Friday, July 30, 2021

India Covid 19 impact

It's now very clear that, like elsewhere in developed world, the formal economy in India too has rebounded smartly from the huge economic shock. It's even more impressive that this has been achieved with minimal fiscal stimulus. 

But it's with the informal economy that there was always doubts about its resilience to a shock of this nature. The Pew Research estimates that the Indian middle class has shrunk by a third, the number living below poverty line ($2 and below) has more than doubled to 134 million, and the poverty rate has risen to 9.7% in 2020, up from the January 2020 forecast of 4.3%. 

The net result is a widening of the base of the income pyramid, wiping out decades of impressive progress.  

It may be a matter of debate as to the degree of widening, but the reality of worsening of poverty and is hard to dispute. It deals a big blow to the second most impressive poverty reduction stories of last two decades. 
A study by the Azim Premji Institute has found that the number of individuals who lie below the national minimum wage threshold of Rs 375 per day increased by 230 million during the pandemic (comparing July 2019 and February 2020 to March-October 2020), an increase of 15 and 20 percentage points in rural and urban areas respectively. Given pre-pandemic income trends, without the pandemic, poverty would have declined by 5 and 1.5 percentage points and 50 million would have been lifted above poverty line. 
Further, nearly half of formal salaried workers moved into informal sector between late 2019 and late 2020. 
These findings are corroborated by research from elsewhere, including the World Bank. The Bank finds that 150 million people would be added to extreme poverty by 2021, with a large share coming from India.

There is limited macroeconomic data to capture the poverty trends given that most of the poor work in the informal sector, whose measures are inherently difficult to capture. However, there are other strong proxies of the impact. One has been the persistence of the high demand for NREGS works - in January 2021, 26.28 million households sought work which was 39.12% higher than last year. 

Or this about food insecurity,
Surveys of food insecurity during last year’s lockdown collated by Jean Dreze and Anmol Somanchi show that between 50 and 80% of households surveyed were eating less than before.
Other good proxies have been the trends from night lights data which too point to significant impacts on incomes.

On the labour market side, Mahesh Vyas points to a possible 11 million job losses since the pandemic struck. 
Employment in February 2021 compared to the average of 2019-20 shows a loss of 3 million jobs among business persons, a loss of 3.8 million jobs among salaried employees and 4.2 million among daily wage earners.

Finally, from an excellent data series by Pramit Bhattacharya in Mint on the impact of the pandemic. This on inter-state poverty trends and this on inter-country trends. India has contributed more than half of the global increase in poverty.

This on the steep wage cuts by the small firms as they struggle to survey.
This on the impact on schools and learning. India's school closures have the fifth longest, and the poorer children have suffered disproportionately especially with the shift in focus on remote and digital learning. It exacerbates pre-existing learning gaps.
Finally, this is the latest from The Economist,
Bank loans against gold jewellery, India’s most traditional way of saving, jumped by 82% in the past fiscal year. A poll of white-collar workers by Grant Thornton, a consulting firm, found that 40% of employees had suffered a pay cut last year. Another survey, of 3,000 mostly informal workers in Delhi, the capital, found that male breadwinners had on average suffered a 39% fall in income in the past year. Of the more than 38,000 respondents to another survey—carried out online, meaning all were rich enough to enjoy internet access—more than three-quarters said they expected their incomes to fall in the current year.

The recovery in the formal sector will become unsustainable without more broad-based recovery.  

Update 1 (10.08.2021)

More signs of labour market distress from the GoI's latest Periodic Labour Force Survey (PLFS),

It shows a sharp increase in employment in agriculture from 42.5 per cent of the total employment in 2018-19 to 45.6 per cent in 2019-20... Such a large shift of labour in favour of agriculture cannot be voluntary. It is a sign of distress in the labour market where non-agricultural sectors are unable to provide employment and labour is forced to shift to agriculture. The forced or at least involuntary nature of this migration is evident from the wages data provided by the PLFS. Salaried jobs provide wages of the order of Rs.16,780 per month. Self-employment provides wages of the order of Rs.10,454 per month. These translate into wage rates of Rs.558 per day and Rs.349 per day, respectively. In comparison casual labour which is the type of employment provided by agriculture yields much lower wages – of the order of Rs.291 per day. Labour would not voluntarily shift to this lowest wage-rate sector unless it had no better option. Agriculture provides a low wage safety net for labour during times of distress in India... PLFS estimates are for a 12-month period from July 2019 through June 2020...

According to the PLFS, the losers are manufacturing, construction and transport, storage and communication. The share of manufacturing in total employment fell from 12.1 per cent to 11.2 per cent. Of all the specific sectors for which PLFS provides data, the manufacturing sector saw the biggest fall (0.9 percentage points). The next largest loser is construction (0.5 percentage points). And then it is transport, storage and communication (0.3 percentage points). These three account for a little over half of the increase in the share of employment in agriculture.

Update 2 (19.08.2021)

The Covid 19 period have seen a steep rise in gold loans, a proxy for economic distress,
Gold loans have surged nearly 85 per cent over the past year, to Rs 60,464 crore… The outlier growth in gold loans compared to any other segment was also aided by the Reserve Bank of India’s (RBI’s) move to hike the loan-to-value (LTV) ratio for such loans from 75 per cent to 90 per cent… Take a look at the gold auctions. Mannapuram Finance had auctioned Rs 8 crore worth of the yellow metal in the first three quarters of FY21. This shot up to Rs 404 crore in the fourth quarter and further to Rs 1,500 crore in the June quarter.

Tuesday, July 27, 2021

Some observations on Zomato and Swiggy

Here are some facts. Zomato raised $1.3 bn through an IPO which was oversubscribed 38 times and which valued it at $14.2 bn. At about the same time, its competitor Swiggy raised $1.25 bn in a Series J fund raise which gave it a post-money valuation of $5.5 bn. 

The post-IPO public market price discovery of Zomato shows that Swiggy is 2.6 times under-valued

Techcircle have these comparative numbers for Swiggy and Zomato.

By all metrics, Swiggy appears bigger, even if only slightly, than Zomato. 

And this disaggregating incomes,

More information is required to make any rigorous comparative assessment of the two. That would include usage intensity numbers like average order size, average transactions per user each month, fee percentage from restaurants and so on. 

I blogged here yesterday on the bubble nature of the IPO.

