Saturday, January 29, 2011

Western leaders get sage advice from Indian experts at Davos

Montek S. Ahluwalia, Deputy Chairman, Planning...Image via Wikipedia
Montek Ahluwalia
The sage advice at Davos came from the Deputy Chairman of India's Planning Commission, Montek Ahluwalia who suggested to the captains of finance in the west to invest in the emerging market economies that are readily offering returns averaging 6 to 8%. He further cautioned against investing in highly complex financial instruments, such as derivatives, who he termed as opaque.
Montek Ahluwalia, a senior Indian policymaker who is deputy chairman of his country's planning commission, suggested that instead of repeating their ill-fated quest for ever more opaque derivatives, banks should direct their money towards rapidly growing nations – citing growth rates of 6% to 8% forecast for India and China this year.
"If they really want high returns, that's where their capital should go," said Ahluwalia. "We will not be helped if too much financial innovation is producing instruments that aren't competitive and which we know are actually hugely risky."
Davos summit leaves David Cameron and George Osborne feeling bruised | Business |
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Friday, January 28, 2011

Crystball forecasting

Cover of "This Time Is Different: 
Eight C...Cover via AmazonMore of ten than not, the economic forecasts are wrong.   The economists are often found revising their forecasts as new and updated data reveal a departurefrom the forecast.

The Economist magazine published the following on why bother with forecasting.

26 January 2011 
Davos 2011: Why do economists get it so wrong?

By Tim Weber
Business editor, BBC News website, Davos

Where are the economic bubbles? How fast will China grow? When and where will the debt crisis strike? How large should the economic stimulus be? And at its most basic: when should I invest, and where?

There's just one problem: economists have a poor track record for getting it right.

So what are "the perils of economic prediction"? A session at Davos tried to find out, with five of the world's top economists at hand to defend their profession.

It's all a question of timing

Nearly every economic forecast will come true at some point. It's just a question when. Poor economic forecasts can be a bit like a broken clock; it shows the correct time twice a day, when the hour comes around.

Still, economists can see where the problems are, and sense who is vulnerable to a crisis, argues Professor Carmen Reinhart from the University of Maryland, and author of "This time is different: eight centuries of financial folly".

Africa's economy was notoriously difficult to predict, says Raghuram Rajan
But if you want to get the timing of a crisis right, then "good luck with that," she says.
IMF Chief Economist Raghuram Rajan at the Worl...Image via Wikipedia
Prof. Raghuram Rajan
"We always failed to predict the [economic] turning point," admits Raghuram Rajan, looking back at his days as director of research at the International Monetary Fund (and now at the Chicago Booth School of Business).

"We were always wrong on Africa," he says. His team would issue a forecast for the continent, then conflict would break out somewhere, making the local economy plummet 20%, wrecking the prediction.

Weather forecasts are easy

If economics is a science, then it's not a very exact one.

Think how difficult it is to predict the weather. Overall, though, weathermen do ok, because they know their limits; they look four or five days ahead, but not much more.

Economists, in contrast, have to make long-range predictions. To make matters worse, like weathermen, economists rely on mathematical models. And here's the flaw, argues Robert Shiller, economics professor at Yale University.

The weather follows certain immutable rules, so its models can be based on experience.

It's different for economists. Their models are based on what used to happen, but the ingredients of the economy - humans, resources, wars, natural disasters, technology etc - change constantly.

Economic models are flawed, warns Robert Shiller
"The economic profession got too much in love with its models," says Professor Shiller.

And do these models take account of all factors? Emerging markets are attracting huge investments, but is that because economic fundamentals have changed, or because US interest rates are low and investors are searching for higher returns, asks Professor Reinhart.

And then there is human nature, with people always saying that rules apply to other people only. After the Mexican financial crisis in the early 1990s, she remembers, Asians said that these things happen only in Latin America - only for a similar crisis to hit Asia a few years later.

The right kind of economics
So it's not always the economists' fault; it's people who pick and choose what they want to believe.

Joe Stiglitz, former chief economist at the World Bank, recipient of a Nobel Prize in Economics and now with Columbia University, says the financial crisis did prove economics right, it's just that most people applied "the wrong economics".

And there is still a lot of work to be done. Professor Shiller apologised to the audience when he briefly delved deep into a mathematical model - "is anybody still with me?" - but he wanted to make the point that economists were still struggling to understand the feedback loops of the credit crunch.

