years old, she remembered walking into his bedroom to see him tidying up, a first for him. He told his mum he was doing this as a character in a story he’d seen tidying their bedroom. At this point Sandra laughed and said stories even inspire action.   It was then that Sandra had what can only be described as her light bulb moment. She declared she was a ‘logic junkie’ (her words not mine) and hadn’t thought of how she might use narratives for business aims. Then she asked,   How can I use stories to inspire change, when all my creative juices were sucked out of me way back in my career.   Becoming a Storyteller   A reasonable question, to which I responded:    How would a documentary film maker explain your culture change to senior managers or your future plans to your top team; how would an artist, a creative writer, a teacher or a customer do the same?   This type of thinking was new for Sandra, and it took her a little time to become playful and share her random ideas. Over a short period of time we lifted her future plans off the page and turned them into a future story that she shared with her top team who, although they had many questions, seemed to feel comfortable with her vision.   Between us, we thought of how we might describe the story of the culture change, and devised a framework for her senior managers to create the story themselves so they felt a greater sense of ownership.   At first, Sandra felt nervous using storytelling rather than her more customary factual approach, but when she saw how facts can be wrapped in the narrative to make them more memorable, and how resistance to her initiative was beginning to melt away her nervousness evaporated.   Sandra started to see other benefits too. She felt there was greater trust in her top team after our away day in which team members disclosed experiences from their early life that had shaped their leadership values. The business development teams' results also improved by weaving stories into their traditional sales approach.   Clearly to achieve all these positive results Sandra brought other approaches into play such as fair-process and adopting a participative style, but she gives a significant amount of credit down to her adopting a storytelling approach.   If using the narrative is something you seldom do, then the first step in becoming an effective leadership storyteller is to use your personal experiences. Here are some dos and don'ts to help get you started:   1. Draw a straight line on a sheet of A4 paper and mark your age from birth to today on it. Then note down on the time-line experiences you can remember and what you learnt from each, these might be anything from something a teacher said to you, through to what you learnt if you failed your first driving test.   2. Select three or four experiences that were significant for you and that you will be happy to share, though nothing boastful.   3. Now, craft these experiences into stories by putting them into this structure: introduce the characters; begin the journey; have an element of surprise or a point that made you have a light bulb moment; then resolve the story. Finally, share with your audience what your learnt as a result of the experience.   4. Think how you might use each story. Perhaps one will help encourage change, another trust or collaboration, and so on.   5. Keep your story short. Three minutes is long enough.   6. When sharing your story tell people how you felt during the experience.   As you start to feel comfortable using your personal stories, you might then like to think how you can bring your company vision, strategy or company values to life using organizational stories.   Roger Jones is an executive and top team coach, and author of The Storytelling Pocketbook.  An alumnus of INSEAD’s EMCCC, the Financial Times have featured his leadership storytelling work.   Follow INSEAD Knowledge on Twitter and Facebook.   This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2018.   (We are now on your favorite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Right on Cue

University of North Carolina Kenan-Flagler Business School

Culture

Most of us do our best to act ethically – right? Turns out, it depends on the situation.   Research by Sreedhari Desai, an organizational behavior professor at UNC Kenan-Flagler Business School, shows that behavior is influenced by factors beyond our intrinsic morality.   Environmental cues, how work is structured, stress and anxiety influence how we behave. Some factors prompt people to be more moral, some less so.   “One of the primary assumptions of economics is that all human beings are rational, utility maximizing agents,” Desai says. But voluminous research — and day-to-day observations — show that other factors influence our decisions.   “People don’t just behave self-interestedly,” she says. “They give money to charity, for instance. Clearly there is something apart from self-interest that motivates human behavior.”   Companies have long relied on monetary incentives — such as pay raises, bonuses and commissions — to motivate employees. And a quick review of news headlines reveals many cases where monetary motivations won out and people crossed ethical and legal lines.   Desai’s research suggests that businesses can nudge employees in more ethical directions. In lab experiments and field studies, she and colleagues at Harvard Business School and Northwestern University discovered that subtle cues can influence people to behave more morally and unearthed factors that might cause people to behave less ethically.   Accountability reduces bad behavior. Moral symbols and thoughts of childhood cue people to act in more moral ways. Stress and anxiety make people more likely to behave unethically.   Accountability and Ethics   When companies build accountability into their processes, employees are more likely to act morally. Desai’s research shows that something as simple as how services are billed— whether in a legal office or an auto-repair shop – can influence whether customers are charged a fair price or are overcharged.   Among the studies that Desai and Northwestern’s Maryam Kouchaki conducted was a field experiment involving auto-repair garages in Boston. A research associate called 94 shops to ask for a quote on replacing brake pads. Half the garages were asked for a total estimate, while the other half were asked to quote the cost of labor and parts.   The garages that gave estimates broken into labor and parts components quoted an average of $229.13 for the work. The garages that were asked for the total cost quoted an average of $265.76 — almost 16% higher.   “Most companies don’t actually think about the ethical implications of something as simple as asking for a unit report versus a cost report,” Desai says. Unit-reporting strategies could be helpful in suppressing unethical behavior in the form of overbilling – a finding that could apply to companies that bill for services hourly, as well as those that price products or services by adding different work components together.   Stimulating a Moral State of Mind   Desai and her colleagues looked at how various cues — from religious symbols to childhood memories — affect moral behavior.   In lab studies conducted with Harvard University’s Francesca Gino, they asked people to write short essays about their own childhoods and then measured how likely they were to donate money to a good cause or to punish a wrongdoer in a hypothetical scenario.   Compared to control groups that wrote essays about neutral topics – such as grocery shopping – people who wrote about childhood memories were more likely to behave in a pro-social way and indicated they would punish a wrongdoer more harshly.   Their findings suggest that thinking about one’s childhood can produce feelings of moral purity and nudge people toward more moral behavior. Since children aren’t a common presence in most businesses, Desai suggests that companies can encourage more ethical behavior by including childlike elements in the workplace. Colorful, playful office décor, for example, might remind employees of childhood and prompt them to behave more ethically.   Moral symbols — from quotes in email signatures to pictures of religious figures – are another prompt to lead people to behave more ethically. Desai found that supervisors were less likely to ask their employees who displayed religious symbols to do something unethical.   Her research demonstrates how the work environment can send subtle messages to employees about what’s important and how they should behave. It also suggests that actions such as changing a company’s values statement can send subtle cues that affect how people behave.   Stress, Anxiety and Moral Choices   To understand the role stress and anxiety play in ethical behavior, Desai and Kouchaki ran several lab experiments using music – specifically, the theme song from the Alfred Hitchcock movie “Psycho” – and video clips to induce anxiety in some participants.   In one experiment, they found that participants who were exposed to an anxiety-inducing video clip were more likely to cheat to win money while playing a simple computer game. Their findings suggest that when people feel stressed and anxious they become more defensive and alert to external dangers and are less likely to consider ethical or moral reasons when making decisions.   “Our studies indicate that organizations wanting to preserve a strong code of ethical behavior should consider taking steps to reduce anxiety or otherwise shore up employees’ moral reasoning,” says Desai.   Taken together, Desai’s research findings can be used to prevent bad behavior in the workplace while prompting employees to be more ethical. As Ben Franklin once said, “An ounce of prevention is worth a pound of cure.”   This article originally appeared in the R.O.I. Research Magazine published by UNC Kenan-Flagler.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

The Bitter Side of Sugar, Substitutes, SSBs and Sports Drinks: Essential or Avoidable?

