Energy in India

With high rates of economic growth and over 15 percent of the world’s population, India has become a significant consumer of energy resources. In 2006, India was the sixth largest oil consumer in the world. The global financial crisis and credit crunch have slowed India’s significant economic growth particularly in the manufacturing sector, and GDP growth rates have declined from 9.3 percent in 2007 to 5.3 percent in the fourth quarter of 2008 according to the US Energy Information Administration[1]. Despite a recent slowing economy, India’s energy demand continues to increase. In terms of end-use, energy demand in the transport sector is expected to be particularly high, as vehicle ownership, particularly of four-wheel vehicles, is forecast to increase rapidly once the global economic crisis abates and domestic spending levels resume.

India faces therefore formidable challenges in meeting its energy needs and in providing adequate energy of desired quality in various industries in a sustainable manner and at competitive prices. India needs to sustain a certain economic growth rate, over the next decades, if India still plan to eliminate poverty and want to meet its human development goals.

Considering the same urge in other Asian countries like China requires that India pursues all available fuel options and forms of energy. Further, India must seek to expand its energy resource base and seek new and emerging energy sources. Finally, and most importantly, India must pursue technologies that maximise energy efficiency.

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[1] http://www.eia.doe.gov/

IT Services in India

The growth introduces its challenges toward India’s current IT services. India should be engaged in another challenge to fine-tuning its current business models designed to deliver world class services while keeping everyone in the country focused on the same objectives, despite phenomenal growth. India at this stage can’t let up this industry unmanaged and hope to achieve its aspiration of becoming the number one of the top providers of consulting, IT, and business-process-outsourcing services in the world. The development of an innovative business model plays a vital role in the India’s economy success. Among other benefits, this will help sustain Indian’s entrepreneurial spirit, distributed leadership roles throughout the country.

However, the knowledge industry operates nowadays in a dynamic environment and it requires a more refined and sophisticated business model to suit current time and current industry challenges. The federal government has to realize that in order to emerge as a global economic superpower; the country must invest in its social fabric in particular. These investments are the most necessary as India is expected to become the world’s most populous.

Talent shortage in China

Talent shortage According to an article that appeared in South China Morning Post, October 19, 2005 suggested that relatively few of the mainland’s vast number of graduates are capable of working successfully in the services-export sector, and the fast-growing domestic economy absorbs most of those who could. This indicates a serious shortage of local talent, with serious implications for the multinationals now in the mainland and for the growing number of Chinese companies with global ambitions.

Additional to this shortage, only a few have the foreign language skills, cultural fit or practical education necessary to work in a foreign or a multinational company in occupations such as engineering, finance and accounting, quantitative analysis and support.

The specific reasons vary by occupation: Poor English, overall communication style, cultural fit and the education is generally biased towards theory, and they get little practical experience in projects or teamwork. As a result, despite the numbers the pool of young engineers considered suitable for work in multinationals is sustainably low.

Multinational companies in China could face a talent shortage in key service professions and managerial occupations. This represents a major problem for multinationals in mainland China, for mainland companies and, indeed, for the nation’s economic future if it aims to move beyond labor-intensive manufacturing and into higher-value service industries.

Growth in India

Unlike China, India’s economy grew slowly for many years, with GDP growth averaging just 1.6 percent a year per capita from Independence through the mid-1980s. From then until 1990 GDP growth averaged 2.6 percent[1].

From 1991-1993, India went through substantial policy liberalization, which resulted in the rate of GDP growth reaching up to 4.2 percent per capita per year. India is still no economic miracle, but it is certainly exhibiting a healthier growth than in earlier years[2].

India has done well in these circumstances to see the proportion of population below the poverty line decline from around 45 percent in 1980 to 26 percent in 2000. Life expectancy has risen more than 25 percent between 1980 and 1998, from 50 to 63 years[3].

These successes, combined with the high rate of population growth, will place a great deal of strain on future labor productivity. The labor force is currently expanding at similar rate as before 1990s. In the recent past, India has derived much of its improved growth rate from improvements in labor productivity, illustrating the vital role productivity improvements play in its economy. 