Why bother?
Paradoxically, while everybody knows that forecasts are mostly wrong, "everybody still demands them," said the senior economist of a large banking group, speaking off the record.

To make things worse, he said, economists - just like investors - were suffering from a very bad case of "group think" where "everybody is unwilling to stick their nose out" and challenge the consensus.

"If you step outside the comfort band of the consensus forecast," agrees Simon Johnson from the MIT Sloan School of Management and another former IMF chief economist, "you get beaten up, you can risk your career."

This consensus, in turn, will make an impact, warns Professor Stiglitz: "If the chairman of the Federal Reserve says we have a new paradigm, and other economists say he's wrong, who will people believe? People will believe the Fed, and that in turn influences the economic outcome.

So why bother with economic forecasts?

"It's a starting point for analysis or discussion," says the chief executive of a large asset management firm, "but you don't have to believe it... economists are just one input among many."

So how often do the economists advising his firm get it right?

He shrugs his shoulders: "Oh, about 3 or 4 times out of ten."
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Tuesday, January 25, 2011

Retail sales rose in November

According to Statistics Canada:

Retail sales increased 1.3% to $37.3 billion in November, reflecting growth at most store types. This marks the sixth consecutive monthly rise in sales and was the largest increase since March 2010.

Sales in volume terms also rose 1.3% after being flat the previous month.

Gains were reported in 8 of 11 subsectors representing roughly 90% of total sales.

In dollar terms, the largest increase among all subsectors was a 2.7% rise in sales at motor vehicle and parts dealers. This growth resulted mainly from a 3.6% increase at new car dealers, the seventh consecutive monthly increase for this industry. Recent strength in sales at new car dealers reflects higher sales of new trucks and used vehicles. Gains were also reported at automotive parts, accessories and tire stores (+8.3%), a fourth consecutive increase. Declines were reported at used car dealers (-1.3%) and other motor vehicle dealers (-9.8%).

Sales at food and beverage stores increased 0.8%, following declines in each of the two previous months. Gains were reported by all store types in this subsector. Higher sales at supermarkets and grocery stores (+0.7%) accounted for almost two-thirds of the increase.

Friday, January 21, 2011

Walmart to guard American waistlines

OAKLAND, CA - JANUARY 08:  The Wal-Mart logo i...Image by Getty Images via @daylifeWalmart has announced that it will help Americans get back into shape. Americans have became obese at a very fast pace in the past 20 years. Obesity is becoming even more pronounced in children. One of the causes of childhood obesity is junk food, which is cheap and rich in carbs and Sodium.

Walmart wants to help Americans take control of their guts. It plans to make healthier foods cheaper, thus providing an incentive to consumers to prefer healthier foods over the junk/fast food.

It sounds mighty altruist of Walmart. However, we are only a few years away from new taxes on junk food to make them less atractive and also to help the State foot the bill for diseases related to obesity. Higher taxes on junk food will be similar to taxes on cigarettes designed to increase with the increase in the healthcare costs associated with obesity.

McDonalds must be taking note of these developments. It contributes handsomely to the nation's GDP and to the waistlines of lower middle class Americans.

My guess: 20-years down the road, Golden Arches will be known for their 0 carb salads than for the bucket-size pop and brick-sized burgers.
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Collapsed housing

The housing starts in the United States are not getting a fresh start. The decline that lasted through the recession was reversed only for a short while.

However, a close-up of the past couple of years in the time series suggest that the housing markets in the US are still in uncertain times. The sustained decline in the number of housing starts is reflective of a declining demand in housing, which would result in further decline in the price of housing assets.


Thursday, January 20, 2011

Hamburg Port may lose business because of inadequate depth

Germany’s Asian Gate Threatened by River Elbe: Freight Markets

Jan. 20 (Bloomberg) -- Germany’s largest container port may lose the world’s biggest freight ships to Belgium and Holland unless it can push through plans to deepen the River Elbe.

Environmental groups and a neighboring state opposed to the 385 million-euro ($516 million) project have delayed it for three years, preventing the biggest container ships from entering the northern port of Hamburg at full capacity. Shares of Hamburger Hafen und Logistik AG, which handles two thirds of the containers that go through the shipping hub, have dropped 42 percent since 2007.

“It’s extremely important for the investment case that this gets done,” said Igor de Maack, who helps manage 5 billion euros at DNCA Finance and Leonardo Invest Fund in Paris, including Hamburger Hafen stock. “I hope the Germans will make a wise decision as this port matters a great deal for trade and for Germany as an export-dependent nation.”