Dr Arun K Chopra

Healthcare

How do Energy Drinks like Monster, and sugar free drinks like Diet Coke measure up as fitness drinks? Are they a “must-have” or just overhyped marketing stunts?   Sugar is often regarded as one of the most addicting, as well as harmful substances available to mankind. High intake of sugar is often associated with obesity, and related lifestyle diseases like diabetes, heart disease, high triglycerides, high blood pressure, dementia and even cancer. An average American consumes over 100 pounds of sugar in a year, highlighting the urgent need for recognition of this risk (US tops the list of per capita sugar consumption globally, followed by Germany and Netherlands). India finds itself at at the bottom of these sugar consumption charts, which could probably be attributed to the fact that a large chunk of the population living in villages does not have access to sugar-sweetened beverages (SSBs) or desserts.     Largely, our continued obsession with the sweet taste stems from the myth that sugar calories are nothing but “empty calories”, a rather benign indulgence. Nothing could be further from the truth.   A study in Circulation 2015 estimated the number of deaths attributed to consumption of sugar-sweetened beverages (colas, sweetened juices, energy drinks, etc.) alone at approximately 184,000 in the year 2010, nearly 3/4th of it due to diabetes and the rest due to heart disease and cancer. Now add into the mix cakes, pastries, pies, sweets, ice creams, cereals, sweetened yogurts, and other sugar-laden goodies. The impact is mind-boggling. Hence it comes as no surprise that we not only continue to hog on these foods, we addict our kids to sugar as soon as they can eat or drink anything other than mother’s milk.   The addiction potential of sugar is linked to brain reward mechanisms. Rats are likely to work much harder to get sugar rather than cocaine. Leading health organizations such as the WHO recommend restricting added sugars in diet to under 10% of total calories consumed per day (6 tsp per day for females, 9 tsp for males). Presently, the average American eats over twice as much daily. These recommendations are based on the fact that reducing consumption or avoiding sugars altogether have shown beneficial changes in the blood pressure, body weight, blood sugar and lipid levels.   It’s also necessary to understand that sweets aren’t our sole source of sugars. These have invaded all modern diet - found in most unexpected foods such as soups, sauces, ketchup, crackers, and even in bacon and most salad dressings. And despite the prevalent belief that sugar doesn’t lead to diabetes, the occurrence of diabetes has gone up 4 times globally from 1980 to 2015, 1980 being the year when US Govt. restricted saturated fats and promoted a compensatory increase in carbohydrate intake.     Realizing the adverse effects of added sugars, sugar substitutes were welcomed with open arms by the people as well as the Food industry. There are around five approved substitutes including saccharin, acesulfame, aspartame (Equal), sucralose (Splenda) and stevia. The first influence of these agents is to make one hungrier, with people consuming Diet Cokes ending up eating more than those drinking Coke. Sweeteners like these are known to worsen insulin resistance- increasing the risk for developing diabetes, they may be carcinogenic, and could even disrupt the normal gut microbes. Furthermore, they cause neurologic imbalances leading to hyperactivity, sleep disturbances and glucose intolerance. Studies done by independent researchers (i.e., not funded by industry) found no proof to suggest significant weight loss with the use of artificial sweeteners. Acceptable sweeteners include limited amounts of stevia, date sugar, maple syrup and honey.   The next question is: What is the best beverage then, considering the ill effects of sugar and its substitutes?   The answer is of course, plain clean water. Perhaps the best source would be an RO plant installed in your kitchen.   But as people get tired of drinking water, we need to know about other safe beverages. Black or green tea are probably the best. They have a great flavor, and are loaded with healthy anti-oxidants. Additionally they carry no calories if taken without milk and sugar.      Once considered harmful, coffee has seen a resurgence of late. Its consumption has been associated with health benefits like reduction in heart disease, dementia, cancers and in some cases even improved survival. Coffee is the largest source of anti-oxidants for the average American. However, it has large amounts of caffeine (a stimulant), usually with big helpings of milk and sugar, adding to its calorie content (the average Starbucks cappuccino without sugar has 120 kcal, while a latte has 190 and a mocha 290; cold coffees are even worse). So while coffee is not a health hazard as it was once feared, it’s also not a source of healthy nutrition either, a reasonable consumption (1-4 cups a day) is advised.   Fruit juices aren’t any different either. They lack the useful fiber found in fruits, have a much higher glycemic index and glycemic load, and are likely to cause high triglycerides, uric acid, body weight and visceral fat, if consumed in large amounts regularly. It’s much better to consume fruits instead.   Sports drinks are another great myth. Red Bull is the king of all energy drinks, with an estimated 6.8 billion cans sold worldwide in 2018. It contains caffeine, taurine, sucrose and other chemicals. Its competitors Mutant has over twice as much sugar, while Gatorade has much higher quantities of sodium. To put it simply, these provide a kick which is not really needed by most athletes. But these companies use extensive marketing-even having competitions named after their energy drinks in order to create a huge brand, leading to unnecessary consumption.   In summary, sugar is best avoided, as are sweeteners: water is the best beverage for most people who exercise and definitely for those who don’t. Among others, black/green tea is the best, followed by coffee (both unsweetened). Sports drinks are over-hyped. There is no evidence to prove their benefits, and instead add several potentially toxic chemicals to our diet.    This is a recurring column published every Sunday under the title: What is Nutrition.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Fending Off Disruption: Incumbent Strategies for Digital Transformation

Prof Sia Siew Kien

Digital

With all the hype about technological disruption, companies are scrambling to jump onto the digital transformation bandwagon. An international Ernst & Young survey, conducted on over 900 companies in 2017, shows that 90% of these companies are elevating digital priorities in their strategic planning over the next two years. But more digital initiatives do not mean stronger transformation strategy. You need to understand the tech disruption scenario in your specific context when you formulate an effective and targeted transformation strategy.     Clarify your Specific Tech Disruption Scenario   According to Professor Ron Adner (Tuck School of Business at Dartmouth College) and Rahul Kapoor (The Wharton School at the University of Pennsylvania), a specific disruption scenario is the unfolding of competitive forces between the new and the old technology ecosystems.   The greater the challenges (e.g., industry resistance, regulatory constraints) confronting the new technology ecosystem, the slower the disruption. The more positive the improvement prospects of old technology ecosystem, the more incumbents will remain relevant and competitive. The different competitive dynamics would yield four disruption scenarios - creative destruction, illusion of resilience, robust coexistence, and robust resilience.     Creative destruction will take place very rapidly, where the new tech ecosystem is emerging fast, and the old tech ecosystem is no longer relevant.   Illusion of resilience is a period of inactivity followed by rapid disruption, where the old tech ecosystem is no longer relevant but the speed of new tech ecosystem emerging is slow such that incumbents will continue its dominance until new entrants resolve emergence challenges.   Robust coexistence occurs when incumbents and new entrants each have their respective advantages because the new tech ecosystem is emerging fast and the old tech ecosystem is still relevant.   Robust resilience is the best scenario for incumbents, where the old tech ecosystem continues to be relevant and the speed of new tech ecosystem emerging is slow.   Align Your Digital Transformation Strategy   In the Creative Destruction scenario, passive participation is most sensible as it is too late for incumbents to develop new capabilities and old tech ecosystem is no longer relevant. Refusal to acknowledge the reality can be costly. For example, to counter the rapid rise of mobile payment in China (e.g., AliPay and WeChat Pay), ICBC, China’s largest bank, invested aggressively in its own payment app and e-commerce site, but still failed to challenge the dominance of these disruptors. Instead, incumbents should focus on their niches to do what they do best, and ensure that they are readily connectable to these platforms to participate in the growth of the disruptors.     In the Illusion of Resilience scenario, incumbents should focus on preemptive reinvention. This is what DBS Bank has done. To preempt disruption of its core retail banking business, it embarked on a radical tech transformation to ramp up its digital capabilities to be like a tech giant. It invested heavily on its people to be a 22,000 person startup. It also disintermediated itself to “make banking invisible” by embedding itself in the lives of its customers.   However, preemptive reinvention is still a defensive strategy. DBS is only getting itself on par with the tech disruptors in terms of new capabilities. With the disruptors’ entrance into Singapore (e.g., Ant Financial and Grad Pay), the competitive battle is still out there to be fought. But DBS would be so much more ready to compete with these disruptors now.   Under the Robust Coexistence scenario, incumbents still have some relevant old capabilities but have no time to develop new capabilities. On the other hand, disruptors have new capabilities, but they need access to some old resources. Since they each have a piece of the puzzle, incumbents should seek to develop a win-win strategic collaboration with the disruptors.   Citibank, for example, has accumulated deep global treasury management expertise in enterprise banking, but it lacks new digital capabilities. Its strategy was to actively seek partners with complementary capabilities. KJ Han, Chief Executive of Citibank Singapore, coined the term “fintegration” and noted that banks will need to become extraordinarily adept at integrating the best fintech innovations into their operations.                                                                Finally, in Robust Resilience, incumbents have the opportunity to entrench their competitive position through platform transformation, given their advantageous positions. For example, Ping An, China’s second largest insurance provider, went beyond reimbursement for social health insurance to build a digital ecosystem that integrated relevant healthcare services around its customers. Ping An Health Cloud facilitated sharing of patients’ electronic medical records across stakeholders (i.e., patients, clinics, insurance providers, government). Ping An Good Doctor enabled online medical consultation and Ping An Wanjia offered offline healthcare services linking to thousands of clinics. The transformation leveraged its strong incumbent advantages - high quality medical data, extensive hospital network, and massive user base.   Measure Your Digital Transformation Efforts   There is no one-size-fits-all digital transformation strategy. Ask these two questions:   Which tech disruption scenario are you encountering?   What should be the focus of your digital transformation strategy?   Such clarity should help you establish appropriate measures to track the progress of your transformation efforts (e.g., KPIs for “platform transformation” versus “preemptive reinvention”).   The truth is that your digital transformation efforts will be scrutinized! Unlike venture funding for startup disruptors, investments for incumbents’ digital transformation must come from its traditional businesses. You need to continuously justify the resource bridging from the old to the new. Having little to show after pouring in huge sum of money is the surest way to kill such transformations. You need to demonstrate real business value as you progress along.   Co-written with Mou Xu   About the authors   Sia Siew Kien is associate professor of Information Technology and Operations Management at Nanyang Business School at NTU Singapore while Mou Xu is research associate at the business school’s Asian Business Case Centre.   (We are now on your favorite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Inside Epic Games' Fortnite Battle Royale: Is "Free to Play" the Way to Go?