Some observations:

1. It's more likely that the the valuation of both are the same, as Aswath Damodaran has shown, whereas the public market price of Swiggy is couple of multiples higher. In simple terms, Zomato's valuation is only $5.25 bn, whereas its current market price is $14.2 bn. 

2. If the wisdom of the crowds is superior to that of a few individuals, then investors should be piling onto Swiggy, the competitor of Zomato. Even if not superior, but if Swiggy is also planning to go public soon, then too there should be a parade of VC investors outside Swiggy's office. It's also a price arbitrage opportunity for the existing investors in Swiggy, who should also double up at the same or slightly higher price. 

3. It's notable that Swiggy could raise $1.25 bn from private investors including Softbank and Prosus (Naspers) but only at a $5.5 bn valuation just a couple of days after Zomato completed its $1.3 bn IPO. Swiggy's investors got lucky and a great deal. 

It probably because, even though the deal was closed just a couple of days after the Zomato IPO itself closed, the Series J negotiations and term sheets would have been fixed much earlier. In fact, $800 million out of the $1.25 bn was already disclosed early this year. 

4. But, if markets stay as frothy as it's now, Swiggy's promoters and investors need not worry. Unlike Zomato's promoters who, judging from the first day pop left huge money on the table, Swiggy's promoters could rake in much more by pricing its IPO closer to the comparator market price. Swiggy and other could benefit from the later mover advantage.

5. There appears to have been a first mover disadvantage for Zomato in leaving money at the table and not maximising its IPO takings. Conversely there may have been a first mover advantage for its investors in maximising their returns.

Monday, July 26, 2021

The startup IPO bubble reaches India

This blog has been cautious about the startup sector of India (and developing countries in general) and global impact investing. I am inclined to believe that there is more froth than substance in both. In case of the former, the ultra-loose monetary policy and the global search for yields has seriously compromised the disciplining powers of finance (see this and this). In the latter, ESG investing have provided the convenient excuse for impact and green washing. In either case valuations are a misnomer for price

The Indian startup scene has been set ablaze by the spectacular IPO of Zomato. In a largely conservative market this constitutes a huge collective leap of faith since the company has consistently made increasing losses and several questions hang on its profitability. With some more blockbuster IPOs lined up, the party is likely to go on for some time. Some high-profile boosters even think of it as a new dawn in risk capital raising. The problem is with those left standing when the party ends, as it must. And it's most likely to be not pretty. 

The real Zomato IPO prospectus should have been something like this

In fact, Aswath Damodaran has this typically rigorous take on Zomato's $14.2 bn post-money valuation,

With my upbeat story of growth and profitability, the value that I derive for equity is close to 394 billion INR (about $5.25 billion), translating into a value per share of 41 INR. That may seem like a lot to pay for a money-losing company with less than 20 billion INR in revenues in the most recent year, but promise and potential have value, especially when you have a leader in a market of immense size.

A good explanation for the divergence is that while $5.25 bn is Zomato's valuation, its market price at this moment is $14.2 bn. 

On a global scale, Indian markets are just catching up with the western markets on startup IPOs. The Economist has a summary of the rise and rise of unicorns and gush of venture capital flowing into startup funding,

The number of such firms has grown from a dozen eight years ago to more than 750, worth a combined $2.4trn. In the first six months of 2021 technology startups raised nearly $300bn globally, almost as much as in the whole of 2020. That money helped add 136 new unicorns between April and June alone, a quarterly record, according to cb Insights, a data provider. Compared with the same period last year the number of funding rounds above $100m tripled, to 390. A lot of this helped fatten older members of the herd: all but four of the 34 that now boast valuations of $10bn or more have received new investments since the start of 2020.

Apart from entry of yields-seeking non-VC investors like pension funds, sovereign wealth funds, and family offices, and competition of fear of missing out (FOMO), the rush of startup focused risk capital has been triggered by divestments by startup's early VC backers,

These stakes command top dollar from investors desperate for exposure to the pandemic-era digitisation wave. Exits, via public listings and acquisitions, more than doubled globally year on year, to nearly 3,000. The proceeds are flowing back into new VC funds, which have so far this year raised $74bn in America alone, nearing the record $81bn in 2020 in half the time. The venture capitalists cannot spend the dough fast enough. 

This is truly staggering,

In the three months to June Tiger Global, a particularly aggressive New York investment firm, made 1.3 deals on average every business day.

Howsoever brilliant the investment team at Tiger Global, it's hard not to believe that those were instinct-based investments. You just can't do due-diligence at anything close to such speed. This is pure impulse investing or throwing money at anything that looks attractive. 

In addition to these global factors, the Indian startups have received an unexpected boost from the Chinese crackdown on its technology startups. It has made Indian startups the obvious favourites for western investors.

There are several compelling arguments against the frothy valuations of the startups. For a start, the business model of growth-focused aggregators like Flipkart, Oyo, Zomato, Swiggy etc is critically dependent on very large volumes to make up for the low margins possible from price-sensitive clients at both sides of the aggregator platform. Second, the large volumes are unlikely to materialise due to the surprisingly small size of the Indian middle-class (sample this talk of 500 million users!). Therefore once the initial flush of clients with the willingness to pay are captured and Covid recedes, the growth models is likely to struggle. In fact, the little meaningful commercial value for these startups are more likely to come in the form of "millennial lifestyle sponsorship" for a tiny sliver of the population. 

Third, the developed market strategy of targeting capturing customers with deep discounts in the hope that clients are likely to be sticky even when prices are increased subsequently is unlikely to work in the Indian context. The small size of the middle-class means that the share of sticky customers will be small.

Fourth, another extenuating factor is the small average size of transactions on these platforms, far smaller compared to those in developed markets. This limits the realisable margins from transactions. This is a natural consequence of the country's low per capita incomes at all levels of the income ladder. 

Fifth, even the existing margins are built on a combination of possible extortion of restaurants (allegedly 25-30% of order value) and regulatory arbitrage, both of which are unlikely to sustain for too long. 

Finally, even at a global scale, despite bumper listings, the experience with post-IPO performance of aggregator startups has been uniformly disappointing. Despite being active for over a decade, all but one continue to make losses.

It's unlikely to be any different with India, and given the aforementioned perhaps even worse. 

On the positive side, irrespective of these mitigating factors, the current window is a great opportunity for Indian economy in attracting very scarce risk capital. In simple terms, Indian startups are at the right place at the right time.