Europe’s largest economy is increasingly reliant on exports to Asia, 71 billion euros of which went by ship in 2009. Hamburg handles 25 percent of the country’s sea-bound exports, and Asia accounts for almost 60 percent of its cargo volumes. Shipping companies have increased orders for big vessels that are used mainly on Asian routes and which often sit too deep for the Elbe when fully loaded.

Market Share

“Hamburg will continue to lose market share to competing north-range ports unless they improve access,” said Peter Meany, head of an infrastructure fund at Colonial First State Global Asset Management in Sydney that holds Hamburger Hafen shares. “The situation not only impacts volumes but also dilutes the pricing advantage of Hamburg’s geographic location.”

Ports around the world are preparing for bigger ships. A.P. Moeller-Maersk A/S, owner of the world’s biggest container liner, has readied facilities in New York and Houston, and the ports around Charleston, South Carolina, are dredging to accommodate larger vessels.

The waterway connecting Belgium’s Antwerp port with the North Sea was deepened last year, and Germany’s Wilhelmshaven is also being prepared to handle the world’s biggest ships by 2012. Holland’s Rotterdam, Europe’s largest port, can already handle them and is investing to expand that capacity further.

“The adjustment of the navigation channel in the inner and outer Elbe is of fundamental national importance,” said Claudia Sye, an infrastructure expert at the Hamburg Chamber of Commerce. “Further delays in the process of implementing the adjustments may involve significant losses of cargo traffic and deteriorating future prospects.”

Flooding Fears

The project to deepen the Elbe, now scheduled to proceed toward the end of 2011, has pitted Hamburg against the neighboring state of Lower Saxony, which shares the river and must agree to the plan. Lower Saxony officials are concerned that a deepening would increase the impact of the tide and waves on the levees that protect its citizens against floods.

“Economic development is very important to us, but the safety of people is our highest priority,” said Jutta Kremer- Heye, a spokeswoman for Lower Saxony’s environment ministry. The state has yet to receive an amended proposal and will probably make a decision on it in March or April, she said.

Environmental groups such as Friends of the Earth Germany say dredging the Elbe is unnecessary and would threaten its ecosystem. The river, which was just three to four meters deep in Hamburg at the start of the 19th century, has been deepened seven times since 1850 to cater for bigger and bigger boats, according to the port authority.


High Tide

Today, vessels with a maximum draft, or water depth, of 12.8 meters can use the port with ease. During high tide, ships sitting 15.1 meters deep in the water can navigate to Hamburg from the North Sea, according to Bengt van Beuningen, a spokesman for Port of Hamburg Marketing.

The Maersk Emden, which visited Hamburg last week, is 366 meters long, 48 meters wide and has a maximum draft of 15.5 meters, according to the Port of Hamburg website, meaning it couldn’t carry its maximum load of 13,100 containers.

“These particularly large ships are used primarily in trade with China and Asia, markets in which the Port of Hamburg is the leading transshipment port in Europe,” said van Beuningen. “Any loss of services or a decline in foreign trade would not be positive for the port business.”

Asian Trade

It wouldn’t be good for Germany either. Its exports to Asia are growing more than twice as fast as sales to other euro-area countries. Sales to Asia jumped 32.1 percent in the first 10 months of last year from the same period in 2009, Federal Statistics Office data show. That compares with a 13.4 percent gain in exports to the euro area.

Hamburg businesses and politicians say deepening the Elbe is crucial to the city’s competitiveness and retaining jobs in the region. Some 165,000 people in Hamburg and 275,000 people in Germany rely on the port for employment.

Those jobs could be compromised if the port is unable to service the growing number of large vessels.

In 2009, a fifth of the 10,871 ships that visited Hamburg required assistance from the tide. Of those, 712 were more than 330 meters long. That number rose to 827 last year and is likely to increase to more than 900 this year, according to the port authority.

Vessels able to carry more than 8,000 containers made up a record 80 percent of orders by volume for the first 10 months of 2010, surpassing the previous peak of 66 percent in 2007, according to Clarkson Plc, the world’s largest shipbroker.


For now, shipping companies are giving Hamburg the benefit of the doubt.

“We believe the port of Hamburg is taking all the necessary measures to cope on time with new requirements made by the world’s largest shipping lines,” said Marie Lopez, a spokeswoman for Marseille-based CMA CGM SA, the world’s third- biggest container shipping company. “The dispatch of very large vessels should be facilitated in the coming months and years thanks to the deepening of the channel in the River Elbe.”

