Petroleum Politics: US v/s OPEC

On January 10, 1901, an enormous geyser of oil exploded from a drilling site at Spindletop Hill in Texas, USA. Reaching a height of more than 150 feet and producing close to 100,000 barrels a day, the “gusher” was more powerful than any previously seen in the world. Oil erupted for nine days before it could be brought under control with the technology of the time. Although, oil was first discovered in America in 1859 by Colonel Drake, known as the father of American Petroleum Industry, the discovery of the Spindletop geyser in 1901 is considered to be the start of modern oil age.
Within a year, more than 1,500 oil companies had been chartered in US, and oil became the dominant fuel of the 20th century.

With the technological breakthroughs of the 20th century, oil emerged as the preferred energy source. The key drivers of that transformation were the electric light bulb and the automobile. Henry Ford started the commercial production of Model “T” automobile in 1908. This was the world’s first inexpensive, mass-produced car.

As oil was first commercially extracted and put to use in the United States; consequently, pricing power for the fuel lay with the United States, which was, at that time, the largest producer of oil in the world. The dominance of the United States during the first half of 20th century is illustrated by the fact that regardless of where oil was produced in the world, its price
was fixed at that of the Gulf of Mexico.

Beginning with World War I, oil became a strategic energy source and a tremendous geopolitical prize. In 1919, however, the U.S. Geological Survey estimated that U.S. oil supplies will run out in ten years, triggering the country’s first oil security fears. Though the United States produced roughly one million barrels of oil per day, or 65 percent of global oil supplies, more than 90 percent was consumed domestically. Following British and French attempts to shut U.S. oil companies out of regions they controlled in the Middle East, the U.S. government began active oil diplomacy in the late 1920s, insisting on an ”open door” policy that would allow all companies to compete for foreign concessions regardless of national origins.

In the 1930s, Gulf Oil, BP, Texaco, and Chevron were involved in concessions that made major discoveries in Kuwait, Saudi Arabia, and Libya. Based on those discoveries, a cartel of seven companies was formed that controlled the world’s oil and gas business for much of the twentieth century. Known as the Seven Sisters, they included: Exxon (originally Standard Oil), Royal Dutch/Shell, BP, Mobil, Texaco, Gulf, and Chevron. Five out of these seven companies were American.

Oil production in America was not able to catch up with the fast pace of industrial development. American reliance on imported oil, which began during the Vietnam war, increased further during the economic boom period of the 1950s and 1960s. Here’s a snapshot of America’s dependence on imported oil since the 1940s:

* in the late 1940s, for the first time, the US began to import oil
* in the 1950s, 10% of US oil consumption was imported
* in the 1960s, 18% of US oil consumption was imported
* in 1973, the share of imports in US oil consumption reached 30%
*By 1977, share of imports in US oil production increased to 50%

America’s dependence on imported oil provided Arab countries and OPEC (which had been formed in 1960 to counter the hegemony of Western oil companies) with increased leverage to influence oil prices. The Seven Sisters controlled much of the oil market till the early part of 1970s. However, the 1973 oil shock swung the pendulum in OPEC's favour. That year, in response to U.S. support for Israel, OPEC and Iran stopped oil supplies to the United States. Further, events like the disintegration of the Soviet Union in 1991 and Asian Economic Crisis in 1997 helped OPEC strengthen its control over oil prices.

OPEC presently holds 40% of the world’s conventional oil reserves and has the world’s lowest barrel production costs. This enables it to have a wide-ranging influence over oil prices. Thus, when there is a glut of oil in the world, OPEC cuts back on its production quotas. When there is less oil, it increases oil prices to maintain stable levels of production.

In the last 3 decades, The Shale Industry in the US has been able to increase production to a major extent, which has reduced US’s dependence on imported oil. Shale oil is generated in Shale rock through processes like Pyrolysis, hydrogenation and thermal dissolution. Extraction of oil from Shale Rock formations, however, is costlier. Shale oil drilling in US picks up only when crude oil prices are expected to sustain above $60 for a long period. The significant fall in crude prices during 2014 to 2017 forced many shale oil producers in US to shut shop. Presently, US imports 20% of its oil demand.

To conclude, regions that hold pricing power over oil control vital levers of the world’s economy. Conspiracy theories in political circles widely acknowledge that the wars such as Persian Gulf war, US’s movement of troops to Saudi Arabia to forestall invasion, Iraq wars, etc. had control over oil production and prices, rather than “preservation of democracy” and
religious reasons as the main intent. The United States controlled oil prices for a major part of the previous century, only to cede it to the OPEC countries in the 1970s. However, the technological advancement in extraction from Shale Rock formations might shift the power back to US in the years to come. Also, US’s focus towards greener resources of energy might tilt the balance in future.