There is the window for both attracting new risk capital and for recycling existing venture capital towards other newer enterprises. While countless retail investors are likely to eventually lose their shirts at such inflated entries, it's also likely to create a generation of wealthy local investors with both the capital volumes and the appetite to assume risks.

Equally important, it has the potential to change the investor culture in India and thereby expand both the envelope and, equally importantly, the share of risk capital (among all financing savings) available in the country. This is one of the most important requirements for the sustainability of high national economic growth rates. 

However, this requires the party to go on for some more time. And that critically depends on what the US Fed does with its monetary policy actions. Indian startups should egg the Fed to keep the monetary gravy train going on. This, and not any real innovation in their activities, may well be the real creative destruction from the startup bubble. 

Update 1

Good Livemint article on the IPO frenzy. In terms of revenue multiple

At ₹1.04 trillion, Zomato is valued at 49 times its latest full-year revenues. At ₹75,000 crore, Paytm would be valued at 24 times revenues. By comparison, the median revenue multiple of the sample set of 73 companies is 5 times. DoorDash, the largest food-ordering company in the US, listed in December 2020 at a revenue multiple of 11 and is currently valued at 20 times. Zomato’s only direct competitor in India, Swiggy, is unlisted. Food franchise businesses like Jubilant Foodworks (Domino’s Pizza) and HardCastle Restaurants (McDonald’s) are valued at 13 times and 9 times revenues, respectively.

And this on the listing funnel, from 401 IPOs in US market listed over the last year

Saturday, July 24, 2021

Weekend reading links

1. Even as other developed countries grapple with return of inflation, Japan continues to struggle,

Japan’s inability to lift inflation is “one of the biggest unsolved challenges in the profession,” said Mark Gertler, a professor of economics at New York University who has studied the issue. One popular explanation for the country’s trouble is that consumers’ expectations of low prices have become so entrenched that it’s basically impossible for companies to raise prices. Economists also point to weakening demand caused by Japan’s aging population, as well as globalization, with cheap, plentiful labor effectively keeping costs low for consumers in developed countries.

The picture once looked very different. In the mid-1970s, Japan had some of the highest inflation rates in the world, approaching 25 percent... But by the early 1990s, Japan began experiencing a different issue. An economic bubble, fueled by a soaring stock market and rampant property speculation, burst. Prices began to fall. Japan attacked the problem with innovative policies, including using negative interest rates to encourage spending and injecting money into the economy through large-scale asset purchases, a policy known as quantitative easing...
Japan found itself in a vicious circle, said Takatoshi Ito, a professor of international and public affairs at Columbia University, who served on Japan’s Council on Economic and Fiscal Policy. Consumers came to expect “stable prices and zero inflation,” he said, adding that as a result, “companies are afraid of raising prices, because that would attract attention, and consumers may revolt.” The sluggish economy made companies reluctant to raise wages, he said, “and because real wages didn’t go up, probably consumption didn’t go up, so there was no increase for demand for products and services.”

Kenneth Rogoff thinks inflation in the US is transient.  

2. Fascinating story about Riad Salameh, the Governor of Lebanon's central bank since 1993, who has been accused of enriching himself and friends across Lebanese political spectrum by amassing an outsized fortune stashed away in Europe. This comes even as the economy is reeling with insolvent bank, hyperinflation, and a contraction of historic proportions, one which the World Bank has described as within the top three worst contractions in the last 150 years. 

3. Green jobs, while being good for the planet, may not be so for workers.

Building an electricity plant powered by fossil fuels usually requires hundreds of electricians, pipe fitters, millwrights and boilermakers who typically earn more than $100,000 a year in wages and benefits when they are unionized. But on solar farms, workers are often nonunion construction laborers who earn an hourly wage in the upper teens with modest benefits — even as the projects are backed by some of the largest investment firms in the world... The effect of Mr. Biden’s plan, which would go further in displacing well-paid workers in fossil-fuel-related industries, could be similarly disappointing. In the energy industry, it takes far more people to operate a coal-powered electricity plant than it takes to operate a wind farm. Many solar farms often make do without a single worker on site... 

While some of the new green construction jobs, such as building new power lines, may pay well, many will pay less than traditional energy industry construction jobs. The construction of a new fossil fuel plant in Michigan employs hundreds of skilled tradespeople who typically make at least $60 an hour in wages and benefits, said Mike Barnwell, the head of the carpenters union in the state. By contrast, about two-thirds of the roughly 250 workers employed on a typical utility-scale solar project are lower-skilled, according to Anthony Prisco, the head of the renewable energy practice for the staffing firm Aerotek.

4. One distortion caused by the persistent low interest rates is the strength of private equity firms which currently sit on a $1.7 trillion dry powder. The pandemic induced corporate stress has also provided an attractive feedstock of buyout targets for PE. This FT report points to the rapid growth of private equity led businesses in UK, who are taking many businesses off public markets. Compared to 2008, the number of listed UK companies has fallen by 40%.

5. Meanwhile PE firms in the US have been leveraging up their companies and paying out dividends,

Private equity groups including Ares and Golden Gate Capital have raised more than $20bn in the US leveraged loan market through the companies they own to award themselves a bumper payday. Dividend deals in the loan market have reached a total of $21.7bn, according to data from LevFin Insights, a unit of rating agency Fitch Ratings. It marks a new quarterly high for data going back to 2016... Private equity groups have jumped on the demand, pulling money out of companies they own and loading them up with fresh debt before the brightening economic outlook fades.

See also this study by Josh Lerner et al on the adverse impact of PE buyouts on employment and prospects of public firms.  

6. John Mauldin has a good summary of the mirage of foreigners owning shares of Chinese companies,

The Didi IPO was not a normal IPO, at least as we think of them in the West. US investors who bought these “shares” don’t actually own equity. They own pieces of a Caymans “variable interest entity,” (VIE) which has a contract with the parent company. This structure is necessary because under Chinese law foreigners can’t own Chinese shares directly... US-listed Chinese companies since at least Alibaba in 2014 have used the VIE structure. It’s one of those things that works great until it doesn’t... This arrangement... let Chinese enterprises rake in foreign capital while giving up no ownership and reserving the right to leave their own “investors” high and dry. This method may now be approaching its expiration date but it worked well for a long time. That’s how Xi and the Chinese Communist Party operate. They do things that lookcapitalist but really aren’t, lacing them with unnoticed poison pills for later use. It’s similar to their appropriation of US technology, trademarks, and other intellectual property. We are literally selling them the rope. 

