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Coke, Pepsi & the Indian Heartland

Posted on Thursday, Apr 14th 2005

December 2004. We were traveling in India. As we waited for our train at a small railway station in Bolpur, a small town near Calcutta, we watched a boy of 10 or 12 arrange his merchandise in preparation for boarding the train to Calcutta. He stacked up hundreds of packets of chips, cookies, and snacks from various multi-national brands in a basket.

I asked him how much he buys the merchandise for. He said, Rs. 9 (20 cents). And sells for Rs. 12. Looks like a 25% gross margin business. He sells about 200 of these packets on the train back and forth, makes a gross profit of Rs. 600 ($12) a day.

This kid is an unbelievably successful micro-entrepreneur, and does not belong in our 4 Billion consumers in question. However, he exemplifies one of those 4 Billion consumers who has managed to lift himself out of the hole.

More interestingly, he is a representative of the distribution channel of the major MNC brands like Pepsi, Coke, and many others. This boy of 12 is one of the thousands that are essential for the Coca Cola’s of the world to penetrate the heart of India, China, Africa, and Latin America.

So. Does Coca Cola have a program to offer financing (and training) to micro-entrepreneurs like our micro-hero?

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Should Netflix own proprietary content?

Posted on Wednesday, Apr 13th 2005

Tiffany does. HBO does.

Jewelry designer Paloma Picasso designs exclusive pieces for Tiffany. It gives consumers a reason to come to Tiffany and only to Tiffany to buy designer jewelry by Paloma Picasso, Elsa Peretti and others.

Roger McNamee writes: “If you are a content owner, proliferating distribution offers lots of opportunity for incremental profits. The key is to behave like a consumer packaged goods company: give customers what they want, when they want it, at a price they are willing to pay. In most cases that means more, rather than fewer distribution channels. As a result, the best strategies for optimizing the value of content conflict with the best strategies for distribution. If they cannot deal with this, the major media companies will continue to produce suboptimal results.”

True, but not if you own the distribution channel. If you are Tiffany, you need to merchandise exclusive items, which would bring consumers to your store.

If you are Netflix, therefore, competing with Blockbuster and Amazon with a “commodity plumbing” positioning will become increasingly tougher. Amongst other brand differentiation strategies, Netflix needs to consider a carefully thought through Content strategy.

KQED Radio is perhaps one of the best proprietary content strategy I have seen. Sharply segmented to cater to a Thoughtful Intellectual segment, it also nicely aligns with a relatively higher income demographic, which allows it to be funded by listeners.

Netflix needs to learn a few branding tricks soon, so that it can position itself out of the shackles of its Geeky origins, and begin to do justice to its Hollywood style audience.

Mentor Graphics: Target for SilverLake?

Posted on Monday, Apr 11th 2005

Mentor Graphics is No. 3 in the Electronics Design Automation (EDA) market, after Cadence and Synopsys. The EDA market itself is not that large, roughly $4 Billion, declining rapidly to $3.5 Bilion due to its tough price-wars. Such a market cannot support 3 major players, and Mentor ought to be a classic acquisition target for Silverlake or Francisco Partners to be subsequently chopped off into pieces.

More specifically, Mentor has a few good franchises that independently could be very interesting businesses for other companies to acquire: their Calibre Physical Verification portfolio, the PCB business, the FPGA tools, for example. However, it is otherwise a very badly put together product portfolio that does not leverage channels, customer segments, or design platforms. There is no organizing principle behind the product strategy.

Chopped into bite-sized pieces, however, it IS a very interesting asset that can make a private equity firm beaucoup money. The PCB tools market is about $500 Million, in which Mentor is the leader, along with Cadence and Zuken as two other serious players. The products are sold primarily through VARs to 3000-5000 Small-Medium businesses worldwide. A major trend in the Electronics industry is that purely Mechanical products are morphing into Electro-Mechanical products, and hence absorbing new Electronics. Mentor’s PCB business could well become a good vehicle with which to align with such a trend.

