Monday, March 5, 2012
FOREIGN DIRECT EXIT (Bye bye to India)
Today’s piece in The Economic Times (http://economictimes.indiatimes.com/news/news-by-industry/banking/finance/why-are-financial-majors-like-new-york-life-fidelity-citi-exiting-india/articleshow/12141804.cms ) by Sugata Ghosh is brilliant. It should serve as an eye-opener, not just for the foreigner toying with the idea of entering Indian services sector but also for the Indian, who is filled with hubris. The foreign financial services sector is a classic example. The foreigner came in expecting dollar revenues and built up his costs accordingly. They came and screwed up the salary levels in banking and equities to a level that is unaffordable. Everything was seen as ‘relative to back home”. If any analyst was getting US$ 200,000 in New York, it was considered ok to pay half of that in Bombay. They never paused to think that they could have stuck to a figure of around US$ 25,000 and got the same talent. They did not mind paying higher rents in Bombay than in New York. Finally, when the dust settled, they realised that whilst they built up US comparable costs, they had grossly screwed up on their revenue estimates. The revenue came in Indian rupees, and in a scale that was very Indian. Transaction sizes, instead of being in multiples of 25 or 50 million dollars, were in multiples of 50 or 100 crore rupees. Do the conversions yourselves. Add to that, we Indians are more open than the US of A. Entry barriers are thin, resulting in a new industry getting crowded overnight. Intense competition ensures that deals are won on fees rather than on any perceived quality. It is quite common to see large deals for government owned companies being done at a fee of zero (typically a few thousand rupees) simply driven by an unexplained desire to get in to the ‘league table”. In the mutual fund industry, we saw a hyper active regulator dissolving the net retention for an AMC to virtually nothing. In the stock broking industry of a small size, the number of players exceeds the total players in US and Europe combined. And the total revenues are a fraction of what it is in the US, perhaps less than what a single player like a Goldman or Merrill may make in a very poor year. The potential in India is also tempered by the reluctance of Indians to pay high fees. In a country where pirated software, photo copies and ‘duplicates’ are the order of the day, it is best that the intending foreign investor come and do a physical study rather than depend on excel spreadsheets which co-relate everything to ‘per capita’! And often, here also the foreigner forgets that if Indians were to consume the same number of coca colas as the Americans do, there would be nothing left of the per capita income of the Indian to eat.