Hamburg Mayor Christoph Ahlhaus is confident that work on deepening the river will start on schedule later this year.

“I am convinced that we can start work on the expansion this year as planned,” Ahlhaus said on Jan. 10 after a meeting with German Transport Minister Peter Ramsauer. “After adapting the project several times to meet environmental concerns, I believe that Hamburg can expect full support for the expansion, also from neighboring states.”

To contact the reporters responsible for this story: Niklas Magnusson in Hamburg at Cornelius Rahn in Frankfurt at

Wednesday, January 19, 2011

IndiGo orders 180 Airbus A320s worth $15.6 billion

Indian airline supporting Western business:

Private low-cost domestic carrier IndiGo has placed a firm order for purchasing 180 single-aisle Airbus A320 passenger jetliners, making it the largest single order for such a large number of jets in commercial aviation history.

IndiGo has signed a memorandum of understanding (MoU) for 180 eco-efficient Airbus A320 aircraft of which 150 will be A320neo's and 30 will be A320s. It will also make IndiGo a launch customer for the A320neo. Engine selection will be announced by the airline at a later date.

The Hindu : Business / Industry : IndiGo orders 180 Airbus A320s worth $15.6 billion

Tuesday, January 18, 2011

Electronic sales down in holiday shopping

Source: Haver Analytics

The retail sales data in the US are confirming what I had suggested  in an earlier blog about the slowdown in electronic sales in North America.

The sales data for the United States are suggesting that the electronic sales have followed a general downward trend since early 2009 and whereas furniture and home furnishing stores are showing a recovery as of late, the electronic sales are down by over 10%.

Smokers’ corner

The number is outrageously large: 3.5 million. Yes, it has been estimated that if the current trends continue, the number of Chinese dying annually of illnesses resulting from smoking will reach 3.5 million in less than 20 years. The Chinese government has to find a way out of this mess. It should not permit profiteering at the cost of public health. It’s bad economic policy.


Death of 3.5 Million Chinese Is Dismal Economics: William Pesek

Jan. 17 (Bloomberg) -- Anyone who thinks smoking isn’t government’s business should consider one number: 3.5 million.

That’s how many people in the second-biggest economy will die each year from tobacco use by 2030, according to a report by prominent Chinese health experts and economists. More than lives will go up in smoke. So will productivity, public money and growth.

China immediately should raise cigarette prices, increase health awareness and ban smoking in indoor public places. Yet instead of acting to protect consumers’ health, greed is distracting Chinese leaders from doing the right thing.

Call it China’s fiscal addiction. The huge revenues rolling in from state-owned tobacco producers are trumping the desperate need for anti-smoking measures. Never mind that untold millions of lives are at stake in the nation with the largest number of smokers. Smoking is big, big business.

China isn’t alone here. From Tokyo to Jakarta, government policies are putting tobacco profiteers ahead of public health. This isn’t just shameful; it’s also dismal economics that imperils the region’s future.

Look, I don’t smoke -- at least not willingly. When you live in Japan, you’re pretty much a smoker. The reason: Japan Tobacco Inc., the world’s third-largest publicly traded cigarette maker, is 50 percent government-owned. Any government getting a piece of tens of billions of dollars of domestic tobacco sales each year has zero incentive to hurt business.

Cheap Smokes

Yes, Japan has discovered no-smoking sections in recent years. It also upped tobacco taxes by 40 percent in October. Yet cigarettes are still so cheap that friends overseas routinely ask me to grab a few cartons for them when I travel (Note to customs officials: I always say no).

Developing Asia is the real problem, though. As Western markets like the U.S. and the U.K. tighten the vise on the tobacco industry, Asia beckons. In this way, cigarette hawkers are hardly unique. Whether you make cars, shoes, air conditioners, wine or movies, Asia is where it’s at in terms of sales growth. Cigarette executives are merely operating in the best interest of shareholders.

Economies won’t be so lucky. Tobacco’s road to Asia jeopardizes the region’s potential. The costs will be counted in huge jumps in medical costs and lost productivity in a region that needs increased efficiency to move up-market from sweat shops to information-technology campuses.

Growing Risks

If you wonder why China isn’t taking these risks more seriously, look no further than its regulatory framework. Its State Tobacco Monopoly Administration sets policies and enforces them, while also overseeing the world’s largest cigarette maker, China National Tobacco Corp. Talk about a conflict of interest.