Prince Thomas

Digital

Fortnite has lately emerged as the poster child for the video gaming industry, having established itself as a cultural phenomenon within the community in a very short time. Even leading entertainment outlets such as Netflix now recognize it as competition.   With c. 200 million registered players, Fortnite was the biggest earner amongst video games, making $2.7bn of  revenue in 2018, as per Analyst firm SuperData. This is the highest annual earnings for any game, ever! The significance of this achievement is only escalated when one considers the fact that Fortnite is a "free to play" game and requires no initial investment from the consumer’s side.   Designed around a "games as a service" philosophy wherein games are viewed as a service rather than a product, somewhat like Hotstar which with its freemium model helps you enjoy select content free of charge, while members who pay get get access to exclusive content.     Along similar lines, Fortnite releases content on a regular basis in the form of battle-passes. The release of these passes are spread out over multiple seasons throughout the year and contain cosmetic items that alter the appearance of your character and weapon models. These cosmetics can be purchased via the in-game currency namely “V-bucks”, obviously exchangeable for real life money.   Paid vs Free   To put things into perspective, PUBG, the top earner in the premium games category earned around $1bn in  revenues  in 2018.   Note, premium games are those for which you need to pay an upfront cost, while free to play games are those that require no initial investment (like Fortnite).   Thereby vs. free to play games, PUBG doesn’t even make it to Top 10. Yes! There are more than 10 free to play games making more than $1bn in 2018 as compared to only one  in the premium list.   It has to be noted that while PUBG is a $20 title, it is also offered as a free to play version. In fact, a substantial portion of the money PUBG earned came from its free version that was released on mobile platforms. If we take away this portion of the revenue, PUBG won’t even cross the billion dollar mark.     An Example   The success of Fortnite and other similar free to play games has attracted attention of big players within the industry. There is a moving  focus towards games as a service model with a free to play "in-game economy".   A prime example of this shift would be publisher Electronic Arts’s latest release APEX Legends, one of Fortnite’s prominent competitors. The game was launched as free to play title in early February with zero publicity. Within a week of the launch, it snagged  over 25million registered players. Their shares surged more than 16% - their best single-day gain in more than four years.   Yet another example would be that of publisher Valve who launched a free to play version of their popular shooter CS:GO in 2018. This shifting trend is likely to continue throughout 2019 with more and more multiplayer titles like Unreal Tournament and Total War going the free to play way.   Will It Work?   Fortnite’s success bears testimony to the fact that free to play model can work and work rather well.   For multiplayer games that make most of their revenue through in-game transactions, charging for the game upfront makes little sense as it limits accessibility for potential players who might have tried the game had it been free of cost. Think of it this way, would 200 million players have bought Fortnite if they had to pay $20 for it? Would it bring in the same amount of money as it is bringing in now?   Shifting towards a free to play model would  allow publishers to reach a wider audience, which in turn will lead to increased customer engagement which in turn is bound to increase profits.   But Not Without its Challenges   Apart from the success that the free to play model brings in, it also brings with it its own set of problems. A free game like Fortnite will have more trouble keeping its player base engaged than a developer who has already charged an upfront cost. These games need to keep releasing content on a regular basis to prevent the formula from going stale. Also as the developer of a new “free to play” game, you run the risk of your game not being recognized among an ocean of similar releases. The more crowded the market gets, the more difficult it will become for the game to find an audience.     Conclusion   Is a company following Fortnite’s footsteps likely to enjoy the same amount of success? Not necessarily. Fortnite is a different beast in itself, it provides an environment for social interaction like none other. You can think of it as a Facebook for gaming. You log in at any time of the day, find your friends online and have a fun  time with them. But this time, the fun is more interactive and that’s what keeps bringing people back for more. The cosmetic system allows users to create unique designs for their characters and show it off to the world – a bit like Instagram this time .   There have been many attempts to replicate the Fortnite formula, but until now, none has succeeded. Additionally the developer, Epic Games also puts in considerable amount of resources in the analysis of player data obtained through feedback to constantly evolve the game into something that the players want. This truly highlights their achievement in keeping their large customer base engaged since the game’s release.   The benchmarks set by Fortnite might be hard to replicate as it launched into a market which had a demand, but offered little competition. However, that’s not to take away from the fact that free to play titles can’t succeed in crowded markets. Take for example League of Legends - a free to play game launched in 2009. The game brought in around $1.4 billion in 2018 in a market crowded with similar games.   Thanks to Fortnite, gaming has gone from being a niche market to a mainstream one, with more players coming in every day, bringing in different tastes and preferences on the type of games they like to play. This provides the publishers with enough breathing room to make good money without stepping on each other's toes. Video Games taking the free to play route will have an opportunity to attract a wider audience, all the while bringing in more money.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