But this has nothing at all to do with the Calibre business, which attaches itself to Physical IC Implementation tools, and is serviced by a completely different channel – one in which Mentor is missing the anchor component: a market leading Place and Route franchise.

Now that big private equity deals is the rage, this one should be a no-brainer!

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Indo-Chin talks: Implications

Posted on Monday, Apr 11th 2005

Wall Street Journal reports on the recent Indo-Chin talks: “Burgeoning economic ties are the drivers of much of the goodwill. Two-way trade reached $13.6 billion last year, up from $3 billion in 2000. To push that figure higher, they agreed a joint task force should consider a free-trade agreement between their nations. If created, it would be the world’s largest tariff-free area and cover one-third of humanity.”

Thank God, that countries cannot execute friendly M&A activities and hostile take-overs, or else India and China could merge (bad for the US), OR China could acquire Pakistan (bad for India).

Well, what exactly are the points of synergy?

India is dramatically bad and behind in Hardware / Chips, which China clearly rules. Now, Intel and Nokia are about to set up manufacturing facilities in India. China is trying to learn Software and Services from India, as well as train its vast population in English.

It is obvious that India will need a huge volume of cheap commodity hardware of all kinds – Televisions, Cell-phones, Networking Equipment – that most likely, China would supply. What is not as obvious is what India will supply to China! India has made most of its money by being a low cost service hinterland for US/Euope’s high-end IT needs. China is unlikely to have such large-scale business software needs, nor is the Chinese market very conducive to software businesses due to rampant piracy issues. May be, they will need a bit of embedded software, some UI programming – but nothing that China cannot do on its own. One thing China needs in plenty, that someone else has – is raw materials. That someone else, in this case is Africa, not India.

It looks to me, therefore, that US, Europe and India are all headed for trade-deficit economies, while China reigns supreme as the trade-surplus nation.

Microsoft’s two should-be M&A considerations

Posted on Sunday, Apr 10th 2005

Microsoft has stagnated, much to the chagrin of its investors. The powerful vision of the eighties and nineties – of putting a PC on every desktop – no longer seems like a big, hairy, audacious goal. Instead, they are looking for greener pastures – mobile handhelds, digital homes, internet telephony – so forth and so on. In that effort, Microsoft had also articulated a desire to go after the small-medium enterprise (SME) markets, but at the end of 2004, Microsoft Business Solutions (formerly, Great Plains Software) scored a paltry $667 Million in sales – only 2% of total revenues. Great Plains was acquired in 2001 for $1.1 Billion. In 1995 antitrust concerns had scotched a $1.5 Billion acquisition of personal finance software maker Intuit, a supremely logical candidate for the SME market.

John Madok at Applied Materials suggested over lunch the other day: “How about Paychex?”

Indeed, how about Paychex? It’s at $1.2 Billion revenue, and a $12.3 Billion market cap, so pretty expensive, but just as synergistic as Intuit, and can probably offer great leverage. And it may actually be permissible, even, without an anti-trust issue. Something to consider.

The other good one would be Autodesk. A leader in multiple markets that serve small-medium businesses, from the small time manufacturing shop floors, to the architect’s office. Autodesk is at ~$1.2 Billion revenue, and $7.5 Billion market cap, and services the $20 Billion Mechanical Design (MCAD) and Product Lifecycle Management (PLM) Market, among others. The Manufacturing software market has lots of players, so no anti-trust issues, presumably. Channels are also well-aligned.

A billion here and a billion there … Microsoft can certainly afford to buy some market leading products, especially since their internal engine hasn’t succeeded in producing the necessary winners.

Heritage Hotels: Roll-up opportunity for a Private Equity firm?

Posted on Thursday, Apr 7th 2005

Spain developed the Paradors concept very effectively, by converting old forts, palaces, and monasteries into beautiful “experience hotels”. India has done only the beginnings of this, but has a very long way to go yet.

Here is a business concept for KKR or Carlyle for India: The real estate market is booming. Old, beautiful architecture crying to be restored, are everywhere. British colonial bungalows in the mountains, hunting lodges in the forests, old aristocratic homesteads in the cities and villages — dwindling under severe resource pressure.

