US housing market report

With US facing the fears of a double dip recession, investments in real estate remains sluggish. However, continuous fall in home prices and mortgage rates have brought in a great opportunity. Though the post-crisis over-cautious approach of lenders and borrowers is still playing spoilsport, current valuations and demographic dynamics may soon change the scenario.

Housing crisis continues

Housing boom in the US that began in the late 1990s led to an exponential growth in home sales. In fact, the demand remained quite strong during the period and outpaced the supply of new built as well as old homes on sale. As per reports, average sales of houses stayed at around five million per year. But with the economic crisis coming into picture, demand dipped thick and fast from over five million to less than four million. Since then, inventories have been on a painfully slow drift downward as a drop in demand offset much of the impact of the collapse in home building. However, by August of this year, combined new and existing homes listed for sale have fallen to 3.6 million units, having completed roughly 70% of the journey back to normal.

Mortgage payment at record low

With a sharp dip in mortgage rates, US Families have to leash out very low rates out of their income to pay for mortgages. As per Freddie Mac, by October 7, 2011 mortgage rates have fallen to an average annual level of 3.94%. Assuming the use of a fixed rate mortgage with 20% down, it will make the median mortgage payment on a single family existing home just 6.9% of per household personal income, compared to an average of 14.4% since 1966. While this presents a downside market, it also emphasises on the long-term gain that one can achieve by investing in the cheaper than average houses locking in cheaper long term financing available at present. Because, any demand pull in future will also pull these prices up.


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Source : IIPM Editorial, 2012.

An Initiative of IIPM, Malay Chaudhuri 
and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles. 

IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting

They listened to us, in part

The recent decision of the DGCA to imprison drunken pilots is something that we suggest a year back, but DGCA needs to read us again, properly!

At last, the Indian aviation ministry did it. After much talk and criticism, the ministry has decided to inculcate a policy of zero tolerance on safety issues through a new set of rules for punishing drunk pilots. As per recent amendments to the Aircraft Act’s Rule 24, drunk pilots will now face one year jail or fine up to Rs.5 lakh instead of just being prohibited from operating their flight if they fail in pre-flight breath tests. Interestingly, this amendment came after an year of B&E’s Scrutiny article titled “Drunk pilots should be jailed” (B&E issue dated 30/09/2010), in which imprisonment was demanded for all drunk pilots.

Earlier, tipsy pilots would get suspended for three months if they were found drunk for the first time and would be suspended forever for the second time.

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Source : IIPM Editorial, 2012.

An Initiative of IIPM, Malay Chaudhuri 
and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles. 

IIPM Best B School IndiaManagement Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age WomanIIPM's Management Consulting Arm-Planman Consulting

Retail FDI in the cross hairs

The government’s backtracking on opening up FDI in retail shows that its heart and mind are at loggerheads. Once the Cabinet cleared the policy, it was expected of the government to stand firmly behind it. Instead, its lack of conviction and half-hearted support to the policy has brought the entire process to a standstill

The flip-flop on FDI policy in retail is proving to be a major contretemps for the Congress-led ruling UPA-II government at the Centre. Barely days after the government announced on November 24 that it had approved 51% and 100% FDI in multi-brand and single brand retail respectively, West Bengal Chief Minister Mamata Banerjee took the Mickey out of the government’s claim by declaring that the policy has been put on hold ‘until a consensus is evolved’. With the government looking likely to back-pedal on its FDI stand, India Inc. came out all guns blazing and attacking the government for going weak at the knees. Most corporate honchos opined that rolling back the FDI policy on retail would be most unfortunate even though they agreed that the government should have chosen a more opportune moment for announcing the policy.

The decision to open up the retail sector to global investors through foreign direct investment means that global retailers such as Wal-Mart, Carrefour, Tesco and others can set up mega deep-discount stores in the country through joint ventures with Indian firms, where the foreign partner can hold up to 51% equity. But there are quite a few strings attached to safeguard national interests and allay fears of market exploitation by foreign retailers. The rules stipulate that at least half of the FDI should be made in back-end infrastructure such as in setting up cold-chains and warehousing, the minimum FDI in any multi-brand retail project should be $100 million, state governments can prohibit FDI in retail in their states if they wish to, stores can be set up only in cities with a population of at least 1 million and at least 30% of the value of manufactured items procured should be sourced from Indian small and medium enterprises.