The perils of whimsical regulatory changes by the Chinese authorities are now increasing,

About $16bn was wiped from the value of three major Chinese education companies listed in New York trading on Friday after a leaked memo suggested that Beijing might ban academic tutors from making a profit. The document, dated July 19 and seen by the Financial Times, requires home-schooling or off-campus education companies to register for non-profit status and bars local authorities from approving any new agencies. If the measures are enacted, it would be a heavy blow for one of China’s fastest-growing industries: tutoring children outside of school and preparing teenagers for university entrance exams. Share prices in some of China’s largest education companies plunged on the news. TAL Education, Gaotu Techedu and New Oriental Education, which are listed in New York and previously had a combined market value of more than $26bn, all fell close to 60 per cent in the first hour of trading.

This follows the now infamous crackdown on the ride-hailing firm Didi Global,

On July 2, just two days after Goldman Sachs, J.P. Morgan and Morgan Stanley launched an initial public offering for the Chinese ride-hailing app Didi on the New York Stock Exchange, Chinese regulators cracked down on the company hard. Citing data privacy concerns, the Chinese government ordered the removal of Didi’s app from app stores, pending an opaque national security review process. As a result, the stock has lost 30 percent of its value since shortly after its IPO, when investors, most of them from the United States, put $4.4 billion into the company.

US investors love for Chinese stocks may well have ended.  

7. Long read on the complex operational management of the National Load Dispatch Centre for the national electricity grid, the largest synchronous grid in the world.

8. Fascinating FT article about Inditex's supply and distribution chain automation. 

Because of its fast supply chains — just three weeks between design approval and going on sale — Inditex can alter and add to its range in midseason, responding to consumer demand. It churns out 65,000 new designs a year, delivering the latest garments to its network of stores at least twice a week... “The essence of our strategy at Inditex is the same as ever: flexibility in our business model, the integration of logistics, manufacture and design; production close to hand; and a capacity to react from moment to moment,” says Pablo Isla, executive chair of Inditex.

This captures the essence of Inditex's success

Because of its fast supply chains — just three weeks between design approval and going on sale — Inditex can alter and add to its range in midseason, responding to consumer demand. It churns out 65,000 new designs a year, delivering the latest garments to its network of stores at least twice a week. The group says its approach is based on “pull” rather than “push”. Inditex does not spend significantly on advertising, but 20m people view its products every day online on its apps or social media. It prefers to buy prime locations for its outlets. Prime real estate — Ortega’s big bet in investing his personal fortune — remains at the heart of what Inditex does. “The essence of our strategy at Inditex is the same as ever: flexibility in our business model, the integration of logistics, manufacture and design; production close to hand; and a capacity to react from moment to moment,” says Isla.

9. Reliance Jio has 426 million users and over 100 million smart JioPhones. And the ultimate objective of the Jio system is to become something like the WeChat of India, the master aggregator platform of choice for any service. However, despite this dominance, its performance has been remarkably deficient,

Only four Jio apps are in the top 100 of Google’s Play Store, according to App Annie, including the music streaming app JioSaavn and MyJio, which bundles together several services like phone top-ups or quizzes. Jio’s chat and shopping apps trail behind rivals... it remains behind on metrics such as app downloads, revenue and basket size, according to brokerage Motilal Oswal. A partnership with Facebook to offer the service through WhatsApp is still in trials more than a year after it was announced.

10. Scott Galloway has a searing takedown of the vanity space flights of Jeff Bezos and Richard Branson,

But if Mr. Bezos was genuine about doing something more than crashing a canary yellow T-top Corvette into a Bosley for Men franchise, he could raise the minimum wage at his firm to $20/hour... After his flight, Bezos said, “I want to thank every Amazon employee, and every Amazon customer, because you guys paid for all this.” He’s right. We did pay for it. Eighty-two percent of American households are Prime members, and the company has 1,298,000 employees. We also paid for the Apollo program, of course, only there’s a difference. To put Neil Armstrong on the moon, we paid taxes, and elected representatives to decide how to spend them.

11. In the context of social loafing while working from home, Sandeep Goyal points to Ringelmann experiment,

One of the first experiments in social loafing was conducted by French agricultural engineer, Max Ringelmann, in 1913 when he studied the pulling power of horses. He concluded that the power of two animals pulling a coach did not equal twice the power of a single horse. It was, in fact, considerably less. Surprised by the result, Ringelmann extended his research to humans. He had several men pull a rope and measured the force applied by each individual. On an average, if two people were pulling together, each invested just 93 per cent of his individual strength; when three pulled together, it was 85 per cent; and with eight people pulling, just 49 per cent of individual strength was exerted by each team member. Ringelmann’s findings more than a century ago created ripples in the emerging study of human resource (HR) management, effectively puncturing the concept of teamwork. Ringelmann called this the “social loafing” effect and posited that when individual performance is not directly visible, it blends into a group effort where every team member actually “cheats” a little, though not always consciously.

12. An FT investigation shows that vaccines have made Covid 19 far less fatal.

 And the impact of vaccines in terms of avoided hospitalisation.

13. Business Standard points to a new study by PHFI on who gets the healthcare subsidies in India. It found that the richest quintile corners 26.7% of all in-patient care subsidies.
The wealthiest 40% get 48% of subsidies, compared to 30.6% for the poorest 40%. In case of out-patient care, the wealthiest quintile cornered 30.2% of subsidies to 17% for the poorest quintile. 

Even with Ayushman Bharat, just 16% of all hospitalisations were covered under that.

Thursday, July 22, 2021

The limits of search for efficiency - "just in time" in Covid times

I blogged here and here about how Covid 19 has exposed the perils of excessive pursuit of efficiency, at the cost of marginalising all else including resilience. Last week I had blogged here about how technology-based management at Amazon created undesirable workforce outcomes. 

The Times has an article about how the global embrace of Just in Time (JiT) supply chain and inventory management, popularised by the Japanese manufacturers like Toyota, has left manufacturers and retailers exposed during the pandemic. It writes,  

Automakers have been crippled by a shortage of computer chips — vital car components produced mostly in Asia. Without enough chips on hand, auto factories from India to the United States to Brazil have been forced to halt assembly lines... This helps explain why Nike and other apparel brands struggle to stock retail outlets with their wares. It’s one of the reasons construction companies are having trouble purchasing paints and sealants. It was a principal contributor to the tragic shortages of personal protective equipment early in the pandemic, which left frontline medical workers without adequate gear.