Our investment Adviser, Anurag Roonwal penned his thoughts about Petroleum Politics.

Poker Face – A Strategy

Poker Face – A Strategy
noun
An impassive expression that hides one’s true feelings.

Movie:
My introduction to this concept was in my early childhood. One of my favorite book and movie is ‘The Godfather’ written by Mario Puzo. I was fascinated with it, enthralled by dialogues such as ‘It’s not personal; it’s just business’, mimicking them in my not so great Italian ascent. But the most important thing I took away from the movie is how not to negotiate. They show that sunny (godfathers firstborn) showed his interest in a drug deal which the Godfather refused; which resulted in godfather being shot. This is what I took away from the movie. In Business whether it’s your colleague, boss, client or vendor they should never know your thoughts. You should be impassive at all times, this is absolutely critical during times of negotiations. If the opposing party can determine high level of interest, the price if not going up will at least not budge from the current price.

Game:
We cannot discuss poker face as a strategy without discussing poker. If godfather introduced me to this concept, poker developed it. Poker is different from the other gambling games i.e.  you do not play against the house, you play against each other. The best way to describe poker is you don’t play the odds, you play the man. The biggest test in poker is your
opponents should not be able to read your thoughts & game. Bluffing in poker and catching a bluff in poker is a tremendous negotiation skill to have. It requires two things – acute observation and absolute control on one’s expression. This is one art which all the negotiators need to master.

 

The Corollary:
The corollary to having a poker face is being observant to others, deciphering their motives through their expressions & behavior. Reading people is an art which helps you not only in business but in all aspects of life. The observation prowess helps you go into detailing of each aspect of your business. You need not be the most brilliant person in order to be the best communicator. You can have a more successful meeting by changing the agenda of the meeting by seeing the client’s reaction.

The Conclusion:
Poker face & observation are like yin & yang, they are incomplete without each other. You can pickup, develop and hone these skills not only in the business world but also by doing things you like i.e. playing poker, reading books and watching movies!!
For me this is the single most important quality I would look in the person whom I appoint to negotiate on my behalf. What about you?

Contributed by guest author Shreyam Shah, CEO Tee Venture (India) Private Limited.

 

An overview on the Indian market roller coaster

Following my colleague Siddhant Shah’s overview on the markets extra-ordinary rally in July, let’s have a look at how the markets have fared in the past few months. My colleague left us speculating whether the rally was sustainable and backed by an uptick in value, or was it another bull run driven by market sentiment. Let’s find out what followed…

NIFTY at 11000 Levels

The Indian equity market was trading at lofty valuations because of high liquidity in the market from DII’s and individual investors post demonetisation. Being amongst the top emerging countries with government revamp plan to bring various new policies and amend the existing ones for ease of doing business attracted foreign inflows too.

 

Global woes with domestic liquidity crunch

The boiling of crude price, depreciation of rupee, Fed rate hike along with US-China tariff war, and ballooning current account deficit in India were not the only concerns for market to correct. In August end and early September, ICRA, CARE and Brickwork Ratings, and other rating agencies downgraded IL&FS group’s various long and short-term borrowing programmes worth over Rs 12,000 crore to ‘default’ or ‘junk’ grade. This created liquidity fear in the debt market.

The above mentioned global worries created sell off pressure by Foreign portfolio managers dragging the Indian market further.

Further, in second half of September,DSP mutual fund sold commercial paper of Dewan housing at a higher yield indicating further liquidity crunch in debt market. This led to a contagion effect in the equity market.

Why are NBFC and HFC stocks under pressure?

NBFCs and HFCs have raised significant borrowings from debt schemes of Mutual funds. A further default will trigger sell off button from fund managers and retail investors putting pressure on equity markets too. This panic would eventually lead to corporates redeeming their investments in debt schemes of mutual funds which would further add pressure on the NBFCs and HFCs.

Rift between RBI and Government with looming State and Central elections

The rift between the RBI and Government has also created extremely bearish narratives. However, softening of crude prices and halt in Rupee’s depreciation along with rising foreign indices are reflecting on Indian markets.

Various State elections are due in this month and the results to be announced in December and Central elections in May 2019are key events in a near future.

Mixed sentiments would continue till Central elections with market volatility to increase further as the events draw closer.

Do long term investors need to worry?

The market sentiments have been impacted by tightening liquidity on account of global and domestic factors enumerated above. The growth in cement volume, uptick in sale of Commercial vehicles and increase in casting volume in this result season are some of the early indicators of turning of Indian economy implying long term bull outlook to remain intact.

