Street Power

The recent fiasco in France holds many lessons for democracies everywhere.

France has this strange combination of a thriving corporate industry and high unemployment especially amongst youth. The culprits here are France’s rigid labour laws which make it almost impossible to dismiss or layoff employees. Companies therefore prefer not to hire. If they have to, they use temporary workers. Since older employees can’t be fired easily, unemployment hits the youth. Much of the unemployment is among the children of immigrants which ultimately was the cause of rioting in France a few months ago. People with no jobs are more likely to riot – they have time on their hands and nothing to lose.

The government in France, with the best of intentions, decided to fix some of these problems to regenerate employment amongst youth. But they could not suddenly change labour laws across the working population. If layoffs were permitted across the board, sure, growing companies would start hiring young people, but there would also be a lot of older workers laid off and out of jobs. So the government decided to make it easier to fire only young workers in the first two years after they join.

Big mistake. Within days, massive student and youth protests were organized across the country. Colleges shut down because all the students were in the streets protesting against what they were calling a law unfairly targeting young people! The government first said it was willing to negotiate the time period – make it 18 months instead of 2 years. In the end, Jacques Chirac just withdrew the bill, in effect dashing the Presidential hopes of his trusted luitenant Dominique de Villepin who was the author of the bill. So were all students against the new bill? No. Last week they were interviewing a law student from the Sorbonne on BBC. The student was being asked about the law and the protests. She was against the protests and for the law. She didn’t like the fact that the colleges had been shut for the past 4 weeks and who knows what would happen to her final exams. But more importantly, she thought that the new bill would generate employment for the youth! She also said that none of the economics and law students of her university were in the protest marches.

I think the new bill would have worked. Not that the French government didn’t deserve the shellacking it got. They have nobody to blame but themselves for making France into an insular, inflexible place to do business. But really, this bill didn’t have a chance. Why? For two reasons:

1. The rationale for the new law is not easy to explain. It is not obvious that making it easier to fire young workers will result in higher employment among the same workers. I can imagine myself trying to explain that to a 3rd year medieval history student. Even if I knew French, I don’t think I could. On the other hand, the opposition can easily spin it the other way portraying it as an evil law designed to protect older workers or even designed to keep immigrant youth from keeping good jobs. Here I don’t just mean the Opposition in Parliament. Every change has opposition to it simply because someone is going to get hurt by the change.

2. The opposition to the law had Street Power. The people who were in favour of the new law like the Sorbonne law student and her friends, did not.

Cut to India. Labour flexibility, for decades, has been the one reform that no politician wants to touch. It is hard to believe that if you are the owner or manager of a company, your company can make losses, go bust and lose its entire net worth, but you can’t restructure your workforce. Capital treads softly where labour is inflexible. There was a time when there was talk of an Exit Policy for sick companies. A very unfortunate choice of name, if you ask me. The opposition (trade unions) quickly positioned the Exit in Exit Policy to be the exit of employees. ‘Hire and fire’ was another colorful phrase they used. The government had to bury the whole thing.

But its now resurfacing. You hear snatches of statements made by the PM and FM about the need for labour flexibility. Although they’ve picked a better name this time, I don’t like the government’s odds of passing any substantive legislation on this matter. Why? because of the same reasons that the French government failed.

How do you explain the rationale of labour flexibility to Mr. Godbole who is a teller in a bank? Mr. Godbole, we plan to make it easier to fire people such as yourself because this will encourage capital investment which will generate more jobs. I can just see Mr. Godbole’s eyes glazing over. Before he gets angry. Even Mr. Godbole can understand that making it easier to fire him is not good for his pension. Self interest is a great motivator. When it comes down to Godbole’s job security vs. more employment in the country, Godbole knows which side of his toast is buttered. And finally, Godbole is part of a union. He has Street Power. His union can call a strike, do a dharna and if it comes down to it, burn a few buses. The stakes are very high. And a burning bus is an arresting sight on TV.

The challenge of sound economic policy making is that often doing the right thing benefits a silent majority, but hurts a vocal minority. In some cases the vocal minority can make their voice heard. In others they can take their campaign funding elsewhere. You need money to run elections. You need votes to win them.

