17.03.2010

Finance & Economy

• On how different countries (in Asia) fared in opening up their retail sector
• Taiwan opened up its retail sector to foreigners in the 1980s without creating a regulatory environment for the emergence of a strong retail sector. Predictably, foreign companies dominate Taiwanese retail today. In contrast, Japan’s distribution networks and regulatory environment have been inhospitable to foreign retailers and the Japanese pay today for this absence of competition with some of the highest retail prices in the world.
• South Korea and China managed the process of foreign entry more gradually, initially encouraging joint ventures between domestic and foreign retailers before looser regulations on FDI in retail were brought in. Both countries now have the benefit of a vibrant domestic retail sector, and the competition between domestic and foreign retailers has yielded low prices and good service.
• India is already following China’s example, initially encouraging joint ventures between domestic and foreign retailers before allowing 100% FDI in organised multi-brand retail. This gradual opening up should preserve a vibrant domestic retail sector in the long term, and provide India with a solid foundation of domestic expertise and human capital.
• What strategies should retailers pursue for long term success in markets like India?
• First, build capabilities and backend logistics infrastructure. Domestic firms should partner with established foreign firms to capitalise on combining foreign retail knowhow with domestic market knowledge. Over time, these joint ventures will dissolve but both the domestic and foreign firms will have the capabilities to establish successful retail businesses independently. While the government is rapidly investing in transportation infrastructure, organised retailers should either invest in their own supply-chain infrastructure or promote intermediaries that develop and invest in cutting-edge supply-chain infrastructure.
• Second, learn local and regional preferences in developing the merchandising mix. ‘One size fits all’ is not a winning strategy. Merchandising correctly in a diverse country such as India takes time, trial and error, and is critical for success.
• Third, to deal with the kirana challenge, organised retailers should actively engage customers and local political leaders, to demonstrate the value of their retail enterprise, especially in the context of political challenges from kirana lobbyists. For example, Bharti has created a retail academy to train thousands of people in Punjab. Creating thousands of jobs over time develops a political constituency of employees.
• Idea in soup over 'paperless' ad
• Mobile services operator Idea Cellular’s ‘use mobiles, save the planet’ campaign (you might have seen it on TV), starring Abhishek Bachchan, has landed in a controversy, with the Indian Paper Manufacturers’ Association (IPMA) dragging Idea Cellular to the Advertising Standards Council of India (ASCI).
• The IPMA alleges that the Idea commercial, which is aimed at weaning people away from paper to the electronic medium, is ‘pitching against the usage of paper and damning the industry as a whole for adversely impacting the environment.’
• Idea Cellular, on the other hand, maintains that its ads promote conservation and that none of the situations depicted in its ‘save paper’ commercials are real and that it has great respect for the paper industry.
• However, Idea is reportedly taking this ad off air. Though it says that the withdrawal is not on account of the objection but as per schedule, it is sure to cool the tempers down.
• Government wants banks to exit insurance?
• This appears so from this news report.
• The main idea behind the government's move appears to be that it wants banks to remain in banking rather than expand into other areas of finance like insurance, mutual funds etc. This is in the context of the fact that the concept of universal banking or the financial supermarket model that has defined global banking groups such as Citi or the Royal Bank of Scotland for years has been severely tested.
• How is it that the government is in a position to dictate to banks as to where they should go and where they should not?
• Its power comes from the fact that it is the largest shareholder in many a public sector bank -- holding about or more than 51% equity.
• The stress on capital adequacy norms is forcing the banks to approach the central government to infuse more capital into them. The government has already committed to provide Rs 16,500 crore in capital support to state-run banks in 2010-11 to be complaint with capital adequacy norms. It estimates that state-run banks will need another Rs 38,000 crore in capital over the next two years.
• Government jittery response has much to do with the fact that India’s life insurance industry posted a combined net loss of Rs 4,878.49 crore in 2008-09, up 43% from a year ago. Of 22 life insurers, only four have reported profits. An insurance venture needs a minimum startup capital of Rs 100 crore and has solvency margins of 1.5% of the total sum assured. Life insurance companies put in nearly Rs 6,000 crore into their ventures in 2008-09, while non-life companies brought in Rs 6,228 crore.

