Sunday, 24 August 2014

India's most admired company

Which is India's most admired company ?  The results of Fortune's 2014 survey released recently, reveals a surprising name at the top. It is ITC.

For those unfamiliar with Indian business, ITC is primarily a cigarette company. In the good old days, it stood for Imperial Tobacco Company. Today it runs its cigarette business quietly. It has diversified into a conglomerate - Hotels and Consumer Goods being the most visible elements of its business. It does a lot of good work, especially in the agricultural sector. Its work with farmers in various parts of the country is legendary. Its has a great management team and wonderful strengths. It has been there for decades and has been a proven success over a long period of time. Growth in revenues and market capitalisation over the years has been outstanding. Yet, and yet, there must be some feeling of unease of it being the most admired company. It sells cigarettes and still makes most of its money from cigarettes.

Is that right ? ITC deserves the award on most counts - growth, profitability, value creation, quality of management, social work, etc etc. But it fails a fundamental litmus test. A cigarette maker cannot be the most admired company, in this blogger's humble view, no matter what.

The results also show where the priorities and values of business people are. The ranking is based on a survey of essentially business people. I am sure it was a very scientifically done survey and a number of parameters were covered. But the corporate world does not get it, when it comes to how the rest of the world sees everything. Do this survey amongst non business folks and it is highly unlikely that ITC would come out as the most admired company. If the corporate world continues to run by its own set of values, and is not sensitive to the outside world, it can only lead to general perception that companies are exclusively concerned with money and are of dubious morals.

This blogger does not smoke, but is actually a defender of the choice of adults to do so or not. I have no problem with ITC selling cigarettes and making lots of money from it. It serves a consumer need and as long as consenting adults choose to smoke out of their own free will, I have no problems with it. There are lots of addictions in the world which are harmful to health and it is not anybody's business to be preventing others from doing what they might themselves not choose to do. So ITC's success in the cigarette business is something I won't object to, and even applaud. But that doesn't make it a fit candidate for the most admired company in the land.

ITC has been hovering in the top five of this list for many a year. But even Yogi Deveshwar, the outstanding Chairman of ITC, I suspect, would rather wish it was not at the top.

Incidentally there isn't an IT company in the top five. The top five has four companies that have each been around for nearly hundred years  - ITC itself, Larsen & Toubro, Hindustan Unilever and State Bank of India. Only Maruti Suzuki is a relative youngster at 40 years old !! Isn't that interesting ?

Friday, 22 August 2014

Windows 9 ?? Yaawwwn !

It's a sign of the times that a rumour that Microsoft is planning a preview of Windows 9 in end September is being met with a huge yawn. Remember when Windows itself came after DOS. And the launch of Windows 95 ? Each of them was a landmark event in the history of computing. Now, of course, technology has moved on and Microsoft has been left standing still. Who cares about Windows now anyway ?

Actually a lot care. Windows is now largely a corporate product - almost every company uses Windows as the operating system for the millions of computers its employees use. And every upgrade of the Windows operating system, is hugely expensive. Coupled with Office, Microsoft is omnipresent in the corporate world. There every such new version is met with fear and dread by the IT folks - for , a huge bill is coming. This is also why Microsoft remains a highly profitable company.

The rate of change in the tech industry is so fast that it seems almost impossible to create and nurture a brand in the way you can do in other industries. The sole exception to this is Apple, but even there, all that is happening is that the rate of fade is slower than that of the others. Brands get commoditised extremely fast. Do you now care what brand of smartphone you own -  Other than a few  members of the Apple Fan Club, nobody cares. Just pick the phone that is fancy at the moment and at the cheapest price. Full stop. Are you really going to get excited about the coming iPhone 6 ???

This is actually a surprise. In other fast changing industries, (OK; maybe not as fast changing as tech), brands survive beautifully. Show me a man who doesn't lust after a BMW. Or wouldn't mind a Rolex. Or wouldn't fly Singapore Airlines. And yet, it seems very few have cracked the marketing puzzle in tech. There are great products in the tech world. But a great product does not automatically make a great brand. How much ever new products come in the iwatch space, the aspirational brand will still be Rolex. Maybe its simply because the tech world is full of geeks - there are very few marketeers there.

