B.E.S.T Vs N.M.M.T - A case of niche marketing & appropriate positioning

Every weekday that the clock strikes 7:30AM, the picture unfolds with a shrill ring of the alarm. It is time out, dreams over. A quick shave and a bath: dressed in formals, I'am off to work. I live in Seawoods the peninsular part of Navi Mumbai. My eyes open up to the Arabian sea on all three sides. A romantic evening spent with a loved one with the sun setting in the distant horizon can inspire a donkey to bray poetry. This was the view that compelled me to take up residence at this corner of the world. The flip side is that the connectivity is really bad.

So I revv up my cruiser and take a long drive on the palm beach highway, arguably the most beautiful stretch of road in Mumbai. At speeds of more than 100 kmph it takes me 8 mins to cover a distance of 10.5 kms. So, here I'am at Vashi by 8:30 AM. Driving in Mumbai can be a real pain and so I avoid driving all the way to my office in Chembur which is 11 kms from Vashi. What are the options I have to travel?

Local Train: Not an option, If Shashi Tharoor could call the economy flight, cattle class. I wonder what we can say about the Mumbai local. I have seen people travel on the roof tops and some die travelling, by just falling off the moving train, as simple as that. You cannot move a finger without touching someone & therefore the local train just gets shelved.

Taxi Cab: Bad Option, A cab charges 300/- from Seawoods to Chembur. So the total travelling expenses would come to 12000/- per month, This without the climate control. With so many other options would I want to travel in a taxi everyday?

Local Buses: Decent Option, Local buses are run by two corporations B.E.S.T & N.M.M.T (BrihanMumbai Electricity & State Transport) & (Navi Mumbai Mahanagar Transport) A local bus charges me 10/- from Vashi to Chembur. The frequency is good, the flip side? Crowded and it stops every 0.5 - 1 km. Also as the fleet is pretty old it really takes a long time to travel from Vashi to Chembur close to maybe 45 mins to 1 hr.

Local Cabs: Not a very good option, Individuals moving in & out of Mumbai generally provide lift for a nominal charge. While this is attractive, the problem is that you never know whose car you are entering into. The other day my friend prodded me to get into an Indica and as we were travelling the two guys were talking in Hyderabadi Urdu. One of them then pulled out a pistol and showed it to the driver and said "Today I'm gonna kill that SOB", to which the driver replied "Calm down dude, we will decide after we reach Raghu's place". That day I decided that this is not really a very good option.

State Transport: The best option under the circumstances, The State transport is run by the M.E.S.T (Maharashtra Electricity & State Transport). It charges me 12/- and takes me to Chembur in about 30 mins. So even if I catch hold of a bus by 8:40 AM, I'am in office by 9:10 AM, the official start time being 9:15 AM. This is my preferred mode of travel.

It was one of the mornings, as usual I had a shave and a bath and revved up my engine and I was at Vashi at 8:25 AM. Smiled at the pretty girl who also gets down at Chembur and waited for MEST to arrive, the clock struck 8:30 AM and whoosh!!! what was that? A Volvo arrived and the doors opened under pneumatic pressure. I checked the signage and it was going to Bandra, I asked the conductor if the bus stops at Chembur ? He nodded in the affirmative and I hopped in. Air conditioned with the FM radio and the bus was empty. I plonked on the seat and looked around feeling good. I was ready to pay 50/- and the conductor handed me a 20/- ticket to Chembur. This was value for money I felt. N.M.M.T had caught onto my pulse and come up with a product offering that just suited my needs. As a week passed I could see that the bus was getting a bit crowded, this was not what I expected. I could see myself travelling in a Volvo and standing at times !!!

One more morning and whoosh!!! the Volvo comes and opens its doors in perfect unision. I decided to give it a pass, MEST was better, if not air conditioned, if not music, atleast I got to sit in a corner and travel the distance. As I let the Volvo pass by another vehicle arrived. This was not a Volvo, it was from B.E.S.T, It was air conditioned and it looked empty. I gave a peek in and asked the conductor, does it go to Chembur? An affirmative and I hop in, hmmm the accelaration is not as good as a Volvo. The design also looks tacky, but it is air conditioned and has music playing at a very low volume. The conductor comes up and I hand him over 20/- for Chembur and he says, Sir 30/- for Chembur. I felt that he was ripping me. I protested, the Volvo charges me 20/-. The conductor replied back saying that the Volvo is run by the N.M.M.T while B.E.S.T runs these chinese make buses and B.E.S.T charges 30/-. I shelled out the money and continued the journey.

