THE

CONSILIUM
Vol 1, Issue 1 March 2010
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REAL ESTATE: CURRENT ROLE IN ECONOMY

Focusing on the Global Financial

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CRISIS

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CONSILIUM
Vol 1, Issue 1 March 2010

cover feature guest feature

REAL ESTATE: CURRENT ROLE IN ECONOMY 3G SPECTRUM: THE ROAD AHEAD RECESSION AFTERMATH: A NEW WORLD ORDER? BUILDING COMPETITIVE ADVANTAGE IN A SLOWDOWN DEATH OF THE DOLLAR? TIME FOR A NEW CURRENCY? PRIVATE EQUITY IN INDIA: RECOVERING FROM THE TURMOIL GLOBAL AUTO MAJORS: BRAVING THE STORM AMERICAN AUTO MAJORS: THROUGH STORMY WEATHER

research paper

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sector focus sector focus

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CONSILIUM
Vol 1, Issue 1 March 2010
Greetings from The Consulting Club at FMS! Were proud to present the 1st Issue of THE CONSILIUM, our bi-monthly magazine. Through The Consilium, we aim to bring you the best of two worlds: Insights from Experts in Consulting & the Industry, and the best research articles & papers written by students & faculty at FMS. The agenda for The Consilium Magazine is to achieve intellectual synergy between experts and students on contemporary problems & issues confronting businesses the world over. We aim to fulfill this goal by encouraging forays into how todays businesses are being run, and what is affecting them. The Consilium thus serves to function both as an Observer body and as a Think Tank. The issue in your hands is the result of a deliberate effort to reach out, and invite from the students some of their best, recent & original research papers & articles. Those articles have been presented here. The current issue also contains an article by consultants from Cognizant Business Consulting. The cherry on top, is perhaps a most illuminating essay on Economic Recovery, by one of the Senior Members of The Consulting Club - Mr. Harsh Raj Kumar. It was this essay of his, that got him an invite to attend the prestigious St. Gallen Symposium held annually in Switzerland. The magazine has been launched exclusively in the eformat, to facilitate sharing and distribution. We are optimistic that you, the reader, shall help this magazine reach other interested people such as you. That said, we leave you to peruse the issue at your pace. We hope you enjoy what you read. Be sure to send your views & opinions to us at conclub@fms.edu - our mailbox is always glad to receive feedback! Mohit Rodeja Editor, The Consilium Associate Member, The Consulting Club

THE CONSULTING CLUB

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Cover Feature

THE CONSILIUM
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10 Commandments
Harsh R. Kumar
A crisis is a terrible thing to waste -Paul Romer 2008 has been like a rollercoaster ride with no tracks leading upwards. The recession has well and truly set in with the global economy shrinking for the first time since the world war II.The year started with the subprime crisis on the fringes. The pinch was being felt by the developed economies and the disaster was just waiting to happen. The year ended with serious challenges to the existing beliefs. The term Investment banking became a hallow phrase and sales of Das Kapital increased. This New Year the demand for good news is bound to outrun the supply. The governments and corporate are trying to understand what hit them and what to salvage from the ruins. The things are looking bleak and the basket of ideas is half empty. The world need to do some serious rethinking if it has to return back to the promising sunshine from the days, which appear to be the darkest since the pre war depression of 1929. There are several lessons which we can find looking back into the past and thinking ahead into the future. The set of things which can help

The

St. Gallen Symposium 2009 Wings of Excellence Qualifying Essay

1. Thou shall raise your Doubts: The subprime crisis resulted from belief that the values of houses can go only one way. The collateral Debt Obligations and Mortgage Backed Security mangers where confident in their beliefs. It looked like they had hit a gold mine. But had they been more respectful of the past, the realisation would have struck them that price of houses, like most of the assets, follow a cyclic pattern, with large rises accompanied by small drops. This fact was overlooked and the domino effect was triggerd.The rise in the interest rate led to the drop in demand for the houses and a decrease in the repayment abilities of the borrowers. The underlying assumption behind any decision must undergo a what if analysis. It is time to look beyond the eureka moments and exercise a more contemplative approach. A brief background search and analysis will expose the hidden side of the deal, thus saving a lot of future trouble.

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2. Thou shall be Imaginative: Business that can dream of the future is most likely to formulate it. IBM always saw PCs as entry, level systems (everyone's going to own a mainframe sooner or later), rather than an entirely new paradigm. Intel and Microsoft, who partnered with IBM in the initial phase, saw the bigger picture. They started off as minor partners to IBM, which had a greater muscle and more initial control. But these companies imagined the next revolution and gained better returns from it. The companies which see tomorrow's industry today will outshine the competitor. These Davids with the right slingshot will slay the Goliath. The larger organization can learn from them and incorporate their principles to reap rich rewards. Organizations need to get the climate right. This can be done through carrots and stick policy, giving the employees bonuses and discipline, in the right measure. 3. Thou Shall Execute: Great Idea badly executed fails to meet its objective. Ideas are worth only if they are put into right practice. Nicholas Negroponte, the founder and Chairman Emeritus of Massachusetts Institute of Technology's Media Lab had the right idea when he setup the One Laptop per Child association (OLPC). In November 2005, at the World Summit on the Information Society, Tunis, Negroponte unveiled a $100 laptop computer, The Children's Machine, designed for students in the developing world. He had an idea which was technologically sound and he was clear about his vision of helping the downtrodden. But what Negroponte underestimated was the problem associated with handling and maintaining the Laptops. OLPC argued that it is very easy to use and little support was required, but the countries writing the checks don't appear to have bought the argument. Nigeria, for example, backed out of a previous commitment to buy a million laptops from OLPC, opting for Intel's Classmate PC instead. Intel's superior support was cited as the major reason for the decision. Negroponte deserves credit for pioneering the concept of producing cheap laptops for poor children, but coming up with the idea is, relatively speaking, the easy part. The many problems associated with execution needs to be taken into account. For an enterprise to be successful, it must think through all possible causes of failure, policies to fall back upon and the prevailing external conditions. 4. Thou shall Employ Thrift: The companies need to go short on cost and long on innovation. The strategy to reduce the cost by applying target costing and Kaizen techniques will yield benifits.They will have an two prong effect in the sense that it will improve the company's bottom line and serve as an constant drive for the employees. At Toyota, the top management believes that they are facing once in a hundred year crisis. The exposure to global markets and their expansionary plans have left them further vulnerable. But crisis is not unknown to the world's largest automaker. They have embarked on a cost cutting programme, which involves use of thrift at every level. They have been turning down the use of heat in factory, asking the workers to wear extra pullover , the executives have been using cars instead of expensive trains and the showroom have been used as makeshift conference rooms. These efforts are expected to yield an additional saving of $1.4 billion, helping Toyota ride through the storm. Proverbial gold mine lies hidden within the everyday expenses. The trick is to involve the entire team to hunt out and implement right measures to dig it out. 5. Thou Shall Collaborate: The difficult times calls for maximum returns from minimum efforts. The companies which are in the same industry and fighting the same battle against the downturn need to help each other out. A healthy dose of collaboration, in noncore competent areas, would be beneficial for industry as it would result in reduction in duplication of efforts. The collaboration could be of three types: Technological, Geographical or Economical. The company may be good technically but might require monetary support or geographical guidance to establish itself. Similarly a company with sound balance sheet and products might collaborate with a local company when it is moving into new territories. A company strong in two areas, can eliminate its week area by forming right partenerships.This is very important for global companies that they find right partners and avoid reinventing the wheel. 7. Thou Shall Explore: 4 billion people still leave on less than $2 a day. They form an untapped unexplored market which can be captured by playing according to a different set of rules.Begining of the last century Henry Ford brought about the democratization of automobile through their mass production. Hundred more products are waiting to meet a similar fate, when they can be mass produced to reach the billion hands. The developed nations need to look upon the developing nations and see how the standard of living is changing there. The best innovation and business lessons must flow both ways. There is much to be learned from Gandhi Engineering, which embraces resource constrains in the quest to do more with less for more people. 8. Thou Shall Consolidate: A bird in hand is worth two in the bush. The old saying holds true for the global companies. They must work towards delighting their existing customer. They need to formulate special schemes to remain at the centre of customer's perception When Nokia's BL-5C batteries developed a problem, it made excellent arrangements to get them replaced. The condition of the battery could easily be checked on the website and suitable