I do think that one of the most important reforms that the Indian economy can benefit from is bringing labour flexibility. This is the best time to do it when economic growth is strong. But I won’t be holding my breath waiting for it. Not while the govenment depends upon the support of CPI(M).

Indian-Americans and the Spelling Bee conundrum

In the US there is a closely watched annual contest for school kids called the Spelling Bee. Over the years, whenever I have seen the results of a Spelling Bee contest I have always noticed that there were quite a few Indian kids in the final rounds. It seems like other people have also noticed this.

One of my favourite programs on TV is the Daily Show with Jon Stewart on Comedy Central. The program covers current affairs and manages to be both funny and incisive. A few weeks back when President Bush was in India the show covered his trip. Here is a clip from one of those shows (you will need a broadband connection). On the same show there was another segment where Stewart, talking about the US-India nuclear deal, says, "We’ll help India build nuclear reactors if their children stop crushing us in Spelling Bees." He then goes on attribute Indian kids’ spelling prowess to their long names. Sivaramabalamuralikrishnan Aghilandanayagaswami Iyenggar anyone?

I decided to investigate this further. I looked at the top 10 contestants in the Spelling Bee contest from 2001 to 2005. Since the contest has elimination rounds, I had to take more than 10 contestants when they were tied for positions. Of the  59 kids, including repeat participants, who made it to the final rounds in these  years, 12 had Indian names. Or roughly 20%.

So I then went to Wikipedia and looked at their entry on Indian-Americans. According to Wikipedia, there are 2.4 million Indian-Americans in the US, or just 0.8% of the population of the United States. Well that doesn’t compute, I thought. I then normalized for the college educated section of the population. According to the US Census 28% of the US adult population has a college degree. According to the same Wikipedia entry 64% of the Indian-American population is college educated. So college educated Indians are 1.8% of the total college educated population in the US. That is still a far cry from 20%. Clearly demographics don’t even begin to explain the Spelling Bee conundrum.

There are some other reasons that could explain this difference but in my opinion don’t do it adequately. The college educated Indian immigrant population is not a random sample from the college educated population of India. They represent the cream of the crop. I would have said ‘immigrant vigour’ was another contributing factor, but then America is a land of immigrants, so that doesn’t count.

How do you explain this mystery? Do Indian genes or the Indian family environment predispose us to be good at rule-based logical tasks (spelling bee contests are all about spelling rules and not about memorizing wayward English word spellings)? Does that explain the success of the Indian computer programmer as well?

I can’t say that I know the answers to these questions. All I know is that I would like Spelling Bee to be included as an Olympic sport. It would be nice to get a gold medal for a change.

New Bombay or Renew Bombay

A couple of weeks back I spent a day in Navi Mumbai with a friend. Every time I go there I am elated by what I see there – a great city in the making. But I am also saddened. Is the only hope of urban India to build new cities? Are today’s cities doomed?

For those not familiar with it, Navi Mumbai is a 344 sq. km area on the mainland next to Mumbai. It was developed with the objective of decongesting Mumbai, which was (and still is) the land of promise in India – a cross between LA and New York with its Bollywood and Dalal Street. Unfortunately, it is a strip of land largely surrounded by the sea and its growing population had no room to expand.

CIDCO (‘we make cities’), the organization that was entrusted with the task of developing Navi Mumbai has done an all around fantastic job. It not only planned and developed the land, it also undertook much of the housing construction there, when no builders thought it would be worth their while. CIDCO continues to plan and develop and run civic services in Navi Mumbai. The results are fantastic and are noteworthy in three seminal ways.

One, Navi Mumbai is a planned city. It is laid out with what I am sure is a Master Plan behind it. It reminds one of the Chandigarh in my school days with numbered sectors and roads intersecting at right angles. Two, the infrastructure is remarkably good – roads, bridges, rail, optic fiber…it’s all there and well maintained. The administration actually runs a surplus and at this time the sale of land must be so profitable for it that investing in very good infrastructure is feasible.

But the most visible difference between Navi Mumbai and Mumbai itself is the almost complete absence of illegal construction and slums. Enforcement of property rights is complete. And that is what is amazing.