Wealth Mantras:Adding on dips would act as catalyst for long term investor in volatile market. Stay invested in quality stocks.

Moneybee group wishes you and your family a happy Diwali and prosperous new year.

A quick market overview by Hardik Solanki, Investment Adviser, Moneybee Investment Advisors Private Limited

What if Shri Narendra Modi runs your business?

         What if Shri Narendra Modi runs your business?

You may be a believer or a non-believer, a follower or a critic – but one thing everyone must agree that Mr. Modi is a master manager and knows how to run the show. He will surely go down in the history!

Have you ever wondered if we can apply Modism to your day to day decision making? How does it affect our HR policies, financial planning, marketing, technology, laws, competition and various other matters.

As a Growth and Turnaround Advisor, here are few interesting Modisms that we can try and apply in our businesses.

Modism No. 1: Outside capital can spur and revive current business

Money is to business what blood is to our body, free circulation of both is very much necessary in the life. Modi recognized this principal very early. During his term as, chief minister in Gujarat he knew that fiscal deficits is something the nation should work on.Reviving India`s fledging economy constituted the central theme of Mr. Modi.  He focused on attracting Foreign investments in India by initiating the Make in India scheme in September 2015, announcing the ease of doing business allowing 100% FDI in almost all the sectors.Taking this into mind, a businessman must plan the cash flow in order to stay on the field for the long run. One needs to strategize the outflow based on the requirements at the same time always check the inflow equity vs. debt.

Modism No. 2: Hire the right man for the right job!

Every Business follows a plan even if it’s not written down in a document. But developing and implementing strategic change needs a team who can execute the way it is required. Mr. Modi is a visionary and a hardcore strategist. One would be aware of how Mr. Modi successfully headed the Pragati Project where as many as 180 out of 350 stalled projects in the states in key infrastructure areas which were delayed for several reasons for a period of 4 to 15 years were on track again. This was done with the help of dedicated team of cabinet secretary P.K. Sinha, who reviewed various delayed projects in the centre and placed for discussion on the Pragati portal based on their relevance. This helped Modi to speed up the infrastructure in India. In business one should take a note that hire the best man for every job.

Modism No. 3: Back your team

सरकार वो ही, मुलाजिम वही, दफ्तर वही, फाइल वही, आदत वही, लोग भी वही। काम हुआ कि नहीं हुआ

Mr. Modi has been in the forefront when it comes to developing skill sets amongst the citizens of the country. To get the work done one needs to solve the problems faced by the employees for their smooth functioning. Mr. Modi knew that the grievance redressal team was stacked with a backlog for various reasons. When went into the roots he realized that the team was divided into 2 areas due to lack of space and physical processing slowed down the processing of petitions.Within few months the process to free up the space to integrate the team was done and online petition platform was formed which reduced the processing time as well as helped to move toward paper-free environment. In the same manner one should help all the employees in every department of the company to develop essential competencies so that they can work efficiently and effectively and also motivate and encourage the young managers and leaders of the company which will help the company to have a sustainable growth for the future.

Modism No. 4: Use technology to eliminate middlemen

Procurement has always maintained an essential role in the business and has a link to the business success, whether by reducing cost or by sourcing for key material for the organization’s operation. Recently, the role of procurement has become more critical in the ever-increasing competitive market to be cost effective.  Just like he has eliminated the need of middlemen by connecting the producer and buyer by creating a marketplace. This should be replicated in the company’s business model by which the total cost of procurement of products and services will considerably go down.

Modism No. 5: Market Market Market!

Marketing serves as the face of the business. Everything in the business depends on marketing. No sales equals to  No company. One needs to develop a brand by promoting the product and creating awareness among the customers. This will give a competitive edge in the industry. The best example is Make In India which he promoted during his foreign trips by holding meetings with businessmen of the countries concerned. He globally promoted and increased the brand equity of India.

Modism No. 6: Take decisions and be persistent

Willpower is that inner fire that gets you past the naysayers, obstacles, challenges and inevitable failures.  No one can give it to you, and no one can take it away. Use it as you see fit.  Mr.Modi`s willpower and vision in making India bright and puissant has helped him to grow. With all his strong desire and decision power he is attracting the world towards India. There are always ups and downs in the business. This can be overcome if one has the willpower to go ahead and tackle the situation.

Modism no.7 Simplicity:-

No matter how complex a task, break it down to the simplest elements!

Thus, if our Respectable Prime Minister were to run my business then there is no doubt that the business will witness a sound and steady growth while satisfying all stakeholders like customers, employees and suppliers. He will be successful in creating a sustainable and robust business model. We would love to hear your thoughts on some of the modism that can be effectively put to use in day to day businesses.