Despite the riders, the proposed move hasn’t gone down well with many sections of the political class and their constituencies. Voices against the decision have also been aired from within the Congress. Opposition parties (including the BJP, which had advocated for a similar policy in 2004) and small traders have expressed apprehensions that deep discount stores of transnational corporations will drive out street vendors and neighbourhood kirana stores out of business, thereby endangering their livelihoods. “Foreign investors with deep pockets entering this segment will have an adverse impact on our domestic retail sector, which is growing,” says senior BJP leader Sushma Swaraj, adding that the decision will decimate competition and involve a loss of jobs, both in the manufacturing and services sector. “These jobs will be lost in the name of eliminating middlemen,” Sushma tells B&E.

For the government, opening up FDI in retail was an opportunity to salvage its image, which had been sullied by serious charges of graft and policy paralysis. That chance, if ever there was one, seems to have been lost. According to sources familiar with government thinking following the uproar and furore created by political parties in the wake of the announcement on FDI in retail, the government was already on track to potentially dilute certain provisions of the policy. But what is befuddling is why the government chose to bring the discussion on FDI in retail to Parliament when it actually did not need to. The clearance of this policy does not require parliamentary approval. As per the consolidated FDI Policy of India, the Ministry of Commerce & Industry is only required to bring out a press note indicating its intent, following which the Reserve Bank of India brings out a notification. Since the decision to allow 51% FDI would only be a change of rule under the Foreign Exchange Management Act (FEMA) and not in the legislation, it did not require any approval from the Parliament.

Why then did Commerce Minister Anand Sharma choose Parliament to make this announcement? If the government actually wanted to push the new rules through, it could have easily chosen a more convenient time and place. Moreover, despite the safeguards that the government claims to have put down in the policy, there is still a lot that needs to be done to make the policy yield positive results.

Calling the government’s move ‘suicidal’, economist and political commentator Suvrokamal Dutta says that the policy has been spelt out in accordance with the interests of the West. “By opening up the retail sector in India, which has such a huge middle class population, Western markets are looking for another dumping ground for their goods.” “India,” says Dutta, “is the second biggest market for the US and UK after China and American and European MNCs need this market to overcome recession, their negative growth rate and their job losses.”

Commenting upon the undue urgency with which the decision to open FDI in retail was brought forward without much discussion, eminent agriculture scientist and Father of the Green Revolution, MS Swaminathan tells B&E, “I think the government feels it has the right to take decisions on the ‘reform agenda’ as they call it. But the retail FDI issue affects poorer sections of the society with millions of people involved in small retail business and small scale farmers – this needs to be seriously examined.” According to Swaminathan, agriculture in India is viewed by the urban people from their own point of view of food security. “However there are issues of livelihood and food security for farmers. With diminishing land resources & disenchantment of the farming community with the agriculture economy, the decision on FDI in retail should be discussed well.” Several other experts echo Swaminathan’s sentiments on FDI in retail. They believe that in order to make this policy truly work in the interest of the nation, there are several measures with respect to land, agriculture, food et al which need to be addressed before opening up retail to foreign investors.

While the sound and fury on FDI in retail continues to rage, the policy looks all set to undergo another change in provisions, if not pushed into limbo altogether. But even if a new version is able to pass muster with the political class, it remains to be seen how many foreign retailers will actually find it viable to set up shop in India. Till then how well the policy, if and when it is introduced, works out will remain a mystery.

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Source : IIPM Editorial, 2012.

An Initiative of IIPM, Malay Chaudhuri 
and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles. 

IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting

Between the Indian customs department and the Chinese “kidnapping” traders, it’s the Indian businessman who is getting sandwiched!?

The recent case of Indian traders being kidnapped in China has opened up a can of worms. Apart from the case revealing weaknesses in the Chinese judiciary (as I had highlighted in an editorial a few weeks back), it has also brought out in the open something that traders from India () were facing for a long time but not speaking about openly. The big trade that happens between India and China is through the scores of wholesalers operating out of wholesale markets in India like the Sadar Bazaar in Delhi. These are not the big guys who prefer getting into litigation that easily; they also aren’t amongst those who operate with lawyers and bigger paraphernalia. These are smaller traders, though huge in numbers, who go to Chinese towns like Yiwu in particular and pick one or two containers of goods worth Rs.30 lakh to a crore once every quarter. And they now fear entering China. The question is why? Can one incident of kidnapping shake up an entire community of traders, especially when China is such a good bargain for them? Or was this not that stray an incident after all?

Consider the case of Manish Rewari. He has been doing business in exactly the same town of China for years now. And swears by the advantages that China gives him in his business as he shows off a fascinating watch that he is wearing while narrating his story! He had first seen the same watch in a wholesale outlet in Karol Bagh (). The shopkeeper quoted Rs.22k as the best price for the watch to Manish. Not be outdone like normal customers, this China believer – in his next trip to Yiwu – went around various shops and found out exactly the same watch. And the price for a single piece was Rs.2.5k; and for bulk order of more than a hundred pieces, Rs.1.2k per piece. A watch enthusiast, he picked up only one watch for his consumption.