So what of Windows 9 ? If its even remotely as painful as Windows 8, then it will be met with every curse in the land. Microsoft really is pig headed in absolutely not listening to its consumers. Refusing to reinstate the Start button and hiding behind gobbledygook is a marketing disaster on part with New Coke.  And yet, I am sure Windows 9 will deliver all sorts of great tech possibilities while exasperating the consumer. After all it was Bill Gates' mother, in the early days of Windows who told him what fool would make a consumer click the start button to close down the computer.

So if you are a geek, and reading this piece, go out and talk to your granny. She is really your customer. Or you prefer, meet the gorgeous (but intellectually challenged) blonde serving you in the pub. Get her to use your new product without a tutorial. Figure out what makes her tick (imagine the wonderful ancillary benefits of this study). Maybe you can then ditch those glasses and transform from a nerd to a marketing whiz kid. It is then that the great brands of the tech world will arise.

Sunday, 3 August 2014

The $1000 pill

How do you price a drug ?  Its a question almost impossible to answer without vehement and justifiable criticism, whatever your answer may be. Nothing typifies this better than the absolute storm raging over Sovaldi.

Sovaldi is a new drug introduced as a cure for Hepatitis C, which was hitherto very difficult to cure. Almost a miracle drug with something like 90% success rate.  In six months it has already become the largest selling drug in the world. In these six months, it has clocked sales of $5.7 billion. Its maker, Gilead, has seen a 50% jump in share price.  Fantastic, you would think.

The only fly in the ointment is that each pill costs $1000 in the US. Or Rs 60,000 if you prefer. You need to take the pills for a six week period, twice a day. That's a bill of $ 84,000. In the rupee equivalent it sounds even more expensive - Rs 50 lakhs.

A veritable storm of accusation and counter argument has arisen. $ 1000 a pill ?? That is criminal argue the opponents. The big bad corporate world is simply gouging the sick to make greedy profits. Bad Bad.

Counters the company - the $ 84,000 treatment bill is significantly cheaper than any alternative which can all be proved to be more expensive with lesser chances of success.  This is therefore a cost saving to patients and instead of being deified, the company is being villified, they say.The trouble with this argument is that the alternative is really liver failure.

This being the US of A, there are all sorts of complications. Medicaid, their programme for providing free medicines for the poor, estimates that it would cost it $ 55 bn if every person eligible for Medicaid and is suffering from Hepatitis C is given this medicine. And the law says no drug that has been approved by the FDA can be withheld from Medicaid.  Of course, there isn't the $ 55bn lying around.  It has also been estimated that the premiums for Medicare (their programme for the elderly) could go up by upto 8% on this single drug alone.

Free market and freedom of pricing is a fundamental tenet of the capitalist world. America, to its credit, defends this even under difficult circumstances. The pharmaceutical industry is a special one - most research results in failure and blockbuster drugs are extremely rare. For every success there are probably 100 failures. If you do not allow blockbuster drugs to make very high profits, there will not be the pipeline of innovation. For all the noise from the rest of the world, the fact is that most of medical innovation comes from the US.

What about the rest of the world, indeed. In previous cases phramaceutical companies have been pilloried for pricing drugs so expensive in the third world that the most needy have no access to them. Gilead, mindful of these pressures, has priced the drug at $11 a pill in Egypt. This has resulted in a storm of protest in the US. If you can sell it for $ 11 in Egypt, why are you charging me $ 1000, shout the American customers (insurance companies, actually, for it is they who foot the bill in the US). They are cursing that America is subsidising the rest of the world on medical innovation. Gilead is shaking its head saying heads I lose, tails you win.

So back to the basic question - how do you price a drug. Yes, free markets and freedom of pricing is important. Yes, huge profits are the attraction for costly R&D which mostly fails. And yet when something succeeds, it creates a monopoly and it is an accepted principle in capitalism that monopolies will be regulated by the government. It is also a fact that, unlike in other product categories, the consumer does not have freedom of choice and is in an extremely vulnerable position at the time of consumption.  Difficult issues to grapple with.

