Uncertainty: The Central theme of life

The events  across the world  today, especially in North Africa and the Middle East remind me of research work during my internship days with E.ON, UK (E.ON is one the world largest privately owned energy provider based in Germany).

The project was about exploring the UK energy market and how it will shape up and look like by the year 2020. As you might guess, studying and analyzing the present energy market scenario was the easier part but forecasting, and in some ways ,predicting the energy market 13 years in the future was really the tough part.

The project was 3 months and over 200+ articles, journals and government white papers long. It gave us (it was a group 3 people) insight about a lot of aspects other than just the energy market in UK. The project dwelled into various issues like market dynamics, geo-political equations, scenario planning, strategy and many others. Although it was not intended at all, but the central theme of our project came out to be UNCERTAINTY.

One would wonder, why uncertainty.  One can also say that something like uncertainty can be an easy scape goat if one doesn’t find answers to the events around you. Let me first define uncertainty- uncertainty can mean not knowing a specific fact or what may happen or how to do something” (Marsh 1998). As per (Courtney et al, 1997, pg 68) Another author defines it as “Underestimating uncertainty can lead to strategies that neither defend against the threats nor take advantage of the opportunities that higher levels of uncertainty can provide.”

As per (Porter, 1985) uncertainty has increased drastically over last decade. The increase in uncertainty has been driven by many factors. One of it is the ideological shift from centralized planning to free and open market dynamics where forces of demand and supply rule the market resulting into much complex socio economic systems (Schoemaker, 2002). Additionally, new and disruptive technologies are stimulating the pace of change.

It is important to mention the period of our project at E.ON. It was the year 2008, when US and the UK were hit almost out of the blue by the mighty recession. The recession which took along with it, organizations like the Lehmen brothers and many more financial institutions, in a matter of days. 2008, the year when millions were rendered jobless and in turn homeless across Europe and US. It was a time when the crude oil price touched an unprecedented all time high of $160/barrel in 2008. Analysists argued that China and India’s economies were growing at a hectic pace and the gulf war had taken a toll on oil supplies, hence the price rise. But then, the price came back right back to $60/barrel in 2009. As we all witnessed that these events had a spiraling effect on many other countries and got affected by it and till date are dealing with the after math. Some say it will take another 9 years more for US to fully recover.

One big blow after the other, and who saw them coming- NOBODY.  However, it is always easy to do a postmortem analysis of the situation and say that the sub-prime crises and the corporate greed were two prime reasons for it. Sure they were, but the point is, nobody saw it coming.

Fast forward to the present events of 2011, two north African nations Tunisia and Eygpt have had a Revolution, and  Libya is currently experiencing one. Truly a people’s revolution, led by the people of these three countries. How it happened, and what will it eventually lead to, is a different subject matter all together and needs to be dealt separately.  But at the cost of being repetitive- who saw it the revolution coming, the answer is a resounding- Mr. NOBODY.

You will soon see one thing getting affected by the other, the immediate one being the oil price has shoot up to $114/barrel from $93/barrel just 10 days back. The other more important being that many other gulf countries which are on the ‘edge’ may witness an uprising which can go either ways. So, no matter how much nations, or organisations hedge against such events, they are bound to be affected by them. No matter how much we plan for things, we are bound to be affected by such external/uncontrollable factors.

It is an uncertain world we live in. This uncertainty also gives rise to a theory known as the ‘Butterfly effect’ which can be defined as a small change at one place in a complex system, which in turn can have large effects elsewhere. Infact, many scholars, business gurus, financial analysists, economists are studying the subject matter of uncertainty and the buffer fly effect.

Although, during our project we came up with a strategy which would help E.ON achieve its objectives in the long term, but during the course of the research, I learned a very important lesson of my life, that life is uncertain. There will always factors beyond our control which affect us, not necessarily negatively all the time but also positively.

Uncertainty has dramatically increased over the last couple of decades, affecting business, jobs, politics and inevitably our lives. The changing milieu in terms of technology, markets and socio economic developments will force us to find new, different and innovative ways to survive and deal with uncertainty. There is no certain way to predict the future, infact, longer the time we plan and try to predict , higher is the uncertainty.  But there are ways to mitigate such high levels of uncertainty surrounding us…….well, I rather not give that away for now.

