New .com bubble!

Startups, Venture funding and profitability go hand and hand else you have a failure on hand!

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My friend Nandu Pradhan sent me a message if I have opened a blog tap! The fact of the matter is that I am on a bit of a sabbatical for a week or ten days. Thoughts keep on coming in the mind and somehow I am able to reach the end line pretty quickly.

I read an article about venture funding this morning. It said that venture fund taps seem to be shutting down, albeit slowly, at least in India. I don’t understand much about venture funding but I am told that this funding is given to start ups with brilliant ideas; then there is second and third round of funding as the idea tries to bloom into business. One term that goes hand in hand is “burn rate” while discussing startups. Burn rate is the money spent every month, without doing any business at least in the beginning.

Most of my life I have been running a small business and during this period, barring a few years, I never needed outside funds! Of course, those loans were in the form of bank facilities. I paid outrageous interest charges on the bank funds. At some stage, I decided that enough is enough and returned all the bank funds. Idea behind running my business was simple, it was my job, and it earned me a living! So idea was to keep on making money from whatever activities I was doing!

Don’t get me wrong but I honestly do not understand this concept of venture funding and startups. All can’t be Microsoft, Apple, Facebook and Googles of this world. These are some of the names that come to mind when we talk of starting up in garage and so on! Don’t forget that people behind them were brilliant people. They may not have had the best of the ideas to start with. Apple took 20 plus years to really hit it. Microsoft initially had a tough time but the idea of MS-DOS is what really took off! These guys had different business models. Microsoft has been making software products and are now also in cloud computing, in a big way! Microsoft’s obituary has been written a few times but lately they have become extremely agile to customer requirements. I need not write about Apple; once the iPod became a hit, rest as they say is history. They have real world hardware that they are selling at very high margins. Google made a brilliant search engine and the advertisements on the engine are their bread and butter; they hardly have anything else that is earning money. Facebook was pioneer in social media and have taken up Google business model but this forms 80% of their income. They have about 20% of their income from other sources. What I am trying to imply is that they are all real profit making companies and balance sheets have been in black, most of the times. They all have hard cash.

Coming back to start ups. I am sure that there is a genius lurking behind all these startups that we keep on hearing. Mr. Mukesh Ambani recently made a statement that Jio is a startup! I think what he meant by that is Jio is thinking out of box, its agile, its is taking business behemoths in the same field head on but of course there is a business plan which will make it profitable sooner than later!

I am naming two large e commerce giants in India, Flipkart and Amazon.  Amazon is doing billions of dollars of turnover world over but I understand that even after 20 years their E commerce business is not in profit! So they keep on pumping money. Because of market capitalization Bezos of this world have become billionaires. So must be Flipkart honchos. What is their business model? To my understanding this is trading business as these two companies’ sale products themselves or through their partners; they do not manufacture a single product. How come their burn rate is much more than their income? I feel that it is because of the discount war they keep on playing to gain territory It is a good thing that they do not take loans from banks; otherwise list of bank NPA’s will grow longer! Loss figures March 2016 Amazon Rs.3572/ crore, Flipkart Rs.2850/ crores, Paytm total loss Rs.7971/ crores! Not bad! Profits can always wait! (Ref. Economic Times dated 24th Sept 2017)

If the organization is not making money then what is the point in doing business? With the taps of funds being slowly turned off, the startups are thinking, in terms of operating profits! Real profits are miles away! I am not sure about operating profits too! I am surprised about both sides. Those running business are not really bothered about profits and the funding guys are hoping that one of their clients will become a Microsoft or a Google and then they will get windfall! I am sure the funding guys are very very smart people and they are pumping only part of their billions as investment in startups! But what about startups which are very small or medium size? Or do the promoters also make their money, on the side, from the “burn”? If there is no profit then how do you sustain? What do you achieve by having a high “burn rate”? Is the business model right? Do these guys have enough maturity? They must be real smart technically but running a business is different ball game! An idea, a great presentation, business plan (which always look lovely on paper) get them funding. But how long can the operations sustain on funding? Should the business not be self-sustaining? Is it easy to convert a brilliant idea into a self-sustaining business? There are many so called brilliant ideas, on paper; they face different hurdles, when they come into business domain.