If that sounded nice, just a trip before this particular trip, Manish’s experience was not as good. He used to work with a Chinese agent then. During his previous trip, he had struck a small deal and purchased goods for Rs.75k through the said agent. The agent took the money, delivered him the goods, but never paid the original seller. The next time, when Manish came and tried to directly deal with the seller, the moment he provided his old receipt with the previous agent’s name to show the price at which he had bought the goods in the previous trip, the seller pounced upon him. His grudge was that he had not received the money for that particular transaction. Manish very courageously tried to defend himself by saying, truthfully, that he had obviously paid up for the same. This he did despite knowing “that they [the Chinese seller] could pick him up and make him disappear”. His reasoning clearly was of no help because soon, there were scores of the seller’s people and henchmen who came from all around and surrounded Manish. Sensing trouble, Manish approached the nearby police, who in their very usual unfriendly manner told him in Chinese that they were there to protect only the interest of the Chinese. That’s when good sense prevailed. Manish knew that he had come for just three days and had a lot of deals to strike. And this would only get messy. And spending a few days in jail like a few others he had heard of was not a great idea. Manish grudgingly agreed to strike a deal with the disgruntled seller, and paid fifty percent of the pending money again as settlement (since it was too small an amount) and fortunately got away.

This year, however, Manish is not ready to go to China anymore; well, almost. He now works through an Indian agent. The recession hasn’t been great for businesses and he fears that even the Indian agent might not have paid up properly to the Chinese sellers (though Manish has paid his entire pending Rs.37 lakh for his last imported container). The fear is that the Chinese sellers might again pounce on him. “It’s undoubtedly a fearful situation. The question of safety for the foreign trading community is totally missing despite us being such regulars and buying so much from them. There is no helpline. And they are just not ready to listen to our version. Someone messes up and someone else pays for it. The recent kidnapping has only brought to highlight the fears and trauma people have been going through for a long time despite doing big business there,” he says, elaborating further. He says something more that has been haunting a lot of Indian professionals in Gurgaon of late, due to a new phenomenon I had outlined, again in a previous article of mine, on how Chinese companies are now doing business in India only when they are allowed to get Chinese workers here (in effect, easing out their employment problem through projects in India).

The grudge the people working in Gurgaon have – as they see scores of Chinese people all around them working on various projects – is that not only are we allowing Chinese people to take our jobs, we’re also accepting their behaviour to simply look down upon Indians despite working in India itself (rightly or wrongly, is another question of course). Manish says exactly the same, “We do so much trade in China but they just don’t treat us with enough respect and that is a key reason behind this high handed semi mafia behavior.”

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Source : IIPM Editorial, 2012.

An Initiative of IIPM, Malay Chaudhuri 
and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles. 

IIPM Best B School
IndiaManagement Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age Woman
IIPM's Management Consulting Arm-Planman Consulting

Second time lucky but determined not to lose first spot again

When GM went broke four years ago not many gave it a chance to spring up a fight and come back from financial rehab. Those Cassandras are now eating their words as the former lumbering auto giant strikes back with a vengeance.When GM went broke four years ago not many gave it a chance to spring up a fight and come back from financial rehab. Those Cassandras are now eating their words as the former lumbering auto giant strikes back with a vengeance.

A lot has changed for General Motors (GM) since it went adrift in rough seas that threatened to dash its corporate ship against dangerous waves just four years ago. In the summer of 2008, about a year before GM became a ward of the state, its chief executive Rick Wagoner was desperate to catch at straws in a futile bid to avert his company from going belly up. The financial results for the 2008 spring quarter left no one in doubt about GM’s bleak prospects: a $15.5 billion loss, its third worst in a century. GM’s revenue in North America had fallen $10 billion — a breathtaking 33% — from the year-earlier quarter. And for the first time, after donning the mantle of being the No. 1 car maker in the world from Ford in 1931, GM lost that coveted position to Toyota. In the midst of a significant downturn in the American and global economy, Toyota raced ahead of GM in global car sales, selling about 620,000 more vehicles in 2008 than GM’s 8.35 million.