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replacement could be obtained. This initiative created a feeling worldwide that Nokia was a brand that could be trusted. The technical error did not tarnish the reputation of the telecom giant, rather it proved to be a stepping stone, elevating it to greater heights in the customer's mind. 9. Thou shall learn: Muscle that gets accustomed to the assigned task does not grow strong. The companies with the policies that allow them to grow and adopt with the changing environment are more likely to be successful on the global scale. Company needs to develop a mental capacity which prepares for the future, by continuously picking up lessons from the past, best practises from around the world and by employing a thinking mechanism to initiate change from within. In 1973, the oil prices rose by 4 times and the oil was no longer a buyer's market. This rise in prices gave way to a recession in the western world. To survive through this period, Shell adoptedlearning as the only sustainable competitive advantage. It diversified into nuclear power, coal and metal. Most remarkable of shell's work was developing oil field in North Sea, where the weather conditions are adverse and the instability of the sea-bed necessitated a huge investment to extract the oil. Shell used crisis as a tread mill to improve its fitness. This attitude helped it to become one of the most admired companies and gain a foothold worldwide. 10. Thou shall be Diligent : The companies need to comply with the laws of the land and try to avoid taking short term measures to inflate their income. The government should enforce the laws more stringently and make sure that the functioning of economy is not affected by the individual actions. At this time an Enron like debacle can prove to be a major setback to the recovery programmes. The stakeholders must work together to avoid any such situation. Thou shall show concern: The unbridled expansion of our needs has left the balance of our planet hanging on a thin snap able cord. It is time to seriously start employing the triple bottom line (people, planet and profit). Companies, who have worked towards establishing a reputation of being clean, have received limited problems in terms of regulations, local unrest etc, while moving into new geographies. J&J is one of the pioneers in this area. When it established it's credo in 1943, it got its priorities right. The credo says that four things are important for the company. The consumer of its products, the employees and the environment. It says that if the first three is taken care of, the fourth, shareholder's wealth, will automatically be achieved. J & J today has manufacturing presence in 57 countries and employees more than 1, 15,000 people. By sticking to the credo, it has gone on to become one of the most respected companies worldwide. The true global company must be diverse and strong enough to take on the turbulences in the world economy. It should serve as an example to the rest and its policies should be considered standards. The present turmoil has devoid some of them of their old glory, but the winners will emerge to take their place. There is always room at the top of the pyramid, for those who choose to climb.

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Guest Feature

THE CONSILIUM
1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 10 11 11 12 12 13 13 14 14 15 15 16 16 17 17 18 18 19 19 20 20 21 21 22 23 24 25 , Associate Consultant 26 27 fashionable to live way beyond your means; plastic money became a 28 substitute for money earned. 29

Is

Anglo-Saxon Capitalism
Rangin Lahiri, Consulting Manager & Siddharth Begwani Cognizant Business Consulting

the Global Crisis?

Going to survive

Few of us have been insulated from the global economic meltdown triggered by the sudden, spectacular and across-the-board collapse of the US & some European financial institutions. While the fall of Lehmann Brothers will remain etched in history as the ignition point for sending global economies into a tailspin, it was only an outcome of a seriously flawed monetary policy that had been put in place and reinforced for over two decades in America, a policy initiated by the iconic former FED Reserve Chairman Alan Greenspan. The Beginning Interest rates in America kept falling through the nineties and the early half of this decade this encouraged individuals and organizations to take on ever-increasing debt available at extremely low rates. Low interest rates meant that individuals no longer had any incentive to invest in any fixed-returns instrument, leading them to invest in speculative financial instruments which had a high risk-high reward profile. This period also saw a surge in the derivatives market, and financial institutions kept churning out highly complex and exotic derivatives products, which promised windfall gains for investors. Another fallout of easy credit availability was that it spurred financial indiscipline and reckless risk-taking. It became

Does the decline of the American financial system discredit and deal a body blow to free market economics, and by extension, the capitalist ideology? According to Hayekian economics, structural imbalances in a financial system occur as a consequence of the exclusion of the most important regulator of the market mechanism, money, from itself being regulated by the market process. Hayek argued that when central banks intervene to artificially keep interest rates low, the long-term spinoff is misallocation of capital and creation of a credit bubble. Friedrich Hayeks theories on free market equilibrium collide with that of Maynard Keynes, whose seminal works form the basis of most of modern economics. Keynes postulated that free markets are never in equilibrium and strongly advocated the intervention of central banks via fiscal and monetary policies to undo imbalances that arose in the system Keynes demurred with Hayeks view that central banks should adopt a laissez-faire approach towards the markets. If Keynesian economics were to work in the current global slowdown, then the recession would have been shallow and short-lived, and the

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massive infusion of stimulus capital would have turned around the US economy in a short time. However, that has not happened. The US economy is still deep down a rabbit hole, and will take at least a couple of years to fully recover. It is Hayekian economics that is at work here. Controlled CapitalismIs it at all possible? The collapse of US financial institutions does not imply that a free market approach, the heart of capitalism, is intrinsically flawed and should be dispensed with. On the contrary, it indicates that regulatory bodies should make limited but controlled interventions in the free market, leaving it to self-regulate for the most part. The central banks should function as a market vigilante, stepping in only when any discomfiting developments, e.g. rising inflation, occur. Also, all policy decisions should be with the view to promote financial discipline amongst both individuals and firms, and discourage excessive and reckless risk-taking. Central banks should not try to steer the course of the markets, but rather act a watchdog to correct market aberrations and ensure that the interest of ordinary citizens is protected. This brings us to the next topic: the importance of putting in place measures and systems for risk management. The US financial markets debacle was clearly propelled by excessive and, in some cases, morally untenable levels of leverage and risk some of the financial institutions employed. The reason why Indian banks have emerged relatively unscathed from the recession is because they were well capitalized, had excellent capital adequacy ratios, controlled credit exposures and low levels of debt on their balance sheet. It was conservatism that had checked the cataclysm. But western markets being so developed, enmeshed & open to complex financial products have to adopt technology tools rather than conservatism as their radar. The importance of devising a clear set of metrics to calculate riskiness of operations, strongly monitoring these metrics, and regularly publishing these metrics, is a key lesson of this recession for firms, investors and regulators alike. The advent of strict guidelines as per the International Financial Reporting Standards (IFRS), KYC Compliance and Usage of dashboard & predictive analytics to identify the anomalies before it turns into a greater problem has become the norm. In addition firms have started adopting strong Fraud & Risk Protection mechanism by automating, controlling & monitoring manual processes with sophisticated business process management suites. This risk assessment tools with audit control, alert & rule driven checks, has become an absolute imperative for corporations, the central bank and other regulatory bodies. Its this intelligent checks & balances which the market will need now rather than a controlling leash. After all we would all like to see Mr. Keynes smiling.

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Research Paper

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Role of Real Estate

in the Contemporary Economic Scenario A Research Paper
Peeyush Anand & Sushil Pasricha

1. Industry Snapshot The Indian real estate sector plays a significant role in the country's economy. The sector contributes heavily towards the gross domestic product (GDP). Almost five per cent of the country's GDP is contributed by the housing sector. The real estate sector is also responsible for the development of over 250 ancillary industries such as cement, steel, paints etc. But, in the last few months the real estate market has undergone major changes into business. 1.1 Market Overview The real estate sector is second only to agriculture in terms of employment generation and contributes heavily towards the gross

domestic product (GDP). Almost five per cent of the country's GDP is contributed to by the housing sector. In the next five years, this contribution to the GDP is expected to rise to 6 per cent. It has also been suggested that India's property sector could begin to improve from late 2009 and may attract up to US$ 12.11 billion in real estate investment over a five-year period. 1.2 Market Segments The real estate sector in India can be divided into the following major segments: Residential Rough estimates residential segment forms nearly 75% of the total

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Real Estate market. This makes it by far the most important and largest factor driving the growth of real estate market. Almost 55% of mortgage finance disbursement for residential properties happens within the top seven cities and the balance 45% is shared by the whole country. The pricing of residential projects went up by 400 - 500% in most cities between 2006 and 2008. Interest rates also went up from an all time low of 7.00%, 20-year fixed mortgage to as high as 13.75% floating rate in 2008. The exponential growth in this segment was driven by rising urbanization. first-time developers who were earlier planning mall developments on sales model have now either postponed or cancelled their projects. This has further limited opportunities. The changes in valuations brought about by the financial crisis in major markets can be seen below:

The credit tightening from domestic banks and marked to market losses started reflecting on credit supply to the sector and the market went dead. Developers became stressed with no cash flows from the sale of projects and rentals of commercial office spaces and retail spaces also dipped by as much as 50% and everybody started playing the waiting game and bottom fishing to get back into the market. Commercial The commercial category is growing but steadily. It forms about 20% of the total real estate market. The IT/ITES sector has been the greatest contributor of this segment's growth contributing 70% of this segment. Due to the heat faced by this sector, the growth in this segment also faced a downturn. This is clear from the change in demand/supply dynamics as shown in the 2 graphs that follow:

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Retail The global financial meltdown and the slowdown in the Indian economy have adversely impacted India's retail sector which forms around 5% of the real estate sector. This drop in yield coupled with low leasing activity and high vacancy rates have all led to individual investors staying away from new retail real estate investments. Many