Growth will also be difficult to maintain without large improvements in infrastructure. Various articles on Internet reveal that there are a lot of challenges for getting skilled labor for infrastructure projects. Because of this, most of the projects are being delayed. Implementation of these as well introduces additional challenges. The system is not organized for this kind of growth or for such implementation of projects. India has to strengthen the whole system.

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[1] Wikipedia

[2] http://commerce.nic.in/wtojune2002.htm

[3] “World Economic Outlook Database”. International Monetary Fund. http://www.imf.org/

The energy in China

The world is quickly realizing that fossil fuels are finite and their market prices are unpredictable and subject to economic and political influences. The focus toward efficient and affordable alternative energy solutions is now the core mission of many companies around the world which are trying to establish themselves as industry leaders. Companies like Suntech in China are one of the examples of industry pioneers that are changing the way we generate and consume energy around the world. The company focuses on photovoltaic (PV) technologies which converts solar radiation into direct current electricity.

China adopted an open-door policy in 1978 and encouraged foreign investment and export in order to get foreign exchange. Nowadays, China is one of the largest foreign exchange reserve countries in the world. During the financial crisis in 2008, the Chinese government pooled 4,000 billion Yuan to stimulate the economy. Besides increasing government expenditure in infrastructure, the Chinese government pushed the domestic consumption market to counteract the drop in the overseas markets. It has taken several decades for companies to shift their markets from overseas to domestic.

In facing the worldwide shortage of energy resources, China has been rapidly developing renewable energy solutions over the past few years. According to China’s Renewable Energy and Sustainable Development Report(1), China has set an objective of satisfying 30% or more of its total energy requirements through renewable sources by 2050. To achieve its target, China needs to invest approximately 2 trillion Yuan by 2020 alone.

The renewable energy focus includes wind power, solar power and bio-fuels. Solar power is one of the most important sources of renewable energy in China as it is transitioning from coal, natural gas and oil as the primary sources of power. It is predicted by Sarasin (Media release, Hong Kong, 30 November 2009) that the annual growth rates for the period up to 2012 are between 45% and 50% for existing PV markets(2). Although China has a great deal of fossil energy sources like oil and coal, the distribution of this type of energy is mostly to the industrial areas within the country. Factors such as climate and geographical locations and attributes determine the infrastructure requirements to distribute these energy sources.

In addition, at least ten new PV markets with an annual volume of 500 MW will emerge in the next two years. China’s solar power industry is still in its early stages. The major markets for China’s solar power products are U.S., Spain, Germany and Japan. Their industrial competitive advantage comes from cheap inputs into production such as labor fueled by government subsidies. The Chinese government however must be very careful in supporting the industry because the over-reliance on government subsidies will eventually reduce the competitive advantage of the industry.

Although China is the world’s largest producer of solar cells, only 2% of industry production is consumed domestically. The low domestic market penetration is due to the high cost of solar PV to generate power versus the lower costs of coal and the lack of government encouragement to utilize solar PV power. Things are changing though as China’s central government has formulated policies to encourage the use of solar PV.

Government subsidies and industry policies that support solar energy create a hospitable environment for local market development and provide a good base to launch global initiatives. The Chinese industry is benefiting from such subsidies as well as low labor costs to successfully compete with global players and gain more customers and market share. Other players in Europe, America and Africa have difficulties competing with the Chinese cost structure and China’s comparative advantage. Several companies in Europe requested for their government and the European Union to take effective measures to compete with China.

It is unknown whether Chinese companies are actively working with their global peers to improve the efficiency of solar energy and exploring other means and technologies to reduce.

[1] October 2008: Volume X – Louis B. Schwartz – China Strategies LLC

[2] Sarasin forecasts a sunny outlook for China solar power industry, Media release on 30 November 2009 in Hong Kong by Sarasin Rabo Investment Management Limited. 

The climate in China

Improvements in irrigation, soil preservation, water storage, and seed engineering could cut some agricultural losses due to drought in Northeast and North China. The drought has caused more damage to China’s agricultural output in recent years than other severe environmental disasters such as flooding or tropical cyclones combined. Between 2004 and 2007, drought affected 21 million hectares of crops, compared with 9 million hectares and 3 million hectares that were impacted by flooding and tropical cyclones during that period, respectively[1].  As a result, farmers lose on average one-fifth of their incomes due to drought each year.