Just In Time has amounted to no less than a revolution in the business world. By keeping inventories thin, major retailers have been able to use more of their space to display a wider array of goods. Just In Time has enabled manufacturers to customize their wares. And lean production has significantly cut costs while allowing companies to pivot quickly to new products. These virtues have added value to companies, spurred innovation and promoted trade, ensuring that Just In Time will retain its force long after the current crisis abates. The approach has also enriched shareholders by generating savings that companies have distributed in the form of dividends and share buybacks.

It quotes Willy C Shih, an international trade expert at Harvard Business School,

It’s sort of like supply chain run amok. In a race to get to the lowest cost, I have concentrated my risk. We are at the logical conclusion of all that... People adopted that kind of lean mentality, and then they applied it to supply chains with the assumption that they would have low-cost and reliable shipping. Then, you have some shocks to the system... The real question is, ‘Are we going to stop chasing low cost as the sole criteria for business judgment?’ I’m skeptical of that. Consumers won’t pay for resilience when they are not in crisis.

There is a clear resilience Vs efficiency trade-off, not just in business but across life in general. Too much of one comes at the cost of the other. The modern economy, especially with neat digital technologies and work-flow automation, makes it extremely easy for businesses to pursue the efficiency line. The challenge therefore is to step back and ensure that resilience is kept in mind while technologies and process re-engineering are adopted. How about a resilience test for any efficiency enhancing change?

Update 1 (28.08.2021)

Matt Stoller (HT: Ananth) points to the role of management concepts and services contracting in the failure of the US strategy in Afghanistan. This from an Afghan General, 

Contractors maintained our bombers and our attack and transport aircraft throughout the war. By July, most of the 17,000 support contractors had left. A technical issue now meant that aircraft — a Black Hawk helicopter, a C-130 transport, a surveillance drone — would be grounded. The contractors also took proprietary software and weapons systems with them. They physically removed our helicopter missile-defense system. Access to the software that we relied on to track our vehicles, weapons and personnel also disappeared. Real-time intelligence on targets went out the window, too.

The US military like the corporate world appears to be another example of the pursuit of efficiency taken to its extremes - management consultants and their ideas being applied indiscriminately and outsourcing to keep costs down and harvest efficiency gains.

Update 2 (12.12.2021)

By Beata Javorcik, Chief Economist at EBRD, in the FT

The quest to find the most cost-effective suppliers has left many companies without a plan B. More than half of firms surveyed by the Shanghai Japanese Commerce and Industry Club reported their supply chains were affected by the outbreak. Less than a quarter said they had alternative production or procurement plans in case of a prolonged disruption... Businesses will be forced to rethink their global value chains. These chains were shaped to maximise efficiency and profits. And while just-in-time manufacturing may be the optimal way of producing a highly complex item such as a car, the disadvantages of a system that requires all of its elements to work like clockwork have now been exposed... Resilience will become the new buzzword. Firms will think harder about diversifying their supplier base to hedge against disruptions to a particular producer, geographic region or changes in trade policy. This means building in redundancy and perhaps even moving away from the practice of holding near-zero inventories. Costs will certainly rise but, in the post-Covid world, concerns about supply chain fragility will come right after those over cost. Firms will be expected to assess resilience of their second and third-tier suppliers, too. We may see some reshoring as automation reduces labour costs.

Wednesday, July 21, 2021

Financing national highways

The National Highways Authority of India (NHAI) is arguably one of the country's biggest successes. In fact, it's perhaps one of the rare successes with PPPs in infrastructure. The NHAI built around 13000 km of roads, or 37 km per day, in 2020-21 compared to 11000 km in 2019-20, and has built 2284 km in Q1 of 2021-22 compared to 1823 km a year ago. However, this pace of its growth may be raising concerns about the sustainability of its success. 

Business Standard has a report that raises questions on the sustainability of NHAI's current operating model. The article informs that NHAI's debt rose 27% to Rs 3.17 trillion at end of FY21 and toll revenues declined 4% to Rs 26000 Cr, thereby raising the gap between its financial liabilities and internal accruals from 2.1X in FY14 to 12.3X in FY21. The debt is expected to reach Rs 3.8 trillion by end of FY22. This is the concern for NHAI,

The NHAI’s borrowing has gone up seven times in the last five years, growing at a compound annual growth rate (CAGR) of 47.6 per cent from Rs 45,300 crore at the end of March 2016. In the same period, its toll revenues have grown at a CAGR of 7.3 per cent from around Rs 18,150 crore in FY16. The growing gap between toll revenues and NHAI borrowing is however a recent development. For a decade between FY05 and FY16, NHAI toll revenues grew faster than its debt, allowing it to maintain a healthy balance sheet. In 10 years between FY06 and FY16, NHAI annual revenues jumped nearly 23 times growing at an annualised rate of 36.7 per cent. The revenues jumped from Rs 798 crore in FY06 to around Rs 18,150 crore in FY16. In comparison, its borrowing was up 11X during the period, from around Rs 4,000 crore in FY06 to around Rs 45,300 crore in FY16.

NHAI depends on fuel cess, additional budget support, and toll revenues. It has embarked on an ambitious asset monetisation drive to augment its revenues.

The NHAI's success has been its simplicity. Long term BOT concessions financed through a combination of road cess levied on gasoline and toll revenues, supplemented with additional budgetary resources. As the pipeline of concessioned roads has grown, there is a belief that large amounts can be raised by unlocking value by monetising them and off-loading (the asset and its debts) from NHAI's balance sheet. 

This is fine as long as the liabilities are matched by the accruals. It means that the expenditure of NHAI, including debt service, should be balanced by internal revenues and budgetary support. 

R (Revenues) = C (Cess) + T (Toll) + M (Monetisation) + Budget (B) 

R = E (Expenditure) + D (Debt service)


Rate of growth of revenues > Cost of capital 

There are some problems on the revenues side. T is what it is, though it has a cyclical component in sync with the business cycle. For all the optimism, M is unlikely to realise anything close to the large amounts being expected. The envelope of domestic capital interested in such assets is small, and that of foreign capital smaller still. The numbers are explained in great detail here.