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2. Industry Analysis The true test of the professionalism in the real estate sector has to be seen now as the market has perceptibly shifted towards the buyer and products must be designed to respond to market requirements. Because the demand in the affordable housing segment is encouraging, real estate developers now need to concentrate on profits through high-volume, low margin deals instead of high-margin and high-quality transactions. This will mean designing affordable housing options suited to average Indian families whose disposable income is steadily on the rise. 2.1 Industry Developments Recent stock market activity in India and aggressive capital raising mechanisms - including qualified institutional placement - adopted by developers reflect the growing positive sentiment and the efforts of recent months and an increasingly stable global environment. The downturn has motivated developers to adapt by restructuring debt, disposing of non-core assets and refining their product mix. Significant loan restructuring by the financial institutions and a reduction of interest rates have resulted in more robust financial statements among real estate companies. The companies are also successfully managing to cut debt and attain liquidity either through non-core asset sales or share sales to investors. 2.2 Key Issues The key issues plaguing the real estate industry are as follows: ? Continued uncertainty and impact of credit crunch ? Infrastructure Status to Housing ? Real Estate Mutual Funds ? Stamp Duty ? Public Private Partnership ? Archaic Laws ? Foreclosure Laws ? Environmental Impact Assessment Notification ? Land Acquisition ? Foreign Direct Investment (FDI) ? Service Tax 2.3 Macroeconomic Indicators The main macroeconomic factors that have affected the real estate industry in recent past and their effect on the same is mentioned in the table in the next column. 3. Lessons frm the bust of 1996 The Indian property market witnessed a prolonged trough following a bust in 1996. Residential real estate prices which had seen an increase of on average 70% cumulatively in the three years preceding the 1996 bust, fell 40% in the three years after 1996. After the trough, prices witnessed a prolonged slump of five years before recovering. ? The property market bust was accompanied by a period of relatively lower economic growth. GDP growth which had averaged 6.8% in the four years prior to the bust, fell to 5.4% on average in the four years after it Although the causes of the growth slowdown were myriad and beyond the scope of this note, there was some impact of the real estate decline on consumption and investment demand. ? In the current context, we think the impact of a property slowdown can potentially be stronger than in post-1996. In the three years prior to 2008, residential prices had increased some 80% on average. There has also been a large increase in mortgages, albeit from a low base (see Exhibit 12), and more household wealth in absolute terms is in housing. Furthermore, the importance of construction in the economy has progressively increased, from 5.6% of GDP in 1997 to 7.3% of GDP in 2007. ? Housing busts generally have larger wealth effects on consumption, deeper effects on the banking system, and a high degree of contagion to other asset classes, compared with equity busts.

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4. Way Ahead Going forward, Real Estate sector has huge scope to grow in a developing country like India and also needs to assume very important role in the overall growth of Economy. India should take lead from Obama regime in USA and try to bring country out of the

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economic turmoil by focussing on establishing huge infrastructure in turn would propel further residential demand. However, rising projects, building roads, building bridges etc. This will not only interest rates have reduced the attractiveness of home loans. increase the productivity but though multiplier effect will generate 4.1.2 Growth in IT/ITES employment and income and lead India towards 10% GDP growth. The IT/ITES sector grew at a phenomenal pace in the past decade, 4.1 Market Drivers for Future significantly impacting office real estate in India. The sector The key growth drivers for the real estate sector arecomprises ~75-80% of the current commercial demand. Bangalore is the traditional hub for IT/ITES space in India. At 4.1.1 Favourable demographics present, Tier II cities offer more advantages to IT/ITES companies, The three demographic trends, i.e. high but falling birth rate, considering the lower real estate prices. Apart from IT/ITES, increasing life expectancy and declining infant mortality (due to biosciences, insurance, banking and consulting sectors are also improved living conditions), are expected to persist in the coming contributing to office space demand. years. Growing urban population India's urban population has grown ~3% annually to 285mn in '01 from 109mn in 1971. We expect the growth trend to continue, with the urban population touching ~370mn by '11E. Indian cities with >1mn population grew from 12 in 1981 to 35 in '01 and are expected to reach 70 by '25. Rising Indian Middle class The number of Indian middle class households with annual income between Rs0.2mn and Rs2mn has quadrupled in the past 10 years from 4.7mn households in 1996 to 17.5mn in '06. The Indian middle and upper class together stand at ~100mn and are expected to grow 15-16% annually in the next five years, which will drive housing demand further. Young India India's median age was 24 in '05 against China's 33 years and Japan's 43 years. As per industry estimates, average age of a home buyer has decreased from 42 years to 31 years. The younger generation is creating further demand for residential units and the trend should continue as the income generation capability of the Indian youth improves. Nuclearisation Reduction in household size has created additional demand in residential units. The size of an average urban household decreased from 6.06 in '01 to 5.5 at present. Rising income, greater number of income generators per household, especially working women and the younger generation, and changing mindset are the primary reasons for reduction in the household size.

1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 10 11 11 12 12 13 13 14 14 15 15 16 16 17 4.1.3 Increasing demand in hotels and logistics sectors 17 18 The growth in tourism and business travel and the emergence of low 18 cost airlines have led to increased demand for hotel rooms. Real 19 19 estate developers have aggressively ventured into the hotel 20 20 business to capture unmet demand. 21 21 5 Backward and Forward Linkages: Multiplier Effect 22 23 24 25 26 27 28 29

Figure: Real Estate Market: Participants & Linkages The construction sector in particular has strong linkages with the economy. By using a commodity industry input-output matrix, there are linkages that construction has with the rest of the economy. Although the direct impact of construction is 7.3% of GDP, the Increasing funding options in India Home loan as a percentage of indirect impact through backward linkages in terms of the sector's GDP was at ~6% as of FY07 versus ~4% in FY06. We believe that a usage of iron, steel, cement etc we estimate to be roughly 12% of sizeable opportunity exists for funding residential units in India, which GDP in FY08 .Of the inputs going into the construction sector,

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industrial goods account for some 64%, while services such as trade Some of the Key initiatives that can impact the overall state of account for a further 34%. economy in near future. ? Long term easy lending to industrial and infrastructure sectors boosting investment demand and hence economy. ? Development and construction should therefore be taken as an integral part of urban infrastructure. This change would encourage banks and financial institutions to resume lending to the industry ? Commencement of large scale integrated infrastructure and real estate projects to boost investor sentiments ? Encourage public private partnership projects on affordable housing ? Encourage corporate lending at discounted rates for affordable housing projects ? Relax foreign direct investment regulations in Real Estate in terms of the project criteria and allow smaller projects to access capital as well, which means that smaller investments could also Figure: Real Estate Linkages: Contribution to GDP start coming into the country ? Allow access to ECBs for construction funds with some Hence Real Estate forms very important part in GDP. In coming 5 years restrictions in terms of average maturity Real Estate needs to play a very mature role to pull India out of the ? Transparent and easy set of rules and regulations. Economic turmoil and back to 8%-9% sustainable GDP growth in 6.2 Affordability Housing coming future. Positive Impact on consumption will be felt through: Impact of Boost in Real Estate on Consumption Demand: ? Positive Wealth Effects ? Higher Income Growth ? Decreasing Borrowing Costs Impact of Boost in Real Estate on Investment Demand: ? Financial Accelerator ? Confidence Effects

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Figure: Need for Affordability: Mumbai Affordability Index The availability and quality of housing has a significant impact on people's lives, affecting choices of work and transport needs, as well as the quality of life. With rates of household formation continuing to increase, housing demand stimulated by the buy-tolet market, and housing supply remaining largely static, there are significant shortages of suitable housing in areas of population pressure. This is reflected in property prices, where in Mumbai, according to building society Nationwide's indices, prices increased 300% between 1995 and 2002. For the past few years, real estate prices shoot up with supply outstripping demand in most of the regions. Going forward it's imperative to look towards Affordable housing as biggest driver for Industry will be from the ever expanding lower - middle class. Initiatives like Affordable housing by Tatas should be encouraged

Figure: Real Estate Sector - Backward Linkages 6 Strategies for Future 6.1 Role of Players like IFCI Real Estate has a direct impact on Consumption and Investment Demand and as seen from forward and backward linkages, it has a great impact on employment levels in the country, net disposable income and other key macroeconomic indicators which directly impacts the Consumption and Investment demand through Multiplier effect.

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by the government and probably be subsidized to encourage other players as well in to the sector.

1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 10 Currently, the bulk of the mutual fund assets are invested in income-oriented options, including debt and money market instruments. For a 11 11 blossoming mutual fund industry, an investment option that combines both reliable income and strong growth, like a REIT, would be a 12 12 favourable. 13 13 14 14 15 To the Right: Table 15 REIT: Dividend Paying Stocks 16 16 Typical Balance Sheet and Income Statement of REIT 17 17 18 18 19 19 20 20 21 21 22 23 24 25 26 27 28 29
6.3 REITs and REMFs: Path Forward In the last couple of years lot of foreign investment has moved in to Real Estate in India through foreign REITs but India has failed to tap the domestic investment opportunities in the country for Real Estate. Introduction of REITs and REMFs will introduce the sector to small investors and hence will broaden the investment horizon for the sector. REITs and REMFs will play a big role in bringing real estate sector out of present depressing state. In the Indian context, REITs can help provide an exit route for developers, to revolve funds more efficiently. It will also provide opportunities to retail investors to participate in the real estate sector and provide asset diversification to corporate investors, besides building a vibrant secondary real estate market. This kind of fund will invest in different kinds of Real Estate properties like Retail Stores, Industrial Properties, Commercial Properties and Residential Properties, etc. and earn their income from rents, lease payments and possible appreciation of the value of these properties. With the infusion of large amounts of foreign capital into India in recent times and with the growing popularity in owning global real estate assets, a viable listed real estate market would garner a sizable portion of that increasing foreign capital.