The Strategic Decisions That Caused Nokia’s Failure

INSEAD Knowledge

Tech

By Yves Doz, INSEAD Emeritus Professor of Strategic Management   The moves that led to Nokia’s decline paint a cautionary tale for successful firms.   In less than a decade, Nokia emerged from Finland to lead the mobile phone revolution. It rapidly grew to have one of the most recognisable and valuable brands in the world. At its height Nokia commanded a global market share in mobile phones of over 40%. While its journey to the top was swift, its decline was equally so, culminating in the sale of its mobile phone business to Microsoft in 2013.   It is tempting to lay the blame for Nokia’s demise at the doors of Apple, Google and Samsung. But as I argue in my latest book, "Ringtone: Exploring the Rise and Fall of Nokia in Mobile Phones", this ignores one very important fact: Nokia had begun to collapse from within well before any of these companies entered the mobile communications market. In these times of technological advancement, rapid market change and growing complexity, analysing the story of Nokia provides salutary lessons for any company wanting to either forge or maintain a leading position in their industry.     Early Success   With a young, united and energetic leadership team at the helm, Nokia’s early success was primarily the result of visionary and courageous management choices that leveraged the firm’s innovative technologies as digitalisation and deregulation of telecom networks quickly spread across Europe. But in the mid-1990s, the near collapse of its supply chain meant Nokia was on the precipice of being a victim of its success. In response, disciplined systems and processes were put in place, which enabled Nokia to become extremely efficient and further scale up production and sales much faster than its competitors.   With a young, united and energetic leadership team at the helm, Nokia’s early success was primarily the result of visionary and courageous management choices that leveraged the firm’s innovative technologies as digitalisation and deregulation of telecom networks quickly spread across Europe. But in the mid-1990s, the near collapse of its supply chain meant Nokia was on the precipice of being a victim of its success. In response, disciplined systems and processes were put in place, which enabled Nokia to become extremely efficient and further scale up production and sales much faster than its competitors.   Between 1996 and 2000, the headcount at Nokia Mobile Phones (NMP) increased 150% to 27,353, while revenues over the period were up 503%. This rapid growth came at a cost. And that cost was that managers at Nokia’s main development centres found themselves under ever increasing short-term performance pressure and were unable to dedicate time and resources to innovation.   While the core business focused on incremental improvements, Nokia’s relatively small data group took up the innovation mantle. In 1996, it launched the world’s first smartphone, the Communicator, and was also responsible for Nokia’s first camera phone in 2001 and its second-generation smartphone, the innovative 7650.     The Search for an Elusive Third Leg   Nokia’s leaders were aware of the importance of finding what they called a “third leg” – a new growth area to complement the hugely successful mobile phone and network businesses. Their efforts began in 1995 with the New Venture Board. But this failed to gain traction as the core businesses ran their own venturing activities and executives were too absorbed with managing growth in existing areas to focus on finding new growth.   A renewed effort to find the third leg was launched with the Nokia Ventures Organisation (NVO) under the leadership of one of Nokia’s top management team. This visionary programme absorbed all existing ventures and sought out new technologies. It was successful in the sense that it nurtured a number of critical projects which were transferred to the core businesses. In fact, many opportunities NVO identified were too far ahead of their time; for instance, NVO correctly identified “the internet of things” and found opportunities in multimedia health management – a current growth area. But it ultimately failed due to an inherent contradiction between the long-term nature of its activities and the short-term performance requirements imposed on it.   Reorganising for Agility   Although Nokia’s results were strong, the share price high and customers around the world satisfied and loyal, Nokia’s CEO Jorma Ollila was increasingly concerned that rapid growth had brought about a loss of agility and entrepreneurialism. Between 2001 and 2005, a number of decisions were made to attempt to rekindle Nokia’s earlier drive and energy but, far from reinvigorating Nokia, they actually set up the beginning of the decline.   Key amongst these decisions was the reallocation of important leadership roles and the poorly implemented 2004 reorganisation into a matrix structure. This led to the departure of vital members of the executive team, which led to the deterioration of strategic thinking.   Tensions within matrix organisations are common as different groups with different priorities and performance criteria are required to work collaboratively. At Nokia, which had been acccustomed to decentralised initiatives, this new way of working proved an anathema. Mid-level executives had neither the experience, nor the training in the subtle integrative negotiations fundamental in a successful matrix.   As I explain in my book, process trumps structure in reorganisations. And so reorganisations will be ineffective without paying attention to resource allocation processes, product policy and product management, sales priorities and providing the right incentives for well-prepared managers to support these processes. Unfortunately, this did not happen at Nokia.   NMP became locked into an increasingly conflicted product development matrix between product line executives with P&L responsibility and common “horizontal resource platforms” whose managers were struggling to allocate scarce resources. They had to meet the various and growing demands of increasingly numerous and disparate product development programmes without sufficient software architecture development and software project management skills. This conflictual way of working slowed decision-making and seriously dented morale, while the wear and tear of extraordinary growth combined with an abrasive CEO personality also began to take their toll. Many managers left.   Beyond 2004, top management was no longer sufficiently technologically savvy or strategically integrative to set priorities and resolve conflicts arising in the new matrix. Increased cost reduction pressures rendered Nokia’s strategy of product differentiation through market segmentation ineffective and resulted in a proliferation of poorer quality products.     The Swift Decline   The following years marked a period of infighting and strategic stasis that successive reorganisations did nothing to alleviate. By this stage, Nokia was trapped by a reliance on its unwieldy operating system called Symbian. While Symbian had given Nokia an early advantage, it was a device-centric system in what was becoming a platform- and application-centric world. To make matters worse, Symbian exacerbated delays in new phone launches as whole new sets of code had to be developed and tested for each phone model. By 2009, Nokia was using 57 different and incompatible versions of its operating system.   While Nokia posted some of its best financial results in the late 2000s, the management team was struggling to find a response to a changing environment: Software was taking precedence over hardware as the critical competitive feature in the industry. At the same time, the importance of application ecosystems was becoming apparent, but as dominant industry leader Nokia lacked the skills, and inclination to engage with this new way of working.   By 2010, the limitations of Symbian had become painfully obvious and it was clear Nokia had missed the shift toward apps pioneered by Apple. Not only did Nokia’s strategic options seem limited, but none were particularly attractive. In the mobile phone market, Nokia had become a sitting duck to growing competitive forces and accelerating market changes. The game was lost, and it was left to a new CEO Stephen Elop and new Chairman Risto Siilasmaa to draw from the lessons and successfully disengage Nokia from mobile phones to refocus the company on its other core business, network infrastructure equipment.   What Can We Learn From Nokia   Nokia’s decline in mobile phones cannot be explained by a single, simple answer. Management decisions, dysfunctional organisational structures, growing bureaucracy and deep internal rivalries - all played a part in preventing Nokia from recognising the shift from product-based competition to one based on platforms.   Nokia’s mobile phone story exemplifies a common trait we see in mature, successful companies: Success breeds conservatism and hubris which, over time, results in a decline of the strategy processes leading to poor strategic decisions. Where once companies embraced new ideas and experimentation to spur growth, with success they become risk averse and less innovative. Such considerations will be crucial for companies that want to grow and avoid one of the biggest disruptive threats to their future – their own success.   Yves Doz is an Emeritus Professor of Strategic Management at INSEAD. He is the programme director for the Managing Partnerships and Strategic Alliances programme.   Follow INSEAD Knowledge on Twitter and Facebook.   This article is republished courtesy of INSEAD Knowledge. Copyright INSEAD 2018.   (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Startup India Standup India: A New Dawn

