Riding The Figo

In the automobile industry, success hinges on the ability to get the right product into the market. It is something that Ford, one of the world’s biggest and most successful car makers, had failed to do in India for more than a decade. Resolute in its belief that the Indian market would move up to large cars, Ford bet on sedans, spelling disaster for the company. The Escort, launched in 1996 in a joint venture (JV) with Mahindra & Mahindra, gave Ford an entry into India. But the car did not do well, and the JV was dissolved in 2005. In 2000, Ford launched the globally successful Mondeo as a completely built unit (CBU), but that, too, did not fare well. The Ikon, launched in 1999, was a success initially, but after its highest selling 1.8-litre diesel version had to be withdrawn in 2007 because it did not meet emission norms, interest dwindled.

Fiesta, launched in 2006, has done better, accounting for more than 50 per cent of Ford’s sales since then. But it has not managed to take Ford’s market share in India beyond the 2-3 per cent range. Its premium hatchback, Fusion, and the sport utility vehicle (SUV), Endeavour, too, failed to set the charts on fire. And after Ikon’s 1.4-litre version was launched in November 2008, Ford did not launch any car in India, other than a revamped version of Endeavour. “Lack of new products hampered Ford’s growth in the recent past, while its competition brought out newer and more stylish products into the market,” says Ammar Master, senior market analyst for India and Korea at J.D. Power and Associates.

The only silver lining for Ford was that even with such lacklustre sales, it managed to break even in 2007, though it went into the red again in 2008 after pumping in $500 million of investments to implement its new strategy. And it is the early signs of success of this new strategy that has given Michael Boneham, president and managing director of Ford India, the confidence to brush off criticism of the company’s past performance. “Ford’s success will be determined by our customers when they use our new products,” he says.

NEW IMAGE: Nigel E. Wark, executive director for marketing, sales and service has constructed a people’s brand image for Ford India

The first new product and centrepiece of Ford’s current strategy, the hatchback Figo, has exploded off the starting blocks. In March 2010, when it was launched, the car sold 7,210 units, comprising 76 per cent of the firm’s sales that month. In April, Figo sold 6,030 units, but its share of Ford’s overall sales rose to 80 per cent. In both months, growth went through the roof.

Figo, however, is not the company’s only trump card; it is only the first in a long line of winners Ford hopes to churn out. In the forthcoming months and years, Ford will launch an all-out attack on all fronts, with new small cars every 12-18 months, plus sedans and SUVs. And all of them will be built around global CEO Alan Mulally’s vision of One Ford — which means a focus only on in-house ‘Ford’ brands and not on marquee brands that it had purchased in the past, such as Jaguar, Land Rover and Mazda.

After 15 years of being on the fringes of the Indian car market, Ford finally looks like a company capable of muscling into the mainstream. Apart from planning new cars, it is feverishly strengthening itself — adding more dealers, reducing the cost of spare parts, and devising more focused branding initiatives. It is also looking to export Figo and other forthcoming cars to South Africa, South-east Asia and North Africa. It wants to be among the top four auto companies in India by 2020, and thinks its current strategy is sound enough to help it reach that goal. Naturally, with competition in the small car market hotting up in India, it will be anything but easy for Ford.

Yankee Doodle No More
The success of Figo, and General Motors’ (GM) Beat, has changed a long-standing paradigm in the auto industry — that the Americans can’t make small cars, and that it is the domain of Europeans such as Volkswagen, Renault and Fiat, and Asians such as Suzuki, Toyota and Hyundai. And it came down to something as simple as a smile to signal the change.