The last body you would expect to give a sane solution to this, is the US Senate, filled with pompous gasbags of doubtful literacy and questionable intelligence. But in this case, this blogger is actively looking to the US Senate to provide an opinion. For the issue has been taken up by Ron Wyden , one of the (only ?) respected, principled Senator from Oregon (Sriram take a bow for electing him). He is one of the few capable of producing a position of substance.

What do you think. Even this blogger, a champion of free markets and rewarding innovation, is blanching at the thought of a $1000 pill. The logic may be impeccable. But to swallow Rs 60,000 twice a day .......

Friday, 1 August 2014

My sympathies are entirely with Argentina this time

Thomas Greisa is an ass. Thomas who , you might ask. This specimen is a Judge of the Southern District Court of  New York. Why should you bother about the "Southern District Court of New York", you might want to know. Unfortunately, the state of the world is that, we have to. For the USA is back to its old game - imposing its laws on the rest of the world.

The problem is Argentina. Remember the many times I have railed against Argentina, here , here and , on the same matter, here. This time my sympathies are entirely with them.

It all stems back to 2001 when Argentina defaulted on its international loan obligations. As is usual in such cases, an agreement was reached with most of the creditors , rescheduling the interest and repayment obligations. The operative word is "most". A few funds simply sold  their debts at a deep discount to whoever was willing to buy them. Up stepped a bunch of hedge funds, whom we shall justifiably call "vulture funds" as the Argentianians have labelled them. This lot have bought up the debt at a deep discount. They have then held out against any settlement and insisted that they be paid in full. They went to court in the US and thus entered  His Lordship  of Southern District Court fame.

Forget all the arguments about a petty judge of a "Southern District Court" imposing his will on a sovereign nation. The worthy has now ruled that the vulture funds should be paid in full, paid before the others who settled and no payment should be made to the others until the vultures have been paid. No less a body than the United States government has backed Argentina, calling Judge Griesa's ruling "impermissibly broad" and raising concerns that it could undermine U.S. foreign relations. The IMF has said that Griesa's ruling could make it easier for a handful of creditors to disrupt a country's efforts to reduce its debt burden. The  pedant is unmoved. He has ruled thus.

The consequence is that Argentina is in default again. They had a payment required to be made to the parties who settled yesterday. They duly deposited this amount which they had to do in a US bank. Unfortunately the judge has ordered that this money be frozen - because Argentina is in violation of his order and have not paid the vultures.

Argentina has basically said that they would honour the obligations of the rescheduled debt, but they are no way going to pay the holdouts in full. In this, they have a case. Restructuring of debt obligations is a common practice everywhere in the world, and more so in the US. The US bankruptcy law, on which the entire business system in the US relies in, has this as a fundamental precept. Business activity in the US, leave alone in the world, will come to a grinding halt if a few vultures are allowed to block any debt rescheduling process.

Why has the judge ruled like this ? Officially he has taken umbrage under the Ramamrithamesque parri passu clause, which is a technicality not worth elaborating. The real problem is that Argentina long refused to accept his jurisdiction over a soverign matter , and when it was forced to, basically showed him its finger. It is a dangerous strategy to show the finger at such a man. He has basically showed Argentina the finger back.

Pointed fingers apart, the original problem was of course Argentina's ridiculous management of its economy, piling of debt and reaching a point of default in the first place. In this, they are of course, not unique. Other notable members of the club - Greece, Portugal, Cyprus, Ireland keep them good company. India is also making every effort to join them. You could argue that the US is also an honorary member, given the levels of its debt. I wonder what the reaction would be if Judge Li Ping of the Second Sessions Court in Beijing ruled that the United States had to pay Chinese bondholders before Social Security cheques were despatched to US citizens. Perhaps he could cheekily rule that the bondholders must also be paid before the Medicare claim of Thomas Greisa is honoured.

The only beneficiaries out of this decade old saga are the lawyers. Imagine the fees they must be raking up.

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