Premansh Sahni

Start-ups

Too lazy to go to the market? Dunzo has you covered. (a+b)^2 seems like a mystery? Byju’s has a solution for you. Short on cash? Paytm Karo!! ‘Startup’ has become the buzzword among millennials and for all the right reasons.   India ranks third globally in terms of its ‘startup ecosystem’ after USA and China. We have made huge strides in the Global Innovation Index and are currently placed 57th on the list. 2018 alone witnessed c. 1,200 startups spring up in India, along with more than 50% growth in the number of ‘Advanced Tech’ startups.   2018 also saw an increase in the number of unicorns or startups that are valued at over $1bn, with 8 startups including Freshworks, OYO, Swiggy, Billdesk, Policybazaar, Udaan and Byju’s entering the unicorn club. In 2019, more startups like Practo, Big Basket and MobiKwik are expected to cross this much-coveted mark. This represents a paradigm shift in the Indian economy.   Startups usually choose Bangalore, Delhi & NCR and Mumbai as their prime locations. However, with an expansion in technology and push for skill training, cities like Hyderabad, Pune, Chennai, Chandigarh, Jaipur, Indore, Kochi etc. are also emerging as startup hubs. Opening up of quality education centres, engineering and management colleges along with initiatives such as incubation centers like IIM-C Innovation Park, RICH (Research and Innovation circle of Hyderabad), improving IT and telecom infrastructure, government-backed programmes like the Atal Tinkering Labs, Fund of Funds for Startups, tax exemption schemes and National Initiative for Development and Harnessing Innovations etc. provide the sector with a much-needed filip. An established network of angel and venture capital investors like the Calcutta Angels Network only further strengthen the case.     Merger & Acquisition activity has also picked up momentum in the startup industry of late. Walmart's $16bn acquisition of Flikart made headlines. Such merger and acquisition deals create valuable synergies in the market as companies combine their tech capabilities, expand their market coverage and tap the human resource potential.   You might have heard of the show ‘Shark Tank’ where budding entrepreneurs pitch their ideas to a panel of investors persuading them to invest their money in their idea. Truly, the market for startup funding is nothing short of a shark tank. But the latest trends look promising. Asia has become the new startup center for global investors led by China. This has resulted in increased global investment in Indian startups. The total amount of funding in Indian startups has increased over 108% from $2bn in 2017 to $4.2bn in 2018. OYO Rooms was the biggest gainer, raising $1bn in funding from Softbank, Lightspeed and Sequoia Capital, making it the most valuable startup in India. It was followed by Paytm Mall, Swiggy, Udaan, Curefit, Sharechat, Lending Kart, Grofers and Qtrove.   There has also been a perceptible change in the way we view Entrepreneurship and Innovation. Earlier, the society harbored a very conservative view and the very idea of opening a startup leaving behind a settled job and life was frowned upon. Funding was also a major roadblock.   Back in the 2000s, India’s network of Seed and Angel investors, Venture Capitalists and Private Equity investors was very weak. But the times are changing. Creativity is actively encouraged as evident from the increasing number of straight out of college entrepreneurs, government initiatives, increasing number of entrepreneurship competitions in schools and colleges, support from faculties and mentors in premier institutions like IITs and IIMs, and most importantly failure being seen as a stepping stone to success. Today 35% of the startup founders are engineering and MBA graduates. There has also been a consistent rise in the number of women entrepreneurs with their share increasing to 14%. Rashmi Daga, winner of the ET-Facebook Woman Ahead, and Founder of FreshMenu is one such example.   According to a report by the World Economic Forum and Bain & Company, India by 2030 will have over 1 billion active internet users, who will have greater access to a variety of goods and services than their predecessors. Startups need to leverage this trend. Growing telecom industry, plummeting data costs and enhanced use of mobile internet services will facilitate the growth of startups. If India wants to become a global economic powerhouse and prevent its increasing demographic dividend from turning into a curse, it must create more jobs. The flourishing start up sector can be a answer to the growing unemployment in the country. The sun has just risen for startups and there are miles ahead to go…...   (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Startup and Never Stop: How Successful IPOs Produce Employees Who Keep the Startup Economy Going

University of North Carolina Kenan-Flagler Business School

Start-ups

You’ve heard the stories about young workers who take risky, low-paying jobs at high-tech startups and then strike it rich when the companies go public. You’ve also heard about the people who make their careers in startups – working at young companies until they run out of capital, get acquired or go public.   But what role do these workers play in nurturing new companies?   Successful Initial Public Offerings (IPOs) might be critical in creating the next wave of startup workers who then help fuel the creation new businesses, technological innovation and economic growth, according to research by Paige Ouimet, Associate Professor of Finance at University of North Carolina Kenan-Flagler Business School.   Ouimet, Tania Babina of Columbia University and Rebecca Zarutskie of the Federal Reserve Board looked at 800 computer and biotech startups and their employees from 1992 to 2006. They teased out patterns in employment mobility based on whether the firms had successful IPOs and share their findings in “Going Entrepreneurial? IPOs and New Firm Creation.”   Their study adds to the research on how startups are formed and what role they play in new company creation, says Ouimet.     “This is one more piece of the pie,” she says. “Probably one of the most important components of a startup are the employees. There shouldn’t be an assumption that all startups can get the employees they want.”   Secure Data   The researchers tapped into state unemployment insurance data collected by the US Census Bureau. Getting access to the data took about four years, required FBI background checks and could only be used in a windowless room in a secure facility. Federal government officials reviewed their research to ensure they released no confidential information.   The rich dataset – covering 25 states – includes information about employees’ salaries, age, race, gender, education and place of birth. Perhaps most importantly, the data also identified employers.   When the researchers cross-referenced the employer data with other databases of IPOs and entrepreneurial firms, they could track startup employees from one job to the next, following successful and unsuccessful IPOs.   Recycling Workers   Their findings lend credence to the notion that startup workers are recycled from successful IPOs back into new ventures.   Using an econometric technique they isolated a successful IPO’s impact from the impact of factors associated with successfully completing an IPO – such as firm quality. They found a successful IPO leads to 17.5% more of the pre-IPO workers leaving the firm and joining a startup in the following three years – an important change compared to a baseline rate of departures to startups of just under 5%.   Because an employee can change jobs for many reasons, the researchers explored three, non-mutually exclusive explanations for why workers from companies that successfully went public are more likely to leave.   Certification Shock: Thanks to the successful IPO, employees are perceived as better performers. This effect, if it exists, would likely be reduced for firms that received venture capital funding (and the press and prestige that goes with it) earlier. Ouimet found no evidence for this “certification shock.”   Culture Change: After a successful IPO, changes to a company’s work environment can make it a less desirable employer. Since CEO turnover can affect company culture, the researchers used a CEO leaving within two years of the IPO as a proxy for culture change. The data didn’t support a link between CEO change and employees leaving, suggesting it wasn’t a decisive factor.   Wealth Shock: Thanks to a successful IPO, employees are richer and can afford to take the greater financial risk associated with a lower-paying startup job. In this case, researchers did find a significant effect – but only for male employees.   Gender Differences   Ouimet couldn’t say with certainty why there was a gender difference, but she speculated several factors could be at play.     First, the sample data had twice as many male employees as female employees. With a smaller number of women, there’s simply more statistical noise with which to contend.   Second, Ouimet points out that it’s common for women in their 30s to leave the workforce, at least for a while, to start families.   Third, there might be a difference in the kinds of jobs male and female employees had, which in turn could influence their job opportunities with new startups.   Why It Matters   The wealth shock is compelling, but Ouimet points out many factors can be in play when people change jobs.   “We only find evidence for the wealth shock,” she says. “It doesn’t mean that the other two mechanisms aren’t there.”   So does all this matter to anyone who’s not a startup employee or a startup hiring manager?   Yes, says Ouimet. There’s ample evidence that startups – young companies seeking to grow fast – contribute substantially to economic and employment growth. Understanding what factors influence that growth is valuable.     Ouimet’s study suggests that the slower pace of IPOs in the early 2000s might have hurt startups. After making a number of assumptions, she and her colleagues roughly estimated that the decline in startups explains about 8.2% of the missing employment in high-tech startups in the decade that followed.   The bottom line: Successful IPOs produce employees who help the next wave of new tech companies. A downturn in IPOs could depress the startup economy.    This article originally appeared in the R.O.I. Research Magazine published by UNC Kenan-Flagler.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Crossing Borders: Devising A World-Wise Brand Strategy In A Globalised World