Coming back to my lack of knowledge, I feel that business is a business is a business! The aim should be to make it profitable, of course not at any cost! One has to follow business ethics. When you get funding you don’t have to pay interest on funding that you get though you actually borrow it!  Funding is a cool name for this borrowing! One is really lucky that this is interest free loan. That most startups fail, is to me, an indication that most ideas don’t get converted to profitable business.

I will give you an example of a “startup”. This was not a startup in the conventional way. This person’s business and products were not hi fi type but products made for farmers and used in farming. Of course it was not cool! He was mentored by my wife Jaya. Jaya happens to be on cool side of life i.e Computers, IT and all. What she found was that the person was brilliant and knew his subject and had good products. He was trying to make too many products on laboratory scale for different produce. After a few meetings Jaya asked him, “What is the USP of your products? Which is your best product?” He said, “My products will give immediate results with very high returns in Pomegranates!” Jaya told him to concentrate only on that. He did it and rest as they say is history. Now he is a reasonably successful businessman. He received recognition from United Nations and business wise he is doing pretty alright! Mind you, he took funding but only after his business had grown reasonably well and was very much in black! Writing this story probably has answered the questions which I raised in the beginning! So startups and venture funding is good provided you have good profitable products and a profit making business plan; otherwise you have to be Amazon or Flipkart or Paytm! To hell with losses! There are enough people who will fund you, if you are large enough!

GST pluses and minuses

This is not a blog  in the usual sense! But I thought GST is very important  subject in India and it touches our life everyday. In my software business, we have handled GST related changes for our customers hence I know a bit about the subject. So I thought why not write about GST in simplest possible language without using accounting buzzwords.

This is not a blog  in the usual sense! But I thought GST is very important  subject in India and it touches our life everyday. In my software business, we have handled GST related changes for our customers hence I know a bit about the subject. So I thought why not write about GST in simplest possible language without using accounting buzzwords.

It’s more than a month after introduction of GST in India. There has always been a question why GST? Modern world has switched over to Goods & Services Tax (GST) over a period of last 15 years or so. I felt that there is a need to explain GST in the format that will make it easy to understand the simplicity as well as complexity of the system.

Why GST?

Before GST there was a plethora of taxes by different names, different authorities, different rates, different procedures, and different forms, making things extremely complex. What GST has done is that it has helped the system to go away from all these taxes. All these various taxes have been merged into two taxes one is under Central Govt (CGST) and other by State Govt (SGST). Central Govt portion takes care of previous excise tax and State Govt portion takes care VAT and Service tax.

Definition of GST

It is very simple. GST is a tax which is based on Supply and it is destination based. This means that whatever you supply Products or Services, there will be only one type of tax, GST! The beauty of this system is that there is same tax percentage for a supply all over India.

CGST/SGST & IGST

When a supply is a made within the state there are two elements of tax, CGST and SGST. If supply is made outside state then there is only one tax element, IGST. If tax percentage is defined at 18% for an item, then IGST is 18% for interstate transaction and intra state tax is 50% of 18%, each for two elements i.e. 9% CGST and 9% SGST.

Why so many tax percentages in GST?

India is a very complex heterogeneous country. Diversity of Income is quite extreme in India. Hence to take care of such issues tax % have been defined from 0% to 28%. This is a compromise that was needed to achieve the social goals as well as fiscal goals of the Govt. World over, taxes have been from 6% to 20 plus % depending on the particular countries requirements. But majority of the countries in the world are as big only as some of our states are or even smaller than them, with reasonably homogeneous population. If we take 28% GST, which is supposed to be on luxury items, in case of cars the prices of most cars did come down post GST. There are some cases where post GST, prices went up and they came down in others.

Input tax credit

At every stage, the seller can take Input Tax Credit of tax charged to him at the buying stage thereby taking care of double taxation. This means that seller charges the tax based on his profit margin and not on the complete price.

Immediate benefit of GST to Govt

Govt is all the time looking to increase the tax base in the country. With GST implementation, a large number of new entities have opted to register under GST, thereby helping in reduction of transactions in parallel economy or so called Black economy. There is an interesting rule. An entity buys something from another entity, which is not registered under GST and does not charge GST for the transaction. The onus of paying GST in this case is on the buyer. The buyer has to raise a self-Invoice for the amount equal to purchase value and charge GST as % defined in the system. He then pays that tax to the Govt. System of “Purchi” will have tough time in future.