This article is penned by Khushbu Gandhi, Investment Adviser, Moneybee Group.

Vehicle Scrapping – What, Why & How?

The Indian Government has decided to scrap commercial vehicles older than 20 years which can be upto 700,000 units in a year.. The current total Indian CV capacity is 3.5mn vehicles and this program will benefit OEMs and Auto Ancillaries emmensly.

OEMs to benefit:

  • Tata Motors – 44% market share in MHCVs
  • Ashok Leyland – 34% market share in MHCVs
  • Volvo Eicher Commercial Vehicles – 5.2% in Heavy Duty Segment

Auto Component manufacturers to benefit:

  • Wabco India: 65% revenue from M&HCVs
  • Jamna Auto: 85% market share in leafsprings with OEMs
  • Setco Automotive: 85%+ OEM market share in clutches in MHCVs
  • Harita Seatings: 18% of the business comes from MHCVs
  • Bharat Forge: 15% market share in OEMs in MHCVs
  • Bosch: 26% contribution from Indian OEMs in MHCVs

Older vehicles, typically more than 10 years of age and pre-BS I compliant, constitute 15% of the total fleet but pollute 10-12 times more than a new vehicle because of drastic change in pollution norms, thus, there is an urgent need for implementation of this scheme.

 

 

 

 

 

 

 

Fuel efficiency

The program will result in improvement in fuel efficiency with the new vehicle replacement. This would lead to lower oil consumption to the tune of 3.2 billion liters per year translating. Crude oil import savings will also be higher to the tune of Rs 7,000cr. MHCVs (both buses and trucks) will account for ~55% of these fuel savings.

Benefits OEM Suppliers

The policy would boost sales of OEMs leading to higher production capacity utilisation and the automobile manufacturers would support the government in this initiative “financially by giving special discounts to customers buying vehicles under this scheme”.

Scrappage policy expected to come in by Apr-20 will be a major growth driver for the CV industry. 200‐250K vehicles will come under the ‘over 20 years’ scrappage policy while in case of a scrappage policy for vehicles older than 15 years, ~600‐700K units will need to be scrapped.

Besides reducing emissions, it generates steel scrap worth Rs. 11, 500 annually, reducing steel import burden.

Though manufacturers are lauding the move, they say the impact will play out over two to three years. According to them, transporters are unlikely to rush to buy vehicles immediately.

How the policy will be implemented?

The programme will follow a structured implementation and execution process, coordinated between the vehicle owner, the recycling and shredding center, OEMs, dealers and government representatives.

Implementation Hurdles

Change of hand

Given that commercial vehicles change hands two to three times during their lifecycle, the government has to work out ways to issue tradeable certificates which would incentivize the last owner to scrap the truck and subsidize the purchase of the primary buyer. This will in turn create a win-win situation for all stakeholders and make the overall dynamics of commercial vehicle trade more vibrant.

Incentives

Levers Proposed Scheme
Scrap Value Part of scrap value from old vehicle to be given as payback
OEM Discounts Special discounts to be given as incentive
Excise Duty Upto 50% ecxcise duty to be passed on as incentive

Fragmentation

The CV industry remains heavily fragmented, unorganized and very rough in nature. The fleet owners are heavily fragmented in India, with more than 80% of the fleets owned by people having less than 10 vehicles, which gives birth to the intermediaries. There are multiple entities involved in the entire transaction and multiple activities happen in the background before the vehicle can actually be in-transit.

Infrastructure required

The most critical enablers required for smooth implementation of this programme are robust IT infrastructure (ensure measurement of programme effectiveness through MIS generation) and setting up of Recycling and Shredding Centers.

 

Global practices

Scrapping of End of life vehicles is carried out all across the world wherein vehicles are shredded and the metal content is recovered for recycling, while in many areas, the rest is further sorted by machine for recycling of additional materials such as glass and plastics. Approximately 10 million vehicles are recycled annually. The successful ones in the CV space have been Japan and Germany, where post the incentivization scheme, truck sales increased by 9% and 17% respectively.

Currently, 75% of the materials are able to be recycled. As the most recycled consumer product, end-of-life vehicles provide the steel industry with more than 14 million tons of steel.

Moneybee View

New vehicle purchases will be even lower

Over 20-year old trucks normally ply in rural areas (national permits are typically for 12 years, state permits for 15 years) as vehicles with high operating costs are not viable on long distance routes. Consequently, it is unlikely that these operators will purchase new vehicles to replace the older ones. While new purchases may lead to higher replacement demand in the long term, in the near to medium term (i.e. after 2020), the impact could be limited. This is because any incentives of buying a truck may eventually flow through to fleet owners that were already looking to purchase new vehicles.

