Recession or Cyclic downturn?

The automotive sector in India is under significant stress. Sales are going down drastically in unprecedented numbers. It is a vast sector and has already started giving layoffs, having non-production days- a euphemism for plant closures. A large number of dealerships have cancelled their tie-ups as the business does not appear to be lucrative. On top of this, BS-VI norms will be starting from 1/4/2020, which will cause further stress as no BS-IV vehicle will be even registered from 1/4/2020.

More difficulties will come up during this year and maybe even next year. The reasons for this is that CAFÉ norms will come into the picture from 2022. There is already a discussion of auto companies going slow on investments, but statutory requirements are mandatory, and these companies cannot avoid them. BS-VI norms and CAFÉ norms will increase the prices of cars. One thing that never comes into the discussion is the sale of old vehicles. It is not that people are not buying cars. People suddenly don’t change their habits. But people become practical and smarter.

George Mathew

I will tell you what I mean. I read an article from Indian Express which was discussing the sales pattern in the industry in general. The data in the table is for two thousand plus companies. The table above shows the business figures for April-June quarter comparison of 2018 and 2019. Sales of AC’s are generally seasonal. But other items like TV’s, Microwaves have not shown any decline. Sales are almost normal and have only shown seasonal changes.

I want to write a disclaimer. I cannot “read” the financial data, and hence, I cannot analyse it too! But as a layman, I thought there is not much difference for these two years. The sales have gone up in 2019.  Operating margins have reduced slightly. Depreciation is quite high in 2019, indicating the investments done in the that year. Hence interest paid has gone up maybe due to investments in plant and machinery. Proportionately tax paid has gone down, and profit has gone down. These figures do not show any drastic changes happening in the market. Companies considered in this table exclude banking and finance companies.

Then why is the auto sector in distress? I have mentioned that people have become smarter and practical. In the last financial year, the total number of vehicles sold was large. But the sales of new cars have come down. There is a secondary market where people buy used cars. The total number of old vehicles sold was four lacs more than new cars. Why is this happening? Small cars like Alto are now sold more in three-tier towns. Young people in big cities want to buy bigger vehicles. I understand that a 3 to the 4-year-old big sedan is now available for the price of an Alto. The trend of buying used fancy cars is affecting the sale of new cars.

I am not arguing that there is no recession in the auto sector. But we should not forget that it is one of the most protected sectors in India. Customs duty on cars below US $ 40000/ is 60 % and above this value 100%. The used cars have a customs duty of 125%.  For various reasons, this sector has remained inefficient. After many international companies started coming to India and opened their factories in India, the auto sector had a tough time. Some Indian companies took 15 years to reach the quality levels of global companies. One company that followed a correct way of doing business is Bajaj Auto. They currently export 1.8 million motorcycles every year. It gives them a buffer when the local market sales dip!

Some of the reasons for the downturn could be that main barrier for transport vehicles like octroi has been removed. The action has speeded up the turnaround time of vehicles  substantially. The effect would be that the number of trucks needed to transport material would be less than those previously required. Another reason that is making rounds is that demonetisation effect causing the sales to drop. Is such a large industry dependent on cash? In the rural areas cash was being used to buy vehicles; even large SUV’s were bought using cash. If people had so much cash with them why did they not use bank instruments to pay? The answer is obvious. Not paying taxes honestly is a habit that does go away quickly.

What was the auto industry turnover 20 years back? How much has this industry grown? The auto industry has made decent profits all these years, so I am sure they have reserves. Pollution norms have been known to everybody, so no point in raising hue and cry about investments needed.

Any sector that is in stress always talks of alarming results of the recessionary trends in their business. Should the government give selective help to the stressed industry? Is such action fair to other sectors which are doing okay in their business? The financial stimulus can be a solution, but such money gets diverted from equally essential areas. We should not forget that high tariff on imported vehicles has helped the industry for a long time.