University of North Carolina Kenan-Flagler Business School

Consumer Behaviour

An American consumer drives his Korean-made Hyundai to a local store to buy chocolate from Swiss manufacturer Lindt & Sprüngli. In Guangzhou, an affluent Chinese shopper drives her BMW to Carrefour – the French-owned hypermart – to buy Coca-Cola.   The globalization of the marketplace – accelerated by rapidly falling transportation and communication costs – demonstrates the sway that global brands have with billions of consumers. And as the global middle class grows over the next few decades, brand preferences will influence trillions of dollars in purchases.   Marketing professor Jan-Benedict E.M. Steenkamp has studied what distinguishes successful and unsuccessful global brands on six continents. He drew on his 25 years of academic research and interviews with corporate executives around the world to write the new book “Global Brand Strategy: World-Wise Marketing in the Age of Branding.”     Steenkamp introduces the global brand value chain and explains how brand equity factors into shareholder value. Designed to help global marketing executives guide, launch or revitalize global brands, the book also provides real-world case studies of successful and unsuccessful global brand expansions.    “Many major American companies derive easily 50% or more of their sales growth from overseas markets,” Steenkamp says. “When I talk to senior managers at all types of companies, they do not see people rising to the top without them having shown themselves to be very effective brand stewards in the global arena.”   Why Are Brands Important Globally   Brands play three key roles for consumers, says Steenkamp.   They make decisions easier. At a time when products and services are increasingly complex – most of us simply can’t assess the technical quality of a car or a smartphone – brands guide us toward the products and services most likely to meet our needs. They reduce risk. Will those new running shoes stand up to your daily three-mile jog? Choosing a brand that has an established reputation for quality reduces the risk of those shoes falling apart after the first week of pounding pavement. They provide emotional benefits. For many consumers, brand choices are a way of signaling our values and aspirations. Though most of us will never climb Mount Everest, a jacket from The North Face signals to others that we appreciate aspirational values such as exploration and achievement.   Brands also are important for business-to-business (B2B) buyers, Steenkamp says.   Many buyers in small firms don’t have deep technical expertise to fully evaluate their options, and many B2B purchases are relatively low cost and routine, and as such aren’t worth extensive evaluation. Purchasing managers are also human and subject to limitations on their time and susceptibility to social influences as consumers. Managers also look to reduce risk. You can hardly be blamed if the product breaks down if it is sold by a famous brand, reminiscent of the axiom of purchasing agents that “nobody ever got fired for buying IBM equipment.”   Together, these factors allow brands to influence B2B purchases.    Developing Strong Global Brands   Brand managers can’t approach the global marketplace the same way they do in the “local” market of a brand’s country of origin. Well-managed global brands have distinctive needs beyond those of a local brand.   Companies need to consider several factors. Among the most important:   Value proposition: To be successful as a global brand, executives must identify the brand value proposition that appeals to a global – not just local – market segment. “It is more difficult to identify a brand proposition that resonates globally,” Steenkamp says. Simply transplanting a brand’s value proposition from one country to another is no guarantee of success. Trade-offs when adapting to local conditions: Brand managers must consider the trade-offs they’re making when adapting a product or service to local market conditions. Ikea, for example, is focused on providing low-cost goods. Doing extensive customization for each market – such as creating new product names in local languages – would increase costs, contrary to Ikea’s low-cost value proposition. When McDonald’s entered the Netherlands, it found customers would not eat its french fries with ketchup. When the company adapted to local tastes by making mayonnaise available, sales took off. Global brand managers must understand when trade-offs make sense and when they might damage the brand. Incentives for brand managers: Companies need to ensure that incentives for global brand managers are aligned with business strategy and the end-goal of increasing brand equity and shareholder value. Allowing global managers to make decisions in local markets to increase sales there at the cost of weakening the brand globally is ultimately destructive.   These aren’t the only considerations for executives in charge of global brands. The opportunities and challenges of the digital age, the growing importance of firm-wide corporate social responsibility in managing global brands and the role of global brands in creating shareholder value are among the other issues that Steenkamp addresses in “Global Brand Strategy.” Global brands can generate tremendous value for companies, so the allure of taking a strong local brand and expanding into other countries is understandable. But global brands are also more complex and challenging to manage, says Steenkamp, who provides a roadmap that all global brand executives need to consider.    This article originally appeared in the R.O.I. Research Magazine published by UNC Kenan-Flagler.   (We are now on your favourite messaging app – WhatsApp. We highly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Transfin. LongShorts Podcast E:26

We like to talk Business and Finance. Figured we should do it for a living.

Transfin. Podcast E25: Hit, Herd, Hope

Professor S

LongShorts

Transfin. Podcast E24: Data Rules, Pro Forma, Dressing Up

Professor S

TheWeekThatWas

Transfin. Podcast E23: Unmanned, Redeal, Rebalance

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LongShorts

Transfin. Podcast E26: Glitch, Translate, NewTube

Professor S

LongShorts

   We like to talk Business and Finance. Figured we should do it for a living.   Sunday kicked off the Festival/Dance/Carnival (you get the point!?) of Democracy. But we spent our time discussing:     The Troubles of Boeing   Boeing’s reputation has once again come into question following the recent Ethiopian Airlines crash that came barely six months after the Lion Air crash late last year. The proximity of these two crashes involving the same aircraft model has led to countries around the world grounding the Boeing 737 MAX. We discuss what this could mean for Boeing and how its competitors potentially stand to gain from the entire episode.   How RBI's Rate Cut Not Hitting your Loan has Something to Do with Your FD     Of late, mutual funds have witnessed an increasing churn and FD is emerging as the favoured asset class. One reason could be equities and riskier asset classes not performing in line with expectation. Another could be the slump in savings which has naturally incentivised banks to have a high deposit rate. Within this background we discuss why RBI's rate cut is not translating on ground despite multiple reminders from the Central Bank.      YouTube's Two Pronged Indian Foray   Google recently launched its YouTube Music, YouTube Music Premium, and YouTube Premium services in India. The ad-supported version of YouTube Music will be free, YouTube Music Premium will cost users INR99 per month, and YouTube Premium will cost INR129 per month. However, will YouTube's latest offerign for India be able to survive under thick competition from rivals such as Amazon Music, Apple Music, JioSaavn, Gaana and Spotify. Listen in.    More on the Comet Aircraft: de Havilland Comet   (We are now on your favorite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Hot Water, Conditions Applied, Collection O and More...

Professor S

TheWeekThatWas

US Grounds All Boeing 737 MAX Models, Embassy Group to Launch India's First REIT, UK Votes to Delay Brexit, Qualcomm Wins Patent Infringement Case Against Apple et al.