 

Long way between now and 2020

The policy has yet to be approved by the GST council. Further, we believe there is a high possibility of the policy shifting between now and 2020, considering the election cycle in 2019 and likely lobbying in the interim. A similar policy with detailed calculations was floated about 2 years ago (with age criterion at 15 years). Hence, we would be surprised if the scrappage policy were to be implemented as currently envisaged.

 

Conclusion

Overall, while the policy is a step in the positive direction, the boost to volumes could be limited. Adoption of BS VI standards by itself will reduce HDV emissions in India, but the near-term benefits are restricted because older, poorly maintained vehicles will still contribute most of the in-use fleet emissions in the near-term. Both direct and indirect subsidies are key in supporting a scrappage program, as is the early introduction of the cleanest vehicles available. Sufficient financial subsidies, offered by government and manufacturers, can reduce, or even eliminate the price gap led by the technology improvement between BS IV and BS VI vehicles.

This article is penned by Sneha Prashant, Investment Adviser, Moneybee Investment Adviser Private Limited. For more details please call on +91 22 4030 2090

Is India charged up for electric vehicles?

The Indian Government has set an ambitious target of selling only electric cars in the country by 2030. The rising air pollution in many large cities has urged the Government to hasten the advent of electric vehicles (EVs). EVs are present in India from 2001, when Reva Electric Car Company from Bengaluru introduced their first ever electric car. [This was later bought by M&M in 2010.] Later it went on to launch e2o Plus, which costs anywhere between Rs 6-11 lakhs with a mileage of 140 km/full charge. However, these vehicles haven’t been very successful.

Some data points to look at where India stands:

What pushed the Government to set such an ambitious target?

At 2 million kilotons, India is the third largest emitter of carbon dioxide behind China and US. According to WHO, Indian cities are one of the most polluted around the world. The country accounts for 33 of the top 100, 22 of the top 50 and 11 of the top 20 most polluted cities across the world.

In the national capital Delhi, pollution due to particulate matter regularly exceeds the WHO limits by a factor of 7-12.As per a study by IIT Kanpur, vehicle emissions account for an average 25% of PM (particulate matter) 2.5 emissions, going upto 36% in winters. Further, given the high congestion in the cities that leads to stop go traffic conditions, conventional vehicles tend to idle more that leads to even higher pollution. Pollution from suspended particulate matter from vehicles is even higher at 40%.

With no tail pipe emissions, EVs hold the potential to drastically change the scenario. As per a study done by United Nations Environment Program and IIM Ahmedabad in Nov-14, in a low carbon scenario where EV penetration is the highest, emissions of PM 2.5 would fall below half the current levels by 2035.

Government’s stress on electrification of cars comes strong

The Government launched the National Electric Mobility Mission Plan 2020 in 2013 with an aim to target 6-7mn sales of hybrid and electric vehicles

from 2020. Also, a scheme called FAME (Faster Adoption and Manufacturing of (Hybrid &) Electric Vehicles) was launched in the Union Budget of 2015-16 with an initial outlay of Rs 750mn.

The Government listed out various actions that were taken in 2017-18 in a move towards improving air quality that include Supreme Court’s ban on the sale of BS-III vehicles in India from April-17 and advancing supply of BS-VI fuels in Delhi. These are meant to tackle vehicular pollution. The Government is thus pushing the use of only electric vehicles by 2030.

EESL’s Tender to electrify India

EESL in August last year floated a tender for 10,000 electric cars. Bids from Tata motors and Mahindra qualified. Both companies have supplied about 500 electric cars to EESL. IN the next phase, EESL is planning to come up with a fresh tender of 10,000 electric cars by end of Mar-18.

The first batch of 500 electric sedans was delivered to the Central government around January 15 and the supporting charging infrastructure is in place. Presently, Andhra Pradesh, Maharashtra and Gujarat are the states apart from Delhi who have come forward to be a part of the electric vehicle roll out in the second phase.

 

 

 

2 and 3 wheelers are leading the EV adoption in India

Two-wheelers (2W) and three-wheelers (3Ws) have been the first in India to witness EV adoption to be followed by intra-city buses, corporate cabs and government fleet. The primary reason for fleets being early adopters are the economics that EVs offer over combustion engine vehicles and that the fleet owners base their purchase criterion on the total cost of ownership and not just the acquisition cost of the vehicle.

The 2W and 3W segments offer a huge opportunity for electrification in India given that it is the world’s largest two-wheeler market as well as one of the biggest for three-wheelers and widely used for personal mobility and cargo transportation.