All I can say right now, my friends, is that sometimes in life don’t reason out the good and the bad events in life, the fact is that there are and will always be, some external factors which will make our lives eventful and at the same time highly uncertain. 

In the end I will leave you with the following thoughts, Imagine what if…….

US and UK attack Iran

Gulf countries decide to turn off oil supplies to the US

Terrorist take control of nuclear power plants or arms in Pakistan

Time travel becomes possible

India drops a nuclear bomb on Pakistan

Water becomes a scarce resource-price Rs.100/litre

Lastly, Bangladesh lifts the World Cup ’11…..Just kidding J

How paying more for 2G spectrum could have benefitted the Telecom Cos.

By now we are all well aware of the big hue and cry over allocation of 2G spectrum. And alteast one thing has come out clearly that due to the scam everybody i.e. the telecom cos., have benefited by the allocation in some way or the other, and so has Mr. Raja. Some telecom operators have got the spectrum at throw away prices and some are riding on other operators spectrum, in turn paying less for the spectrum actually allocated to them.

Therefore be it the new entrants or the old players in the telecom sector, both have benefitted from the pricing policy of issuing licenses. In both the cases be it in the year 2001 or 2008, there wasn’t any auction like in the case of 3G services. As we know that, an auction ensures that the highest bid get the license and more importantly the entire bidding process ensures transparency.

Therefore one would ideally say that if an organization is paying less for something, it would obviously save money and it will impact their bottom line positively. Right? Well, yes, but not all the time. Especially if you observe the telecom space in India.

Lets see how is that possible…

Ok, let us first understand for the economic point of view what is the market structure telecom cos are operating in. The Indian market was once monopolised by just one player- ‘BSNL Zindabad’. But now there are more than 15 players in the sector but the market share is concentrated in the hands of few players, to be precise only 4 players. Bharti, Voda, Idea, Reliance control more than 70% market share and revenue share. This is typically an Oligopoly kind of a structure where the power is concentrated in the hands of few players inspite of numerous players in the market.

Cheap licenses have meant higher EBIDTA for the telecom players, no doubt. Bharti for example is operating currently at 36% EBIDTA margin, Vodafone is roughly at 30% and Idea at 20%. So one can imagine what would be the EBIDTA levels before the competition actually crept in. Therefore one would conclude that by paying less for the licenses the telecom cos have actually made a lot of money.

Yes they did, infact if I was put it in economic terms, they have made ‘Supernormal profits’. Lets first understand what are normal profits. Normal profits by definition represents the ‘opportunity cost’ for an enterprise, since the time that the owner spends running the firm could be spent on running another firm. But, in case of supernormal profit the enterprise is not losing out on an opportunity cost as it is earning more than normal profits, therefore in simple terms he is happy running one firm. Infact, if you look around, companies are operating on wafer thin margin, e.g. manufacturing 5-10%, Petroleum 10%-12%, food and tabacoo 8%-12%.

Supernormal profits have a flip side. They attract competition. Lets say if one were to start a business, one would obviously look for something to invest in where one would be assured of more than average profit. That’s a no brainer, right? And that is what exactly happened in the telecom sector. It attracted competition from all over the world and even enterprises who didn’t know head or tail of telecom, case in point- Unitech. So economically speaking, as new firms enter the industry, they increase the supply of the product available in the market, and these new firms are forced to charge a lower price to entice consumers to buy the additional supply these new firms are supplying (they compete for customers). Time to go back to the basics, excess supply of goods and services results into lower prices and lower prices means lower profits.

Now let us say that the telcos would have got their 2G licenses through an auction just like they got them for 3G services. All of them would have been very careful in investing their money, just like they were during the 3G auction. They would been very selective in choosing the circles where they wanted to offer the services to the customers, just like 3G. They would have done a backward calculation in terms of their NPVs and IRRs, just like in 3G. And most importantly they would have send out a very strong signal to other companies, that this is an expensive business to be in, and the entry barriers are high, very high. That is what has happened in the 3G auction, handful of telcos have opted for 3G and ones who have opted have opted for even fewer circles.

Things have a strange way of balancing out and finding an equilibrium, be it life or business. In the long run it all evens out. Today, so many players have entered the telecom sector that the average cost of providing the service is same or lower than the break even point of offering the service, in which case profits slowly disappear. And when this happens then the companies outside the scenario don’t see any advantage in entering the industry and finally price of the goods and services stabilizes.