Ease of use

For traders who make a large number of sell transactions every day, there is a system that allows them to be under Composition Scheme. They are required to pay GST to Govt every quarter, at a fixed % based on their turnover.

Why people Love to Hate GST?

First and foremost, the reason is ignorance! Second most important aspect is the transactions will come above board requiring the entity to pay correct amount of Income Tax! Hiding Income can become tough over a period because the transactions, and returns of different entities are now going to be entangled with each other.

GST Returns filing

This is another reason for hating the GST. Except for those who have opted for composition scheme, returns need to be filed on a monthly basis. In previous tax system returns were allowed on a quarterly basis. In GST returns, more information is required to be shared with Govt, every month. For example, when returns for July are filed, one has to fill up gross turnover value of that entity between 1st April and 31st July and so on. This will put the limitations of “playing around with figures” at the end of the year! You hate GST, of course many will hate GST!

Entanglement with each other

By a certain date of every month, sales details are to be shared with Govt and these are more detailed than was previously done. This includes names and GSTIN number of customers! This is to be uploaded to Govt site. In next couple of days after this is done, your customers will have visibility of these Invoices and are required to “approve” your Invoice, online. There is dispute resolution mechanism; in case of dispute, two months are allowed to resolve the dispute. There is one more entanglement. To claim set off the customer must “approve” your Invoice. Your customer will finally avail Input Tax Credit during payment of GST, only when you have shared the proof of actual payment of your liability of GST amount on the site! Now, now you hate GST more, you will hate Govt more. But what Govt is trying to do is to bring more discipline in the society and more compliance. The effect of this is even trickier. Everybody’s compliance rating, adhering to discipline will be made available in public domain. This will lead to getting lower business in case compliance rating is down! This is because the lack of compliance indicates indiscipline and financial burden to your customer. You cannot avail tax credit if your vendor has not paid taxes. What do you do in such cases, go to a better compliant vendor! Simple?

I have tried to explain the gist of GST in non-technical way and have tried not to use accounting jargon! Its early days for GST and we will see improvements over a period. This GST system will probably create world’s largest data under one roof and will be a challenge to data analysis experts too! Happy GSTing!

 

 

Electric cars, are they round the corner?

Definition of inflection point: a point on a curve that separates an arc concave upward from one concave downward and vice versa. The term inflection point was first used by Andy Grove in his book “Only the Paranoids Survive”. Inflection point can be there in anybody’s life on in business cycle of industry. It indicates the total change in scenario or make and break situation. The diagram showing point of inflexion.

 Inflexion point

I visualize a major point of inflexion in automobile industry in near future. There are different views floating regarding when the Electric Cars will be mass produced. The year mentioned fairly regularly is 2030! That’s not really far! Why this is going to happen and whether it will happen at all will be based on many factors. Currently volume of Electric cars manufactured world over is not significant. But Nissan, BMW, Ford, GM, Mahindra in a small way and of course Tesla are already making electric cars. I have heard that Toyota plans to come up with a full electric car by 2019.

 2016electric cars predictiongraph

This is the forecast sale of electric cars as percentage of total car sales, for the year 2016 but I could not get the real figures. Japan at 9.7% is highest in the number of total cars produced and China at 0.9% is the lowest %. France, Great Britain, Germany, USA, South Korea, Spain are there in between.

 What will give the boost? What factors are going to push this production? When will the momentum gather for switch to mass production? When will the point of inflexion be reached? Main factors considered in usage of automobiles are its price, fuel cost, car driving  range, parts cost and main is the cost of ownership. Besides this battery charging infrastructure is going to be the most important aspect that will make or break this change.