THE CONSILIUM

3G Spectrum: The Road

Abhinav Chugh & Nidhi Kaicker
< Abstract The government has finally put the much-delayed 3G license auctions on the fast track while doubling the proposed reserve price to Rs 4040 crores. 3G has been successful in countries where service providers have offered 3G users strong platforms for both online content and applications like e-commerce. While 3G ARPUs can be 30-40% higher than 2G ARPUs, viability of 3G investments on a standalone basis remains uncertain due to huge incremental costs involved. As a result the large 2G operators potential bidders for 3G licenses are unlikely to go overboard in their bids. Further, given that additional 2G spectrum is proving to be difficult to come by, large operators are likely to use the additional 3G spectrum more for de-congesting their 2G spectrum, while simultaneously creating room for subscriber additions. > Introduction The telecom industry is always in a state of flux with rapidly advancing technologies competing with each other for a share of the market. The most recent development is the role out of the 3G services by MTNL/BSNL. Technology change poses major challenges to existing companies and provides opportunities for new entrants into the industry. The opening up of the market and the changes in the regulatory framework in India has created a very competitive telecom Industry in India resulting in a tremendous pressure on the service providers to increase their Average Revenue per user (ARPU). > 3G Subscriber & Revenue Predictions

Ahead

From 2009 to 2013, total mobile revenue in India is projected to grow at 12.5% annually to exceed US$30 billion and cellular subscribers are forecasted to reach 771 million. India is expected to achieve a mobile penetration rate of 63.5% by 2013 based on household income levels, increasing affordability and decreasing Total Cost of Ownership (TCO) for a subscriber. By 2013, the 3G subscriber base is projected to reach 89.9 million with industry ARPU (2G and 3G) decreasing to $4.1 at a CAGR of -3.1%. The initial target segment for 3G services will be the corporate users, professionals and high income youth as this segment is characterized by the current use of 2.5G services and ownership of 3G enabled handsets. > Viability of 3G for emerging Markets In the emerging countries, either the 3G services are yet to be launched or the 3G subscribers are below 10% of the total subscriber base. According to some industry experts, either the total ARPU should be over $10 per month or the data ARPU should be over 15% of total ARPU for the 3G services to gain traction. The reason for taking these two as criteria is that if the ARPU is low, it would take a long time to breakeven and it is very difficult to increase the ARPU in any market unless there is a genuine appetite for value added services which is reflected in the greater than 15% data ARPU criteria. In the chart below the countries that fall in the lower part of the graph are likely to be less successful in the 3G space while the countries in the blue area are more likely to be successful.

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The efficient operating model of service providers has allowed them to maintain high margins, even at a low ARPU and low revenue per minute. However, with higher operating costs in the rural areas and falling revenue per minute in the urban areas, the margins have come under considerable pressure as the service providers pursue further expansion.

> Determinants of 3G Business Case in India

? Improvements in infrastructure and increased cap-ex investments by carriers have laid the groundwork for the growing 3G market. Operators are now providing advanced

THE CONSILIUM
? services, which means an enriched user experience features and

for the consumer. However, there are still several areas to be considered for 3G to realize its full potential:
?

1. Subscriber uptake and increase in ARPU, which would be dependent on services offered 2. Ability to attract high-spending subscribers of other operators 3. Freeing up of 2G bandwidth, which would enhance the ability of operators to attract more subscribers without significant additional investments 4. Strategies (entry, positioning, and portfolio) chalked out by vendors in conjunction with service providers to ensure rapid rollout of 3G services 5. The final bid amount and the restraint exercised by operators while trying to outbid one another > Issues Facing the Technology In some countries the 3G technology has been introduced very successfully, however in some other countries there are various issues that prevented the technology being launched. High initial investments, policy uncertainty, long gestation period and very few business successes have delayed the launch of 3G services in India. Some of the issues concerning rolling out 3G technology are: 1. High Licensing Cost: One of the main reasons for the slow introduction of 3G technology in many developed nations was the high licensing fee. European mobile phone companies spent approximately $130 billion six years ago to buy the required licenses for the spectrum. 2. Breaking the Price Barrier: If 3G is to scale up quickly in India, handset prices will have to fall sharply. Unless prices are dropped, subscribers are unlikely to give up their 2G phones for 3G instruments. In India, where almost 87% of users are prepaid, it would be difficult for operators to bundle handsets or provide subsidies like in US. 3. Infrastructure: Upgradation of network infrastructure to make it compatible with the 3G services would require a huge investment from the service providers. In the present economic scenario apart from cash rich players like Airtel no other provider would be prepared for such enormous investments. Currently, the internet penetration and well as cellular penetration in India is very low. Therefore, 3G as a standalone business model does not offer much scalability. Japan (which provides a good example of the 3G market) had a cellular penetration of 54% and internet penetration of 40% (as against only 36.5% for telecom and 3.6% for internet in India). This coupled with the freeze imposed on the 2G spectrum by the DoT will lead to operators using the additional 3G spectrum to decongest their 2G spectrum as well as adding new subscribers. > Impact of 3G Spectrum on Spectrum Allocation & Pricing Policy On August 27th, 2009 Empowered Group of Ministers (EGoM) announced the broad details of the planned 3G auction. Some of the key policy decisions were:

1. The reserve price has been fixed at Rs 3500 crores, 75% higher than the earlier price of Rs 20 billion. 2. The number of slots per circle has been restricted to 5 (including those reserved for MTNL/BSNL). 3. Spectrum will be auctioned in the 2.1 GHz band in the blocks of 2*5 MHz in each telecom service area 4. Successful bidders will be granted the 3G spectrum license for a period of 20 years; and would be required to roll out the services within 5 years from the date of allotment. The government has stated that it expects to earn at least Rs 25000 crores via auction of the 3G spectrum in India. It is expected that bidding will occur at multiple times that of reserve price, considering the limited spectrum being made available. > Impact on Wireless Operators >>> Market impac 1. For successful operators, the policy provides an opportunity to earn higher ARPUs by offering differentiated services. 2. Allotment of 3G spectrum will alleviate pressure on 2G spectrum, especially in high traffic areas. 3. With the roll out of 3G services coinciding with the planned implementation of Mobile Number Portability (MNP), operators with better QoS will have the opportunity to attract high-end customers from other operators. >>> Bidding impact 1. . Metros like Mumbai and Delhi will witness aggressive bidding with only 4 and 2 slots respectively available for auction. In comparison, there already exist 8 operators in each of the circles. 2. In the event of a bidding war, considering that large existing operators (Airtel, Vodafone) already have the infrastructure in place and recurring cash flow, they might be in a position to outbid potential competitors. > Impact on Wireless Subscribers Wireless subscribers will witness an improvement in the quality of service (QoS) because initially the 3G spectrum is expected to be used for voice services only. Also, services such as video calling, gaming, high-speed Internet access and other data services will increase the range of content made available to consumers. However, in the initial phase, the offtake of 3G services will be limited to high-end subscribers due to the relatively high cost of handsets and pricing of 3G services. > Conclusion There exists a strong business case for 3G services, provided operators are rational while bidding for the spectrum. Even at 2 times the reserve price, a service provider with a 12-15% market share would earn a reasonable IRR of 15 per cent. Eventually, the subscriber uptake of 3G services in India would depend on the pace at which operators roll out services, ability to improve the QoS and the range of value-added services offered, pricing of 3G services and handsets, the availability of relevant content and applications

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THE CONSILIUM
1 1 2 2 3 3 4 4 5 5 6 6 7 7 8 8 9 9 10 10 11 11 12 12 13 13 14 14 15 15 16 16 17 17 18 18 19 19 20 20 21 21 22 23 24 25 26 27 The fears of an impending recession were ignited when the US government allowed Lehman Brothers to go bankrupt. This slump 28 has seen the demise of the investment banks. The world has 29