All the companies in the automotive sector are large organisations, and they have the wherewithal to overcome current tough times. Asking for a reduction in GST is a short-term major and is taking a myopic view of the situation. In the last couple of years, the government has been receiving feedback from business about GST. Government has already made changes for the benefit of both industry and the government. Making changes for a specific industry for a short duration is an incorrect way. The auto industry has been generating decent profit for the last few years. Some things have changed; some new variables have come into play. There are who experts can find a solution and suggest corrective actions. I am sure the industry will come out of it.

Raising the alarm, making statements like “It is the wake-up call for the Government of the day” does not solve issues. But the government help should be an exception but not a rule. There is an interesting story about General Motors and Chrysler. When they were in serious financial trouble, a decade ago, the senior executives of both companies were called to Washington DC for discussions. In the initial informal chat, they were asked if they reached Washington the previous night. The surprised executives said, “Oh, we landed only about 45 minutes back. We chartered a plane to come here.” The government official was aghast!

So where is the vendor conference this year? Italy, Las Vegas, Macau? How can you have the conference inside your factory? Cost cutting is for others. I have attended General Motors vendor conference once in Pune. It was at the Oxford club and there were at least six helicopters used by GM bosses to arrive at the venue! It is not a surprise that GM closed their shop in India.

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Our dream of Immortality!

There is a lovely Hindi song, “Tum Jiyo, Hazaro Saal, Saal ke Din ho Pachhas Hazar”!  The song is sung to celebrate a birthday and  means, “My dear, please live for thousand years and let each of the years have fifty thousand days.” It wishes immortality to the blessed soul. When we discuss human life, we always say that our life span is a hundred years! From where this number has come from is difficult to say. But it indicates the wish for immortality or longevity. Immortality is also discussed in mythology! Dronacharya’s son, Ashwathama, is supposedly immortal, and that is later considered as a curse or a punishment.

In our day to day life, there are many examples of mortality. Mortality is not a curse, but it is a fact of life. Dalai Lama had spoken about Shunyata in one of his discourses; it means emptiness. This emptiness means all the objects in the universe have no meaning unless we attach the meaning through our thoughts and beliefs! In the real world, the atoms and molecules exist independent of our mind. But our mind also exists independently, and we feel this when we are angry or happy! Anything that exists physically has a life span or shelf life. The span depends on many variables. But till the beginning of the 20th Century, the lifespan of humans was pretty low. Longevity was a word which came into discussion about a tiny number of people.

Still, the fascination for immortality continues. Why is it so?  We forget that everything has a specific life. With futility, we cling to that toiletry pouch long after it has fallen apart. We visit and revisit the old neighbourhood where we grew up, searching for the remembered grove of trees and the little fence. We want to go back to our roots. We clutch our old photographs. In our churches and mandirs and mosques, we pray to the everlasting and eternal life. In every nook and corner, nature is showing you that nothing lasts, that it is all passing away. All that we see around us, including our bodies, is shifting and evaporating, and one day will be gone. Where are the one billion people who lived and breathed in the year 1800, only two short centuries ago?

https://panvalkarpramod.wordpress.com/2018/05/01/another-view-point-the-native-place/

The above link is a blog I had written about native places. We get nostalgic about our good old native place where we spent our childhood. We remember that school where we spent an extended part of life. Some people keep on going to their native place ( गावाकडे or मुलुक ) every few years. They hope that everything has remained in the time frame when they have migrated elsewhere. But when they go there, they find most of the friends have left the place; those still left behind have changed beyond recognition. Their children don’t even know you. That old grocery shop is now converted to a modern-day cell phone shop selling Oppo and Samsung. Every visit, we see that our past memories are now becoming actual memories. Those teachers have died, the priest died 30 years back. There are more wine shops than shops selling those sweets which you enjoyed in childhood. There is a clear sign that things are changing, the old world is dying, withering, replaced by a new one. This change is happening in a short span of about 30/40 years. We don’t accept the changes, but inwardly, we know that the reasons for which we keep on going to the native place do not exist. The other day, I went on a road in Pune, where my grandfather used to live. Though I exactly knew the location where the Wada existed, I could see none of the old signs. Then suddenly I saw a flour mill or chakki from those days, that was still around! The sighting also brought a thought in my mind that in another five or ten years, the chakki will also be gone! Did I accept it? I am not sure. We humans do not accept the adage, “Time and Tide wait for none”!