At the New Delhi Auto Expo in January, when Lutze Kothe, chief general manager for marketing at Volkswagen India, announced that the company’s forthcoming car Polo would be a premium hatchback, the teams from Ford and GM attending the launch broke into huge smiles. Being a premium hatchback meant Polo would be priced higher than Figo and Beat, and would give the latter added advantage in the market. It also proved that the Yanks had finally mastered the art of making small, low-cost, but quality cars that could compete on equal terms with the Europeans, Japanese and Koreans, in key developing markets like India. Speaking to BW at the auto expo, Yoshinori Noritake, the chief engineer for Toyota’s Etios small car (and sedan) project, admitted that the Yanks had beaten Toyota to the Indian market, one of the fastest-growing car markets in the world in the next decade.

What is interesting is that apart from being priced lower (starting Rs 3.4-3.5 lakh), compared to Polo and Fiat’s Grande Punto (starting Rs 4.3-4.4 lakh), Figo and Beat have stood up well to technical scrutiny by experts against their European rivals, and even against hatchbacks from market leaders Maruti Suzuki and Hyundai. “The Polo offers a better power-to- weight ratio with a lower displacement diesel engine, but the Figo is an equally fun vehicle to drive with the 1.4 cc diesel engine,” says Shrawan Raja, an automobile engineer and managing editor of Indianautosblog.com from Chennai.

It has taken long to happen, especially for Ford. GM, which had bought bankrupt Korean company Daewoo in 2002, launched the tiny Spark, a rejigged version of Daewoo’s popular Matiz, in 2007. Since then, Spark has led sales of the company every month. GM took that learning ahead, and built the Beat in the Daewoo facility in Korea. Ford had to borrow from the old Ford Fiesta European hatchpack.

The New Ford
For the past four years, Ford was developing what it calls the B platform in the Asia-Pacific region (especially Australia). This platform, tailor-made for low-cost sedans and small cars, allows for high levels of localisation. Figo is part of this platform. For the past two years, Ford India realigned all its 119 vendors to localise the car up to 85-90 per cent. Localisation is an area that other challengers are also putting maximum efforts into, with GM boasting 85 per cent localisation for Beat, and Toyota and Nissan aiming for 80 per cent and 85 per cent localisation for their impending launches of Etios and Micra, respectively. On his part, Nigel E. Wark, executive director of marketing, sales and service at Ford India, is more concerned about the processes to deliver low-cost cars. “We cannot push vendors to make low-cost cars,” he says. “Low-cost comes with design, engineering and trimming processes through the production and supply chain.”

Trai-ing Times For Telecos

Talk about a summer surprise. The telecom regulatory Authority of India (Trai) on 12 May gave public sector telecom operators — mainly Mahanagar Telephone Nigam (MTNL) and Bharat Sanchar Nigam (BSNL) — and entrenched private sector players an unpleasant jolt with its recommendations on spectrum management and pricing of 2G spectrum. Some fear that if the recommendations in the 437-page report are accepted, it might be the end of MTNL and BSNL.

Two recommendations in particular can also hurt market leaders Bharti Airtel and Vodafone badly: a one-time additional fee for spectrum held in excess of 6.2 megahertz (Mhz), and the return of ‘excess’ spectrum. The one-time fee will be based on 3G prices. Bharti Airtel had three words in response: shocking, arbitrary and retrograde, which pretty much captures the sentiment among the entrenched players.

Take MTNL, which has 12.4 MHz in Delhi and Mumbai. It also has 3G spectrum ahead of other operators. Under Trai’s recommendations, to retain its current 2G spectrum and get its 3G spectrum for Mumbai and Delhi, it will have to pay Rs 11,720 crore — MTNL announced a loss of Rs 895 crore for the quarter ended December 2009.

BSNL will also have a hefty bill of Rs 17,000 crore for excess spectrum — an amount that could enable BSNL to give all its 350,000 employees voluntary retirement, according to some. “We are in no position to pay this,” says a senior official in the finance department of BSNL. Especially when the company is likely to announce a loss of Rs 3,800 crore for 2009-10.

Gautam Balakrishnan, director at Mumbai-based telecom consulting firm Optsoe Consultants, says, “Spectrum is like any asset and its value can appreciate or depreciate over time. To value 2G spectrum previously allotted at today’s 3G pricing is incorrect.”