The

of the Global Recession: A New World Order

Siddhesh Agashe & Dhruv Anand
The worst seems to have passed by us. The sensex has started to look up and worldwide a positive sentiment seems to indicate that the world can now prepare itself for living in a post recession era. The leading economies have started to show signs of recovery and although the pessimists believe that the economy will recover only by end of 2010, most believe that we are well on our way to recovery already and economy should be in order by the end of this year itself. Every recession gives rise to a new world order with the economists and politicians come up with what is at that time thought to be a panacea for all. The great depression led to the formation of the bi polar world and the cold war for 60 years. The 90s saw the failure of socialism and the formation of the uni-polar world. This recession would also lead to a new world order. Many are speculating this recession could see an end of capitalism as we know it. As US gets ready for its new socio capitalist model, it could also lead to rise of economies like India and China who have managed to grow at respectable rates even in the blood bath elsewhere. Thus it could be a move towards a multi polar world with emerging countries acting as a power centre to counter the west. understood that having no control on the economy can have disastrous consequences. The US has already introduced large scale reforms that will ensure a greater control on banks which will require them to keep a large stock of money to protect them. Products that the banks produced were aimed at creating money out of nothing which was based on false assumptions which in turn crippled the whole economy. The bankers have to realize that they are a means to achieve an end and not an end in itself. The Indian banking system has proved to be extremely strong because of the strong influence of the RBI and government control. In future, almost all countries will probably adopt a similar system. We can bid adieu to the absolute independence governed by the Federal Reserve a few years ago. The credit culture of the West has also come under severe criticism and is one of the biggest reasons for the current situation. Under

Aftermath

THE CONSILIUM
current tax and spending policies the US publicly-held debt could rise to 400% of GDP by mid-century. The culture of excess spending will be controlled by the US government and a decrease in spending will mean economic growth will slow down. Large scale changes can be expected in the Obama regime including imposition of stringent limits on corporate debt and speculative lending. Such limits will restore confidence in outsiders to invest back in the US economy. There is a greater awareness amongst the US citizens with respect to the debt culture and the future could see larger saving rates and lesser credit card bills. A growing concern is on the relevance of the WTO in the post recession world. All the economies moved towards protectionism in order to protect their own domestic economies. Bail-out packages encourage operations for insolvent firms and denies share to foreign firms. WTO released a statement in March stating that steps such as raised tariffs, imposed restrictions or subsidies are detrimental to free trade and will only enhance the downturn. Countries under pressure from its people will continue to protect jobs and products of their country for short term goals and there is a distinct danger of WTO slipping into irrelevance. Another result of the recession could be decrease in the US domination of the world economy, as economies will try to move from dollar transactions to Euro to hedge their risks. As knowledge is disseminating across the world, US and Western Europe is losing competitive advantage that was gained because of scientific thinking and knowledge. Although US will continue to be a dominant force in the economy but it will face a huge challenge from the emerging economies which would mean we will be moving towards a multi polar world. Chinese economy has remained resilient even these hard times. But even then only 50 percent of their GDP is due to local consumption. China relies a lot on investment is tied up much more with the world economies. Indian economy seemed to have done well even in the worst times of recession. The main contributor to this has been that despite the globalisation era the Indian economy still relies on the domestic consumption. Almost 2/3rd of Indias produce is domestically consumed. Indias so called mixed economy and its wise use of fiscal and monitory policy has helped Indian economy to stay stable even in these times. A great talk about recession is that the BPO sector will suffer under the constant pressure from the Americans to keep the jobs in America. The big IT companies will look for markets outside USA in Europe. Some IT firms have been successful in establishing the same. They will have to improve internal efficiencies to improve the service delivery as well as move the value chain in terms of delivery of the product. All Indian exporters need to look at newer markets including West Africa, a potential market which has largely been unexplored. On the jobs front, we will see a welcome change were young graduates will look at alternate career options. Not everyone will dream of becoming a derivatives trader or investment banker. Sectors like manufacturing and engineering will be able to attract talented youngsters. Public sector jobs will again rise in popularity as it provides the necessary job security. Better people joining the public sector will mean better services will be offered by the otherwise much maligned sector. > Conclusion To conclude, the post recession world would be multi polar with the emerging economies having a much greater say in the world affairs. There is a great threat that parochial vision from the politicians with respect to protection of local jobs and outsourcing could delay the globalised world vision of the WTO. MBAs will think harder before jumping into a lucrative career on Wall Street. In addition, the Keynesians will return and greater government regulations will be the norm. The world has seen the end of uncontrolled capitalism and the future is a mix of both capitalist freedom and the socialist control.

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THE CONSILIUM
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Competitive Advantage Sabyasachi Ghosh & Yatindra Vijayvargiya in a Slowdown

> Introduction The present financial crisis, which formally began with the collapse of the Lehmann Brothers on September 15 2008, has now hit all countries in the world. The magnitude of devastation was largely unexpected even till March 2008 and has made organizations worldwide wary of making any crucial policy or strategic decisions in this situation of uncertainty. M& A activity, which was earlier believed to be the sole prerogative of the Giant Multinationals from the developed economies, has now reversed in direction considerably. In such a scenario, cost cuts across the board, reduction in staff and cut in spending are seen as the most viable strategies. Amidst all this cacophony and slaughter, business leaders ought not to forget the importance of the opportunity that a slowdown presents for re-aligning business strategy and policy. Capacity utilization optimization, workforce motivation, salary corrections are only some of the opportunities presented before the management by the slowdown. Financial prudence measures are, of course, taken up in every firm to survive liquidity crisis but presented below are some other strategic areas where the firm can focus during this slowdown to emerge even stronger, leaner, fitter and capable of driving the business growth in good times. > Lead Analysis to Maximize Value Generation of new business in times of recession could come like a saviour and hence firms should invest in lead management tools to ensure that every rupee spent on a lead generates the maximum results. Thus firms should thoroughly grade the various leads to identify and filter out the highly engaged ones which are expected to give no business, lowering the eventual costs and maximising chances at success during a downturn. > Agressive Brand Building Brand building against financially devastated rivals should be pursued as aggressively as possible. This way, the weaker clients will be hit at a point from where they are least likely to recover. The sinking brand will lose customers and these can then be tapped into by the surviving businesses, which is when the brand building exercise will show results. > Enhance the Marketing Budget A classic example of brand building and confidence was visible during the Great Depression in the 1930's when Kellogg's doubled its adspend instead of severely curtailing it. This unconventional approach paid huge dividends and Kellogg's sales almost doubled during the great depression. Similarly essential sectors like food products, communication, FMCG should look up to this slowdown as a great

Building

THE CONSILIUM
opportunity to get airtime at lesser rates and pursue brand building aggressively. This could also mean leveraging the cost efficient technologies such as the internet more effectively, especially with more and more people hooking on to the net and making purchase decisions there. > Focus on Innovation Organizations which are a part of the high tech and modern knowledge economy must further emphasise upon the value of innovation and ingrain into the organizational culture. This reinforcement will lower the costs of innovation for the organization and enable it to gain competitive edge in the industry. For example, Indian IT industry came of age in real terms when the world faced the Y2K bug. The Indian IT companies came to the forefront and thought their innovative implementation capabilities, displayed their mettle to the world. > Product & Channel Optimization Difficult times are also a wonderful time to innovate. This is the time when production optimization steps are received actively by employees and they are also the most likely to contribute their own ideas towards this cause. Thus at such a time, companies should follow a policy of encouraging the employees to try out innovative practices which result in increased efficiency in production. The employees in the distribution channels of FMCGs can give valuable first hand inputs on distributor performance and force the company to rethink its distribution channels and a possible reengineering. > Vertical & Horizontal Integration Reducing costs of production becomes a primary concern for manufacturing organizations during recessionary times and hence they should sincerely explore the possibility of lowering their costs though vertical / horizontal integration. This will not only reap immediate benefits during the recessionary period but also open up new business avenues for the company as the economy marches on to its hey days one again. > Expansion of Sales Geographies This strategy seems to have been especially useful during this recession as China and India, the two major developing economies continued to grow at 5%+ even during the recession and are expected to emerge out of it within one year. Standard Chartered, a bank that operates largely in the growing markets of Asia, Africa and the Middle East has shown impressive growth even this year, thanks mainly to its India operations, where it also became the No. 1 Foreign bank in the sphere of trade financing. Thus companies which might not have thought of expanding into the developing economies till now must take this opportunity to move out of the sinking markets of the developed economies into the new consumption hubs which are home to majority population of the world. It is these high numbers that are the business drivers in these geographies even in such dark times. > Enhance Customer Segment In today's economies, where communication costs have greatly reduced and the age of call centres has dawned, customer engagement assumes special dimensions for any organisation, especially in these times of financial uncertainty. A proactive strategy should be adopted to engage customers and promote the brand through ever improving product quality, service and delivery mechanisms. The same holds true for the business partners such as suppliers and distributors, with whom relations can be strengthened in such times. > Financial Restructuring Of course, the financial slowdown provides an opportunity, though not a very profitable one in many cases, before companies to restructure their resource allocation. The firms will need to liquidate some of their assets and excessive inventory, plant equipment and other unutilized assets can be disposed off to cater to liquidity requirements, which might form a priority in times of recession. This will not be very profitable in many cases but still it rids the companies of unproductive assets and releases much needed cash as working capital for managing operations of the firm, also purging the accounts of the company. The lower rates of interest which prevail during such recessionary times can also be utilised to the firm's benefits. > Other Best Practices: Presented here are a few more business practices that can help a firm sail successfully through a slowdown: ? Corporate restructuring through the merger of two or more divisions may be considered by the firms to contain losses and utilise resources more fruitfully ? to low cost destinations for production / services. This Relocating might mean moving production to regions in proximity of mines for metal producers, or moving to lower wage rate geographies for services firms ? product prices. This erodes not only margins but also Avoid cutting the brand equity that may have been built over many years, leading to loss of permanent customers who are the key to the business of any organization ? Focus on long term contracts with clients will help the business attain stability not only in terms of the financiers but also among the employees and other stake holders ?strengthening : good talent is easily available at a low Workforce salary levels in such time due to large scale lay-offs in the industry. This opportunity should be utilized to source such talent effectively

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> Conclusion Firms need to view the slowdown as not only a thereat but also a potential opportunity to either reaffirm their faith in the founding values and philosophy of the firm or overhaul these thoroughly successfully face such challenges in the future. A holistic strategy which does not lay stress on cost cutting unscrupulously, coupled with financial restructuring and better tactical and strategic decisions can prove to be the panacea for the firm. The only difference has to be in outlook, i.e. the firm must be able to think out of the box and utilise the slowdown as an opportunity to emerge bigger and better than before.