Later on I realised that I was travelling more frequently by chinese make BEST buses than Volvo make NMMT buses. This was because:

Both offered Airconditioning,

Both offered music, but BEST put on a very low volume while NMMT had blaring music

The low accelaration of BEST ensured that when I opened a book to read there was no strain in the eyes due to jerks.

The differential in pricing ensured that people who really wanted to travel in peace actually travelled in peace.

I was able to complete Outliers by Malcom Gladwell and Kane & Abel by Jeffrey Archer travelling in BEST.

When you look at the bus it may appear that the revenues of NMMT maybe higher than BEST and also the profits of NMMT would therefore be higher than BEST.

However, while an NMMT Volvo maybe taking 30% - 40% more passengers than BEST, BEST has priced it's tickets higher by 50%. Also the Chinese make vehicles must definitely be cheaper than a Volvo leading to lower capital costs. I may not be able to comment on the maintenance but looking at the fact that 40% more passengers board the NMMT, I belive that the maintenance cost of NMMT would be higher than BEST. All of this leads me to only one answer.

BEST is defintely the best and a clear winner.

What caused the financial crisis?

The US $ 700 bailout package proposed by the US government is one of the most extensive government interventions in the financial markets since the great depression. The bailout plan is similar to the 1933 Home Owners' Loan Corporation of the post-depression era. Way back in 1933 it helped in stopping foreclosures and refinance defaulting mortgages , and increasing liquidity. That a similar proposal is being considered indicates the extent of damage caused to the banking and financial services systems all over the world.
But how did the banks and investment banks create this crisis? Let's cut through the financial jargon and understand in simple words how this problem was created in the first place. The root cause for the current crisis seems to be the excessive use of leverage.

Excessive leverage:

To take an example, a company with a net worth of US$ 25 billion borrowed 26 times its net worth and creates leveraged funds of US$ 650 billion to invest or lend them. When a small portion of the company's investments turns bad, as is the norm for the industry, the company's capital is under threat. To put things in perspective a 3.8 percent misjudgment in their books was enough to wipe out their shareholders' capital of $ US 25 billion.

Bad lending policies:

In 2005-07 the property markets were on a high growth path. The property prices kept increasing. A sense of complacency had set in the real estate markets . It was assumed that the residential property prices would keep increasing forever. Mortgage lenders relaxed lending standards. Billions of dollars of sub-prime loans were to given borrowers with the sketchiest credit histories on recommendations of mortgage brokers who were more interested in their commission. Loans were structured very innovatively. Some gave borrowers the ability to skip repayments and some had interest rates that rose over the life of the loan. Lenders were not worried about repayments as defaults if any, on loans, could be recouped from the property itself.
Contrary to this assumption, the property bubble burst leading to sharp depreciation in property prices. As loans were given to people who could not repay it in the best of time, mortgage repayments defaults kept increasing, triggering off a chain of events that led to the bankruptcies of the hallowed institutions of Wall Street.

Financial engineering:

Now you may ask how investment banks of the Wall Street who generally deal in investments in stocks, bonds and commodities have anything to do with mortgage loans. To understand this we move into the realms of financial engineering. Wall Street investment banks purchased the mortgages from the banks. This freed up banks' funds to lend more and gave the investment banks an underlying asset to create their financial magic.
Using these assets as collateral, they created derivative instruments and sold them to various institutional investors like hedge funds, pension funds, mutual funds and banks in all parts of the globe, including Europe and Asia. The instruments were to be redeemed as and when mortgage payments were received from borrowers.
The mortgages were categorised according to their quality. The good ones were pooled together under one derivative instrument. After being highly rated by credit rating agencies and insured from insurance companies these instruments were sold to institutional investors. The second quality ones got lower ratings, but nevertheless could be sold off with higher interest rates. The investment banks decided to keep the junk quality ones with themselves under separate companies called special purpose vehicles (SPVs) paying them the highest interest rates.
In all there was approximately US$ 1 trillion invested in these securities. Things were cruising along as long as property prices were on an upward trajectory . Once the tide turned the echo of defaults were heard far and wide. The value of mortgage-backed securities fell sharply. All institutional investors that had bought these highly-rated bonds in large volumes expecting a good rate of return now faced complete erosion of capital.