Buy them up, restore them, staff them up with superb local cuisine chefs, pampering personnel (staff costs literally nothing in India), masseurs, yoga instructors, … and you have a franchise that could become a global brand, and a great investment!

Tourism in India: Huge Opportunity

Posted on Thursday, Apr 7th 2005

We were traveling in North India during the holidays last December. We focused mainly on Rajasthan and Varanasi, and our flight to Khajuraho was cancelled. Rajasthan is one of the most popular tourist destinations in India, perhaps second only to Agra and the Taj Mahal. It has enormous and spectacular forts like Amber in Jaipur, Mehrengarh in Jodhpur, and others in Chittaur, and Jaisalmer. In my extensive travels all over the world, I have seen very few monuments of comparable scale and architectural intricacy. The Moorish influenced Alhambra may be the closest.

Rajasthan has done a decent job with tourism so far. Guides are available in many languages (Spanish, Italian, French, German, Japanese). European tourists abound, and hence the industry caters particularly well to their needs. Beautiful old palaces and homesteads have been converted into Heritage Hotels. Food is excellent at most of these. We stayed at Fort Chanwa at Luni village outside Jodhpur, Samode Haveli in Jaipur, and Jagat Niwas Palace in Udaipur. We deliberately avoided the Taj / Oberoi experiences, and chose the more authentic “old-world” ones heavy on charm.

But logistics of getting to these places are still complex, and ridden with calamities. Our 20-minute flight from Jodhpur to Jaipur was cancelled, and instead, we were put on an 8-hour road trip, paid for and orchestrated by Indian Airlines.

During this trip, I made notes for a number of interesting business opportunities.

I know from past experience, traveling in the Himalayas is very difficult still, with long road journeys (Bus, Car) being the only resort. Accidents are common, as vehicles often get tossed down the abysmal chasms alongside the winding mountain roads.

While Sahara and Jet Airways have made travel between major cities vastly more efficient, pleasure travel infrastructure to the exotic and exquisite destinations, sadly, is still pretty pathetic. A fleet of small air-crafts placed in the right tourism routes all over India would be a great addition to India’s tourism development, and is an opportunity waiting for an entrepreneur to take charge of.

Indian Enterprise Market Sucks

Posted on Thursday, Apr 7th 2005

So far, India’s IT industry has primarily catered to the US market, and secondarily to European and Asian markets. In other words, India builds technology largely in a back-office mode.

Of course, as the market matures, investors get over their fear factor, and the pendulum swings to the other extreme with over enthusiastic investors flocking to Bangalore, Mumbai, Chennai, Hyederabad, Delhi, Pune, and now even Kolkata.

The sentiment, still, is largely focused on opportunities with India as a low-cost production center, less so with India as the end-market.

This will most likely change in the next 5-10 years. However, as it changes, the VCs may very well make the mistake of thinking that the Indian market would mimic the evolution of the US market:

* a) The large enterprises will become the biggest consumers of leading edge, expensive technology.
* b) Small-Medium Enterprises will lag.
* c) Consumers are the trickiest to market / sell to.

Indian enterprise customers are cheap. Very cheap. A direct sales force selling to the enterprise customers will wear out the soles of their shoes before they close a deal, and when they do, the deal will most likely be unprofitable.

If you look at history, one of the most successful “product” companies to have been built in India was Vedika software, a small-medium business accounting tool.

On the consumer side, however, are India’s most exciting opportunities. Education is an obsession for all Indians, especially the middle class. Humongous technology companies have been built in India by serving this obsessive desire to be educated and marketable. NIIT is one of the best examples in IT training.

Other sectors that are just getting organized in India are:

* a) The ready-to-wear garments segment
* b) The media industry
* c) The tourism sector
* d) The packaged food sector

If you are looking at an India strategy — latch on to some of these trends. Don’t try to apply the proven American wisdom, because it is likely to prove that America is not very wise when it comes to investing in India.