Intra-city buses is another segment which is amenable for electrification as the route predictability is very high, thus enabling the development of charging infrastructure on the route / bus depots. However, high cost of e-buses due to heavier and pricier batteries remains a challenge. While the trucks segment makes more economic sense to electrify because of the fixed routes and larger distances covered, high battery capacity requirements and uncertainties around decline in residual value with decline in battery costs are impediments to their electrification.

Road to EVs can create USD 300bn domestic battery market

India’s vision of mass conversion to electric vehicles can create a USD 300billion domestic market for EV batteries by 2030 as per a report by Niti Aayog and the Rocky Mountain Institute. This is around 2/5th of the global battery demand and 25-40% of this market can be captured through ‘Make in India’, aimed at encouraging manufacturing and attracting foreign investment to India.

Since battery currently accounts for one-third of an EV’s total purchase prices, reducing battery costs through rapidly scaling production and standardizing battery components could be key to long-term success. However, high cost of lithium-ion batteries is a big roadblock to this.

 

 

 

 

 

To meet India’s domestic EV battery requirements, the country would need around 20 giga factories, each of which entails an investment of USD 5 billion, thus taking the total to USD 100 billion. As per the report, a gigafactory is a factory that is representative of Tesla’s battery manufacturing facility in Nevada, USA which has a total manufacturing capacity of 35Gwh per annum and required an investment of USD 5 billion.

 

It estimates that India can capture 25-40% of total economic opportunity represented by EV battery manufacturing under a scenario where India imports lithium-ion cells and assembles these cells into battery packs.

 

Going forward, as the country’s EV battery manufacturing matures and starts producing both cells and packs, while importing only the cathode or its raw materials, the report said India stands to capture nearly 80% (USD 240 billion) of the economic opportunity over time.

 

Stocks to benefit from the EV adoption

OEMs: Mahindra & Mahindra Limited is the first player to launch fully electric cars in India and will certainly gain with the EV boom. Tata Motors Limited has also manufactured electric Tiago and has supplied first 500 cars to EESL. The commercial launch is expected in 2019. Suzuki Motor has also decided to set up lithium-ion battery plant in Gujarat with Toshiba Corporation and Denso. Ashok Leyland introduced the first ‘Made in India’ electric bus “Circuit” last year. It has also formed a strategic alliance with SUN Mobility to develop electric mobility solutions. JBM Auto is in a sweet spot to reap benefits from the government’s push on electric vehicles. The company is in a JV with Polish firm Solaris Bus to make electric buses. The JV should start yielding results from FY19.

 

Battery manufacturers: BHEL is finalizing a memorandum of understanding with The Indian Space Research Organisation (ISRO) to help develop low-cost lithium-ion batteries for electric vehicles. IOCL is developing batteries and other technology for energy storage applications. As per ET, while IOCL is mainly focusing on lead-acid, it is also working on lithium-ion battery chemistries. Exide Industries and Sydney-based Ecoult are also setting up a new manufacturing plant in East India for Ecoult’s lead-acid hybrid product, named UltraBattery.

 Battery component makers: Hindalco, Vedanta and Nalco have good potential going forward irrespective of the fact whether Aluminum Batteries are made or not because aluminum is lightweight and will be used to make the car’s body. HEG and Graphite India should benefit as it is into graphite electrodes and its one of the main components in batteries. Manganese is a critical component in Nickel-Manganese-Cobalt (NMC) Li-ion batteries used in electric vehicles and hence MOIL should gain from the EV boom.

 

 

 

 

 

 

The post is contributed by Sneha Prashant, Investment Adviser, Moneybee Investment Advisors Private Limited. For more information you can email on sneha@moneybeeadvisors.com or call on +91 22 4030 2052

 

 

China’s reforms story: Lessons for India

The World bank released its Global Economic Prospect’s report on 10th January 2018. According to the report, India is expected to grow at 7.3% in 2018, and at 7.5% in 2019 and 2020. On the other hand, the report says that “Chinese growth is projected to edge down in 2018 to 6.4% percent as policies tighten, and average 6.3 % in 2019-20”. Since the last few years, India has been compared to China with the former purported to a be significant challenger to China’s influence in Asia, and perhaps the world politics by media pundits.

Let’s compare few vital numbers of both the economies:

What if I tell you that the Indian economy was at similar levels as China in 1978. India had a GDP of $135 billion, lagging not too behind China at $150 billion. However, China is currently a $11.2 trillion economy, five times bigger than India, which is at $2.3 trillion. So, what has led to this daunting gap between the two economies? The answer lies in understanding the Chinese vision and series of economic reforms undertaken over the last four decades to fulfil it.