International

• What is the issue between Google and China?
• Google has been operating google.cn, a search engine meant for Chinese speaking people since 2006.
• China requires Internet operators to block words and images the ruling Communist Party deems unacceptable.
• China demands that Google should respect its censorship laws. But Google accuses China of hacking its sites with an intent to bully the search engine giant.
• Google in January said it may exit China pending talks with the government on a plan to stop censoring search results in its Google.cn site, after claiming it was targeted by cyber attacks from within the country.
• The height of this tiff is that China demands that Google should respect its censorship laws even if it exits China.

• Global credit markets on debt row
• Is another global disaster staring us in the face? Looks like so.
• 2012 is the beginning of a three year period in which more than $700 bn in risky, high-yield corporate debt begins to come due, an extraordinary surge that some analysts fear could create a glut in the debt markets. With huge bills about to hit corporations and the federal government around the same time, the worry is that some companies will have trouble getting new loans, spurring defaults and a wave of bankruptcies.
• The US government alone will need to borrow nearly $2 trillion in 2012, to bridge the projected budget deficit for that year and to refinance existing debt.
• How is this coming about?
• Private equity firms and many nonfinancial companies were able to borrow on easy terms until the credit crisis hit in 2007, but not until 2012 does the long-delayed reckoning begin for a series of leveraged buyouts and other deals that preceded the crisis.
• That is because the record number of bonds and loans that were issued to finance those transactions typically come due in 5-7 years. In addition, many companies whose debt matured in 2009 and 2010 have been able to extend their loans, but the extra breathing room is only adding to the bill for 2012 and after.
• The result is a potential financial doomsday, or what bond analysts call a maturity wall. From $21 billion due this year, junk bonds are set to mature at a rate of $155 billion in 2012, $212 billion in 2013 and $338 billion in 2015.
• As was the case with the collapse of the subprime mortgage market three years ago, derivatives played a big role in the explosion of risky corporate debt. In this case, the culprit was a financial instrument called a collateralised loan obligation, which helped issuers repackage corporate loans much as subprime mortgages were sliced, diced and then resold to other investors. That made many more risky loans available.
• Are all foretellers gloomy?
• Not everyone is convinced that 2012 will spell catastrophe for the junk bond market. Optimists note that investors seeking high yields snapped up speculative-grade bonds last year and early this year, and that continued demand will allow companies to refinance before their loans come due.
• The scenario points to companies with a lot of debt competing with a raft of better-rated borrowers that are expected to seek buyers of their debt at around the same time. Chief among those is the best-rated borrower of all: the US government. The Treasury Department estimates that the federal budget deficit in 2012 will total $974 billion, down from this year’s $1.8 trillion, but still huge by historical standards.
• Some estimates say that Washington will actually have to borrow $1.8 trillion in 2012, because $859 billion in old bonds will come due and have to be refinanced in addition to the deficit. By 2013 and 2014, $1.4 trillion will have to be raised annually.
• Next in line are companies with investment-grade credit ratings. They must refinance $1.2 trillion in loans between 2012 and 2014, including $526 billion in 2012.
• Finally, there is the looming rollover of commercial mortgage-backed securities, which will double in the next three years, hitting $59.7 billion in 2012.
• Even if most of the debt does get refinanced, borrowers may have to pay more, if heavy government borrowing causes rates on Treasury debt to rise. Those higher rates would trickle down through the credit markets, hitting the weakest companies the hardest.

Language Lessons

• smithereens: Noun
• A collection of small fragments considered as a whole
• eg: If only the Maoists would step aside, in peace or at the point of a bayonet, the state would take care of the poor. This claim would be blown to smithereens if the state were to facilitate a classic case of development that impoverishes a defenceless populace, perhaps to extinction.
• sidestep: Verb
• Avoid or try to avoid fulfilling, answering, or performing (duties, questions, or issues)
  
• eg: Europe's blueprint for a financial lifeline to Greece amounts to an unprecedented bet by finance ministers that they can avert a euro crisis by sidestepping the no-bailout rules intended to sustain the 11-year-old currency.