Wednesday, March 28, 2007

Tata buys Chrysler for $1 March 25, 2007

‘Tata buys Chrysler’ was the headline in the online daily, The Globalist, on 23 February. Its author imagines a scenario in which Ratan Tata buys the Chrysler subsidiary from DaimlerChrysler for a dollar. The famous American car company is cheap because its employees’ health care and pension liability of $20 billion has bankrupted it. The story also has a message for Indians who don’t know quite what to make of the global ambitions of their companies.

When Ratan Tata bought Corus last month, he got the entire steel industry of Britain and Holland and earned the applause of an India bent on assuming a place in the world. He paid too much but he called it ‘a moment of great fulfilment for India’. Two weeks later, Kumar Birla bought Novelis to become the world leader in rolled aluminium from which cans of Coke and Pepsi and cars are made. Once again national pride was on display. Are these purchases smart business buys? Or is it about personal egos and national honour?
After the deals the shares of both companies fell 11% on stock markets. Standard & Poor’s placed Tata Steel’s long term rating on ‘credit watch’. What would Tatas do with 30,000 expensive European workers? Others asked how Birlas would discharge Novelis’ mountain of debt. The stock markets are telling the companies that their earnings will decline in the short term even though their acquisitions may be good and strategic in the long term. What matters now is that Tatas and Birlas bring their considerable skills to Corus and Novelis and run them better.
No one could have imagined even five years ago how quickly Indian companies would burst upon the global stage. For all the hype about China, it has only a handful of truly world-class companies. By contrast, India has a much deeper and broader stable. Indian companies have also been remarkably sensible in the way they have gone about buying assets abroad. They have ventured out from a position of strength after winning victories in the domestic market. They have usually bought smaller companies to gain access to new customers or technologies or to leverage their low Indian costs. Quite unlike the Chinese electronics firm, TCL, which was so influenced by the prideful ambitions of its government (rather than business logic) that it bought parts of two famous French companies, Alcatel and Thompson. It is in trouble today as the acquisitions have drained it of cash.

The Globalist headline is a warning to Indian companies to beware of hubris. The next time they raise their mighty chests to make a big foreign acquisition, they should remember that only one out of two acquisitions succeeds and the failure rate rises with size. Only four acquisitions did well out of all those made by the 15 largest Japanese firms between 1980 and 2001. This is a sobering lesson from McKinsey’s research department. A foreign target will always appear more attractive from far away Nariman Point, and a brand is up for sale precisely because it is in trouble.
India is still an enigmatic rope trick where great companies perform magic amidst unwashed masses, corrupt politicians and negative bureaucrats. We have the largest billionaires in Asia, but the point is they are creating untold wealth for India. One of them, Mukesh Ambani and his gas discoveries could reduce our dependence on foreign energy—something that the state failed to do. Indians only need good schools, health centres, and infrastructure from the state, and they will respond with amazing prosperity for all.

A tale of two numbers March 11, 2007

Our ruling Congress Party led coalition genuinely wanted to use this year’s budget to shrink the rich-poor divide. But it failed, of course. Hidden in the budget were two items that almost escaped notice. One was the provision to hire 200,000 teachers and the other was to give 100,000 scholarships to schoolchildren. In the differing stories of these two numbers lies the answer to the question why every Indian government keeps failing to help the poor.

Although India’s booming economy is doing its bit in raising the poor, the poor also need good schools and health clinics to enjoy the benefits of high growth. It is not the lack of money that prevents them from having the most basic public goods. India spends a respectable 4 percent of GDP on education and even in this 2007 budget, spending on education (and health and rural employment schemes) has increased 35%. The failure is the result of deeper disease. Surveys show that one out of four school teachers is absent in state primary schools, and of those present one out of two is not teaching. Similarly, two out of five doctors and one in three nurses is absent from government primary health centers. There are over a million primary school teachers in India’s state system, and going by surveys, it means that 670,000 teachers may not be doing their job. So, when Mr Chidambaram proposes an additional 200,000 teachers, how can one feel cheerful?

What do parents do when teachers don’t show up? As with so much about India's success story, they find their own solutions. They enroll their kids in cheap private schools which charge only Rs 70-100 a month in fees and which are spreading rapidly in slums and villages. Even though private schools pay one third the salary of the unionized government teachers, they deliver better results. Hence, 53% of urban Indian children (and 18% of rural children) are now in private schools. This is very high by world standards. Even Chile, which privatized education in 1981, has achieved only 46.5% share of private enrollment after 25 years.

For this reason, the second number—the promised 100,000 scholarships--in this year’s budget is excellent news. It will empower parents to choose schools based on merit and give state schools an incentive to improve. Merit testing will also help to assess the quality of government schools. It might even improve the “anti-merit” image of this UPA government. I wish we could give a crore instead of a lakh scholarships!
How does one explain the discrepancy between the government’s desire to spend more on elementary education and health with the reality that more and more Indians are embracing private solutions? Let’s face the fact that our politicians have captured the bureaucracy and use the system to create jobs and revenue for friends and supporters. In many states politicians sell teaching jobs for a handsome price. Teachers, who are thus appointed for life, believe they don’t need to teach. As a result, the state is so riddled with perverse incentives that accountability is gone.

But none of the solutions being debated will bring accountability unless we recognize that the government’s job is to govern rather than run everything. The state may have to finance primary services such as health and education, but the providers could be NGOs, teachers, ‘edu-preneurs’, and they would be accountable to parents and not to a bureaucratic hierarchy. This tale of two numbers teaches that the hope for decent services for the poor may lie in such public-private partnerships.