Unfolding of the reforms story

The current phase of economic development in China was started in the year 1978 when Deng Xiaoping assumed power. The program of economic reforms, termed as “Socialism with Chinese characteristics” was carried out in two stages. The first stage, spanning over the 70s and 80s, involved decollectivization of agriculture, opening the country to FDI, and permission to entrepreneurs to start business. However, most of the industry remained state-owned. The second stage, in the late 80s and 90s, involved privatization of state-owned industry, lifting of price controls, protectionist policies, and regulations. The Chinese economy grew at approximately 10% each year for nearly three decades; an outstanding feat in itself.

China’s journey towards development started with agriculture…

During the pre-reform period, Chinese agricultural performance was extremely poor and food shortages were common. However, post 1978 agricultural output increased by 8.2% a year, compared with 2.7% in the pre-reform period, despite a decrease in the area of land used. Under the new policy, peasants were able to exercise formal control of their land as long as they sold a contracted portion of their crops to the government. Trade in agriculture was also liberalized and China became an exporter of food, a great contrast to its previous famines and shortages.

Today, China ranks first in worldwide farm output, primarily producing rice, wheat, potatoes, tomato, sorghum, peanuts, tea, millet, barley, cotton, oilseed and soybeans. Although accounting for only 10 percent of arable land worldwide, it produces food for 20 percent of the world’s population. This is despite the fact that agriculture sector’s share in GDP (see chart below) has fallen continuously over the last four decades.

Reforms which first began with the agriculture sector were later expanded to industrial sector

A dual-price system was introduced, in which state-owned industries were provided increased autonomy. By the 1990s, large-scale privatizations reduced the market share of both the township and village enterprises and state-owned enterprises and increased the private sector’s market share. The state sector’s share of industrial output dropped from 81% in 1980 to 15% in 2005. From virtually an industrial backwater in 1978, China is now the world’s biggest producer of concrete, steel, ships and textiles, and has the world’s largest automobile market.

Infrastructure is the backbone of a prosperous nation and China invested substantially to strengthen its own. China invested 8.5% of its GDP each year during the period 1992-2011– most of it on developing roads, power, and rail (see chart below). India spent 3.9% of its GDP on infrastructure during the same period. Today China boasts of the longest bridge in the world, Danyang–Kunshan Grand Bridge, spanning 165 km; longest high-speed rail network in the world, exceeding 25,000 km; and the biggest port in the world, the Shanghai port.

The service sector was also considerably liberalized after China joined the World Trade Organization

Foreign investment was allowed, while restrictions on retail, wholesale and distribution were withdrawn. Banking, financial services, insurance and telecommunications were also opened up to foreign investment. The service sector in China has increased from 24.6% in 1978 to more than 50% in 2016. China is aiming to get that number up to a 70-80%, the average for advanced countries.

Liberalization of economy with promotion of foreign direct investment greatly helped China in rapid development as it greatly increased quality, knowledge and standards, especially in heavy industry. During the last 20 years, there has been $2.9 trillion worth of FDI inflow in China, as compared to $404 billion in India. Also, the Chinese government focussed on export-oriented growth. Export as a % of GDP has increased from 14% in 1990 to nearly 36% in 2006. A major part of these exports has been high-technology exports – north of 25% of total exports.

The world’s factory – now a global force

Opening up of the nation to the world and adopting the institutions of a market economy has immensely benefited China. Today, China is considered to be the world’s factory with all kinds of goods, be it high technology goods like iPhones to children’s toys, being manufactured. Moreover, not just contract manufacturing for other countries’ products, China now has its own army of entrepreneurs who are beating the world’s behemoths in their own game. Amazon had to reluctantly accept defeat in China after having tried for years to turnaround its business started in 2004. Similarly, Uber had to retrace its steps from China in 2016 after pouring billions of dollars trying to snatch market share from the leader Didi Chuxing. Chinese companies like Alibaba and Tencent, having firmly established themselves in their domestic market, are making huge investments globally to compete in the world stage. The Chinese government is extending ample support to offer a conducive environment for entrepreneurship and innovation. China is quickly emerging as a hotbed for new technologies and areas such as Artificial Intelligence thanks to its talent, government support and venture capital funding.

Secret behind the success

Vision aided by a strong communist government…

The most important factor that explains the success of China’s economic reforms is a six-letter word – Vision.  Deng Xiaoping set out an economic vision which seemed astonishing – a 70-year policy to transform China into an advanced economy. “We give ourselves 20 years,” Deng said then, “from 1981 to the end of the century, to quadruple our GNP and achieve comparative prosperity. By the middle of the next century we hope to reach the level of the moderately developed countries”. Although, Deng left for heavenly abode in 1997, successive leaders have kept the torch alight.