Therefore, some times my dear friends, it not a bad idea to follow the rules of fair pricing and save yourself from a lot of trouble in the long run.

Industrialization and Onion prices

A loose disscusion on Linkedin, today "on onion, beer and petrol" prompted me to write this blog.

I am sure that the title would have got your imagination, atleast to some extent. Can there be link between the two? Are the high prices of Onions, fruits, vegetables and industrialization connected in some way.

Lets see, if they are.

Lets start with some facts and figures.The world population till the beginning of the 20th century was only 1 billion. Yes, only 1 billion. Today India's population is more than 1 billion and so is china's. Today the world pop is close to 6.5 billion. Which means the world pop. has increased 6 times over in just 100 years.

Therefore it leads us to the question: what happened so dramatic, so conducive that our fertility levels shot up this much. What prompted us to do what we couldn’t do in last 1900 years and were able to do in just 100 years.

Well, for starters industrialization took place only in 18^th and the 19^th century. It began in the UK and then rest of the Europe and spread to America. The Industrial Revolution marks a major turning point in human history; almost every aspect of daily life was influenced in some way. Mainly from manual labour we switched to machine based manufacturing. The development of all-metal machine tools in the first two decades of the 19th century facilitated the manufacture of more production machines for manufacturing in other industries.

The human population was deployed in various factories in the key sectors. This brought about major economic and social changes in our environment. People starting having regular and better incomes and the standard of living started getting better. Industrial revolution also created a large number of doctors and lawyers and therefore a large working middle class.

Basically things started getting better overall (or we thought) for majority of the population. Better incomes also meant higher purchasing power and the desire to want more out of life. That is where our beloved banking system and the credit system came into play. People started taking more and more credit to fulfill their desires, needs and wants. So there was finance available for housing, which led to urbanization, finance available for automobiles which led to building more and more roads, finance available for  everything and anything one to imagine. But isn’t it good? We can own houses and provide shelter to our families. Infact,we can buy anything we desire with the help of a bank loan and pay it back in installments.  Sure, its damn good only if we don’t consider that economics like the US consumer debt is close to $ 14 trillion. That’s how may zeros, I don’t know, u tell me.

Any way, coming back to onions. Industrialization did us a lot of good. We have seen countries like China in last 20 years and the way their economy has growth and millions have been lifted above the poverty line. But, these millions and billions in turn are putting a lot of pressure on our existing resources. More housing has meant cornering of more and more land by the real estate and housing cos. More industries have also meant the same.

What does that lead to? You guessed it right, lesser and lesser land left for farming and agricultural produce. So what do we have here, from 1 billion population to 6 billion with lesser farming land and pressure on every possible natural recourse. Now lets go back to our most basic economic lesson of demand and supply. When demand of goods will be higher than the supply the prices will only go one way, and that’s up north.

At the same time I acknowledge the fact the farming techniques and better equipment have helped us to milk every inch of our farming land. I also acknowledge that there are gaps in the supply chain system and we need to have better warehousing facilities for our produce to plug the gaps. But at the same time the population is projected to go higher and there will be more mouths to be fed and many more humans desires to be fulfilled.

So, my fellow onions lovers, lets be prepared to pay more for chicken do piazza and onion rava dosas. But we have the banks to finance all that, don’t we??

Why the price hike in fuel

Well privatisation and deregulation can be very fancy words, but with dire implications. Many voices have been asking for de-regulation of oil prices, and this is what we get. De-regulation gives a free hand to the Oil Cos. to fix prices according to the international market prices, without any government intervention.

So the question arises, why no govt. intervention? Simple: because the govt decided last year in June '10 that the Petrol prices will be de-regulated/de-controlled,which means least amount of interference from the regulators side and the govt's side.

Therefore, when ever you will see crude oil prices going up, there will be a price rise in fuel in India. No debates in the parliament, no arguments like before, oil companies will simply raise prices. Enjoy the benefits of a near 'FREE MARKET' ECONOMY guys. How else can you explain the price of per litre fuel @Rs.50 when the crude prices were $150/barrel and Rs.62+ when the crude oil price is today at $90.

Government still has a trick up its sleeve.
The duty, the cess, and other taxes levied on the Petroleum Products are the other culprits.
Crude prices can be fluctuating , but the tax component is fixed and that's the differentiating factor when we compare the prices even with neighbouring countries.