This leaves us with C and B. Both have to increase in proportion with the pace of road construction and debt assumption. If you want to ramp up highways construction, increase road cess and allocate more in the budget. This is both an accounting and historical reality from experience across the world, and there's no way around it.

Saturday, July 17, 2021

Weekend reading links

1. A NBER working paper examined the impact of new national highways construction on the local monopsony power exercised by manufacturing firms in labour market in India, 

Using panel data on manufacturing firms, we find that monopsony power in labor markets is reduced among firms near newly constructed highways relative to firms that remain far from highways. We estimate that the highways reduce labor markdowns significantly. We use changes in the composition of inputs to identify these effects separately from the reduction of output markups that occurs simultaneously. The impacts of highway construction are therefore pro-competitive in both output and input markets, and act to increase the share of income that labor receives by 1.8--2.3 percentage points.

2. Josh Lerner, Nick Bloom et al examines the diffusion of 29 disruptive technologies across firms and labour markets in the US and find five stylised facts.

First, the locations where technologies are developed that later disrupt businesses are geographically highly concentrated, even more so than overall patenting. Second, as the technologies mature and the number of new jobs related to them grows, they gradually spread across space. While initial hiring is concentrated in high-skilled jobs, over time the mean skill level in new positions associated with the technologies declines, broadening the types of jobs that adopt a given technology. At the same time, the geographic diffusion of low-skilled positions is significantly faster than higher-skilled ones, so that the locations where initial discoveries were made retain their leading positions among high-paying positions for decades. Finally, these technology hubs are more likely to arise in areas with universities and high skilled labor pools.

3. Inflation is biting Indian consumers hard,

Edible oils are the largest category in the fast-moving consumer goods (FMCG) sector, with Rs 1.5 trillion yearly sales. Their average price has spiralled upwards by over 45 per cent in the last year... Analysis by Edelweiss Research for the April-June quarter shows that HUL raised prices by at least 6 per cent. The prices of its leading soap brands such as Dove, Lux, and Lifebuoy have gone up by 16 to 27 per cent since last year... Amul has announced a Rs 2 per litre hike in packaged milk... TV prices have so far been raised by up to 15 per cent as panel prices surged by 30 to 100 per cent, depending on their size... most electronic appliance brands have had to increase their prices by seven per cent. Smartphones and notebooks... prices rose around 5-10 per cent as a result of chipsets becoming 30 per cent more expensive in the past year.

4. Inflation has been compounded by the effect of Covid on health care prices. Here is another report from Business Standard, 

According to industry estimates, consumables earlier made up between 2 per cent and 8 per cent of hospital bills. But during the pandemic, this has increased to 15-20 per cent, with some putting the figure to as high as 30 per cent... There are four major heads under consumables — administrative charges, housekeeping charges, part of room charges, and disposable treatment items. Bhaskar Nerurkar, head of health claims at Bajaj Allianz General Insurance, said... “Consumables made up approximately 8-10 per cent of the hospital bill before the pandemic. But, now, it has gone up to 25-30 per cent.” Amit Chhabra, health business head at, said: “Because of strict sanitisation measures as well as higher usage of PPE kits, gloves, and other items, consumables are now almost 15-20 per cent of the bill amount.”... He said for other diseases and in the pre-Covid period, the firm would pay anywhere between 88 per cent and 92 per cent. “There is a 5-10 percentage point enhancement in the consumables as a proportion of the hospital bill. So, earlier 5-10 per cent of the bill was consumable items, now it has moved up to 18-20 per cent,” he said.

5. FT reports that Chinese investors have been the big losers in India's record $7.2 bn venture capital fund raising in Q1 of 2021-22. 

6. Martin Wolf has some informative graphics that compare equities and debt instruments. 

In the 1900-2020 period, equities have outperformed bonds big time.

The outperformance is much higher over longer durations

However, equities are more volatile than bonds.

7. The US Council of Economic Advisors compares six post-war inflation episodes and concludes that inflation this time may decline quickly once given the nature of the shock,
No single historical episode is a perfect template for current events. But when looking for historical parallels, it is useful to concentrate on inflationary episodes that contained supply chain disruptions and a spike in consumer demand after a period of temporary suppression. The inflationary period after World War II is likely a better comparison for the current economic situation than the 1970s and suggests that inflation could quickly decline once supply chains are fully online and pent-up demand levels off. The CEA will continue to carefully gauge the trajectory of inflation.

8. Livemint long read that examines the agritech startup scene in India. Consider this claim,

Over 500,000 farmers spread across six states are currently on the DeHaat platform, which handles about 1,500 tonnes of produce and 9,000 delivery orders for crop inputs daily... Gramophone, which provides farmers with agronomic intelligence and input delivery services, began its journey in 2016 with just 5,000 farmers in Madhya Pradesh... In FY21, Gramophone added 400,000 farmers to its platform, taking the total number to 850,000. 

This is typical of the claims that growth-focused startups make. It's high time that investors go beyond these irrelevant metrics and look at metrics like average revenue per user, number of transactions per subscriber, per capita transaction value etc. As I co-wrote here, the point should be to focus on value proposition demonstration indicators like intensity of adoption/use of the innovation. 

The point that investors (and entrepreneurs) should fuss over is how much value is DeHaat and Gramaphone generating for its median customer, and what's the universe of that customer base. 

9. India middle class fact of the day,

While India has about 550 million smartphone users, most are not high-value “targets”. Zomato has an average monthly user base of only about 10 million. These are high net-worth individuals at the very apex of the digital pyramid. In that same income segment, Amazon Prime has 7 million users, while Netflix has about 3 million subscribers.

10. Shyam Saran has a very good oped where he outlines the emerging geopolitical dynamics in Afghanistan as the Taliban closes in on taking over the entire country. With a hostile Pakistan providing the military and political support, and with the simmering border tensions with China, the emergence of Taliban controlled Afghanistan poses enormous risks for India. 