A strong communist Government, having complete power, created the necessary infrastructure for rapid development. Internal incentives were provided within the Government, in which officials presiding over areas of high economic growth were more likely to be promoted. Local and provincial governments in China were hungry for investment and competed to reduce regulations and barriers to investment to boost economic growth and the officials’ own careers. A government official’s performance was evaluated based on the GDP growth in his province. This led to high rates of investments, especially increases in capital invested per worker, which contributed to China’s superior economic performance.

Deng’s legacy carried forward by Xi Jinping…

The vision set out by Deng Xiaoping was carried forward by successive leadesrs. The present Chinese president Xi Jinping presented his 2050 vision for China: To become a top innovative nation by 2035 and a nation with global influence by 2050 (read – to become a global superpower by 2050). The Belt and Road Initiative and introduction of Petro-Yuan assets are some of the most important steps being taken by Xi in line with these targets.

The Belt and Road Initiative (also known as One Belt One Road initiative) is a major part of Xi’s strategy to push China to take larger role in global affairs with a China centred trading network. By various estimates, this project is one of the largest infrastructure and investment mega-projects in history, covering more than 68 countries, equivalent to 65% of the world’s population and 40% of the global GDP as of 2017.

The Belt and Road initiative (6 land corridors and the maritime silk route)

China rolled out a yuan-denominated oil contract on the Shanghai stock exchange in March 2018 – one that could presage a huge shift in global energy markets and advance China’s quest to play a bigger role in the global economy. China’s ultimate goal is to translate its growing economic might into levers of real influence that come with having a globally used currency like the dollar today or the pound sterling in decades past.

What does India need

India has been clocking an average growth rate of 6.6% since 1991, when the economic liberalization in India started, however, it is nowhere close to where it should be. However, some very strong economic reforms have been undertaken since the present Narendra Modi led government came into power. Introduction of Goods and Service Tax (GST) was the biggest reform undertaken by the government which is expected to augur well for the long term growth of the country. Also, the significant push to infrastructure being provided by the government is expected to boost economic development. Further, reforms such as increasing FDI limits in sectors such as railways, insurance, defence, and retail would help in globalization of the economy.

Although, the Indian Government has been taking various steps to step up economic growth, there are some inherent issues in the political and economic structure of India that obstruct decisive policy making.

Direction from the top

India needs a strong government that sets a clear vision for next several decades. The pitfall of a democratic country – government constantly on its toes to woo public to stay in power – has held back policy making since long. The present BJP Government does have a strong and visionary leader in Narendra Modi, however, public elections in every five years do not allow any government to plan decisively for the present term itself, leave alone next few decades. We need to ensure that our democratic structure does not hold us back from growing. Multi-decades targets should be set for the nation with each elected government obligated to achieve those targets.

Promote innovation, encourage entrepreneurship and protect local companies

The global market is extremely competitive with companies from all countries eying to gain market share globally. China provided sufficient protection to its in-house companies in terms of financial and political support to scale up and aggressively compete with foreign players. In India too, we need similar support from the Government to incentivise entrepreneurship and support in scaling up and be competitive. Government also needs to promote innovation and technological development in the country. India has been left behind in the race towards innovation and high-end technological development. For example, in Information Technology we have been stuck behind as an outsourcing hub, rather than evolving as an innovation and technology development hub. India’s skilled force, renowned in the world for its intelligence, has been lost to other countries due to brain drain. The Government needs to vigorously develop Innovation and Technology hubs in India, akin the Silicon Valley in US, and highly incentivise to allow for inward flow of foreign investments, new technologies, and retain highly skilled workforce.

Decentralized economic model with incentives for local development

Although, India does have a decentralized model for governance, local leaders are less bothered to develop their local provinces. Elected representatives are more concerned with filling up their own coffers rather than the development of their constituencies. India ranks 81st among the most corrupt countries in the world as per Corruption Perception Index (CPI) ranking released by Transparency International. India’s score of 40 (A score of zero indicates a “highly corrupt” nation while 100 indicates a “very clean” one) is same as countries like Ghana, Morocco, and Turkey. When the Indian public stops voting based on caste and religion and elect their leaders based on their contributions to local development, it would go a long way in creating a progressive economy.

 

This blog post is penned by Anurag Roonwal, Investment Advisor, Moneybee Investment Advisors Private Limited. For more information call on +91 22 4030 2052 or email on anurag@moneybeeadvisors.com