 Price factor for electric cars appears to be in reasonable control even without mass production. In the cost of electric cars “Engine & drive train” needs be brought down; all other things remain same. When Tesla started producing cars, people looked at it as Elon Musk’s fancy! Tesla is working like a start-up but it is somehow managing to survive financially. Now they are also coming up with an affordable sedan. Slowly big giants like BMW, GM and others have woken up. Initial experiment started with Toyota’s Prius hybrid. Thinking was to just increase the fuel efficiency of existing car system and Prius hybrid was the first successful attempt. But it was definitely a minor change in thinking and not the game changer like fully Electric car. As per current thinking even  in India, Government has increased the Tax on hybrids. When asked, the minister said, “When Electric cars is the future why bother about hybrids!” Electric cars will of course need Government support by way of lower taxes to make them attractive for buyers. Government support will also be needed for battery charging infrastructure.

 Second factor is the cost of fuel. With many shocks offered by Petroleum politics, world has been looking to go away from fossil fuels. Plus the world has woken up to climate change and is aggressively looking to control pollution. Cars are known to be major pollutants. Stringent control is being sought on exhausts from cars. But this will happen only in newer cars, old polluting cars cannot be wished away. Volvo has made a statement that the cost of manufacturing car systems to match pollution norms in 2022/23 will be so high that they will stop making diesel engines. To overcome pollution issue, Germany has declared that by 2030 only electric cars will be manufactured in Germany. To achieve this target they will really have to work hard but German car makers have the technology, financial clout, will and wherewithal  to achieve this target; they are working very aggressively. Best non-polluting fuel obviously is electricity. But cost of producing electricity was a major factor hindering its usage in cars using battery banks and of course the cost of batteries. Solar and wind energy seem to be galloping ahead of other sources to make electricity cheap. Classic example is Germany. On a day in 2016, 85% of electricity produced in Germany, was from non-conventional methods.

https://energytransition.org/2016/05/germany-nearly-reached-100-percent-renewable-power-on-sunday/

With abundance of cheap electricity, on that day the rates of electricity went in negative in tendering process! Recently, California produced 67% of electricity, on a particular day,  by non-conventional methods causing serious disruption in electricity pricing mechanism! World over including India, Solar and other non-conventional methods are very aggressively pursued. By 2030 it looks like world will easily achieve the goal of cheap fuel in the form of electricity!

Currently when we travel by car, we do not think how much distance we are going to travel. This is because fuel infrastructure is fully established world over. Whenever needed, we just refuel and move ahead. This is not going to be so easy, at least today, in electric cars. There are two major points. First is charging stations and second is charging time. Both need to be vastly improved. Charging time is evolution of technology, in cell phones rapid charging technology is already available so maybe it’s a matter of time when we get this in car battery charging. Charging infra of course has to come up but when number of electric cars increase, the infra will come up. The range per charge is also the matter of technology so hopefully it will rapidly increase. Similar to what we do today, while driving long distance, we should be able to stop for coffee and wash room break and get batteries recharged. Lo we are on the way! 2030 very much possible. But my take is that this will happen faster in Europe, Japan & Korea because such things are national policies and are easier to implement  in these areas because of the smaller size of the nations plus most of European nations are developed nations.  In geographically large countries like US, Canada and China plus India, this change may happen region wise or state wise starting with highways. City limits will adopt faster as people can charge their cars in their own homes. 

 Replacement parts and cost of ownership are combination factors. In the electric cars, drive train, exhaust systems as we know them today, will simply be not there being replaced by battery packs, motors & drives. Less number of mechanical parts is going to definitely reduce the repairs and servicing cost. This factor has nothing to do with 2030. As the cost of ownership comes down, more people will be interested in driving electric cars.

 Another major change is going to be the nature automotive components industry. When major systems like drive trains & exhaust system are not needed, current manufacturers will find in a drastic reduction in parts needed by industry; over a period these will be only needed in old cars. With a mandate to supply parts for ten years, 2040 will be the last straw on the back of the Camel for this industry assuming by 2030 electric cars will be used in large numbers. How will current component manufacturers of these components handle change? Will they start making parts needed for electric cars? Do they have the technology? Only time can tell? How will Bosch’s, Conti’s, Denso’s and Valeo’s of this world handle the situation only time can tell. I am sharing one important information about change that has already happened. Nvidia Graphics, www.nvidia.com  producing chips and cards with their GPU technology are already vendors for Toyota, Mercedes, Audi, Honda, BMW, Volvo. This is because of rapid increase in usage of onboard computers to perform various functions including self-driving cars. Five years back, I am not sure if Nvidia name was much known in automotive world! Point of inflection? Yes my friends this is the point of inflection and in this business jungle, snipers in the form of technology are hiding! You never know when you will get your bullet! Yes, my conclusion,” ELECTRIC CARS ARE COMING IN A BIG WAY BY 2030”!