Is it time Dollar: for a new global currency?

Abhinav Chugh & Nidhi Kaicker
The United States' status as the unrivalled global superpower has rested on two unchallengeable pillars - the overwhelming US military superiority over all other rivals; and the control of global economic markets with the dominant role of the US dollar as reserve currency. However the scenario has changed drastically in the past few years; the US trade deficit, federal budget deficit, low interest rate, and low GDP growth compared to the high GDP growth restof-the-world has caused the dollar to decline against the world's major currencies. Though the fall in currencies' value maybe dismissed as cyclical occurrences, what makes the situation unique is that the most country's currency reserves are crammed with depreciating dollar assets. It is no surprise to see the US dollar's role as a global reserve currency is coming under pressure. In the past, with no credible alternatives, such criticism has been academic. But following the recent G-20 meeting, it looks as if there is a fledgling movement to turn the SDR (Special Drawing Rights) into a dollar substitute. Typically, the factors contributing to a strong/weak currency are: ? interest rate in home country Higher/lower ? inflation rates Lower/higher ?trade surplus/deficit A domestic ? A large, consistent government deficit/surplus crowding out domestic borrowings ? Sound/speculative monetary policy aimed at price stability > Understanding what makes a good reserve currency The currency reserve must satisfy two very important criteria:
? Should be easily convertible (so that they can be used as an emergency

The

THE CONSILIUM
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> Why the dollar is still the King of the World Although there has been lots of news lately about the U.S. dollar losing some of its status, there is no doubt that the dollar still dominates the Currency World.
? a part of each of the world's most actively traded currency The Dollar is pairs. According to the Bank of International Settlements, these currency pairs account for 67% of the daily turnover in the Forex market. When you add all of the currencies categorized as other traded against the U.S. dollar, the total rises to 86%.

source of liquidity), which the dollar with its large (and liquid) capital markets satisfy well. ? good store of value ; in the wake of depreciation in recent Should be a times, this goes against the dollar

THE CONSILIUM
?world's primary reserve currency, accounting for over 63% USD is the of the world's currency reserves. A 'reserve currency' is a currency held by the governments/central banks of other countries in large quantities. ? Another reason is that major commodities such as oil, gold and silver are priced in U.S. dollars. Almost two-thirds of the world's currency reserves are kept in dollars, because oil importers pay in dollars and oil exporters keep their reserves in the currency they are paid in. This makes access to U.S. dollars essential for anyone in the world who wants to purchase these products.

Mr Zhou suggests that the dollar's reserve status should be transferred to the SDR (Special Drawing Rights), a synthetic currency created by the IMF, whose value is determined as a weighted average of the dollar, euro, yen and pound. The SDR was created in 1969, during the Bretton Woods fixed exchange-rate system, because of concerns that there was insufficient liquidity to support global economic activity. It was originally intended as a reserve currency, but is now mainly used in the accounts for the IMF's transactions with member countries. SDRs are allocated to IMF members on the basis of their contribution to the fund. SDRs represent a basket of four currencies comprising 44 per cent US dollars, 34 per cent Euros, 11 per cent yen and 11 per cent pound sterling. Presently SDRs are too few in circulation, the outstanding amount being $33bn. Even with the new tranches lately issued by IMF, it will still constitute less than 5 per cent of the world's foreign currency reserves. By contrast, US dollar instruments comprised 64 per cent of reserves at the end of 2008. The strong global network that has expanded over the years is a self reinforcing process. A transition from dollar to any other reserve currency is only possible, if a substantial proportion of the world population makes the jump in unison to continue exploiting the benefits of globally integrated markets that we have today. Hence a shift from dollar to SDR though seems reasonable from the theoretical point of view is not likely in the near future. > Growth of the Euro Euro is the only currency that can give competition to dollar. The combined GDP of Euro zone is close to US GDP, and the total Euro in circulation now exceeds dollars.

> Factors Determining the future of the Dollar While the dollar still dominates the currency world, many argue that the tides are changing, and that the dollar is in danger of losing this status. Two of the main reasons for the decline are mentioned below: 1. Many people consider the monetary policy of the United States to be flawed, citing the Federal Reserve's increase in the money supply to hold interest rates low, as a major factor in the dollar's decline. The lowering of interest rates tends to weaken the value of a currency when all else is equal. As the value of the currency falls, countries around the world holding that currency see their wealth evaporate due to the falling value of their reserves. Obviously, this has the potential to make the dollar less attractive for them to hold as their reserve currency, which means a decrease in demand, and a decrease in the value of the currency when all else is equal. 2. The other factor that people point to as a reason why the dollar may lose its status as the most dominant currency of the world is because of the rise in prominence of the 'Euro' and its relative strength in comparison to the dollar in the past few years. The graph below shows the distribution of foreign exchange reserves among Dollars, Euros, Yen and Pounds.

> Is the SDR a rival to the Dollar? Zhou Xiaochuan, the governor of the People's Bank of China, in his speech on Reform the International Monetary System delivered on 23 March 2009, just before the G20 London in April, called for a radical approach wherein a global currency should replace dollar as the reserve currency. This global currency, according to him, should be represented by a basket of significant currencies and commodities, an extended version of the International Monetary Fund's Special Drawing Rights (SDRs). An attempt in this regard will have serious implications in the financial world majorly undermining the strength of dollar and the U.S. economy as a whole.

Until the advent of the Euro in late 1999 there was no potential challenge to the Dollar hegemony in world trade. The coming of the Euro has threatened the dominant role of the US dollar as reserve currency. In just a few years it has established itself as the second-most important currency in the world's financial markets. With a significant part of the petroleum trade using the Euro instead of dollars; many countries would have to keep a part of their reserves in Euros. The dollar would then have to compete with the Euro for global capital. > Conclusion While the Dollar has been and still remains the ruler of the currency world, it is no doubt that its position is now being threatened by the SDR and the Euro. With the continuous decline in its value, countries are scared of their deteriorating reserves and want an alternate to the USD. Potential middle ground could be structuring a basket of rich world currencies which would somewhat diversify the dollar-risks and allow more freedom to dollar-benchmarked economies in pursuing their monetary policy, while allowing them gradually reduce their dependence and purchase of dollars. However there remains considerable space for thought and action in this domain.

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THE CONSILIUM
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Private Equity

In India:
> Right Exit Opportunities:

Breaking Ahead of

Economic Turmoil Sushil Parischa & Peeyush Anand

A couple of years ago, private equity players were spoilt for choice in terms of investing opportunities. Funds were flowing in and there was room for everyone, as evidenced by the frenetic pace of deals and the ever expanding competitive landscape, even in the face of increasing valuations. With Stock markets reaching new heights and frenetic M&A Activity, there were enough exit opportunities for Private Equity Investments. With the arrival of economic downturn and credit crunch, Private Equity players faced new challenges and in future they need to rethink about their strategy in terms of timing of entering and exiting and also managing their portfolios. Strategies for Private Equity players with respect to timing of entry and exit: > Right Vintage Year: With economy showing some signs of revival and valuations again picking-up in last 6-8 months, it's important for PE players which are planning to establish new funds to enter the market at right time. Vintage year or the calendar year in which drawdown of capital for fund starts, has a great implication on the returns the fund will generate. Vintage year at the peak of the economy can lead to lower returns as valuations will be high when the fund was established and can lead to false start. As the valuations at this point of time are rational but at the same time increasing, it's important for PE firms to time their entry right. Capital Markets have revived in last couple of months but still there is lot of volatility present in the markets and also signs of IPO markets are not that encouraging with IPOs of Adani Group and NHPC falling flat. Keeping all of this in mind, PE firms should follow wait and watch policy for exiting from some of the existing portfolio companies. 6-12 months from now will be a good time to access the markets and decide upon exiting from some of the present holdings of private equity players. Strategies for Private Equity players with respect to Portfolio Management: > Add-on acquisitions: Based on the robust models of some of the existing portfolio companies and existing rational valuations and limited exit opportunities, Private Equity players can look for expanding their Investment horizon by making add-on acquisitions of existing portfolio companies. Cheap asset prices have lead to relative increase in add-on acquisitions versus traditional private equity deals. According to a deal type breakdown for this year's first quarter, add-ons accounted for 51% of all private equity deals