According to the same article) News Announcement, For Immediate Release, November 25, 2009’, China has seen some of the worst droughts in half a century. Severe drought damaged 4.5 million hectares in eight provinces begin 2010. Some of provinces suffered its worst drought in nearly 60 years, with 6 million hectares are affected. Climate change is expected to lead to increased instances and severity of drought unless more is done to mitigate the effects of drought. If China does not employ adequate irrigation measures and new technologies to mitigate the effects of drought than China will see cascaded negative of this on overall sectors.

Doing business in China in this particular industry or any industry that is heavily depending on agriculture output will demand severe measurement to survive. Not only that, China with its large population will have to import the most of its agriculture need from outside which may effect its trade relationship with other countries like US and therefore will be forced to change and adjust its business strategy.

China is probably spending billions on irrigation techniques. McKinsey estimates that China will need to spend up to 25 billion renminbi per year nationwide between 2010 and 2030 to counter the affects of drought and avert substantial agricultural losses. Foreign companies may benefit from a substantial part of this investment. In North China alone, China will need to spend up to 5 billion renminbi annually on a host of measures including drip and sprinkle irrigation, soil conservation, seed engineering to make crops more drought resistant, and reservoirs and dams. Without sufficient measures in place, China’s long-term food security, and indeed social stability, could be put at serious risk.

As a result, such challenge in China introduces a tremendous opportunity for some foreign enterprises to assist and help China with this challenge and therefore secure business for at least till 2030 if well managed.

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[1] News Announcement, For Immediate Release, November 25, 2009

China today

As China, India and other Asian countries are gaining dominance on the world stage, more and more multinational corporations elsewhere in the world will need to rethink their assumptions and strategies about competing under the state that India and China are far away.

Companies in the west have to recognize that their comparative advantage today is not necessarily going to be the same competitive advantage tomorrow. They furthermore have to recognize that what they think is their comparative advantage may not be appreciated at all considering that the world has been changed dramatically.

While the Chinese economy has grown significantly in the past 20 years, the growth has been uneven both geographically and among various sectors of the economy. The government implemented various measures, like subsidies, to encourage economic growth and guide the allocation of resources. Some of these measures benefit the overall Chinese economy and in some cases have a negative effect on foreign organizations within the same industry. This seems to leave little room for competitors to enter the Chinese market. Besides the large capital requirements needed to make the initial investment, foreign organizations find the following as potential barriers: taxation, relationship with the Chinese government, local and international CO2 emission regulations, language, energy and water shortage, ability to access local and global resources and suppliers, and raw material scarcity and associated costs.

In addition to the above, current global liquidity concerns and the credit crisis since 2008 have had a significant negative impact on businesses around the world. This has impacted new business initiatives and has diminished business spending in China. It has also increased the barrier to enter the Chinese market in general as the local and federal government want to protect its industries and enterprises.

As an example, Google has had difficulties with the fact that there is censorship in China and therefore forced to move out of China. But that is not why Google isn’t in China. Google did not do well in China because it didn’t consider various things at the beginning that might cause damage to its success in China. It turned that Baidu was supported by the Chinese government to be the premier search engine for China. And ultimately, Google had to make the decision at the end. Although Google has legitimate reasons not stay in China (i.e. censorship) but the fact that Google appeared to be a competitor for Baidu and therefore a reason at the same time to protect it.

Looking at China now, it no longer needs foreign capital. What China needs is advanced technology. And of course, Western corporations aren’t willing to provide that level of technology, especially given how bad intellectual-property protection and regulations are in China. As a consequence, China changes it strategies to acquire various R&D companies in Europe and US and sign joint venture with market leaders in technologies and manufacturing industries. Acquiring such companies changed the competitive game dramatically and gave the Chinese companies extraordinary competitiveness advantage in Europe and US itself.

As such, each country and each individual company despites its size and customer range and target has to consider China influences and calculate this as a business risk in its portfolio and has to bear in mind business consequences if one of the Chinese companies tomorrow succeeded to get a market share and be able to compete locally.

Yet, China despite its global advantage has numerous issues and challenges to address. A small exercise to fill in the diamond and the five forces model shows that foreign companies can take some of the disadvantage and threats as opportunities to compete with Chinese companies in China. One of these issues and challenges are: Climate, Energy and Talents shortage.

