Murdoch massacre!
Shareholders should consider son Lachlan's orchestrated axing a masterstroke of father Rupert

A media mogul with a $18 billion empire, six children, a wife 37 years his junior, an ex-wife and an unsteady succession plan; Rupert Murdoch's story has all the ingredients of a heady pot boiler. After the departure of his son Lachlan Murdoch the one time heir apparent from News Corporation on July 29, the 74 year old media genius has become the target of much derision. He has been blamed for the surprise exit of Lachlan and labelled senile, erratic, a tyrant and even been likened to King Lear.

Yet, like many pot boilers, the maverick media mogul might turn out to be the unlikely hero who has the last laugh. The official version for Lachlan's 'sudden' departure was that he wished to return to Australia along with his wife and infant son. Following this, Rupert Murdoch said: "I am particularly saddened by my son's decision and thank him for his terrific contribution to the company." The buzz is that younger son James, the current chief executive of News Corp's pay TV company, BSkyB in London, who is known for his affinity to new technology, is now preferred by Murdoch over Lachlan, less friendly with technology. In fact, discerning analysts see the typical streak of ruthlessness and ability to see ahead that has made Murdoch a legend in his lifetime. Even his fiercest critics have grudgingly admitted that Murdoch never lets emotions get the better of him while taking strategic business decisions.

Lachlan has been replaced by the Chief Operating Officer Peter Chernin who is widely credited with the wild success of the Fox network. According to Tuna Amobi, analyst at Standard and Poor's, "The Lachlan episode has been blown out of proportion and it is not a major issue for News Corp." Murdoch had gambled more than $500 million on China and India more than 10 years ago and the pundits had laughed at his act.

They don't laugh any more. The manner in which Murdoch has moved between countries and changed political support also reveals a keen business mind at work. An Australian by birth, Murdoch became a de facto British when his media empire took wings in England. When News Corp became a big player in the world's biggest media market US, Murdoch became an American citizen. For close to two decades, Murdoch's newspapers in England openly supported the Conservative party. When Tony Blair led the 'new' Labour party, Murdoch switched loyalties. Murdoch's Star Network beamed BBC into China during the 1990s. When the Chinese regime was furious at critical BBC stories, the channel was promptly dropped from the Star bouquet.

So, more than the picture of a helpless father with a weakness for children, the Lachlan episode reinforces Murdoch's image as a hard nosed visionary who is more interested in an enduring legacy in the form of a global media empire than heirs. Every time pundits have written off Murdoch, he has sprung a nasty surprise on them by growing even bigger. Shareholders need to understand that Rupert Murdoch's incisive acumen is what drives News Corp to newer heights; and one Lachlan leaving, does not news make. The odds are, Murdoch will ignore the derision and criticism even this time and continue doing what he does best: Build a formidable global media empire.

Destroy that long-term vision
Whirlpool should not go ahead with the proposed Maytag takeover

When Maytag was tagged for sale in May, 2005, the frontrunner for America's third largest home appliances company was the Chinese wannabe Haier. But after a spate of whirlwind protests, it is now the US market leader Whirlpool that intends to cough up $1.7 billion for Maytag. Now, there are lingering questions whether Whirlpool has rushed in where angels would have feared to...

In 2004, the combined sales revenue of both Whirlpool and Maytag was more than $18 billion, with a 48 percent market share, far more than GE and Electrolux. As is wont with such mergers, spin doctors at Whirlpool are painting a rosy post merger scenario, stating that Whirlpool will, in the long term, be able to "deliver cost savings, innovation and needed investment in Maytag's brands." Maytag, which owns popular brands like Hoover, Jenn-Air and Amana appliances, will in return, get the Whirlpool sales muscle. But the truth is, it is in fact Maytag that will gain much more out of the deal.

Quite simply, Whirlpool has acted as a white knight for Maytag, a company in significant decline this century. Maytag's annual growth rate, earning per share and dividend per share have virtually witnessed no growth since 2000. And its operating income has been falling continuously; reaching a dismal $40 million in 2003-04, barely one percent of sales. Further, the acquisition comes at a time when Whirlpool's sales in Asia especially China and India, the future markets are hardly 5% of global sales.

But most critically, Whirlpool has perhaps not accounted for a massive $3.3 billion in Maytag's debt and pension costs that are bound to drag down the company's bottom-line; apart from huge investments in supply chain restructuring.

Going by the past, RCA, a similar American consumer electronics giant, was almost but obliterated by Japanese and Korean brands, since it simply could not compete on price, due to bottomlines suffering because of acquisition of various companies. With Chinese brands like Haier, even fiercer a price warrior, does Whirlpool stand a chance? Unfortunately, no! Such acquisitions that are supposed to give long-term value would ensure that Whirlpool gets wiped out in the short-term. For a change, that longterm vision needs to be destroyed.