11. Border conflict and import controls notwithstanding, India's import dependence on China continues to rise,

In April, 40.71 per cent of India’s imports of electronic components were from China. The share was 33.54 per cent during the same month in 2020, 33.82 per cent in 2019, and 33.90 per cent in 2018... Similarly, imports of electronic components... the share rose to 40.5 per cent in FY21 from 37.2 per cent in FY20 and 36.9 per cent in the previous year. China accounted for 16.53 per cent of India’s imports in FY21, the highest in at least 12 years... About 63 per cent of consumer electronics imports in India were from China in April compared to 26 per cent last year. The share grew significantly in 2020-21 to 52.3 per cent from 44 per cent in 2019-20. Computer hardware and peripherals... share has grown to 50.8 per cent in FY21 compared to 46.4 per cent in FY20 and 44.6 per cent in FY19. The share has expanded further in April 2021 to 55 per cent compared to 51 per cent in the corresponding period last year. Telecom instrument imports from China accounted for 43.5 per cent of India’s inbound shipment in this area in 2020-21, compared to 39 per cent in the previous year. In April, the share of telecom instruments from China rose to 47.3 per cent from 33.6 per cent. More than half the consumer electronics imports in India in FY21 were from China, compared to about 40 per cent in the previous two years.

12. Excellent primer on the microchip shortage problem that's adversely impacting the automobile industry globally. This snippet conveys a lot about the reasons,

Apple alone consu­mes more semiconductors (worth $58 billion) than the entire global auto industry ($40 billion) and mobile phones use higher-end, higher-margin chips compared to cars. So chip makers had little incentive to prioritise the auto industry.

Friday, July 16, 2021

On the progress Vs stagnation debate

A topic of intense debate in recent times is on the future of technological progress and human development. The optimists argue that thanks to technology we are at the cusp of a world with unlimited possibilities. The pessimists feel that we are in a long period of stagnation where all the low hanging fruits have been harvested. 

A related, but more enduring debate, is one on the apportionment of credit for innovations and inventions. The narrative of modern capitalism, especially that of technology start-up fuelled innovation, credits extraordinary individuals and corporations having created paradigm redefining ideas, products, and services. In contrast, others point to Newton and claim that innovations are inherently accretive, standing on the shoulders of giants. 

In this context, Rohit has a nice essay which examines these issues and argues for a balanced middle-path. 

He starts of with how most of the now-simple ideas are a deceptively complex accumulation of pieces,
Since early gunpowder needed oxygen for a proper flame, arrows in the air were as close to useful as they got. To become good enough for rockets you needed better gunpowder formulae. For that you needed better knowledge of chemistry and materials to build fire lances, and more. It took many more iterations before hand cannons became usable enough in combat.. Similarly, what does it take to make bicycles? Is having a spoke and wheel enough? A padded seat? An axle? Still no. If you want it to be in reasonably continuous operation, the trick is to overcome friction, which like most things to do with Newton is relentless. There needs to be ball bearings, something that would take a hell of a lot more innovation to create. Thinking "oh the bicycle is a simple machine" is to elide the entire world of complexity that's subsumed within each square inch of its frame. And that's without taking into account its materials of construction... technological convergence helped Wright brothers make the first plane fly, because it relied on aluminium, aluminium molds.

Accordingly, he writes about the combinatorial nature of innovation and progress,

I suggest that innovation which leads progress is itself caused by combinatorial growth in its sub-domains, which first naturally creates accelerated growth, and later slowdowns as a result of a slowdown in any individual part or an increase in combinations to be tried... The fact of the matter is that the general purpose technologies that we built, and which had disproportionate impact across all categories, they're few and far between. Once we built steel, it impacted everything. Once we invented electricity and the laws of electromagnetism, it affected everything. But getting to the benefits of both also required advances in chemistry, in manufacturing the right compounds, in thermodynamics, in automobiles and motors, and so much more, not to mention the advances in humanity-organisation-techniques that we were forced to invent along the way. They all reinforced each other in a positive feedback loop. Advances in one is what led to advances in the other.

His conclusion,

  1. Progress seems to come primarily from innovation and technology
  2. A Kuhnian paradigm shift or the emergence of a new breakthrough innovation is a result of a combinatorial exploration of existing technologies 
    1. Technological innovation in any one field shows up in the form of an S curve
    2. Several S curves add together to create exponential growth
    3. To break through requires the innovation to be above a certain threshold, which itself increases over time as we make more and more discoveries
  3. Breakthrough innovation comes from the addition of novelty to existing paradigms - this requires a "search" of the actual technological frontier, which keeps expanding
  4. Depending on the level of progress of each S curve, occasionally you'll have periods of stagnation while the search for right combinations is ongoing 
    1. If the number of existing fields is too large, the search can take longer, while we wait for the right combinations and the right level of progress amongst the component technologies
    2. Bridging that gap requires sufficient progress in more individual technologies, and more collaboration amongst technologies
    3. This might feel like a stagnation, but that's only because without the emergence of new paradigms or new breakthrough innovations, we're at the far end of an S curve, where you need exponential inputs for linear outputs.
... The story is that we have moved from a world where ideas are getting harder to find, but we discover new sources of ideas anyway, to a world where ideas are getting harder to find and we discover new seams to mine for ideas more sporadically. Occasionally the progress might cluster when a general purpose technology reaches critical mass, but that is not predictable either. Either you wait until a new GPT reaches maturity, when the steep drop in per unit cost makes it applicable to every other sector. Or you wait until the combinations of existing technologies can be applied to new sectors, which gets more complex as the number of combinations to try increases

This view of progress in turn calls for intellectual humility and balance,

Productivity of a process, whether that's startups trying to expand or scientists inventing the next big thing, are subject to the law of diminishing returns. They will find that initial traction is easy while subsequent traction gets harder and harder. There's a big difference between "work exponentially hard to squeezes the stone and find new ideas" vs "work exponentially hard to find a whole new paradigm". The first is what necessitates exponential increase in researchers to discover the next piece of insight from within a paradigm.

But as Kuhn would point out, the emergence of a new paradigm opens up new vistas. Unfortunately we can't tell how or when it might open up. Maybe banging away at the seams of the existing paradigm is what's needed. Maybe it's trying to find new paradigms directly. Maybe it's throwing smart people from multiple disciplines together and hoping for the best. Regardless, that path of breaking through a paradigm isn't guaranteed, nor is it predictable with any degree of accuracy. We can't tell whether a pause in productivity growth of a few decades is cause for concern or just a blip or a random adjustment period.

My conclusion here is that the dips we see are because the level of specialisation we have achieved increases the level of coordination that's required to get the benefits of one field to another. You could call us victims of our success, though that would be too pessimistic. Knowledge is naturally accretive, though knowledge also requires chiselling out of raw marble to generate. If we need to continue our paths what's concretely needed is tools and norms and institutions to help explore the idea-frontier better. We don't need to jump off a cliff in sadness at the thought that our physicists aren't as productive as those in the mid-century. And we shouldn't jump off a cliff in joy that mRNA vaccines show us the path to a brave new world. This would be the time for some intellectual humility.