Others have different views. Jaideep Ghosh, executive director at KPMG, says, “6.2 Mhz is sufficient to operate in a circle.” He says those who cannot pay can opt out. It is an option private operators have, but not BSNL and MTNL, who have been using 3G spectrum for more than a year now, have over 100,000 subscribers, and have spent Rs 2-5 crore on advertising.

Most companies say they are still reading the report, but initial responses suggest a mixed bag of positive and negative recommendations. For instance, Trai has attempted to address the problem of spectrum hoarding by a few operators, and has also tried to remove impediments for mergers and acquisitions of companies.

Cellular Operators Association of India (COAI), the apex body of GSM operators, said in a statement that it was disappointed. Rajan Mathew, director-general of COAI, says, “These recommendations are not in sync with the country’s growth path in which mobile communications plays a critical role.”

However, Reliance Communications’ response was positive. “Most of the recommendations appear to be forward-looking, pro-consumer and pro-competition. Also, the recommendations are pro-spectrum efficiency. Good for the industry and the sector,” a company statement said. The impact on RCom is minimal, about Rs 20 crore.

Given the opposition, will the government accept Trai’s report? They could accept a part of it. “We would like the Department of Telecommunications to adopt the recommendations in totality. If they wish to drop some of it, we would like them to discuss with us,” says J.S. Sarma, Trai’s chairman.

Bharti Airtel said it was confident that the government would take a rational approach and summarily reject these arbitrary, impractical and perverse recommendations. Some telecos have even said that they may go to court. The last word on the issue has not been said.

9 Injured In Clash In Orissa Over Posco Project

At least nine people, including six policemen, were injured in a clash on Saturday as violence flared over a planned steel plant of South Korea's Posco in Orissa.

The clash between police and villagers protesting the planned 12 million-tonne-capacity steel plant by the world's No. 4 steelmaker took place in Jagatsinghpur district in Orissa.

Hundreds of villagers refused to vacate a road they had blocked since January, preventing access to the site to company and government officials.

"Police fired rubber bullets and teargas after they (protesters) pelted stones and hurled crude bombs," Arun Sarangi, inspector general of police, said.

The police were trying to evict protesters from the site when the clash erupted, he said.

Prasant Paikray, a protest leader, said police acted without provocation, and that at least 15 protesters had been injured in the clash.

Posco signed a memorandum of understanding in June 2005 for the plant, which was to be built in three phases by 2016, with production scheduled to begin by the end of 2011 at the completion of the first phase.

The $12 billion project, touted as India's biggest foreign direct investment, has been delayed by more than three years due to protests by farmers who fear losing their livelihood.

The steelmaker requires 4,000 acres (1,600 hectares) of land, of which 2,900 acres is forested. Final clearances for acquiring the forested land have been given, but there has been little progress in land acquisition on account of the protests.

"It was an administrative action. We still hope everything will be resolved peacefully and our project will be expedited," said Simanta Mohanty, POSCO India's general manager of external relations.

Leading steelmaker Arecelor Mittal also faces delays to its plans in eastern India from allocation of mining licences and protests by villagers.

Posco announced plans in January to invest more than $7 billion in a new steel plant in southern India.

Weak Signs Of Strong Revival

The stagnant commercial and office property market, paralysed over the past two years with plummeting demand and excessive supply, seems to be cranking back to life. But opinion is divided. While some large property broking outfits see an imminent revival in the second half of this year, others say the inventory is too large and prices and rents too high to stoke a large-scale recovery in a hurry.

A report by property consultancy DTZ found that the cumulative take-up across seven major cities had risen 42 per cent in the January-March quarter this year compared to the preceding quarter. Meanwhile, new supply had declined 6 per cent quarter-on-quarter and 30 per cent year-on-year. The report said the deal sizes for leases had become larger and a revived IT/ITeS sector was driving the market. Some of the big corporate leases in April cited by DTZ include EXL’s 225,000 sq. ft in Global Oxygen IT Park in Delhi, Ocwen taking up 180,000 sq. ft in Bangalore’s Vrindavan Tech Village, and Religare’s 80,000 sq. ft deal in Pune’s Matrix.