Blinding flashes of brilliance
Emerging markets hold the future for Qualcomm's new technology

If you thought 3G in mobile phones is the in thing, you might look outdated very soon. In a recent 4G master move, the $5 billion Qualcomm has spent $805 million to buy Flarion Technologies. For the newly inducted, Flarion owns Flash OFDM the most path-breaking 'killer' technology to hit mobile communication this decade that is expected to push the 3G market to extinction, by providing data speeds that are 10 times faster. According to Flarion's Vice President, Ronny Haraldsvik, Flash's "efficient use of radio spectrum" is its biggest innovation. Qualcomm straddles the CDMA platform as the clear leader; and with the Flash technology leap, needs to now convince mobile service providers to switch over from GSM platforms. At the moment, five GSM phones are sold for every CDMA phone sold in the market totalling 1.2 billion connections. But unfortunately, the biggest hitch for Qualcomm is its killing dependence on the to-be-merged Sprint-Nextel entity the largest mobile service provider in the US to kick start and deliver phone services using the Flash technology.

But then, historically, new-age technologies have found more acceptance in emerging markets, than in markets like US where customers are trapped by huge switching costs. Qualcomm could do well to convince service providers in China, Indonesia, Thailand and India to adopt this radically new technology. With more than 500 million subscribers and more than 5 million new consumers joining up every month, it is Asia, and not the US that will ensure Qualcomm's indubitable dominance of wireless mobile communication in the future.

Driving on the Detroit quicksand
Miller must take tough decisions to stave off Delphi becoming bankrupt

When Detroit sneezes, the auto companies might catch a cold. But auto companies could well catch pneumonia and head for the intensive care unit this time. In July, 2005, the $30 billion Delphi Corporation saw a new CEO Robert Miller, taking over. In time, he issued a terse statement: "We will consider other strategic alternatives, including Chapter 11 re-organisation." Chapter 11 is jargon for bankruptcy. Delphi is stretched to the limit, near to reaching the threshold of an allowed $1.8 billion credit limit.

But it's not time to completely write off the company. More because Miller has acquired a sterling reputation after turning around a once written off Bethlehem Steel. Yet, even he might find the task of salvaging Delphi a daunting challenge. Delphi's woes can be directly traced to parent company General Motors (GM) and the persistent decline in the fortunes of the world's largest auto company. The fact is, GM accounts for almost 50% of the revenue of Delphi; and the sinking parent is clearly dragging down Delphi.

The prime culprits are Delphi's unsustainable health and pension plans; and losses at GM - legacies that endure even after Delphi was spun off from GM in 1999. For the second quarter, Delphi registered a depressing loss of $338 million, and falling sales of $7.02 billion.

Before Miller staunches this flow of red ink, he will have to deal with the powerful United Auto Workers (UAW), who are simply not willing to allow Delphi lower pension and health costs. Delphi's current contract with UAW goes on till 2007. But by 2007, it might be too late.

Miller really has to take three hard decisions: First, Miller should convince GM to rescue Delphi; given the legacy they hold. If that fails, he should follow the examples of airline companies in the US and file for bankruptcy to get the UAW off his back. That will provide temporary respite. But in the long run, Miller can salvage Delphi only if he can drastically reduce the company's dependence on Detroit and find new buyers in Asia.

From American pie to Chinese noodles
Structural issues in China can spell doom for new internet ventures

Internet has found a new El Dorado China which is attracting Internet moguls like Yahoo!, Ebay, Amazon.com and Google. Yahoo! has recently invested $1 billion in Alibaba.com the largest e-commerce web portal in China. Terry Semel, chairman of Yahoo!, is talking of "explosive Internet growth in China" driven by "search, commerce and communication." Baidu.com the largest search engine in China bears further testimony. It traded at three times its offer price on the day it debuted at the stock market.

The 'Chinese Google' even has the original search technology behemoth, Google, holding a 2.6% stake. Despite these gung-ho parameters, things are not so rosy. Last year the Chinese government came down heavily on cybercafés, fearing an unhealthy effect on the Chinese culture. The moot point being that the regulatory patterns and business climate are typically highly controlled. Even though official estimates on internet penetration claim that China is second only to USA, the fact is that China commands only 7.9% of web penetration, compared to 67% in USA. The problem gets compounded with credit cards the standard route through which web transactions are done. China has an abysmally low credit card penetration of just 3%; and almost unheard of internet gateways supporting secure transactions.

These issues have the potential to seriously dent the e-retailing or net banking dreams of many players. Before jumping on the bus to El Dorado, companies must remember that they could also end up getting a one way ticket to nowhere.