This has implications for the extant narrative of modern capitalism. Marianna Mazzucato among others have written extensively about how all the symbols of modern capitalism stand on the "shoulders of giants". Consider a few things:

1. The idea of long and exclusionary patents, derives in no small measure from the underlying assumption of innovation and invention being largely stand-alone phenomena. At the least such innovations attribute a disproportionate share of credit for an new product or service to those who brought it to the market, overlooking the contributions of all those ingredients and their creators. 

2. There is a strong element of path dependency with most innovations. The final product or service is only the last step in a long journey that has been traversed over time involving countless iterations and intermediate stages. In many cases, the previous stage of evolution or iteration critically determines the design or specifics of the present stage. 

3. Nowhere is this evolutionary dependence more relevant than in digital technologies which enjoy network effects. Even their founders admit that they did not plan the creation of the Amazon or Facebook of today. These behemoths emerged opportunistically as new paths opened up with the growth of their original businesses. As a corollary, almost all digital businesses of today are built on the foundations of pre-existing digital landscapes. 

Thursday, July 15, 2021

Amazon HR practices facts of the day

The Times has an excellent investigation of the HR practices at Amazon. It scrutinised the practices at JFK8, one of Amazon's largest fulfilment centre, servicing New York City and employing over 5000 people. This popped out as quite stunning, 

... while the company boasted of job creation, turnover at the warehouses was roughly 150 percent a year — a figure never reported before — meaning Amazon had to replace the equivalent of its entire warehouse work force every eight months. That number, and the entire project, took on deeper meaning when David Niekerk, the architect of Amazon’s warehouse human resources system, told her the turnover was more or less by design. Jeff Bezos, Amazon’s founder and chief executive, had sought to avoid an entrenched work force, fearing laziness and a “march to mediocrity.” So upward mobility and raises for warehouse workers were limited.

And this,

From July to October 2020 alone, it scooped up 350,000 new workers, more than the population of St. Louis. Many recruits — hired through a computer screening, with little conversation or vetting — lasted just days or weeks. Even before the pandemic, previously unreported data shows, Amazon lost about 3 percent of its hourly associates each week, meaning the turnover among its work force was roughly 150 percent a year. That rate, almost double that of the retail and logistics industries, has made some executives worry about running out of workers across America.

This is also a teachable story on the limitations of technology-based management,

In contrast to its precise, sophisticated processing of packages, Amazon’s model for managing people — heavily reliant on metrics, apps and chatbots — was uneven and strained even before the coronavirus arrived, with employees often having to act as their own caseworkers, interviews and records show. Amid the pandemic, Amazon’s system burned through workers, resulted in inadvertent firings and stalled benefits, and impeded communication, casting a shadow over a business success story for the ages. Amazon took steps unprecedented at the company to offer leniency, but then at times contradicted or ended them. Workers like Mr. Castillo at JFK8 were told to take as much unpaid time off as they needed, then hit with mandatory overtime. When Amazon offered employees flexible personal leaves, the system handling them jammed, issuing a blizzard of job-abandonment notices to workers and sending staff scrambling to save them, according to human resources and warehouse employees.

Update 1 (29.10.2021)

From a NYT investigation, a snippet of the company's priorities and treatment of its 1.3 million workforce,

Workers across the country facing medical problems and other life crises have been fired when the attendance software mistakenly marked them as no-shows, according to former and current human resources staff members, some of whom would speak only anonymously for fear of retribution. Doctors’ notes vanished into black holes in Amazon’s databases. Employees struggled to even reach their case managers, wading through automated phone trees that routed their calls to overwhelmed back-office staff in Costa Rica, India and Las Vegas. And the whole leave system was run on a patchwork of programs that often didn’t speak to one another. 

Some workers who were ready to return found that the system was too backed up to process them, resulting in weeks or months of lost income. Higher-paid corporate employees, who had to navigate the same systems, found that arranging a routine leave could turn into a morass. In internal correspondence, company administrators warned of “inadequate service levels,” “deficient processes” and systems that are “prone to delay and error.”

The extent of the problem puts in stark relief how Amazon’s workers routinely took a back seat to customers during the company’s meteoric rise to retail dominance. Amazon built cutting-edge package processing facilities to cater to shoppers’ appetite for fast delivery, far outpacing competitors. But the business did not devote enough resources and attention to how it served employees, according to many longtime workers... Employees apply for leaves online, on an internal app, or wade through automated phone trees. The technology that Amazon uses to manage leaves is a patchwork of software from a variety of companies — including Salesforce, Oracle and Kronos — that do not connect seamlessly.

Wednesday, July 14, 2021

Update on private capital in Asia

Preqin have a comprehensive report on private capital in Asia.  

The total Asia-Pacific focused private capital assets under management in Asia over the 2000-20 period, with $1.71 trillion in AUM as on end-September 2020.

As can be seen, the vast majority of AUM is private equity and the AUM of infrastructure funds is tiny. The infrastructure dry-powder too is very small, though the total dry powder available to deploy is $446 bn as on April 2021.
Private debt while growing fast is relatively small, with an AUM of just $59 bn as on September 2020. Infrastructure funds too form a small share of private capital in Asia.
The Asia-Pacific focused unlisted infrastructure fund raising is tiny, in the annual range of $4-6 bn in recent years. This is instructive,
Annual infrastructure fundraising in Asia-Pacific peaked in 2014 at $15bn, and plateaued for the following three years (Fig. 5.2). It fell back significantly into 2018, with a 50% drop in the number of funds closing and a 42% decline in capital raised. While fund closures bounced back in 2019, capital raised continued to fall – the average size of funds closed that year was $246mn, less than half of what it was in 2017.

This is the latest confirmation of the limited amount of Asia-focused private capital willing to invest in infrastructure. This too would be distorted by the disproportionate share that would be prioritising renewables within infrastructure itself. 

Healthcare, information technology, financial services, and consumer discretionary sectors formed the vast majority of PE investments in India. The share of industrials, including manufacturing, has declined over the years from being the biggest in 2008 to a very small share by 2021.

Similarly, on the venture capital side, information technology, consumer discretionary and financial services made up the vast majority of PE investments.