The jigsaw puzzle:

So, now, if we look at it as a giant jigsaw puzzle we have many independent pieces. One, a home owner who borrowed a loan; second , a mortgage lender who sold off his loans as income streams; third, an investment bank that purchased and re-engineered them; fourth, an insurer who through credit default swaps insured these debtbacked securities; and finally a bond holder who invested in these highlyrated instruments.
Now, due to defaults by homeowners all institutions up the chain are already bankrupt or facing bankruptcies.

Bailout to the rescue:

This is where the bailout plan is expected to solve the problem. The US government wants to buy mortgages and bonds from these near bankrupt companies with taxpayers' money. The plan as of now seems to be, after acquiring them at steep discounts, to hold them till maturity.
If all mortgages are paid back in full, the government can earn a handsome return on the taxpayers' money. This move will also help banks remove these illiquid assets from their balance sheets and free up the funds to be lent again, hopefully to good borrowers.
While experts seem cautiously optimistic that this bailout will solve the credit crisis to a certain extent, questions remain on whether it can prevent more failures of banks and Wall Street firms.

Bankrupt

Sorry for going offtrack, but could not help. From the day I started preparing for my B School Interviews in 2003, I was fascinated by the world of M&A's (Mergers & Acquisitions). There was a surge in M&A since 2003 an euphoria, what I call an urge to merge. I remember feeling elated and excited on reading the frenetic pace with which M&A activities were on, Sony buys MGM, AOL buys Time Warner. It made me proud to hear Ranbaxy buying a host of foreign drug companies and Tata buying Tetley and ofcourse the JLR (Jaguar Land Rover) deal was a crowning moment of India Inc. I would keep track of the different multi billion dollar deals, I would marvel at the way cash was produced on demand. As my interest in this area kept waxing, I started reading the different ways in which organizations would fund their acquisitions. It also brought me to a very interesting book by the name "Barbarians at the Gate" which detailed how RJR Nabisco was destroyed by a few greedy managers.
Today there is a lot of destruction in value; GM files for Bankruptcy, Lehman Brothers files for Bankruptcy, Meril lynch may be acquired. It is surprising that times change so fast. Lehman brothers, the favored destination for all the budding i bankers. The organization which only takes the best and the brightest of the Management graduates has failed to manage itself. Is it the subprime crisis, Is it an inability to weigh the risks? I am not sure, The euphoria has melted down and the only lesson that I take from this episode is to keep your feet firm on the ground as you try to reach for the stars, but do reach for the stars...

Subprime Crisis

The last post promised a detailed discussion on the sub prime crisis. However, I felt that a discussion on the same is beyond the scope of this blog. While a personalised discussion is welcome, I have felt that the subprime crisis would be going to far from the world of sourcing. The treatment given in the last post, would I believe suffice for all the managers connected with sourcing. However, for those of you who would like to know more, Please click on the title. The hyperlink would redirect you to wikipedia where a detailed discussion is available. The treatment is comprehensive. In case it fails please click on the link below or copy paste the url in your web browser.

http://en.wikipedia.org/wiki/Subprime_Crisis

I have referred a diagram showing the causes, Effects and response put in a comprehensive manner by wikipedia here.

Secret behind the price hike of Caustic Soda

In my last post I promised to discuss the reasons behind the price increase of Caustic Soda & Soda Ash. Let me devote this post to the price hike of Caustic Soda. Caustic Soda is NaOH, Somebody suggested why don't we just take an aqueous solution of Common Salt (NaCl) & electrolyse it and produce NaOH. Ofcourse this seems to be a logical process. As I browsed through web pages I found that NaOH is actully produced in the way described above. However, the main product is not NaOH but Chlorine. Caustic Soda is a byproduct of the chlor-alkali process. Therefore, the supply of Caustic soda is dependent on the demand of Chlorine.
The price of Caustic Soda is supposed (actually)to have gone up due to the non availability of the product. It is the supply- demand game that is playing out. If the supply of Caustic Soda has gone down, it is assumed that the demand of chlorine must have gone down. The demand of chlorine is supposed to have gone down due to the subprime crisis.
The obvious question is, What is the subprime crisis ? The answer to this is beyond the scope of this post. However, we will be discussing the same in the next post. For now briefly; The crisis is evolved due to Mr. Bush exhorting the American public to spend their way out of the recession of 2002. Banks started giving loans, housing loans to the general public who carried a credit risk i.e those who may not be able to repay the loan due to unstable incomes, low income or a host of other factors. These were the subprime guys. When the real estate prices crashed due to oversupply of houses, these people found that the net repayment was higher than the market rate of the houses. Therefore there was a mass default of the loans. Meanwhile the banks had bundled the subprime loans and started selling the same to different financial institutions, as instruments. The defaults led to a revaluation of the price of the instruments which pulled the value of the instruments down. (Keep watching for the next post for a detailed discussion). The cascading effect was both a drop in demand for houses or new projects as well as huge losses creeping into the books of the financial institutions.
Going back to the second paragraph, Chlorine produced from the chlor alkali process described is primarily used in the manufacture of polyvinyl chloride resin which is again primarily used by the housing industry. With demand for housing falling, consequently demand for polyvinyl chloride resin fell and consequently the demand for chlorine. This led to a drop in the operating rates of the chlor alkali plants leading to a drop in the supply of caustic soda and with it the hike in prices of caustic soda. Phew... that was one hell of a chain reaction...