I see a great future for Navi Mumbai. There are big corporates like Reliance that are making big bets on Navi Mumbai. I think that is good for Navi Mumbai and for Mumbai itself. Mumbai can’t handle its urban crisis itself, so a helping hand from a satellite city should be welcome.

Cities like Mumbai and Bangalore are crumbling under the pressure of rapid growth. But growth is really a handy excuse. Its not like you couldn’t see it coming. Its just that it was nobody’s  problem. Unfortunately, urban development is a long cycle endeavor. Developing urban infrastructure with foresight is a waste of time for an elected government. Its benefits are not seen by the electorate in time for the next elections. On the other hand urban development is a most lucrative opportunity for corrupt politicians and bureaucrats. Planned development that benefits future administrations versus builder driven development that lines ones pockets today – the choice is easy. Even if one is an honest administrator, doing the right thing will require you to fight so many vested interests, why not let sleeping dogs lie?

Which is what saddens me. Is the difference between Navi Mumbai’s rise and Mumbai’s meltdown a matter of new versus old? Or is it the difference between governance by an elected government and a state corporation (CIDCO)? Either way, the odds are stacked against today’s Indian metros. We need strong leaders and able adminstrators. And citizens who care.

Paperbacks in India

Every trip to India, I bring back half a suitcase full of books. My wife is a voracious reader of fiction and she reads a lot of Indian fiction too. Also, we want our children to read Indian mythology and other Indian stories and it’s impossible to get Indian childrens’ books in the US (there’s eBay retail opportunity for someone out there).

Of all the reasons why I buy books in India, cost is not one of them (unlike for Hindi film music and DVDs where there is a cost arb opportunity). But I think I may have to reconsider. I had just bought The Argumentative Indian’ by Amartya Sen in the US before going to India. It was the hardcover edition and cost about $25. In India the same book was available in paperback for less than half that price.

I know what’s going on of course. A book is an information product (like music, magazines, software and cinema). All of them are digitizable and the medium that carries them is immaterial (more or less) to the enjoyment of the product. All information products have a similar business problem. The marginal cost of producing the next copy is minimal and so variable cost has no bearing on the pricing of the product. For instance, the cost of a blank CD disc is insignificant compared to the price of the CD. So how does one price such a product?

In the case of books, the cost is not insignificant but it is much less than the price of the book (20% of the cost of a hardcover). So how does one price a book? The main technique is what I will loosely call ‘windowing’, though this is a term more widely used in the movie business. Publishers first come out with hardcover editions for (in the US) a $20+ price. With this they cover the well informed, price insensitive crowd. After a year or so comes the paperback with a price of around $10 that caters to the more price sensitive crowd.

However, there is another problem that publishers must deal with. Readers in different countries have vastly different purchasing power. How do they preserve their pricing model in the developed world without losing readers in developing countries like India? In the past they would just delay the launch of the book in India. However, in today’s global village, the media buzz around the launch of a new book creates demand everywhere at the same time. Postponing the book launch in India could mean lost sales.

So the solution is to launch relevant books in India simultaneously (or closely after) with the US market, but go straight to paperback. The different covers in a way justifies the different prices. For me, this is great news. I hate buying hardcovers because I do most of my reading on long flights and that is just extra weight to lug around. But many times, I just can’t wait. Paperbacks in India are like having your cake and eating it too.

Pricing of information products is one of the most fascinating subjects in business. My own company sells an information product. Many an hour has already been spent on how to price it. I’m sure this is not the last time I’ll be talking about this subject on this blog.

The Competitive Indian

Last week I did some travel within India while on my trip here. On the Mumbai to Bangalore trip I saw something really fascinating. The flight was more or less on time. When it landed in Bangalore, the airplane had barely steadied itself after landing (still taxiing) when about a quarter of the passengers on board stood up and started taking their things out of the overhead compartments. The plane was still taxiing when there had formed a line at the door. The stewardesses repeatedly announced that the plane had not reached the gate and that passengers were required to be in their seats, but to no avail. These were people in a hurry.

On the next leg of my journey from Bangalore to Delhi I did not see this rush for the exit. Which is surprising if you know Dilliwallahs. So I wondered a little about it.

