Note On Gov - India

Eight lessons learned from Narendra Modi
First, declare your ambitions and goals clearly. Rarely in Indian elections have we seen any
candidate clearly state what he wants and what he hopes to achieve if he gets what he wants.
While others pussyfoot around the idea and act coy, Modi has always been clear he wanted to
be PM. This is the main reason why many voters are clear about giving him a chance.
This is simple logic. Consider that there are three applicants for a job. The first applicant says it
does not matter if he gets the job or not, for he is on to higher things. The second applicant says
everyone else is a crook and doesnt deserve the job. The final applicant says he wants the job
and he is best qualified for it. He is willing to work hard and brandishes his past achievements to
support his candidature.
Who will you give the job to? The chances are you will consider the person who is keen on the
job, seems to have the qualifications, and willing to toil for it.
This is the power of goal clarity and focus.

Second, break the final target into a set of smaller targets and milestones.
Modis milestones were clear: First, win Gujarat convincingly, next win public backing for his
candidature through carefully-choreographed speeches to specific audiences (starting with the
address to the Shriram College of Commerce in January 2013 in Delhi), then win party support
by getting the cadre excited at various fora, and then expand his support base by winning votes
for his party CMs in various assembly elections (but after sealing his candidature for the top
post). Now he is in sight of the final peak: getting enough votes in crucial states to lead his party
to victory and form a government. Modi ran his campaign like a US presidential election - from
primaries to the final party nomination and on to voting day.

Third, demonstrate strength, then invite stakeholders. One of the big myths perpetrated by
the media is that Modi would never get allies because of 2002. For a while it seemed likely to
prove true. But Modi did not bother with this theory. He knew allies would come if they saw
winning potential in him. Once he demonstrated public support and the opinion polls started
conveying the same groundswell of support across the country, allies started trickling in one by
one. It is strength that attracts allies, not entreaties.

Fourth, eliminate doubters and bring in team players. This is one of the core philosophies
that saw Roald Amundsen, the Norwegian explorer, beat Robert Scott to the South Pole in
1911. Amundsen knew that if his team had to make it first, it needed competent people, but
more important, he needed people who would fall in line and not try to be too individualistic. As
Morten Hansen writes in this HBR blog: Amundsen emphasised unity and teamwork over
individual competence. He got rid of his best person, Johansen, and booted him from the final
assault team because he had quarrelled with Amundsen openly in front of all the others.
Amundsen could not risk fracture in his team, which could jeopardise the whole enterprise.
Likewise, Bill Gates was quick to manage out people who didnt fit, including two presidents.
This is exactly what Modi did. First, he got his bte noire Sanjay Joshi out of Gujarat in 2012.
Then he got the party to appoint his key person, Amit Shah, as the person in charge of his most
important state Uttar Pradesh. Shah is facing cases against him in some encounter killings,
but for Modi his loyalty and political acumen was what mattered. He brought back BS
Yeddyurappa despite opposition from within, and tied up with Ram Vilas Paswan in Bihar
despite misgivings in his party. Inside the party, LK Advani has been neutered, and Jaswant
Singh shown the door. Everybody knows now who is boss. To be sure, Modi will still face some
internal conspirators political parties are not like South Pole explorers with small teams of
specialists - but he will probably deal with them if he wins.. He cant outplace everyone and still
seek to win.
As Hansen writes in his HBR blog: Amundsen was not nice, warm, and fuzzy. However, he
didnt take the easy path (lets hope it will work out) but made difficult choices ahead of time. In
selecting people, it is not about being nice, but rigorous.
Modi is not in the race to win awards for being nice to people.