 

 

 

BS IV! What’s the hurry!

I think Supreme Court is making me think a lot currently and also giving me fodder for blogs! Thank you Sir! Today, 29/3/2017, they have thrown out a petition by both Govt and Vehicle Manufacturers, to allow Vehicle Manufacturers & their dealers to sell BS III vehicles beyond 31/3/2017, stating commercial reasons. Supreme Court said that this date was known to everybody for a long time and people’s health is more important than the commercial aspects of business. Period!

This blog of mine is not the usual comment on social aspects or musings. This is about an event in field of automobiles. I joined the industry in 1973 after passing my Master’s Degree in Engineering. I continue to work in the automotive field in auto components and software area. The subject is dear to my heart and I feel sad to see the way events have rolled out.

How do we compare with European manufacturers?

The table shows dates of introduction of various stages of emission norms and in most cases it  is the beginning of the year i.e. 1st January.

Bharat Introduction  Date Euro Introduction  Date
1 2000 1 1995
2 2005 2 1998
3 2010 3 2001
4 2017 4 2005
5 Skipped 5 Mid 2009
6 2020 6 Mid 2014

In early part of last decade, the technology for emission control was probably not available in India, at least initially.  I remember having seen diesel vehicles bellowing smoke more than a chullah (a low cost brazier being used in India to cook daily food in villages.) So much for the technology of those days. To my knowledge there are three factors which governed emission control project. First is technology itself, quality of fuel sold by Govt owned companies and Will to introduce these changes.

We will compare with Europe and their Euro standards, from where we got our technology or Japan who are equally ahead in technology. For each stage, Europeans allowed three years for the manufacturers to switch to next stage. In Europe too, the implementation was done phase wise and not in one stroke. For reasons best known to all concerned, we in India allowed five years each for first two phases and seven years for the current phase switch over.

If we look at the technology, we simply got it from elsewhere, all that we had to do is to try it, test it and productionize it. It was collusion between the powers that be and vehicle manufacturers or simply lethargy, they simply decided that five years are needed and later seven years for BS III. Also there have been multinationals in India, from Europe and Japan. These companies already had the experience of stages, ahead of Bharat stages. For BS IV, Toyota has been selling BS IV vehicles since last one year.

Fuel in India is refined by oil companies owned by the Govt. Business size wise these companies are run on global scales. They are owned by Govt so what good excuse did they have not to refine the fuel as needed to achieve emission norms? Honestly I don’t see any reason, simply lethargy!

Next is the Will to handle emission control as a project! When Europeans could develop technology and productionize it every three years for next phase, why we needed five and seven years? It showed the simple lack of will and lethargy on part of all parties.

With the new Govt there appears to be a zeal to get things going. If you see the data above, Govt has now simply skipped Bharat V stage and decided to go for Bharat VI stage after Bharat IV. All these days, everybody thought that respite/relief will be given by all authorities including courts, when large number of vehicles of BS III variety remain in stock on the last day. But with Supreme Court result, the effect is same as demonetization action on 8th November. So, there appears to be similarities between these two events which can also be compared with surgical strike!

Society of Indian Automobile Manufacturers (SIAM) has submitted that the companies have a stock of 8, 24,275 BS III compliant vehicles which include 96,724 commercial vehicles, 6,71,308 two wheelers, 40,048 three wheelers and 16,198 cars.

Why have we reached this situation? From figures it appears that car manufacturers have done a tremendous job of managing their inventories of old vehicles. Next are two wheeler companies. The physical number will look high but if we compare it with the production per year, it is just 0.025 %!  It is the commercial vehicles guys who have shown poor project management. Who is to blame? Why this has happened? Somebody in project management did not run a tight ship!

Has the industry learnt its lesson? We will come to know in 2020 when Bharat VI has to be introduced. The only option maybe to export these remaining BS III vehicles! Till then to overcome current situation of vehicle stocks, Indian ingenuity and jugad will come in play!