The empire strikes back
Despite presumptions of analysts, ITC's new initiatives in the FMCG segment are bound to succeed

What does a company do when a bestselling brand becomes 'politically incorrect' and it is not allowed to advertise the brand? Simple, launch Wills Lifestyle Stores that will kill two birds with one stone: Cigarette smokers continue to be reminded of their favourite cancer stick, while upwardly mobile urban consumers look hip using Wills lifestyle products. But then, haven't we heard this before? What's new? ITC is now launching its personal care product range to strengthen its footing in the FMCG business. Branded as Essenza de Willis and meant for both men and women, the perfume range will target high end consumers. The company is also expected to launch soaps, creams and other personal care products. With already existing packaged food, lifestyle retailing, agarbattis, safety matches and stationary, it seems ITC is bracing up to make it big in the FMCG space.

The Chairman of ITC Ltd, Y. C. Deveshwar, now is attempting to achieve what his illustrious predecessors like P. N. Haksar and J. N. Sapru had always dreamt of: Shed the tag of a controversial cigarette company that was perpetually embroiled in excise evasion cases and create the reputation of being the most respected consumer products company in India. As Chairman Deveshwar stated in the recently held AGM: "We need to create multiple engines of growth, even as we keep looking at fresh opportunities all the time, at assets which will produce more value in the hands of ITC." So, can ITC leverage these strategies to attain market dominance?

Despite what market analysts might presume, the answer seems to be an emphatic yes! In the first quarter of 2005, ITC actually registered a record profit after tax of Rs.5.5 billion, a 20.1% growth. Interestingly, this was the highest profit for any quarter in the history of ITC. The truth is that the non-cigarette business is proving to be the main driver behind ITC's growth. The revenue from this segment had a gigantic100% growth, from Rs.1.05 billion in the first quarter of 2004 to Rs.2 billion in the first quarter of 2005.

The strongest core competence of ITC is the fact that the company straddles both the rural and the urban markets in the country better than any of the current competitors in the FMCG segment. The ITC e-choupal scheme a Harvard case study is perhaps the most successful technology strategy in rural penetration witnessed in emerging markets. At the same time, in the urban markets, ITC's biggest competitive advantage comes from its highly structured and long standing supply chain networks and retail channels that competitors would find enormously tough to replicate. With such twin stranglehold in urban and rural markets, ITC is undeniably poised to be the indisputable leader of the Indian FMCG segment.

Midwife crisis, generically though
Ranbaxy CEO Tempest's failure in US markets should not be a deterrent

Sales of dollar two billion by 2007! Doesn't it sound a little overambitious? Especially when one sees how Ranbaxy's strategy of concentrating on the US market seems to have backfired with profits dipping due to various reasons. Hailed as the true Indian MNC, the US market has been the cornerstone of Ranbaxy's growth. In fact, Ranbaxy has been operating in almost all the top markets for generic drugs and more than 70% of the company's revenues come from overseas markets. But Ranbaxy reported a dramatic 47% fall in its net profits for the quarter ended June 30. Net profits dropped from Rs.1.97 billion in the last quarter to Rs.1.01 billion.

Is it time for Ranbaxy to exit the US market? In reality, apart from increased R&D costs, Ranbaxy has suffered falling margins due to three main reasons. Firstly, Ranbaxy's gamble on the US generic drugs industry has been mirrored by the entry of a large number of competitors, due to many highly lucrative drugs coming off patent. Secondly, this has led to massive price cuts across the board throughout the US generic industry. Thirdly, even in niche segments, Ranbaxy hasn't been able to leverage price margins because US still follows government controlled regulated pricing and insurance reimbursement schemes that limit the number of drugs accepted for insurance claims. In spite of the sorry figures, CEO Brian Tempest commented that the targets were within reach, "We have committed ourselves to a series of strategic and investment initiatives that will equip the company favorably to achieve its sales mission by 2007." And he perhaps is not all that wrong.

According to IMS Health forecasts, the global generics market is expected to grow at 20% to reach a huge $80 billion by 2008. Generics is the future for drugs, and US is the future for generics. Current low profit margins are simply temporary structural adjustments and would necessarily disappear in the long run as huge supply demand gaps would encourage price increases for all players. Though Ranbaxy should surely look at diversifying its portfolio at other overseas markets too, the current setback should not tempt Ranbaxy to limit its operations and marketing exposure in the most lucrative market of the world.