“A snapshot of China’s smoking problem now looks like America in the 1940s,” Zhao Ping, deputy director general of the Cancer Foundation of China and co-author of the above- mentioned report, told reporters in Beijing. “People just don’t know the health risks.”

That report claims that last year it cost about 62 billion yuan ($9.4 billion) more to treat people for smoking-related ailments than tobacco companies generated in profits. That may not sound terrible in a $5 trillion economy. The current death toll -- about 1 million Chinese per year -- also sounds small in a nation of 1.3 billion people.

The problem is the trajectory of costs and deaths if China leaves this problem untouched. Current estimates have China losing as many people to smoking in a year as Lithuania has people. The risk is that this figure understates future losses in China, and elsewhere in Asia.

Financial Stability

“There is a link between tobacco use and economic and financial stability,” Douglas Bettcher, director of the World Health Organization’s Tobacco Free Initiative, told Xinhua. “So the government can’t turn a blind eye to tobacco control.”

What’s frustrating is how avoidable this unfolding health crisis is -- and what it says about Asia’s leadership. These incestuous ties between government and tobacco profiteers are a microcosm of things to come in Asia. To me, it’s a bit like a public official lining his energy-policy task force with industry cronies. Its means things may not end well for Asian consumers who should be encouraged to smoke less, not more.

Consumer advocacy groups are beginning to push back, as “American Idol” winner Kelly Clarkson can attest. Last year, she was embroiled in controversy over a concert in Jakarta that was sponsored by a tobacco company. After an outcry from Indonesian activists and fans, Clarkson dumped the sponsor.

We need more grass-roots pressure because not enough is coming from the public sector. Economic trends aren’t likely to generate much political will to rein in Asia’s growing tobacco habit. Not with governments struggling to generate tax revenues amid weak global growth.

Two years ago, top WHO officials said that 1 billion people might die of tobacco-related diseases this century unless governments get serious about this issue. As trends in China suggest, that prediction might end up being a conservative one. If so, Asia’s economic rise will come with a whole lot of coughing and wheezing.

Anyone got a light?

Gas pains

The consumer price index, it appears, is primarily driven by the gasoline prices. The graph below demonstrates the correlation between the two.

Blood libel

Sarah Palin has been denounced lately for her poor choice of words. She used ‘blood libel’ while defending herself against the accusations that she may have inadvertently motivated the man suspected of shooting a Congress woman, a federal judge, and scores others in Tucson, Arizona.

The use of the term ‘blood libel’ has been on the rise in the books published in English, according to the  millions of books scanned by Google. The graphic below suggests that there has been a resurgence in its use as of late, especially since 2003.


The biggest bang for the education bucks is not from Harvard

HMC SealImage via Wikipedia

Princeton, Dartmouth, Harvard, step aside. Usually these institutions are synonymous with the financial success of their alumni. However, Harvey Mudd College, a relatively unknown amongst the big-banner academic brands, returned the highest returns on education investment. According to a survey, the starting median salary of its graduates at US$68,900 far exceeded those earned by the graduates of the big named universities.

More on this is reported below.

collges-that-bring-the-highest-paycheck: Personal Finance News from Yahoo! Finance
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Thursday, January 6, 2011

US Census 2010

The US population counts have ben released. The red states have gained more population than the blue states. Michigan reported a slight loss.

Also, the increase in population in the states that grew the most was a result of increase in immigration and higher birth rates amongst the non-white Hispanics.

For details, visit:



From Audrey Singer, Senior Fellow, Metropolitan Policy Program

December 21, 2010 —

Nevada, Arizona, Utah and Idaho had the fastest growth this decade while slow growth was seen in Rhode Island, Louisiana, Ohio and New York. Michigan was the only state to see a decline.
Most people poring over the 2010 state counts are doing so with an eye to future elections, but it makes sense to proceed cautiously before drawing any hard conclusions about what that data mean in the political context.
Attention is focused on 12 seats in the House of Representatives that will be leaving slow-growth states in the Northeast and Midwest and moving to the South and Southwest as populations there continued to grow quickly.
Census 2010: America grew at slowest rate since the Depression
Texas is the big winner, with four new House seats. Since the states losing seats are usually regarded as blue, tending to elect Democrats, and those gaining seats are normally considered red, tending to elect Republicans, it would be easy to assume Tuesday's census release is good news for that party and alarming news for Democrats.
It's not that simple.
If we regard simple population change as an indicator of political power, the buildup in red states is indeed significant. However, early next year, the Census Bureau will release counts of the population by race and ethnicity. That number will show shifts of the population that official estimates have pointed to all along: The diversifying of the population is more extensive in areas of fast population growth.
Many of the states that have gained in their head count have gained non-white minorities, especially Hispanics. Estimates already show that four states that gained seats -- Texas, Florida, Arizona and Georgia -- are highly ranked in the Top 10 states for growth in the Hispanic population during this decade.
Moreover, more than half the population growth in those states alone came from increases in the Latino population. These additions were a result of net immigration and births in those states. While the large increase in Hispanics in these high-growth states includes some immigrant newcomers ineligible to vote, eligible Latinos tend to vote Democratic in most of the states that gained seats. That may change by 2012, but much will happen between now and then.
Putting this into further perspective, the U.S. population grew by 9.7% between 2000 and 2010, slower than any decade since the Great Depression in the 1930s. With the Great Recession taking hold at the end of the 2000s, slowing immigration and birth rates, it is possible that slower growth will continue, at least for the short term. Thus, the sizeable increase in minority populations comes at a time when the overall population is growing more slowly.
Thus the sweeping demographic changes going on in our nation are much more significant than just shifts in where people live. We are becoming more diverse, and, as many analysts have noted, we will be a white-minority nation in about 30 years. So simply looking at geography may not yield correct results when we're talking about how new populations may behave and particularly how they may vote.
The excitement that demographers feel about this once-a-decade population snapshot is likely overwhelmed by the enthusiasm of political analysts, who are busy discovering what state-level population shifts mean for state reapportionment and redistricting within states.
But as we can see by looking more carefully at the data, there is more to population shifts than a simple rearranging of the map based on total counts.
We're in for a much more interesting and challenging time than many people may believe.

In praise of the article

As a non-native speaker of English language, I have always struggled with the elusive article, especially ‘the’. When  should ‘the’ be used is not intuitive to me. Therefore, I rely on rules to determine when to use an article. 

Over the years one should not expect any change in the frequency of use of articles in English language. However, one could observe a significant decline in the use of the definite article (the) in American and British English. See the graph below, which shows that in American English the definite article ‘the’ represented 5.5% of the words used in the books published in English in the United States. These are the books scanned by Google as part of its initiative to digitize every published book. However, one sees a decline in the use of the article ‘the’ starting in 1970s. I wonder why. Is the language referring more to proper nouns and hence the decline in ‘the’. Also ‘the’ has been used much more frequently than ‘a’ or ‘an’.


The books published in English in England and scanned by Google present almost a similar trend, which is visible in the graph below.


Data through the history

Analytics and data are becoming ubiquitous in finance, politics, and other spheres of life, such as friendships where people now boast about how many friends they have on Facebook. It was however not very long ago that the word data was not even part of the everyday lexicon. See the graph below, which shows the evolution of the word data over the past 100 years in the books digitized by Google. The graph immediately below is that of word data used in books published in English in the United States. The y-axis presents the share of the word data in a given year as a percentage of all words published in books in that particular year.

Data saw an earlier increase in its mention in 1920s in American English. However, it was only in the 1960s when the use of data become more pronounced and remained so until mid 1980s. It was the period when Robert McNamara, the most prominent of all quants, tried to win a war in Vietnam by improving the analytics. He failed.  A decline in its mention is observed 1990s and then a quick reversal with a rapid increase in its mention from late 1990s to the first few years of the new millennium. The decline continues again in the mention of the word data.image

The graph below shows the same for books in English that were published in England. The decline in its mention in the past decade seems to be levelling off in the UK.


TATA Bye Bye

A car for 100,000 rupees has failed to tickle most Indian's fancy. Many might think it's the price (app. $2,500), still too high for the Indian consumers. I think it's the lack of parking that is also preventing TATA's Nano from taking over roads in India. The average consumer lacks space to park the car outside their homes (no space available inside the house) on narrow streets in most Indian towns. Furthermore, paid parking at work and other destinations further makes operating a car more expensive than a two-wheeler. Of course, fuel price differential between a car and motorcycle limits the possibility of making Nano the peoples' car in India.