Despite the preponderance of evidence against it, our culture strives for immortality and youth. We cling to a past like — photographs, memories of our children, old wallets and shoes. But it’s not only about our physical bodies that we want to be ever lasting. We struggle against every change — big and small.

We have seen these changes in real life, but we tend to ignore them until the last possible moment. Kodak and photography were considered synonyms. Till the ‘90s of the last century, other companies were called also-ran. Kodak invented digital photography but never understood its real potential. Well, Kodak does not exist any more. The change took place in front of their eyes in 20 years. Garware Nylons was a leading company, in Pune, and it prospered in front of our eyes. For various reasons, within 15 years of reaching its peak, it closed shop. There were many car manufacturing companies in the early part of the 20th century in the US. Only GM, Ford and Chrysler remained. Even GM and Chrysler were saved by the US government from Bankruptcy a decade ago.

The coast of Pacifica in California is a beautiful place to live. (The photos above)  But the sea erosion is eating away 8 inches of land every year. Those who did not understand the meaning of 8 inches per year are now suffering. In forty years, it meant almost thirty feet of erosion. People in that area have understood the real meaning of mortality!

Human life span is tiny, whereas the life span of the Universe is in terms of millions of years. Hence we hardly visualise any changes happening around us except for some happening in Pacifica. But let us not despair. In the cycle of mortality, some beautiful things and events have a life of a few hours. The night-blooming flower of Cereus or Brahmakamal blooms only once a year and has a life of a couple of hours. But during that night these flowers give us tremendous pleasure.   The other day a friend called to share the information that the plant in his home had 30 flowers in one night. He was really excited.

Why are we looking for immortality? Is it for pleasure? Is it enjoy life for an infinite period? Imagine you in the year 2219. I can not imagine what the world will be. I may be immortal, but my body cells may not be eternal, my muscles may not be immortal, nor may my brain be immortal! Will my contemporaries also be in a similar position? What will we do in those times?  Instead, it might be a good idea not to have immortality and in short span of life, be like Brahmakamal to your friends and near one; be a Brahmakamal those in your ecosystem. There are some great achievers who in the same life span cross the mountains of achievements and some reach the Mount Everest.

The joy of living life is an individual choice! Some are happy with the smallest of achievement and others are not happy even after climbing the Mount Everest! Immortality is not going to give us any special joy. But don’t forget that even the North Start (Dhruv Tara) is not immortal.  After a million years it might disintegrate into atoms and molecules. But one thing is is surely permanent and will always be available; that is God!  He will always be there as a concept and will last forever! Let us not try to imitate Him! We are humans!

Richie Rich!

RIchieRich

 

Richie Rich! This is my favourite comic character, in fact I still read these comics when I get a chance to read them. This kid is from a rich family and has everything that one may dream of. I used to wonder, how hard his family must have worked to reach this stage. Even today I dream of becoming Richie Rich but now there appear to be simpler ways than working hard, slogging all through life!

Nirav Modi has shown us the way of doing these things. This Modus Operandi had started with Harshad Mehta when he got a bogus Rs.200/ crores fixed deposit certificate. This was done in connivance with some bank official from Bank of Karad. The original FD certificate was for Rs.2/ crore and was conveniently changed the certificate to Rs.200/ crores. Using this fictitious certificate Mehta borrowed money from institutions, and rest as they say is history. When you borrow money against a Bank Deposit, it is assumed to be correct one in all respects and loan is simply given against the most liquid asset. Bank of Karad later went into liquidation. Why work  hard when you can cheat? A little jail term and some bad name is ok as long thousands of crores are available to you.