THE CONSILIUM
> Secondary vs. Primary Transactions: The recent turmoil in the financial markets and the resulting liquidity crunch drove many institutional investors to cash out, including pension funds, university endowment funds, corporations and funds of funds. This provided secondary market to expand and buyers to look for discounted prices of assets. So far this year, secondary deals have taken place at discounted 37% of their face value. Secondary investments also give opportunity to established PE players access to selective funds and quicker returns on investment. Secondaries market will be encouraging in short-term in 12 to 18 months on the basis of cheap asset prices and consolidation in PE market but on the longer horizon of 3-5 years, Primary transactions based on the robustness of the business models of prospective portfolio companies will drive the profitability of Private Equity players. > Early vs. Late Stage Transactions: Late stage transactions in present scenario make sense because firstly businesses have survived the down-turn and still are sustainable and secondly it gives a better perspective to PE Investor while evaluating the performance of a business model. Investor will be much more certain about the investment in case of late stage transaction and it becomes extremely important when presently every player is making cautious moves in market. Going forward early stage transactions will also come in to the picture with the volatility in stock markets becomes less and overall market comes out of this turmoil. PE firms also need to sure about investing in specific sectors with the present economic downturn affecting some of the sectors. In India's context, Education sector holds lot of promise in terms of growth and hence is a good prospect for getting good returns for Private Equity players. According to estimates, Education in India happens to be a huge market of around $40 billion with a CAGR of around 14%. Hence it provides an opportunity of 20% to 25% profitability on good deals. Some of the segments of interest within Education sector for Private Equity players will be: right opportunity for choosing profitable deals. Some of the recent activity in Education space for Private Equity players:

In one of the largest exits by a private equity firm in India, UTI Ventures has made 50 times its investment in e-learning firm Excelsoft Technologies by selling its 35.5% stake for Rs 125 crore to hedge fund DE Shaw. In another exit from Education sector, ICICI Ventures' exit from Infoedge fetched it 17.5 times higher returns. Another sector which has great prospects in near future is Healthcare and Life Services. Whether it is consolidation of hospitals within India or the impact of the push for generic drugs by the new US administration. there is no lack of buzz and opportunity for the Indian Healthcare & Life Sciences (HLS) industry. Some of the key segments are diagnostic products and services, Medical Devices and Equipment and Wellness Products and Services which are growing at a CAGR of over 20%. Given the fragmented nature of both the hospitals and pharmaceuticals sectors, investors see clear potential for tapping into consolidation opportunities in partnership with growthoriented entrepreneurs. Penetration of Health Care facilities from non-metros will provide boost to the Industry and provides a great opportunity for expansion and growth. Opportunities like Tele-Medicine and hub & spoke models. Once the delivery and business models are honed, non-urban India provides healthcare companies with a large and scalable market and hence a great opportunity for Private Equity Investors in next 35 years.

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Key Segments:

K-12 Schools include all schools till class 12, currently owned by trust, structured as non-profit entities many of them political/religious backed. Professional Colleges include Engineering, Medical and Business Schools. Around 75 % of Professional colleges are Private entities. Vocational training basically include training for English speaking, staff training for Finance, Retail and hospitality. This sector provides right size for the Private Equity deals ($10-$15 Mn) and going forward potential scalable business and low real estate exposure. Another important aspect in terms of Education sector is the good deal flow for Private Equity players and hence this gives them the

Drivers for this sector will be increasing per-capita spend, improving health care infrastructure, increasing health insurance coverage, increasing disease profiles and penetration of healthcare services in to tier 2 cities and rural areas in India. With the present state of healthcare in India and most of the players having big expansion plans investors will get right multiples in healthcare sector.

Sector Focus Auto

THE CONSILIUM
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Braving the Storm

Abhinav Chugh & Nidhi Kaicker
> Introduction In the times of global uncertainty, the U.S. automotive industry is facing some of the most complex challenges in its history. As of June 2009, the automotive industry accounts for about 2.3 percent of the US output (down from about 5% at the beginning of the century) and about 20% of the shrinkage in manufacturing sector can be attributed to the automotives. Pressures from plunging sales, frozen credit markets, global competition, higher raw material costs and, until recently, gasoline prices, and growing consumer demand for more fuel-efficient vehicles are driving a transformation of the industry across its entire value chain. There has been a massive setback for the entire sector; sales have dropped to an annualized rate of only about 10 million, where the industry boasts of a capacity of over 17 million cars per year. While the Detroit 3( General Motors, Ford , Chrysler) have been struggling with profitability and the restructuring of their operations for the past few years, the global financial crisis has begun to negatively impact automotive Original Equipment Manufacturers (OEMs) around the world. > Recounting the Recent Events The timeline of the crisis is rather easy to trace. The first jolt came from spiraling fuel costs, with crude touching $100 a barrel. In the recent past, the Detroit big three had focused on manufacturing the high margin SUVs and trucks (SUVs on an average had profit margins of about 20%, as against the 3% margins on the average small car).

The

Global Auto Majors:

As fuel prices skyrocketed, the sales of SUV began to dip with customers beginning to worry about fuel efficiency. As customers moved towards smaller cars, it was Toyota and Honda who were making merry while the big three suffered. Next came the credit squeeze. In the blink of an eyelid, the entire financial market seized up and credit facilities dried up. The automotive market already reeling from impact of the oil shock could not recover, and went into a tailspin. Even though the oil prices have receded on the back of a worldwide economic slowdown, there has virtually been zero positive impact on the automotive industry [Exhibit 1]. As the months have passed by, the outlook for the future begins to look very bleak indeed. For the first time in decades, the sales have dipped under 15 million [Exhibit 2]. Given that the current state of the market were to be maintained, it is more than likely that the next three years would see all automotive manufacturers (relying primarily on the US market) incurring substantial losses. > The Prospects for Chrysler & General Motors Chrysler which had been asked to merge with Fiat could be another failed automotive merger in the making. The record of foreign carmakers buying large or controlling interests in American auto companies has been uniformly disastrous. The example of failed mergers can be looked from Chrysler's relatively recent merger with Mercedes-Benz, at which time the joint company was known as Daimler-Chrysler. Also the purchase of American Motors by Renault,

THE CONSILIUM
products. As a result share of Ford, GM and Chrysler combined which was 73% in 1995 slipped below half to about 48% in 2008, with each company experiencing a 20-30% drop in sales during the year. Consequently, inventory on dealer lots in the US have surged. Measured in days supply, vehicles in stock at the Detroit Three have jumped from an average of 78 days during the first 10 months of 2008 to 121 days on December 1st, 2008. > Salvaging Detroit: The Way Ahead There are many proactive steps that need to be taken in order to ensure the survival of the indigenous auto industry in the US. First and foremost is cleaning up the balance sheet. The objectives are quite clear: the automakers need to reduce the amount of debt they have accumulated. The best option is to convert most of it into equity, an option that would be the most difficult to exercise given the poor performance of the automotive sector. The big three also need to take the employee related liabilities off the balance sheets, which again is easier said than done. The ideal way would be to give out a huge sum of cash to a trust that takes up the responsibility of maintaining the benefits and the controversial job banks. The fact that UAW declined to take wage cuts in 2009 indicates that the unions would play hardball, and industrial policies under Barack Obama's new democratic regime would be tested. Next, it becomes important to promote smaller, fuel efficient cars. The market for smaller cars is very well developed the world over, and the success of SUVs in the US has been an anomaly. In the BRICs, it is simply the affordability that has led to the success of the small car concept. Japan and Europe have policies that keep gas prices high. This has created a very stable market for small, fuel efficient cars. Activist steps need to be taken to promote the sale of smaller cars. If the auto industry has to survive, it will have to incorporate and encourage breakthroughs either from outsiders or improve their research and development sector. Automakers will need to transition from a vertical, proprietary, hierarchical model to an open, modular, collaborative one, becoming central nodes in an entrepreneurial ecosystem. In this unstable dynamic environment, virtually all major automakers, both in the U.S. and abroad, are looking to collaborate with other automakers to jointly develop new technology like hybrid power trains, share components such as transmissions, or fill excess production capacity by assembling vehicles for other OEMs. The industry transformation that is underway will see the rise of a variety of partnerships and other forms of collaboration that only few years ago did not seem possible > Conclusion The most important action every stakeholder in the auto industry must take is to think globally and beyond the immediate horizon. The causes of the current downturn demonstrate the degree to which every player is inextricably intertwined. It is very obvious that unless measures are taken at every step of the way going forward, the next page in the stories of the big three would have to be chapter 11. If that eventuality were to be realized, the debtors, the unions and the franchisees would stand to lose everything. It would be best for these parties to accept whatever deals they get now, and live with it. Success in the upturn will require companies to understand the terms of that transformationnew technologies, new sources of demand and supplyand to act accordingly.