I present two interesting views on Nano. First, from Professor Madhav Badami of McGill University in Montreal who pointed out the following shortcomings in Nano:

Working paper, IIM Bangalore (2008)

A Note on the Tata Nano, and its Implications for Motor Vehicle Ownership and Activity

Mr. Ratan Tata was reportedly motivated to develop an inexpensive car in order to have M2W vehicle users switch to cars because he was concerned for their safety -- it is not uncommon to have entire families, including small children and babes-in-arms, travelling on unstable M2W vehicles. Thus was the idea of the Tata Nano born.

Although it has been claimed that the low price of the Nano will cause demand for it to explode, and therefore, motor vehicle ownership and activity to further accelerate in India, it is doubtful to what extent this will happen, and whether those who currently use, or plan to purchase, a M2W vehicle, will opt for a Nano instead (Gupta, 2008; Guttikunda, 2008; Mohan, 2008b).

First of all, personal motor vehicle sales have already been growing very rapidly, even without the Nano – in fact, they nearly doubled, just between 2001-02 and 2006-07. In particular, car sales grew an astounding 22% just over the previous year, more rapidly than for M2W vehicles, which grew 11% over the same period. However, M2W vehicles continue to account for the bulk (78%) of all motor vehicle sales, and – this is key -- 85% of passenger vehicle sales (SIAM data quoted in Gupta, 2008).

Secondly, although the Nano has been proclaimed, with much fanfare, as the "people's car" on account of its low (by international standards) price of 100,000 rupees (approximately US$ 2040 at current exchange rates), the on-road price will likely be around 125,000 rupees for the basic model, and around 150,000 rupees for its deluxe versions (as against the approximately 205,000 rupee on-road price tag for the immensely popular Maruti 800, in its standard version). Further, one needs to consider the operating costs of the Nano over its service life, in terms of fuel, insurance, servicing, and maintenance, in addition to its capital cost, in determining its attractiveness to potential buyers.

Guttikunda (2008) and Mohan (2008b) have worked out the economics of owning and operating a Nano relative to a M2W vehicle for a middle class family. Whereas the annual payments for fuel, and loan servicing for a M2W vehicle would amount to 10% of the annual income of a typical middle class family, they would account for as much as 22% of this income if the family chose to purchase a Nano (Guttikunda, 2008). According to Mohan (2008b), given that a middle class family cannot afford to spend more than 15% of income on transport, the annual payments he calculates for fuel, loan repayment, insurance, and servicing and maintenance for a Nano would require an annual income that only about 20% of families command even in a wealthy city like Delhi (it should be noted that Mohan assumed a higher number of daily kilometres travelled than did Guttikunda).

Finally, as Mohan (2008b) points out, used air-conditioned cars in reasonably good condition have been available for 100,000 rupees or less. Yet, it does not appear that M2W vehicle users have shifted to these cars in any significant way.

Given the foregoing, and given the low operating and maintenance costs, high maneuverability, and ease of parking of M2W vehicles, it is not very likely that those who currently use or plan to purchase these vehicles will switch to the Nano. Neither does it appear to be likely that the Nano will lead to accelerated car ownership. The Nano is likely, however, to take a share of the high-end M2W vehicle market, and to some extent the low-end car market -- although it should be kept in mind that the annual expenses for the Nano are likely to be only around 10% less than for the Maruti 800. The Nano may also establish for itself a niche market, perhaps comprising second or third family cars (Gupta, 2008; Guttikunda, 2008; Mohan, 2008b). But a true "people's car" – assuming of course the desirability of the majority of Indians owning a car – the Nano will likely not be, in a country in which more than two-thirds of the population live on $2 per day. Indeed, as Mohan (2008b) observes, if the term people includes more than 70% of the population (which one hopes it does!), there can be no "people's car" in India.

Regardless of the effect of the Nano on motor vehicle ownership and activity, it may safely be assumed that a business as usual approach will sooner rather than later lead to an intolerable situation for all, including those in motor vehicles. This paper is an argument for a rejection of that approach, and for policy choices, challenging though they undoubtedly are, that will hopefully lead us to transport (or more precisely, accessibility) systems that are resource conserving, environmentally benign, and socially equitable, in Indian cities."

And from the Economist:

India cars: The one and a half lakh car


Tata Motors is trying a number of tactics to try and boost sales of the Nano, its ground-breaking low-cost car.

Sales in India of the much-lauded Tata Nano passenger car have dropped dramatically in the past four months, as surging raw material costs forced Tata Motors to raise the price of the car twice in that time. The price rises mean that the most basic version of the car no longer costs the original 1 lakh (Rp100,000; US$2,200). At the same time, the car's profitability is being dented all round as Tata is being forced to come up with new ways to try and shift the Nano.