Professor S

End Of Day Wrap Up

US grounds all Boeing 737 MAX models. Boeing at risk of losing orders worth $600bn. China’s industrial output drops to 17-year low. UK votes 413-202 to delay Brexit. Embassy Group to launch REIT to raise INR4,750cr. Tesla may come to India soon. Apple to pay Qualcomm c. $31m for patent infringement. Spotify files antitrust complaint against Apple.   Moving on to the top Business stories of the week.    BOEING US grounds all Boeing 737 MAX models. Boeing at risk of losing orders worth $600bn; plans to release upgraded software for its 737 MAX in the next 10 days. 737 Max revamp could cost Boeing over $2.5bn. Last Man Down: President Trump has announced that the Federal Aviation Administration would ground Boeing’s fleet of 737 MAX airliners after new data indicated that last weekend’s deadly crash in Ethiopia resembled the Lion Air crash in October last year. All Right: Boeing said it maintained full confidence in the MAX plane but decided to recommend a temporary grounding to reassure the flying public. Since the crash on Sunday, regulators in dozens of countries have suspended flights by the single-aisle airliners, including the UK, Australia, and Canada. The US was the last significant aviation market still allowing the 737 MAX to operate. Buyers Beware: Boeing’s more than $600bn worth orders for its 737 MAX models hang in balance as customers threaten to reconsider their purchases in light of the recent Ethiopian Airlines crash. These Include:   VietJet Aviation, which doubled its order to about $25bn only last month Kenya Airways, which is reviewing proposals to buy the Max and could switch to Airbus A320 Utair Aviation, which is seeking guarantees before taking delivery of the first of 30 planes Lion Air, which decided to drop a $22bn order for the 737 in favor of the Airbus jet   Damage Control: Boeing plans to release upgraded software for its 737 MAX within the next 10 days.   This is Why: Boeing has been working on a software upgrade for an anti-stall system and pilot displays on 737 MAX aircrafts in the wake of the deadly Lion Air crash in Indonesia in October. Read more on the matter here.  Costing Dearly: The software fixes on Boeing 737 MAX models is likely to cost the Chicago-based aircraft over $2.5bn as it redesigns a computerised flight-control system on hundreds of jets.   Boeing could end up spending $500m on software rejig alone. Another $2bn could go towards delivery delays and reimbursements to airlines for flight disruptions.   GLOBAL China’s industrial output drops to 17-year low. Unemployment rate also on the rise. UK votes 413-202 to delay Brexit. Long Time Coming: China’s industrial output growth fell to a 17-year low in the first two months of the year. The industrial output rose 5.3% in January-February vs 5.7% in December, lower than the expected 5.5% growth. Silver Lining: Growth in fixed-asset investment, a major growth driver in the past, increased to 6.1% in the first two months of this year, up marginally from 5.9% in 2018. Retail sales were also marginally better than expected, with the headline figure rising 8.2% in January-February from a year earlier. More Help: In addition to a fiscal stimulus such as higher local government spending and tax cuts, more monetary policy support is also expected this year. No Jobs: China’s unemployment rate jumped to 5.3% in February from 4.9% in December on the back of low industrial output and slow retail sales expansion. Perfect Timing: The jump in joblessness comes just days after Premier Li Keqiang announced an employment first strategy as a key part of the economic policy for the coming year. Side Effect: The increase of the unemployment rate shows rising pressure from the US-China trade war on China’s job stability.  Fun Fact: China combines January and February activity data in an attempt to smooth distortions created by the long Lunar New Year holidays early each year, but some analysts say a clearer picture of the economy’s health may not emerge until first-quarter data is released in April.    Wait: UK lawmakers have voted 413-202 in favour of delaying the Brexit process, acknowledging that more time is needed to break the deadlock over Britain’s departure from the European Union (EU). All For: This allows Prime Minister Theresa May to approach the EU for an extension to Article 50, the legal process under which Britain is leaving the EU.  May had been forced to offer MPs a vote on delaying Brexit after they rejected her withdrawal agreement by a large margin, for a second time, and then voted to reject a no-deal Brexit.  Ask Again: A request for an extension of Article 50 will require the unanimous agreement of all 27 EU Member States.  Opinion: With Brexit now on hold, there’s only one option left - compromise.   COMPANIES Brookfield to acquire RIL’s East-West pipeline. Tesla may come to India soon. OYO acquires Innov8 in a INR220cr deal. Google launches YouTube Music, YouTube Music Premium, and YouTube Premium in India.   Costly Deal: Canada-based Brookfield Asset Management’s India Infrastructure Trust, an InvIT is set to acquire RIL’s East-West Pipeline (EWPL) in an INR13,000cr deal. Brookfield has filed a preliminary placement memorandum, through which its InvIT will invest INR13,000cr to acquire EWPL. As part of the transaction, the InvIT will acquire 100% equity in Pipeline Infrastructure Private Ltd (PIPL), which currently owns and operates the pipeline. RIL will get the right to acquire equity shares of PIPL, held by the InvIT at an equity value of INR50cr, at the end of 20 years.   Tesla in India: Replying to a query on Twitter, Elon Musk replied that the company would love to be in India this year. If not, definitely next.   Interestingly, the comment comes months after he blamed restrictive policy for delaying the carmaker’s entry into the world’s fourth largest automobile market – India.   The Deal: Hospitality chain OYO has acquired Gurugram-based coworking startup Innov8 in an all-cash deal worth about INR220cr.  Under OYO, Innov8 will be working towards creating a capacity of 10,000 seats across India.  Founded in 2015, Innov8 currently hosts over 350 companies as members and claims to have a 95% occupancy across all its 15 coworking spaces with combined seating of approximately 5,500.  Besides, OYO itself has also started two new co-working brands—PowerStation and WorkFlo, which will cater to a variety of start-ups and companies.   Another One: Google launched its YouTube Music, YouTube Music Premium, and YouTube Premium in India.   Following Suit: The news comes shortly after the launch of Spotify in India. The ad-supported version of YouTube Music will be free, YouTube Music Premium will cost users INR99 per month, and YouTube Premium will cost INR129 per month. Subscription to YouTube Premium also unlocks features like the ability to play videos in the background while running other apps, offline downloads, access to YouTube Originals, and YouTube Music Premium. Long Road: In India, the YouTube services will compete against other streaming platforms including Amazon Music, Apple Music, JioSaavn, Gaana and Spotify.   TECHApple to pay Qualcomm c. $31m for patent infringement. Spotify files antitrust complaint against Apple. Google is likely to be hit with a third EU antitrust fine next week. Softbank to start a new fund for early-stage investments.   No Escape: Following a two-week trial, a jury in federal court in San Diego determined that Apple had violated three Qualcomm patents in some iPhones.  What You Need to Know: Qualcomm had last year sued Apple alleging it had violated patents related to allowing phones to quickly connect to the internet after they're switched on; battery efficiency and graphics processing; and a traffic management function that allows apps to download data faster. Qualcomm asked the jury to award it unpaid patent royalties of up to $1.41 per iPhone that violated the patents.  Unfair: Spotify has filed an antitrust complaint in the EU against Apple.  What’s the Case?: Spotify alleges that Apple in recent years has abused its control over which apps appear in its App Store with the aim of limiting competition with its streaming service Apple Music. Spotify claims that Apple made it difficult for rival subscription services to market themselves to users without using Apple’s payment system, which generally takes a 30% cut of transactions. Threats: The European company also said Apple at times rejected security updates of its app and threatened to kick it out of the App Store for allegedly anticompetitive reasons.   Not the First: Google is likely to be hit with a third EU antitrust fine next week related to its AdSense advertising service.  However, the sanction expected to be much smaller than previous fines.  Backstory: The European Commission had in 2016 opened a third case against the world’s most popular internet search engine by accusing Google of preventing third parties using its AdSense product from displaying search advertisements from Google’s competitors.  It said that Google, which at that time had held 80% of the European market for search advertising intermediation over the previous ten years, had kept its anti-competitive practices for a decade.   SoftBank: Is set to launch a new global investment fund for early-stage investments. The fund, to be run by Seoul-based SoftBank Ventures Asia, will be worth $500m. SoftBank, South Korea’s National Pension Service as well as other companies and asset management firms will invest in the fund. Brookfield to acquire RIL’s East-West pipeline. Tesla may come to India soon.   INVESTMENTSOYO invests INR1,400cr in India and South Asia businesses, launches millennial-focused new brand, Collection O. Embassy Group to launch REIT to raise INR4,750cr. Hospitality firm OYO has committed over INR1,400cr for its India and South Asia businesses.  Need to Grow: The infusion would be used to facilitate expansion plans, improve customer experience and ensure increase in continued asset owner success. yOung Ones: OYO also announced a new category called Collection O, which will focus on millennials and young travelers and will be added to its existing portfolio of budget and mid-segment hotels. Going Desi: Global investment giant Blackstone and Bangalore-based real estate developer Embassy to launch India’s first real estate investment trust (REIT) next week to raise about INR4,750cr The REIT, which includes Embassy Group properties, will offer as many as 158.6 million units at c. INR300 apiece. Bonus: REITs offer a unique 'financial markets' avenue to gain exposure to real estate rather than requiring investors to buy physical assets. Click here to understand all about the new way to invest in real estate in India.    (Don't want to miss out on these End Of Week Wrap Ups? Subscribe Now to our No Nonsense Email Digest and get the day's Top 6 Business stories straight to your mailbox.)