Are domestic services crucial to Asian economic development?

The collapse of the financial system in the US triggered a global credit shock that affected all financial services in Asia. Before the crisis, many enterprises treated this region as a stable economic ground. After all, Asia had high growth rates, large trade surpluses, and substantial foreign reserves. Its large companies were well capitalized and the banks were almost free of the risk full loans and doubtful investments. Nonetheless Asia couldn’t avoid the economic fallout. The stock markets went down, currencies were weakened, and the exports to Europe and US slowed significantly. The impact of the crisis on the financial markets and real economies of Asia has ended speculation that Asia isn’t decoupled from Europe, United State and the rest of the world and has exposed important linkages between Asia, on one hand, and Europe and the United States, on the other. Asia depends heavily on external consumers.

But, the developments of the past few months underline the fact that Asia as Europe and US should move more aggressively than ever to secure its economic future and improve its resilience in future crises. The crisis might happen again and there are no securities that the next crisis will originate inside Asia region itself. Asian governments must accelerate their plans to integrate regional economies by facilitating and increasing trade and investment between Asian countries, and strengthening local and regional financial markets. Only then can Asia hope to minimize the impact of future economic failure.

However, the fundamental question remains: How to defeat the crisis? Asian economies have gone through a tremendous transformation. The Asian government promoted for a long period the high-tech sectors and manufacturing exports, but did not give the deserved attention for services sector.  Many countries and companies in Asia look to service exports as a source of employment and economic growth. Yet, this sector remains important for boosting offshore services as India trying to achieve with its IT outsourcing strategy.

Domestic services are crucial to economic development and essential to growth. It accounts considerable percentage in creating jobs for middle-income in developed economies in Asia. Manufacturing is not a sustainable source of job growth for any economy as the industrial revolution has been changed dramatically. US old economy versus new economy and the blue ship enterprises are a nice example of this. Even China, the so-called “factory floor” of the world, has shed more than 15 million manufacturing jobs since 1995 according to Asian Wall Street Journal[1].

The domestic-service sectors are the powerful drivers of overall GDP growth, and their share of the economy rises as countries develop. And the quality of those services impacts growth rates in other sectors because every enterprise must use them. Also, good and valued domestic services can help attract foreign investment. India’s offshoring sector, for instance, did not take off until Indian services were valued by Western enterprises like Microsoft, SUN, Sonny and other companies.

On the other hand, productivity lags far behind other sectors like export and manufacturing. The possible main reasons behind this are:

• The service industry offer limited room for innovation. Asian countries did not developed their own service history but instead, they imported the principles from the west and failed to integrate thoroughly and innovate it to shape the economy as Europe and US did in the late 1990s when Internet and mobile industry are started.

 

•  The manufacturing and export jobs are higher skilled and better paid than service work. On the contrary, service industries create more high-skilled occupations than manufacturing like in India: IT engineers and experts, managers, researchers, etc. various European and US companies hired several high skilled resources from India for decades.

 

• The manufacturing jobs are more stable than jobs in services. However, manufacturing employment is shrinking world-wide due the industrial revolution as mentioned in previous paragraph.

Nowadays, service industries tend to have higher job turnover than manufacturing. Service industries as a whole create more jobs than they lose. So creating a dynamic service sector guarantees employment opportunities for everyone, if not the same job for life. The fear that service industry won’t create enough jobs and therefore damage the economy is misinterpreted. This fear ignores the fact that this industry might offer lower prices for the products but better services, which boosts demand and causes the industry and companies to hire more people.

To exploit the domestic services and boost the economical growth as one of the means to overcome the crisis, governments and policy makers need to adjust current regulations to balance between each sector. Governments should treat the service industry equally as the other sectors and should revise labour laws so that employers can hire and fire in line with the business cycle, giving workers more jobs overall to choose from.

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[1] The Asian Wall Street Journal, Diana Farrell, November 30, 2005 

Innovation and Failure Paradigm

Nowadays an authentic innovation cannot be achieved with the old-fashioned formulas; we need an entirely new mindset that revolutionizes our thinking on this subject. A total shift in attitude and priorities at one point and an open minded at the other hand are the concepts that defines winning from losing, victory from defeat, success from failure. Although in such paradigm, I am afraid that the meaning of these words becomes fuzzier and loses its original definition.