“Excessive supply has dried up. Many commercial projects have been recast to cater to residential demand. There is 16 million sq. ft of residential property coming up in south central Mumbai but no new commercial ventures,” says K.G. Krishnamurthy, CEO of HDFC Realty Fund. In Bangalore, too, stagnant sales in Devanahalli, near the new airport, had picked up with several large groups such as Ascendas striking new lease deals, he adds. Many companies seeking large floor areas are not finding suitable space. “Deloitte is looking for 250,000 sq. ft, Ernst & Young and a number of law firms are in the market. Citibank is considering demolishing its building in the Bandra-Kurla Complex to utilise more FSI (floor space index) to meet its needs.”

Other analysts, however, think that the commercial market has a long way to go before it revives. “The last quarter of 2009 saw all-India commercial sales and leases of 1.7 million sq. ft. This is a vast improvement from the previous three quarters that averaged just 400,000-500,000 sq. ft. However, when you consider that there is an unsold inventory of 147 million sq. ft of completed and under construction commercial property, the over-supply situation continues,” says Pankaj Kapoor, CEO of property tracking agency Liases Foras.

Which way are rentals moving? According to DTZ, rentals are stable with the trend towards firming up of rates. “As vacancy eased, there were indications of strengthening prices in Gurgaon and Delhi. Quoted rentals in some cases revised upwards in the range of 5-10 per cent,” said the DTZ report.

But Knight Frank Property Consultants’ chairman Pranay Vakil saw no substantial upward pressure. In Mumbai’s top notch commercial address — C.J. House in Worli — Vakil says the asking rate is around Rs 300 per sq. ft a month. At peak, Lehman Brothers had leased property at an astronomical Rs 450 per sq. ft in C.J. House. “Now, at the smell of a deal, landlords are ready to settle at Rs 225. Buyers have a choice,” he says.

High vacancies are putting downward pressure on rentals. Godrej’s Vikroli facilities in Mumbai are saddled with 1.5 million sq. ft of vacant office space. At Rs 60 per sq. ft a month, brokers say there are few takers because similar commercial property in the northern suburb of Thane was available at Rs 30 a sq. ft.

The retail segment is also facing a glut. Knight Frank estimates that by 2012 the retail market will face an oversupply of 21 million sq. ft across seven big metros. Considering that the organised retail stock by 2012 will be 95 million sq. ft, this oversupply amounts to a huge projected vacancy of 22 per cent. Real estate developers are overestimating the actual organised retail activity.

Developers are not doing their homework,” says Vakil, who sees a large number of the 350 malls in the pipeline delaying completion.

The good news on the flip side is that the frenetic rental hikes witnessed during the boom will not haunt retailers until 2012.

Policy Blow On Cash & Carry

Just as French retailer Carrefour prepares to launch wholesale cash-and-carry (C&C) operations — a key part of the supply chain — in India, the government stunned the organised retail companies with a clarification on the rules that govern the C&C business. Now, any retailer tying up with foreign C&C wholesale businesses can source only 25 per cent of the stock keeping units (SKUs) from such a venture.

By implication, the C&C business will effectively have to supply 75 per cent of the SKUs to kirana stores. Analysts estimate that there are more than 50 million of these small and medium businesses in India; 90 per cent of them are kirana or mom ’n’ pop stores.

The announcement reiterates an election promise that the Congress party made, since organised retail business was perceived as a threat to the kirana stores — apart from a host of middlemen — whose owners make up a vote bank too large to ignore. The announcement also comes amid rumours that Carrefour could tie up with Kishore Biyani’s Future Group to help build their retail outlet Big Bazaar.