Later, I came to this conclusion – the people who formed the line knew that there was an aerobridge at the Bangalore airport. Therefore, if they got off the plane first they would actually get out of the airport first if they didn’t have checked baggage. In Delhi there was a bus to ferry us to the terminal and so there was no advantage in trampling over old women and children to be first off the plane. If my conclusion is correct, we are in for more stampedes as our airports modernize and have more aerobridges. Sobering thought, that.

In a more serious vein, is all this competitiveness good or bad for us as a nation? (Some of you may contest this conclusion that we are ultra competitive simply by pointing to our cricketing performance). I think that on balance it is good for us. While we do have to put up with the occasional dent in our Honda Accords from aggressive SUVs, it still has its advantages. It is Darwinism at its best. The students coming out of colleges today are tough. They know that if they don’t make it in the job market there is no social security safety net to break their fall. They also know that in the growing private sector the only thing that matters is merit. Hard work will pay. And when they do start making the big bucks, the marginal rate of tax is a moderate 30-35%. Compare this with the European social states where you can maintain a pretty good lifestyle on dole but if you make the mistake of working hard for a decent income, the state can take more than half of that away from you in taxes.

So the next time someone cuts into the check-in line at the airport in front of me, I’m going to think calm thoughts. Here’s someone who wants to get ahead in life, I’ll tell myself. May his tribe increase.

Back to school

I am on a trip to India. We just closed our funding. Now the action in India is going to be thick as we build our team in Mumbai. The quality of people we hire is going to be the single most important determinant of our success. And so the opportunity to go talk to students at the premier business school in the country was almost impossible to turn down.

One of us was invited to go talk to a forum at IIM Ahmedabad that comprises of students interested in startups. Either doing a startup or joining one. Since I was in Mumbai and this was over the weekend, I decided to go as well. I hadn’t been there for over 10 years (I graduated in 1989) and needed just an excuse to visit the alma mater.

I went there with some trepidation. IIM A is not known to produce your entrepreneurial sort. Most students have little or no work experience, and perhaps rightly so, seek to get some. And there are all kinds obscenely high-paying jobs in India and abroad in investment banking, management consulting and other spheres that are just waiting to be landed.

I was pleasantly surprised by the turn-out. There were about 40 students from both PGP I and II (first year and second year). They were engaged and had good questions. In the break I learnt that many of them were choosing not to take up jobs but instead start a new venture immediately. I thought that was just great.

I also caught up with Prof. Arvind Sahay who teaches Marketing at IIM A. Arvind and I were in the same graduating class from IIM A. Since then he had done a Ph.D from UT Austin and had taught for a while at London Business School. Next stop – Ahmedabad. It seems many Indians abroad who are doing well in academia are heading back to quality institutions like IIM A. Arvind reeled off an impressive list of recent hires. This is great news. The 1990s weren’t the most exciting times for IIM A. Now a new generation of faculty is injecting much needed change. There are new courses, new programs (like the PGP Ex on the lines of ISB) and a lot of investment in the right things. The new campus is still not done but it looks quite impressive. Different architectural theme from the old campus, but retains some of the old flavour.

It felt good to go down memory lane a bit too. For those in the know, the magic of Louis Kahn Plaza at night does not diminish with time.


Here’s another one for Things That Don’t Make Sense To Me.

In Indian restaurants, why is the quarter plate kept on the left of the plate? Think about it. We’ve been brought up eating with one hand – the right hand. Assuming the rotis go on the quarter plate shouldn’t they be on the right? Why should the table be set by Western customs?

And while we’re on the subject, should the glass be on the right or the left? My vote is it goes on the left.

Indian Real Estate Funds

The world of business is fascinating. There are parts of it that are science – you can predict outcomes based upon the conditions and a set of rules. Or you know that you could if you knew enough about the rules and could measure all the conditions. And there are parts of it that aren’t science. Or if they are, they are more of a ‘social science’. I find joy in both CAPM and Leadership theory. Both make sense to me.