In November 2010 (the latest figures available) Tata Motors delivered just 509 Nano cars to Indian consumers, according to the Society of Indian Automobile Manufacturers (SIAM). That equates to an 85% decline compared with November 2009, and was the car's lowest ever-monthly sales total since it was launched onto its home market 17 months ago.

Unfortunately for Tata, this was not a one-month blip. In July 2010, monthly deliveries of the car peaked at an impressive 9,000 units. In each of the subsequent four months between August and November 2010, however, monthly sales have crashed compared to the previous year. In the first 11 months of 2010, just over 71,000 Nanos were delivered to Indian customers.

Tata's Chief Executive Officer Carl Peter Forster has blamed the sales decline on the worsening availability of financing loans in India, as cautious banks become nervous about lending to low-income consumers, in case they default on their repayments. Yet purchasers of rival models do not seem to be experiencing the same financing problems.

On the contrary, new car sales in India are booming right now. In November 2010, new car demand leapt by 21% compared to the previous year. This followed an incredible October, when new car sales reached their highest ever monthly total, at 182,992, which was a 38% year-on-year increase. Indeed, the Indian economy is enjoying brisk consumer spending all round, driven by rapidly-rising GDP, which in the last quarter grew by 8.9% compared to last year. SIAM is now predicting that Indian new car sales will increase by at least 25% in the current fiscal year, which began in April.

Worryingly for Tata, there is unlikely to be any lift in Nano sales this month or next. October and November are the strongest months of the year in the Indian car buying calendar, thanks partly to the five-day Hindu festival of lights, Diwali. The downside of this sales rush is a two-month sales hiatus in December and January.

The one and a half lakh car

Almost certainly more relevant to the Nano's waning sales than any financing issues are the two price rises that Tata has put in place in the last five months. Tata raised the price of the Nano by 4% in July 2010 and then by another 9% in October. The cheapest variant of the Nano now costs around Rp140,000 (US$3,100). Crucially, this means that the car is no longer the one lakh car it was dreamt up to be. The 'one and a half lakh car' does not have quite the same ring.

These price rises are in direct response to surging raw material costs, especially in the two key commodities of rubber and steel. Ironically, it is partly the booming car sales in the two emerging Asian giants of India and China that has fuelled demand for these raw materials, which in turn has pushed their prices up.

Another reason for the Nano's sliding sales is the reports of fire or smoke within the car. Such reports first emerged shortly after the Nano's launch in mid-2009 and were the reason that many of its initial orders were cancelled. Stories continue to circulate, as does one particularly damaging photograph of a Nano that has spontaneously burst into flames.

Testing tactics

Tata has been forced to take drastic action to avoid inventory levels of the Nano building up even further. Production of the car at Tata's Sanand factory, in Gujarat India, is said to have stood at just 71 cars a day during the month of November, or 2,000 for the entire month. The factory, which only opened in July 2010, is capable of building 250,000 Nanos a year.

The company is pouring money into various sales and marketing tactics to try and shore up Indian sales. These include more than doubling its warranty repair period to four years or 60,000km, up from its previous 18 months or 24,000km. Tata executives point out that this makes the Nano even more economical compared to rival products as owners get free repairs for years.

In response to the waning number of loans available to would-be Nano buyers, Tata is also working hard to put a number of financing programmes in place. For example, India's largest commercial bank, the State Bank of India, is offering seven-year loans to Nano buyers with extremely favourable annual interest rates compared to their standard loans.

The carmaker is even now targeting the purchasing power of its own employees with their own bespoke financing scheme. From the beginning of 2011, all Tata employees with a monthly salary of over Rp12,500 (some 25,000 employees) can buy the car on a four-year loan with annual interest rates of just 2%, and no processing fee. This compares with the 14% interest rate for a normal car loan. Repayments will be deducted from workers' monthly salaries under the scheme, which is even open to blood relatives of employees.

If these tactics work, then Tata may be able to overcome some the problems caused by its rising prices. But it will still be some way from making the Nano a success. The car's utra-low price was always dependent on exceedingly high volumes, which is why Tata is working so hard to keep up the car's sales momentum. Nor were the array of expensive sales, marketing and financing tactics included in the Nano's original business plan, and nor indeed surging raw material costs. The profit margins on this vehicle were always perilously low. Right now, they must be non-existent.