But the worst was yet to come. Finding itself at the end of financial tether, Wagoner flew into Washington D.C., cap in hand, to ask for $10-12 billion of easy loans from the Federal government to bail out his cash-strapped company. But his demeanour - flying in a private luxurious jet at the company’s expense - rubbed many in Washington the wrong way. Sensing that GM was fast on its way to go kaput, the Obama administration had the good sense to push through some painful but imperative decisions. In quick time Wagoner was booted out and the doddering company was offered a lifeline in the form of government bailout funds after being put under bankruptcy court protection. GM - which hadn’t made a profit since 2004 - declared in its filing that it had $172 billion in debt and $82 billion in assets. Its market capitalisation, having plumbed the depths of investor confidence, stood at $2.21 billion in March 2009 when Wagoner departed. The value of GM stocks had cratered to $3.62 as against the trading levels of above $70 when Wagoner had joined as CEO in June of 2000.

Wagoner’s exit did not exactly move GM away from over the hump. Through the initial months of restructuring, the company became a revolving door for a succession of CEOs who drifted in and out without leaving any mark or making an impression. It was only after Daniel Akerson - GM’s fourth CEO in just under 18 months - arrived in September 2010 that the company once again rediscovered it automotive mojo and competitive gene. Since then the automaker, which had lost about $100 billion in the years before its 2009 bankruptcy, has been consistently profitable. In the latest quarter (Sept-Dec. 2011) for which results are available, GM made about $1.7 billion in profit, besides having already repaid $24.1 billion of the $49.5 billion in federal government aid it had received. But the biggest icing on the cake was that GM’s worldwide sales rose 7.6% to 9 million vehicles in 2011, helping the auto major to once again grab pole position as the world’s No. 1 car seller (a position it had ceded to Toyota in 2008). That’s surely a remarkable achievement for a carmaker that looked completely down in the dumps until two years ago.

The uptick in sales came about on the back of the strong showing by its flagship Chevrolet brand, which sold a record 4.8 million vehicles last year (even more than total sales of brands like Nissan and Honda). European carmaker Volkswagen was the second-largest seller of vehicles worldwide whose sales rose 14.3% to 8.2 million vehicles followed by the likes of Toyota, which expects its 2011 sales to come in at around 7.9 million vehicles, down about 6% from 2010. Analysts attribute GM’s recent swell performance to its strong US and China operations. Being the two biggest markets for carmakers today, GM has done well to wedge the China market open in its favour by collaborating with its local partner (SAIC Motor Corp), a strategy that has paid off handsomely. In 2011, GM sold more than 2.5 million vehicles in China, registering an 8.3% increase from the previous year. In its North American home market, GM clocked sales of over 2.5 million vehicles at a 13% growth trajectory last year.

According to Jeremy Anwyl, Vice Chairman of Edmunds, an automobile industry information website, GM was lucky to have come out of its bankruptcy and consequential restructuring at a time when global market conditions were once again turning favourable for the automobile industry. “The bankruptcy allowed GM to cut costs and fundamentally restructure its operations from a cost and incentives perspective. GM came into a growing market with a lean inventory and, at the same time, it introduced impressive new products such as the Chevy Cruze.” What also helped GM pip Toyota to the post was the fact that the Japanese car maker could not exploit the tailwind of growth and the resurgence in the global car market as it was badly kneecapped by supply-chain and production glitches at its plants, arising due to the double whammy of the tsunami and earthquake that struck Japan early last year.

But despite making the most of the opportunities in the past year, the real test of GM’s ability will be to consolidate and expand its market share without diluting its profitability. With Japanese car makers like Toyota and Honda emerging from the shadow of last year’s contretemps and players like Volkswagen and Ford stepping up on the throttle, can GM continue its alpha dog run in the industry? Already, Toyota has come out with its sales forecast of 8.48 million units for the current year, Volkswagen is pulling out all the stops to top the industry league tables by 2018 and Ford is on track taking its One Ford strategy to the next phase that might give it a fair shot at becoming market leader. In other words, GM is up against the most competitive automobile market in its history and its ability to continue delivering stellar results is bound to come under increasing strain. “Ford, VW and Hyundai are some of the toughest players there are and they lead by dint of their product line-ups. GM has to push harder to get ahead of the curve to compete head to head with these companies in all market segments globally,” says Laurie Harbour, President, Harbour Results, an industry analyst.
         
Read more.......

Source : IIPM Editorial, 2012.

An Initiative of IIPM, Malay Chaudhuri
and Arindam Chaudhuri (Renowned Management Guru and Economist).

For More IIPM Info, Visit below mentioned IIPM articles.

IIPM Best B School India
Management Guru Arindam Chaudhuri
Rajita Chaudhuri-The New Age WomanIIPM's Management Consulting Arm-Planman Consulting