“This decision can affect those retailers whose front-end businesses are supported by the cash-and-carry business,” says Devangshu Datta, chief executive officer of consultancy Third Eyesight in Delhi. Bharti Wal-mart has one cash-and-carry unit that supports its front end ‘Easy Day’. There are nine such stores in the Delhi and Punjab regions.

Even Trent’s Star Bazaar, which has more than 50 stores across the country, will have to wait for its UK partner Tesco to begin C&C operations by end of this year. The government’s rationale is that letting C&C tie-ups with organised retail make sense only when kirana stores collectively are part of India’s retail growth story — estimated at $350 billion by global consulting firm Ernst & Young (E&Y).

“The wholesale C&C business will effectively give kiranas a chance to modernise and organise their stores,” says Pinaki Ranjan Mishra, partner, consumer practice, at E&Y. Even then, India’s retail business will be driven by the kirana stores supported by distributors, agri-middlemen and traders. “The policy will hurt those players who have cross holdings in both retail and C&C business,” Mishra adds.

But will organised retail chains actually drive costs so low that they could wipe out the middleman through the C&C business? True, supply chain efficiencies are dismal. Kiranas, on the other hand, have very low operational expenditures on fast-moving consumer goods (FMCG) — they do not include power and labour. That allows them to drive costs way down and yet stay profitable. And with food and produce, kirana stores can mark up transport costs and still deliver cheap goods to customers, something organised retail is unable to do. Organised retail does not make profits from food; they mark down food products, but gain through impulse purchase of FMCG items.

Although tying up with the C&Cs drops supply chain costs, the government still puts organised retail on the back foot. “By 2013 all the top global retailers will be here. The success will depend entirely on changes in shopping habits,” says B.S. Nagesh, vice-chairman at Shoppers Stop and interim chief executive officer, HyperCity, in Mumbai.

But the current note on what a C&C business can actually do will make front-end retail merchandising teams go back to the drawing board and realign business strategies. The C&C businesses, which include Germany’s Metro, Bharti Wal-mart, Star Bazaar-Tesco, Shoprite and Carrefour, have invested over Rs 2,500 crore in India so far. Changing the rules may not necessarily derail organised retail’s ambitions.

UK Govt May Impose Bonds On Indian Students

Britain's new Immigration Minister Damian Green has indicated that students from India and other non-European Union countries will have to furnish a bond of a specified amount before coming here to study at British institutions.

Green, who was the Conservative spokesman on immigration issues, believes that the current points-based student visa system is the 'biggest single loophole' and has promised to bring about major changes in the immigration system.

British authorities had suspended the issue of student visas in north India, Nepal and Bangladesh earlier this year after missions received an unusually large number of applications from these regions.

"We want genuine students and want a fair system. We will introduce the bond system for international students who will be refunded the bond amount when they leave after completing their studies," Green had told an audience at the Guru Nanak Prakash Singh Sabha in Bristol recently.

International students are a source of major revenue because they pay three times higher fees than students from the UK and the European Union.

Among other new measures Green is likely to introduce is an annual cap on the number of skilled professionals from India and other countries outside the EU in order to drastically reduce the annual number migrants coming to Britain.

As per the coalition agreement between the Conservative and Liberal Democrats, it is the Conservative policy that has been adopted by the new coalition government.

The coalition agreement says: "We have agreed that there should be an annual limit on the number of non-EU economic migrants admitted into the UK to live and work. We will consider jointly the mechanism for implementing the limit".

The overall goal of the Conservative party's policy is to reduce net immigration to the levels of the 1990s ? "tens of thousands a year, instead of the hundreds of thousands every year under the Labour government".

Green said: "There are benefits of immigration but not of uncontrolled immigration. There is concern about immigration within the migrant community that have integrated well in British society over the years. We will ensure that immigration returns to the level of 1980s and 1990s".

The proposed annual cap, however, is expected to be opposed by campaign groups who believe that any such measure will ultimately affect British trade and industry and the economy.