Success and failure have another definition despites what we know, believe and learned in the classes. People who appear to be successful seldom feel successful. What other preserve as success might not be well deserved success. One mistake or a failure in ones life might turn years of success into all failure.  Failure paves the way for successes and vice versa. What stood for success yesterday may represent failure today and vice versa.

Till this point I was worried? Do we need to? Have we lost it? I guess not. We should be enjoying another level of knowledge and understanding of the new paradigm. Till recently I used to think, if I need to succeed I mustn’t fail. But nowadays, the term success becomes vague, complicated and unpredictable. We need to deconstruct how we think about success and failure and propose a counterintuitive approach that acknowledges that both coexist in any given situation. We should de-stigmatize and embrace failure as a prerequisite for success and a natural by product of the risk-taking.

Taking risks, however, is precisely what is needed now, more than ever. Risk is the only path to innovation. And the demand for innovation in the current fast-paced, globalized and technologized economy is constant. We need continual innovation in vision, strategy, leadership, products, processes, etc. Instead, we are seeing a pulling back, a move toward tightening up, toward making sure no mistakes are made.

This impulse to seek perfection takes us in the wrong direction, robbing us of what is perhaps our most important strength: the ability to innovate. Other countries, like China, may occasionally have taken markets away from us, but there were always more where those markets came from because we had the power to innovate by taking chances and, in the process, to create new markets. The lessons learned taken from this and the insights gained from many companies failures inspired many business innovators. Common intensive systems, accounting reforms and punishment of the wrongdoers in response to these failures are damaging the business community rather than changing the scandalous behaviour. In a climate of fear like this, we tend to persevere more on tests and measures. In the process we become increasingly risk-averse.

Inspired by:

• The Innovation Paradox by Richard Farson and Ralph Keyes.
• The Success Paradigm: Creating Organizational Effectiveness through Quality and Strategy by Michael E. Friesen, James A. Johnson.

Deprivatization? is it good or bad?

A few thoughts about deprivatization

1.      What impact will the prospect of deprivatization have on investment by managers of privatized firms?

The impact will be:

·        Loosing corporate focus;

·        Missing planned CEO turnover;

·        Affecting planned managerial objects and strategic efficiency

Obviously, normal managers invest in long-term projects, products and services, deprivatization may come up with a different strategy that not aligned with corporate goals and its profit will probably go to different parties.

Managers believe, in a privatized firm, in greater gains and therefore have different incentives to implement long-term and in many case different strategies than in a deprivatization firm. In a competitive market, manager will constantly search for better ways to sustain profits and constantly reduce the costs.

In absence of these incentives and the pressure to maximize the profits and reduce the costs, the manager of deprivatization firm will only rarely be involved in such extensive exercise and will only meet his superior requirement. 

2.      What effect will the deprivatization have on foreign investment?

Based on the answers of question 1, foreign investment is will decrease if deprivatization increases:

·        The room to maximize foreign profits will be small;

·        Long-term investment will be no longer valid as the government will have greater share in the local market and will force foreign investment to shrink;

·        Short-term investment may not be profitable enough to return the investment;

·        Renovation in technology may suffer as well;

·        Exceptional technology and knowledge will leave the country and will be expensive to attract again.

3.      Do you think that mass deprivatization is in the long run best interests?

In my opinion, I don’t think that mass deprivatization is in the best interests of the country. This step will:

·        Slow down potential growths of the country;

·        Force some important factors to vanish that motivate the existing of the firms;

·        Impact the quality of the products and services;

·        Products and services variations;

·        Impact or freeze the price negotiations and eliminate competition.

4.      Who gains from deprivatization? Who loses?

Who will gain?

·        The local government;

·        Politicians;

·        Anyone endorses the deprivatization for his/her own goals.

Politicians and wealthy businessmen will abuse their power to help them increase their power and profits.

Who will loose?

·      Foreign and local investors;

·      Local economy;

·      Current products and services (quality, variations, healthy products, etc);

·      Consumers and workers;

·      Jobs.