Fifth, plan meticulously and in detail. TV viewers watching Modis speeches in various places
may think it is all about oratory, but that is only one part of the Modi plan to communicate with
the masses. The truth is there is an entire army of people working to support his rallies. There in
a huge IT crew that monitors the buzz on social media. There is a huge contingent of on-ground
researchers who thank people who come to his rallies and seek feedback.
A Narendra Modi rally is not about erecting a stage and giving the speakers a mike. There is
water-tight security combing, there are LED screens to give everyone who attends a clear view
of the man, there are speakers at vantage points to amplify every soundbyte from the stage -
the works. Plus there are feeds organised for the TV channels, and facilities for live streaming
on the internet.
Says an Indian Express report: Narendra Modi rallies have, in recent times, gone on to become
full-fledged stage productions involving light, sound, carefully chosen music, stage design and
sky cameras all intended to enhance viewer experience and build the Modi brand.
An Economic Times report explains why a Modi rally is not just any event: At every Modi
meeting, an army of volunteers combs through the crowd, gathering feedback, profiling
attendees and making a headcount. Later the party's IT cell collates all the data.

Sixth, set the agenda and keep control. Companies which hope to win in a competitive arena
must choose their battlefield and the agenda. In this election, Modi has been setting the agenda
most of the time. During the Gujarat campaign, he spent more time attacking Sonia and Rahul
than on local issues he took the nations eyes way from any nagging issues in his own state.
The media labelled him as uncouth, and pooh-paahed him. He won by setting the agenda to his
advantage.
After emerging from Gujarat on the national stage, he began talking of the Gujarat model.
Suddenly, the man who everyone labelled communal was talking growth and development and
introducing new talking points to the TV and media circuit. The agenda excited young voters at
a time when Rahul Gandhi was talking elliptically about escape velocities. The Gujarat model
is now being questioned following Arvind Kejriwals foray into Gujarat, but the agenda has
changed again. It is too late to debunk the Gujarat model. The Congress gave him space to
introduce the Gujarat model by initially ignoring him. Now that they have decided to take him on,
he has shifted the agenda again.
Over the last few weeks, the main issue in this election is Modi himself. All his detractors have
taken him on making him the focus of this election. This suits Modi since this election will now
be a referendum on him. He has not only set the agenda, he has become the agenda.
Take another example: Till a few months ago, the general assumption was that everyone votes
regionally and regionally alone. Indian Lok Sabha elections are about parties and alliances,
not about the candidate. But Modi has succeeded in making this election substantially
presidential.

Seventh, attack the enemy where he is weak. This strategy is, of course, obvious. Modis
strength has been the UPAs economic failures, and the meekness of Manmohan Singh as PM.
It did not need a Modi to discover where the UPAs chinks were, but it required genius to
discover whom to attack, how to attack, and for what.
Contrary to general assumptions, Manmohan Singhs weakness is actually his strength and his
weakness his strength. As LK Advani found out in 2009 and even later in parliament, if you
attack Singhs meekness, you risk public opprobrium and Singh can easily turn the tables. But if
you pity him, you gain. The meek always inherit the publics sympathies. Modi was happy to
defend Singh when Rahul Gandhi insulted him by rubbishing the ordinance to help convicted
criminals as nonsense. Modi defended Singh. He attacks Sonia and Rahul more in order to
expose the weakness of their government.

Eighth, never play to your weakness. Answering direct questions from aggressive TV
anchors is an uncontrollable situation.. As Rahul Gandhi discovered in his TV interview with
Arnab Goswami, you can make a fool of yourself. Modi, in contrast, uses only friendly
interviewers for his Q&As. He has learnt from bitter experience as in the India Today Conclave
in 2013, when he lost his cool following aggressive questioning about 2002. It is unlikely he will
change this strategy as long as he is not PM.
This is not to suggest that every part of his strategy is well worked out. Thats not the case. Modi
still does not have a substantial think-tank lending weight to his interviews. He probably talks too
much extempore with small strategic inputs, and does not prepare enough when talking on the
economy or complex subjects.