The going 'Getz' tough, 'Swift'ly
If Getz can't beat Swift on pricing, it could well exit the segment

Getz and Santro are no longer zinging; Maruti Swift has usurped all the glory. In fact, it has led to a veritable bloodbath among auto majors. Second quarter results saw Hyundai overtaking Tata Motors to emerge as the number two automobile player in India. But the biggest problem facing B. V. R. Subbu, Hyundai President, is Maruti's Swift. Direct sales comparisons show Swift sweeping the Indian market with a tremendous reach of 86 percent; with a miniscule 14 percent achieved by Hyundai Getz.

The potent pricing strategy adopted by Maruti for Swift (Rs.387,000 for the base model versus Rs.450,000 tag for Getz) has provided an advantage to Maruti that Hyundai is finding extremely tough to break, despite consecutive price cuts in the past months. Hyundai's Subbu cannot afford to ignore this segment at all. Hyundai should know it already that the small and compact cars segment forms a staggering 70 percent of the overall auto market. This sector has also experienced superb annual growth rates exceeding 10 percent over the past five years. With a four months' waiting period on Swift, Maruti seems to have gained a suffocating and comprehensive price advantage, due to its existing economies of scale and scope, which allow it to manufacture its cars at average costs that are much lower than those of any other company in the Indian automobile industry. Unless Hyundai invests huge amounts in newer plants and infrastructure, it seems very improbable that it would be able to beat Maruti in this price war, especially using Getz. Exiting at this juncture should neither be shameful for Hyundai, nor a bad idea; for this segment seems to be lost completely to Maruti.

Waiting for the crash
Though the airlines industry is promising, only a few will fly

The Indian skies have opened up and many low-cost domestic airlines have literally grown wings. These airlines are creating ripples that are affecting even established players like Jet Airways, which recently slashed its domestic fares by up to 80 percent. The low-cost brigade created a stir recently when IndiGo, one of the airlines slated for launch in a few months, placed an order for one hundred A320 aircrafts at the Paris Air Show. Even Kingfisher Airline's announcement to buy five A380 aircrafts the largest in the Airbus fleet rocked the industry. Air Deccan started the low-frills race last year by introducing point to point flights at rock bottom prices. It was soon followed by SpiceJet and Kingfisher airlines. At least a dozen more are expected to join the fray soon and the list includes IndiGo, GoAir, Indus One, Air One, Paramount and Magic Air. Amusingly, current slashes across airlines in air ticket pricing have further narrowed the distinction between the so called low-cost and non-low-cost airlines.

With so many new entrants, and rampant price cutting, is the industry going to consolidate even before it opens up? Without argument, there are many challenges that current and prospective players would have to face in this industry. Fuel prices have started soaring with August seeing a 10% hike in aviation turbine fuel prices. Finding trained aviation staff is becoming increasingly difficult with salary costs jumping by over 50% in the last year. Of course, price wars would further result in falling margins.

A recent Morgan Stanley report has also been quoted as saying that that the lowcost segment might face execution risks related to huge capacities. Most encouragingly for these airlines, according to Centre for Asia Pacific Aviation, air traffic in India is set to increase by 5 million passengers annually for the next 10 years, while the domestic air passenger market is expected to grow by a massive 30% this year. Clearly therefore, even though the current price wars are more short-term in nature, only those airlines that have deep pockets are bound to survive the initial clear air turbulence. India has seen many airlines crash in the past, some more will only add spice.

The new East India Company?
Positive results hide Standard Chartered's missteps in consumer finance

It has been more than 150 years since Standard Chartered, the UK based bank, first opened a branch in India in Mumbai. Today its India operations are at an all time high. In its recently released profit figures for the six months ended June 30, 2005 India has replaced Singapore in contributing the second highest share of global profits after Hong Kong. Indian operations reported a 23.4% rise in operating profits to $137 million for the first six months, compared to $111 million in the corresponding period last year. The operating profits in the first half of 2005 exceeded the profits made in the full one year of 2004. Wholesale banking has been the main driver of Standard Chartered's India operations and rose by 20.2% to $107 million for the first half of 2005. "We are continuing to invest in growing our footprint to benefit from the scale and potential in India," asserted Bryan Sanderson, Chairman, Standard Chartered, through the press communiqué publicising the half-yearly results.

Unfortunately, such positive results seem to have blinded the bank's focus on the consumer financing sector in India. The bank's consumer finance business in fact suffered a major set back in the first half of 2005, dipping by 30% to $30 million from $43 million last year in the same period. Consumer banking is the most important sector in a high growth focused emerging economy like India; and no bank can think of future leadership in India, unless their presence in this segment is secure. Standard Chartered has a pristine opportunity to consolidate its position at this juncture, especially when by 2009 the Indian banking sector will be thrown open to all foreign players. Rather than focusing on agri-business or asset reconstruction, the bank needs consumer financing as the highest priority target.