the French auto giant resulted in the extinction of AMC, with its remnants bought by Chrysler. It should also be noted that Fiat abandoned the American car market decades ago, so it is totally unfamiliar with the dynamics of the U.S. auto marketplace. General Motors is a different case which is a larger carmaker, with a global presence and vast overhead. The fact that its size is huge defines the essence of the problem being faced not only by GM but also by other global car builders, including Toyota, Nissan and Ford. The overhead for maintaining this complex, global manufacturing infrastructure is staggering, and can only generate profits if sales match production capacity. > The Problems The seventeen billion dollar question, therefore, is this: what is it that is killing the big three? There is no correct answer to this; one can only speculate. Many have said that the big three have been digging their own graves for decades, and it's only fair that they are buried now. We can say that it's the benefits that are killing Detroit. A system that was at the centre of American capitalism is more socialistic in nature now. At $30 per hour, Toyota pays one dollar more per hour to its employees than the wages paid by the big three to UAW affiliated workers. However, the average hourly wage of unionized workers in the US is $76 an hour. The differential: benefits, benefits and more benefits. GM proudly boasts of 3 retirees for every worker. Where dealing with the retirees is a national problem, it has taken quite different proportions in Detroit. One of the other reasons why the Detroit three have remained in the spotlight is the ongoing shift in demand towards smaller cars - a segment in which the domestic automakers lack competitive

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Sector Focus Auto

THE CONSILIUM
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Driving Through Stormy Weather

Rising fuel prices, the economic downturn of 2008 has led to global financial crisis in the auto sector with major players suffering great losses and loads of job cuts. Two of the three Detroit majors have already filed for Chapter 11 bankruptcy. The US car makers have been challenged by the emergence of the foreign players into the US market. These foreign players have done well despite the crisis which shows that major reasons for failure of US automakers has been poor management and a general inability to keep up with changing consumer preferences.

American Auto Majors:

Dhruv Anand & Siddhesh Agashe
the rising fuel prices and increasing eco-consciousness among the consumers and continued production of the big cars. With the economic downturn, decrease in liquidity and no major construction taking place the demand for such light truck derivatives reduced immediately as customers moved towards more cost effective measures. > Strong Unions 'Wages in the automobile industry are made up of two components, what we call base rates and the cost of living factor which is fed in by the operation of the escalator' Leonard Woodcock, Former President, United Automobile Workers US auto markets has also been affected by extremely strong labour unions which have worked against the automakers. They have forced the automakers to pay workers even if they have not been contributing to production. Critics of the union feel that the union kept the auto giants burdened with costly benefit programs and protected higher-paid, long-term employees from the cutbacks set in place for new workers. Foreign automakers pay workers only $4550 per hour and have been successful in keeping the unions away from the assembly line while on the other hand the US auto makers had to pay them around $73 an hour, thus increasing costs of production and eating away the profits. >Braving the Storm To come out of the mess and regain the pride of place they once enjoyed, the big three auto companies have to make several drastic changes in the way the function. Some of the methods that can be cited are: Restructuring of the Companies 'That's the method: restructure the world we live in some way, then see what happens' Frederik Pohl, Science Fiction writer Many experts believe that the filing of the Chapter 11 bankruptcy will help GM and Chrysler to restructure itself and hence come out of arm twisting by the unions. Wharton finance Professor Jeremy Siegel,

The

> Producing an Outdated Product 'Car designers are just going to have to come up with an automobile that outlasts the fuel payments' Erma Bombeck, Humorist Detroit car manufacturers have long been concentrating on making gas guzzlers like SUVs and mini light trucks. These are extremely fuel inefficient but have much higher profit margins (15 to 20% on an SUV compared to 3% or less in a sedan) and hence have been a major source of profits for GM and Chrysler in the past. Light trucks, pick-up trucks and SUVs form 55% of US production and took no account of

THE CONSILIUM
2010 for use in commercial fleets, complemented by a batterypowered sedan in 2011. By 2012, the company will bring a family of regular hybrids, plug-in hybrids, and battery electric vehicles to market. Ford intends to invest about $14 billion on fuel-efficient technologies over the next seven years and aims to achieve a 36% improvement in fuel economy for its entire fleet by the 2015 model year by. It has already come out with a new line of 'EcoBoost' Consolidation of Industry - Emergence of the Bigger Players engines for its cars which have 20% higher fuel efficiency and 15% 'Globalization is not only something that will concern and threaten us reduced GHG emissions than normal engines.GM has unveiled a in the future, but something that is taking place in the present and to high profile plan to launch its plug in hybrid car, the Chevy Volt in which we must first open our eyes' Ulrich Beck, Sociologist 2010. GM plans to launch predominately fuel-efficient cars and crossovers over the next four years, investing $2.9 billion in fuelConsidering recent market, industrial and economic trends, in about a efficient technologies and alternative fuels during that time period. decade, the auto industry could become a market for just 5-6 major global players. For an automaker to survive, it has to move beyond the Smaller Cars - the Nano Effect boundaries of its own country. This represents a huge challenge 'Small is the new Big' Seth Godin, Management Guru because cars cannot be exported economically to other countries because of higher cost of inventory, import tariffs, etc. If you have to The US and the developed markets have saturated. The rising sell a car in China, it has to be produced in China itself. The most cost middle class in densely populated developing Asian and African efficient method is to source components globally and set up countries will be the future for auto makers. The export driven manufacturing units in the local country. Toyota is in the best position markets of China have been struggling because of the global of becoming the market leader, mainly because it employs this recession and it has to concentrate on the demand in domestic business strategy. It is well established in the emerging markets of markets. China has reduced taxes on automobile purchases and India and China and other Asian countries. It has production facilities India has reduced interest rates on new vehicle loans. India and in US and Europe as well. The future could see manufacturing of cars China are the second and the third largest car markets but the being done in Asian countries, South America and Eastern Europe demands of the two countries are naturally different to those in the because of the potential of the markets and also availability of cheap developed world. Manufacturers like Hyundai have done well in labour. Elsewhere, companies will need to look for mergers and India because they have been able to bring in India specific models acquisitions as a strategy to increase their brand portfolio, market to India. Volkswagen has decided to enter in India with India share and share certain costs. For example, Fiat, has acquired 35% of specific small cars in 2010. Tata Nano is all set to change the face embattled US car major Chrysler. In return, Chrysler gains access to of automobile industry in India. Already many manufacturers have Fiat's fuel efficient technologies. Ford, the only surviving US announced their plans to make cheaper cars. Toyota aims to launch automaker must look for a deal with some European or Asian a 'strategic' small car by next year. Maruti Suzuki is going to launch manufacturer to increase its market share in Europe and Asia. French smaller cars by 2012. Even motorcycle manufactures like Bajaj has manufacturers like Renault and Peugeot might come together. Small decided to enter the automobile sector by launching a small and manufacturers like Saab could see an end of the road unless they take inexpensive car with high fuel efficiency. Tata Nano aims at proactive measures. achieving unprecedented market penetration by targeting a large consumer base for which cars were a luxury items earlier. It is a Movement Towards Cleaner Cars classic example of use of innovation and technology to increase the 'If we were driving pure hydrogen automobiles, that automobile would size of the pie. Major auto makers will need to come up with such actually help clean up the air because the air coming out of the exhaust innovative designs to stay in the race. would be cleaner than the air going into the engine intake' Dennis > Conclusion Weaver, Actor 'Failure is simply the opportunity to begin again, this time more The reason Toyota has taken a lead from American car manufacturers intelligently' Henry Ford, Founder, Ford Motor Co. is because of the presence of hybrid cars like the Prius in its armour. In times of greater environmental consciousness and high petroleum The words 'innovation' and 'efficiency' gain even more prices, auto companies will be forced to move towards cars running on importance in recessionary times, and the car manufacturers know alternative technology. While announcing the bailout package for the that they will have to improve the products to suit the demands of auto car makers, the Obama administration had stressed on the fact the consumers. Fuel efficient, hybrid cars will be the order of the that the Big 3 have to shift their focus to make hybrid and times to come. Production facilities will need to be shifted to environmental friendly cars. The US Department of Environment has countries were cheap labour and resources are available. Global spent $25 billion in low interest loans to encourage companies to build sourcing and use of cutting-edge, clean technology and other green vehicles. Clearly the future is in the manufacture of hybrid and innovative steps would be necessary. The automobile industry is at fuel efficient cars. the crossroads and the direction a company chooses will decide its Ford Motor Company unveiled an aggressive plan to electrify its fleet of chances of survival in the future. vehicles, including plans to offer an all-electric van-type vehicle in author of the book 'The Future for Investors', asserts that Chapter 11 bankruptcy would allow Detroit to reorganize but not cause the massive job losses feared by some. "Any bailout of the auto industry is really a bailout for the health benefits of the UAW. That's all it is." GM will emerge as a smaller company after the Chapter 11 filing but can than concentrate on fewer, smaller yet more profitable brands.

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THE

CONSILIUM
Vol 1, Issue 1 March 2010

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