Amit Kapadia, director of HSMP Forum, told PTI: "Any such cap will affect Indian professionals because most non-European Union migrants to the UK come from India. But we will oppose and lobby against any illogical number or cap that the government may seek to impose".

Kapadia said the Conservative party had not been able to come up with any number as a cap for the annual number of migrants into the UK.

Any knee-jerk attempt to impose a cap will hurt the British economy and will be opposed by British business and industry, he said.

The Conservative party's policy on immigration states that to promote integration into British society, it would introduce an English language test for anyone coming here from outside the EU to get married.

The policy says: "Britain can benefit from immigration, but not uncontrolled immigration. Look at any aspect of life today and you will see the contribution that migrants have brought, and not just to the economy. We want to continue to attract the brightest and the best people to the UK, but with control on the overall numbers coming here".

The Spectre Of Dual Regulation

Here is a question: do you buy insurance or does your insurance agent sell it to you? Silly as the question may seem, the courts’ answer — perhaps the Supreme Court’s — to that question will determine which agency will regulate unit- linked insurance plans (Ulips).

Residential real estate, for instance, is sold. If you decide to sell your house, you hire a broker, advertise and show people your house. Indian Premier League (IPL) players play their best cricket, talent scouts track their performance, and become part of an auction process where teams buy them.

But it is always not that clear. For instance, real estate firms can find old apartment buildings that can be redeveloped and offer to buy out home owners who live in them. In the case of Ulips, if the courts decide that they are a bought business, then the Securities and Exchange Board of India (Sebi) can regulate cost structures.

Insurance companies, on the other hand, have been arguing that insurance is a savings product that needs to be sold, even hard-sold; that, they say, justifies the high cost structures in the business.

“The fundamental worry is not regulation and it is not the framework,” says Ashvin Parekh, partner and national leader of the insurance business at global consulting firm Ernst & Young (EY) in Mumbai. “Sebi and the Insurance Regulation and Development Authority (Irda) have to determine what the nature of the insurance product is.”

This debate cropped up often, and Parekh suggests that we decide whether we need to build the insurance market or have more regulation. “There should be regulation of the sales teams and Irda continues to introduce robust sales practices,” says S.B. Mathur, secretary-general of the Life Insurance Council, an industry body. And, he adds, insurance companies invest in the market through brokers, who are regulated by Sebi.

The industry numbers underscore the importance of the entire debate. According to Quant Research, the insurance sector grew by 50 per cent year-on-year during March 2010 alone — measured in annualised premium terms — led by the Life Insurance Corporation of India (LIC). For the entire year, the industry grew 20 per cent in 2009-10 (FY10), state-owned LIC at 31 per cent and private players at a modest 12 per cent. The bulk of that growth came in from Ulips.

According to FY09 figures from Irda’s annual report, about Rs 1.72 lakh crore is Ulip money, out of a total of roughly Rs 11.3 lakh crore in life insurance assets, or around 15 per cent. What’s more, Ulips account for about 85 per cent of all business among private life insurance companies; for LIC, Ulips account for over 40 per cent of new business premium for the past five years.

That is a lot of assets under management (AUM). Compare that to the mutual fund industry, that has been around much longer, that had roughly Rs 4.2 lakh crore in AUM in FY09, or two-and-a-half times that of Ulips. Rough estimates put the AUM of Ulips at about Rs 2.5 lakh crore for FY10, a growth rate of over 40 per cent, compared to the AUM of the mutual fund industry at Rs 4.82 lakh crore (a growth of just over 12 per cent).

“But unlike the mutual fund industry, which aims at maximising returns to investors, life insurance investments require different investment approach,” says Kshitij Jain, chief executive officer of ING Vysya Life in Bangalore.

For Irda, it is a matter of balancing the development agenda of its mandate against the regulatory part; in almost all circumstances, the trade-offs are difficult to manage. This much seems clear: most insurance industry folk are not in favour of dual regulation. The ball is now in court.