What we all have seen is that real money is created over a period a few generations of consistent efforts and hard work, sometimes a bit of luck also plays part. But during last 50 years, share markets, and IT companies with their very high  valuations and hence their skyrocketing share prices, have created billionaires. But in share markets real billionaires are far and in between. Not like those from IT industry. Classic case is Jeff Bezos, founder of Amazon. Even after 25 years in business, Amazon is constantly in loss, but keeps on doing business, gives deep discounts on products, Bezos is currently the richest person in the world. Some years back he bought iconic Washington Post for US $ 250 million , in all cash deal. These people have huge personal wealth, they have money to pump in business continuously, but their companies are loss making all the time! But at least they are not cheating banks and you and me!

In normal course, non- IT businesses do become bankrupt, fail but in IT industry failed companies on your CV make you special! Venture Capitalists pump more money in your next  ventures. Cheating happened to some extent, like in case of Enron. There are normal cheats but those of the size of Mallya’s and Modi’s were not many. There was a classic case of Chrysler corporation, who were given special loan by US Government. After a couple of years, this loan was repaid! The Chairman, Lee Iacocca at that time made a famous statement. “We borrow the money the old way, we repay it!” This one statement explained the way the business is done, world over, including India !

But with Modi’s and Mallya’s of this world, things are different. In recent years, there is a big list of people, from different sectors of industry like, power, construction and steel. These companies were given such huge loans that they have sucked the banks in trouble because they are all on the verge of bankruptcy. The beauty of current law in India is that the personal assets of the defaulting promoters cannot be attached. So, most are enjoying life as if nothing has happened.  A bankrupt company’s assets were being auctioned. The original promoters had failed to repay Rs.800/ crore. Original promoters took part in the auction and bought the same assets back at Rs.50/ crores; due to declaration of bankruptcy Rs.800/ crores went into thin air! A law was recently modified to stop people from cheating further.

In case of Modi, fraudulent LOU (Letter of undertaking) were issued by Punjab National Bank. Officers from the Bank issued these without any guarantees. This issue came up in January as the suspect officer had retired and when Modi needed fresh LOU’s, the new officer asked for guarantees. Modi’s people said that they had never given any guarantees before. Why they are being asked now? The whole Pandora’s box opened!

There are many checks and balances in the system but those who are supposed to check, break the rules, how to stop such frauds? It seems that the sizes of fraud are increasing in proportion to inflation and lifestyle. With whatever wealth they had,  before fraud, both Modi and Mallya could easily have lived with whatever lifestyle they wanted! But why do something fraudulent? What is enough money? It comes to basic question; how much land does a man need? What does one do with tens of thousands of crores of Rupees? There is a reverse trend started by Bill Gates who is encouraging the superrich to donate their assets because those assets by remaining under control of an individual or organization, remain idle. If these are donated and correctly used, world will be a better place to live.

In case of Modi he has been living in Europe most of the times, in case of Mallya also it is the same! At least at present they are lucky otherwise, when and if they are brought back to India, they will meet the same fate as Sahara Chief, Unitech boss, Jaypee team and now probably D S Kulkarni. What is the thinking of these people? All these people had done reasonably well in life, till they started doing wrong things. What were they trying to achieve? To become biggest in their field? These four groups have cheated individuals like you and me! Many of us have taken loans to buy flats, many have given life’s savings as FD’s after retirement!  Now there is no way for any new infusion of funds; income for these retired people have stopped, and capital is locked!

Let us hope that government of India, irrespective of party in power, continues the good work they are doing. They are ably supported by our courts by giving strongest possible indictment for bad deeds of the suave looking bad guys! But in discussions with some friends, I found that some people have sympathy for the these fraudulent people! They felt that it is just bad luck in their business cycle and people should support such business people. If you are supposed to be doing Rs.10,000/ crores of projects, and cannot raise Rs.50/ crores to repay depositors money, you do not deserve sympathy, they deserve law to take over and may free stay in Tihar jail or jail of your choice!