But then, I have another category – Things That Don’t Make Sense To Me. Over time I have generally found that most things in the TTDMSTM category don’t make sense to me only because I haven’t found the answer to my question, or haven’t found the right person to ask. But sometimes they just don’t make sense. The Indian Real Estate Funds question is one I have put to many people and haven’t yet found a satisfactory answer. So if anyone out there has a good answer I’ll be eager to hear from them. Here it is:

In the US there is a vehicle called REIT, which is essentially a publicly listed company that invests in real estate. Management fees are low and they are available to the public to invest in (both facts are linked in a way).

In India in the last few years real estate funds have been mushrooming like rabbits. Every company that has an asset management side of the house, and many that don’t, either has a real estate fund or is starting one. Which is not surprising, since the thesis that real estate is a good investment in a booming economy with crowded cities is reasonable. However, all these funds are structured so that they make a lot of money for the fund managers at the expense of the investors. Most of them have the economics of a Venture Fund – 2% Management Fees; 20% Carry. (20% Carry means that the Fund managers will keep 20% of the returns of the Fund over a certain hurdle rate of return).

There is a big difference between the risks in a Venture Fund and a Real Estate Fund. VC thumb rules say that a third of a VC’s investments go bust, a third are chart-busters with the remaining third somewhere in between. This is a high-risk business. It is also a business where the expertise of the fund managers in attracting and backing good ventures hugely determines the success of the fund.

Investing in real estate is not like that at all. The risk on individual properties is much more contained. Also, the level of expertise is not that high. A local real estate broker will know far more about a property than an MBA who manages the fund. I am not saying that the quality of management, the reputation of the firm and so on doesn’t add value, but 20% carry for just diversifying one’s real estate holdings sounds like a ‘get rich’ scheme – for the Fund managers.

As you may have guessed, I have so far not bought into any Indian real estate fund. If they come up with a REIT like instrument that is publicly traded, regulated and has low mutual fund like fees, I will gladly invest in that. Or if someone can explain what justifies the fees. If it is simply supply and demand for such funds, that’s not a good enough reason. I’ll wait.

Before you get influenced by this post, let me tell you about another TTDMSTM of mine – GOOG (Google). For a long time, my wife was on my case to buy GOOG. I didn’t. My reason – its P/E didn’t make sense to me. Where were they going to get that kind of growth from? Recently, when GOOG dropped over 20% from its high of $475, I told my wife that I felt vindicated about not buying GOOG. She sneered "I told you to buy it at $180!"

Company structure – Cross border issues

When we set up our company we went through some very detailed thinking on how to structure the company. Our business model involved research operations in India but our markets were going to be largely in the US and other developed markets outside India. We ended up incorporating in the US with a wholly owned Indian sub, which is kind of the vanilla solution, but in the process went through a decision process that may be interesting to other entrepreneurs.

Some people we talked to had set up a corporate structure that was designed for tax efficiency. They had a holding company in Mauritius or some other zero tax country, with subs in every country that they operated in. This gave them a very flexible corporate structure with great tax efficiency. Any of the subs could be sold or go public independently without an incidence of capital gains. And so on.

Another thought was to incorporate the parent company in India and have a wholly owned sub in the US. That had corporate income tax advantages as well as tax advantages in the event of a liquidity event. Also, doing an IPO in India would have a lower bar and probably get a better valuation as well.
In the end we decided to incorporate a Delaware company and have a wholly owned sub in India. While this is almost certainly less tax efficient it has other advantages that don’t show up on a spreadsheet exercise. If you are looking to get quality venture money into the company (and we are), you can’t go wrong with a US company. US VCs are comfortable with a US legal jurisdiction and not all of them are completely open to an Indian jurisdiction. Indian VCs on the other hand regularly fund US incorporated companies.

Also, the management of the company is largely in the US (4 out of 5 founders are here). Being an Indian company makes it operationally a tad more difficult. For instance, under Indian company law, board meetings must be attended in person, not on the phone.

In the end, the argument that tipped the scales for us was ‘simplicity’. The US-parent-Indian-sub structure was simple and a natural fit. Anything else would have made things complex to manage and complex to explain to an outside investor. Sure, we would probably have liked to have been more tax efficient. But then you have to make a whole lot of profit before you start worrying about the income tax on it!

While this solution works for us, everyone has a different business model and their own preferences. Be sure to talk to a lawyer and an accountant who know cross-border issues. And don’t forget to check within your network of entrepreneurs.