A bleak picture turning rosy ?

Companies are raising prices at break neck pace. The rising input costs has painted a gloomy scenario for the procurement function. The industry is faced with two dilemmas:

• Either it increases the prices of its products in response to the increase in key input commodity prices & thereby risk losing the market.
• Continue to hold on the price increases and risk diminishing margins or possibly bleed.

Also a degrowing market has not helped the cause. The problem is compounded in the Indian pharmaceutical industry faced with a triple whammy.

1) With the Olympics due in China, China would want to present itself as a country which is conscious of the environment in which it lives. Therefore, all the chemical firms (supplying intermediates) that were flouting the global environmental norms are being forced shut. This has led to a huge supply crunch. The output has dropped to 40% of the previous year, leading to
unprecedented hike in input costs.

2) The crude story is well documented and would not need much elaboration. However the key reasons identified for the increase in crude price are: (order depends on where you live & who you are)

a) Falling dollar (due to sub prime crisis)

b) US Iran standoff

c) Increasing consumption of oil by third world countries

d) No increase in production

e) Excess Speculation

f) Rising costs of oil exploration & development

3) Key pharmaceutical product prices are controlled by the government (whoever talked of liberalization). Prices of essential drugs are fixed by the government and are revised only through a lengthy, time consuming process. To quote an example, Ibuprofen is considered an essential drug and the government fixes the price of the finished product marketerd by the companies. Ibuprofen was hovering at around Rs 400/- when the government last fixed the price (about six months back) and today the same is hovering at around Rs 500+. To make matters worse the cost of the input Ibuprofen represents 90% of the cost of the finished product, & 65% of the Average selling price. Therefore if the price of the key active pharmaceutical ingredient rises by 25%, the pharma company starts bleeding. This is the reason why many of the pharma products are going of the shelf.

However, all is not lost. China is expected to revive production in a short while and all the pharmaceutical organizations are waiting with bated breath for the olympics to be completed & factories to resume operations. Crude is expected to soften on the back of anticipated production from Brazil, Canada & Central Asia and also due to softening of demand. The government is expected to revise the pricing norms in a shortwhile based on the stable conditions expected to arrive in a short while.

Now you maybe wondering the reason why I have not mentioned the ever so ubiquitous inflation as one of the three reasons. Well inflation is an effect of these three, atleast in the pharma industry. There are other minor factors too like the rise in the prices of Soda ash & Caustic soda. I will be discussing the same in another post. Till then keep your fingers crossed, pray for the early completion of the olympics, discovery of more oil fields and revival of the global economy.

Oil rising up agenda as price rise shows no sign of slowing

If oil wasn’t topping procurement’s agenda at the turn of the year, it certainly is now. With the cost of crude rise near to a potentially ruinous $140-a-barrel.
Hardly music to procurement’s ears given that a recent CIBC World Markets Report claimed that once oil hit $120 a barrel, “Every 10% increase in trip distances translates to a 4.5% increase in transportation costs.”
Busch uses the example of the cost of shipping a container from Shanghai to the eastern seaboard of the US having risen 250 per cent since 2000 (when oil prices were a relatively benign $20-a-barrel).
Clearly the latest price hikes are going to put more pressure on those organisations that lean heavily on global sourcing. Any further rises and they may start to ask, if they haven’t already, if the strategy is really delivering the results it once did.