Boeing 737 Max 8 Crash: An Escalating Crisis

Professor S

LongShorts

Background: Less than six months after the crash of the Lion Air flight which killed over 189 people, Boeing finds itself in hot water yet again. This time around post the unfortunate crash of the Ethiopian Airline-operated aircraft last Sunday, which left no survivors.   Not the First: The Ethiopian Airline-operated flagship model 737 MAX 8 carrying 149 passengers aircraft heading for Nairobi crashed barely six minutes after its takeoff. The same model was involved in another crash late last year when a Lion Air flight from Jakarta crashed into the Java Sea killing all 189 passengers onboard. The proximity of these two crashes coupled with the questionable MCAS (Maneuvering Characteristics Augmentation System) anti-stall flight control system has put the spotlight back on Boeing.     Big Earner: The 737 MAX series launched by Boeing in 2016, was built with the aim of providing better fuel economy for short distance fights, in a bid to take on its rival - Airbus A320neo - a similar offering, which then dominated the market. The 737 MAX series has been the most popular of Boeing’s offerings with airlines around the world, having delivered 354 of the jets globally, and with 2,912 still on order. However, it needs to be noted that many of the orders in line may now have been put on hold or been cancelled in the aftermath of the tragedy.   Faulty System: As per the  US Federal Aviation Administration, at the center of both the crashes is the MCAS (Maneuvering Characteristics Augmentation System) anti-stall mechanism, a system that takes in data from various sensors to adjust flight parameters in order to ensure that the engines do not stall and the plane keeps flying.    After the first crash, it was found that the system could be triggered by erroneous data from sensors, which could have led it to operate in an unintended manner. Data from the second crash also shows evidence that faulty inputs from the system might have contributed to the crash. If investigations could conclusively prove that MCAS had a hand in the crash, all 737 MAX models would need to be grounded. This could mean serious trouble for Boeing for whom the 737 MAX series of aircraft have been the most successful. It has been estimated that Boeing’s more than $600bn worth orders for its 737 MAX models hang in balance as customers threaten to reconsider their purchases.     Pilots Unaware: Another grim picture is painted by the pilots who have previously flown the 737 and claim that the MCAS was not included in the training program, and that most of them came to know of the system only after the first crash. This would mean that pilots operating a 737 flight would not have had adequate knowledge or training to correct any deviation caused by the MCAS.   But the MCAS might not be the only malfunctioning component of the 737. Some pilots report that they had other issues with the plane concerning the autopilot system, which is independent of the MCAS. This could mean that there could still be some unknown variable other than MCAS which is affecting the aircraft.   Dire Consequences: In light of the incident, several countries including US, EU, China, Indonesia, India and Ethiopia have grounded all MAX aircrafts. Boeing is likely to be the most affected by the ban in China as more than half of the 737 MAX orders come from the country. Analysts predict that if investigations lead to grounding of all 737 models, Boeing could lose up to $5bn, which amounts to 5% of the company’s annual revenue. Ironically, Boeing stock had recently ridden to nearly a record high on the 737 Max’s early sales.   Meanwhile, rival Airbus stands much to gain from Boeing’s affliction, whose similar offering - the A320neo has had a better service history than the 737.   (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Draft National E-Commerce Policy: Treading the Thin Line Between Regulation and Restriction

Professor S

LongShorts

Backdrop: The government recently released a draft e-commerce policy for stakeholder comments, barely two months post rollout of its new FDI policy which shook the nascent industry, especially major players. The Draft deliberates upon a comprehensive framework aiming to preserve consumer interest by creation of suitable regulatory mechanisms.   However, like most policy actions, it walks on a fine line of managing citizen interest at the expense of creating a less-than-conducive regulatory environment for the industry at-large - one that may not allow the country to reap the maximum benefit from the rapid digitalization of the domestic, as well as the global economy.   Let’s Start from the Start: India’s burgeoning e-commerce market was valued at $38.5bn in 2017 and is estimated to rise to $200bn in 2026. Electronic commerce and data are emerging as key enablers and critical determinants of India’s growth and economic development, facilitated by cheap smartphones and even cheaper data.   Here’s a rundown of the key points:   On Point?: Six broad issues have been touched, including i) data, ii) infrastructure development, iii) e-commerce marketplaces, iv) regulatory issues, v) promotion of domestic digital economy and vi) export.   Data is the New Oil: There’s an overwhelming push for a robust administrative, regulatory and legal mechanism to control data flows. The word “data” itself has been quoted more than 200 times within the 42 page document. The principal case has been that an individual consumer/user who generates data retains ownership rights over it.   Viewed in conjunction to the Personal Data Protection Bill submitted to the government (for consideration by the Justice BN Srikrishna Committee on 27th July 2018), the policy at the least envisages to regulate cross-border data flow while enabling sharing of community data (data collected by IoT devices installed in public spaces like traffic signals or automated entry gates).     Breaking it Down:   No data collected or processed in India shall be made available to a third party or to other business entities outside India, for any purpose, even with the consent of the customer. Neither can it be made available to a foreign government, without the prior permission of Indian authorities. The document, however, is light on details around potential implementation mechanisms. Push for a three-year data localization requirement    Backbone: Development of data-storage facilities/infrastructure is another vital part of the value chain recognized.   Data centres, server farms, towers and tower stations, equipment, optical wires, signal transceivers, antennae etc. will be accorded ‘infrastructure status’ – facilitating access to longer maturity loans, easier lending terms, and even cheaper foreign currency funding through the external commercial borrowing route. An ‘infrastructure status’ also seeks to streamline the regulation of the sector. Budgetary support to be provided for the exploration of domestic alternatives to foreign-based clouds and email facilities   Supply Chain Transparency:    To streamline functioning of the e-Commerce sector under the FDI Policy, e- commerce websites/applications are required to ensure that all product shipments from other countries to India must be channelized through the Customs route. The Policy provides for integrating Customs, RBI and India Post systems to improve tracking of imports through e-Commerce. All ecommerce sites/apps operating in India must have a registered business entity in India as the importer on record or as the entity through which all sales in India are transacted. All parcels under the ‘gifting’ route to be banned, with the exception of life-saving drugs. This move comes in light of companies exploiting India’s “gifting” rule whrein personal gifts priced below INR5,000 are exempt from duties. Several red flags have been raised in the recent times over numerous “gift” deliveries being made to the same address and heavy 15 kilogram parcels being brought in with a declared value of just INR3,000.     Watchdog: Given the inter-disciplinary nature of the sector, a Standing Group of Secretaries on e-Commerce (SGoS) would be appointed to regulate the issues effectively. No standalone regulator proposed, so far.   Bonus: The Policy also proposes regulation of advertising charges in e-commerce (including social media platforms), to create a “level-playing field” for small businesses, who otherwise have to allocate an excessively high proportion of their budget and working capital to advertising to find their potential customers. In our view such a stance borders on regulatory overreach and we’d be very wary of its detailed wording, whenever it comes out.   In Conclusion   While the draft ecommerce policy means well for MSMEs and startups who seek to break through the competitive space, it is also likely to increases their compliance costs having to restructure means of how they store and share data.   Giants such as Amazon and Flipkart will likewise be hit in a significant manner, forced to make huge changes to comply with the proposed rules, even as they have often been known to find legal or other ways to circumvent potential downsides.   The enhanced cost of compliance may also have an adverse bearing on the rate of investment in Indian e-commerce, specifically on FDI inflows.   As for the consumers, the policy seeks to offer some respite with strong anti-counterfeiting and anti-piracy measures, pushing e-tailers to publicly share all relevant details of the sellers listed on their portals and ensuring speedy redressal of consumer grievances.   While the draft at multiple instances reiterates the need for the creation of a facilitative regulatory environment for growth of e-commerce sector, it falls short of providing specific details on implementations or addressing any operational nuances.     Moreover, the manner in which the policy addresses the question of ownership of personal data has been termed as “unusually parochial”, often directly at odds with the recommendations of the Justice Srikrishna Committee and the decision of the Supreme Court in its right to privacy judgement.   With the Department for Promotion of Industry and Internal Trade having kicked-off a round of stakeholder consultations on the draft policy, one can only hope that the future iterations don’t propose ham-fisted solutions to problems, rather push for a more definite and implementable framework.   (We are now on your favourite messaging app – WhatsApp. We strongly recommend you SUBSCRIBE to start receiving your Fresh, Homegrown and Handpicked News Feed.)

Social Media, Preferential Trade, Spotify Debut and More...

Professor S

TheWeekThatWas