On the other hand, he has also not committed himself to making elaborate promises to the
electorate that he cannot keep. That will work to his advantage if he gets election. He has great
expectations to meet, but few promises to keep.

http://www.washingtonpost.com/news/business/wp/2014/10/15/hbo-is-launching-a-stand-alone-
streaming-service-in-2015/
HBO is launching a stand-alone streaming service in 2015
By Cecilia Kang October 15 at 11:11 AM Follow @ceciliakang
HBO is set to launch a stand-alone online streaming service in 2015 which will not require a cable or
satellite subscription. (Reuters)
HBO will launch a streaming video service in 2015 that doesnt require consumers to have a cable or
satellite subscription, the company said Wednesday, in a move that could roil the television industry and
pave the way for vastly more choices for consumers.
With HBOs announcement, television fans have been given one more reason to drop their expensive
cable subscriptions, a growing trend in recent years as viewers have enjoyed more choices online
through services like Netflix, YouTube and Hulu.
Up to now, many households have decided to continue paying for cable since they value live sports on
ESPN and wildly popular shows on HBO, such as Game of Thrones all content they can only get
through a cable box.
But HBOs move could change that calculus.
This is an enormous breakthrough; consumers will be able to get to pick what they want and they will
finally have content companies selling directly to them, said Gene Kimmelman, president public interest
group Public Knowledge, which has fought for regulations that would force the unbundling of cable
television channels for consumers. The question is, Who is next? Thats trickier because this speaks to
the power of HBOs brand to be able to break from the cable bundle.
HBO chief executive Richard Plepler, who announced the plan in an investor meeting held by parent
company Time Warner, did not say how much the service would cost or what content it would offer
exactly. He said starting next year, the service will be available to U.S. subscribers and to consumers in
two other countries before expanding to its entire international footprint.
Plepler was careful to describe the service as complementary to cable, rather than something aimed at
busting the industrys business model. He said HBO is targeting the 10 million homes in the U.S. that
have high-speed Internet but dont subscribe to cable or satellite television already.
Its time to remove the barriers to those that want HBO, Plepler said.
The way things works now, cable firms and HBO have enjoyed a highly profitable and close relationship.
HBO charges cable firms hefty fees for the right to carry their programming; cable companies in turn
charge consumers additional moneysay, $10 or $20 per monthto add HBO to their selection of cable
channels. The linchpin of this arrangement: HBO agreeing to offer its content exclusively to cable
companies.
But in recent years, HBO has grown impatient with its cable partners, saying many have not done a good
job of marketing the premium channel. Plepler said hundreds of millions of dollars have been left on the
table through untapped distribution rights and poor marketing for new subscribers.
And studies show younger viewers particularly millennials are choosing online video
subscription services over cable TV.
In May, Amazon and HBO announced a deal in which Amazon Prime members could watch a slew of
HBO shows, films and miniseriesmostly past seasons of old shows like The Sopranos.
When asked by an analyst if the plan will hurt HBOs cable business, Plepler said: I dont think this is
either or, adding that 85 percent of Netflixs users also subscribe to cable or satellite television. He said
the HBO online service would be offered in partnership with Internet service providers, who are also their
cable partners.
The announcement Wednesday is a striking reversal for parent company Time Warner, whose chief
executive Jeff Bewkes in 2010 famously dismissed the threat of Netflix, equating it to The Albanian army
or a 200-pound chimp.
But with an online streaming service, HBO is taking a page directly from Netflix and will soon compete
head-to-head with the rival streaming service. HBO has 30 million subscribers in the United States; Netflix
has about 37 million.
Netflix has modeled itself after HBO with its mix of exclusive award-winning original shows like House of
Cards and movies. We have to become more like HBO before they become like us, Netflix CEO Reed
Hastings said in an interview last summer, referencing a favorite saying of the companys chief content
officer, Ted Sarandos.
With HBO stripped away from the cable bundle, Netflix loses one of its advantages over its rival. The
company, which reported Wednesday that it added fewer subscribers than anticipated, saw its shares
tank about 25 percent in after-market trading.
As much money as HBO makes from cable companiesthe company made $4.9 billion in revenues last
year, mostly from fees paid by cable firmsthe future of watching television is clearly online. According to
a report by Comscore this week, four out of ten online users subscribe to a service like Netflix or Amazon
Instant Video.
I find it hard to believe that HBO is going to offer something that will make [cable companies] angry, said
Deana Myers, an analyst for research firm SNL Kagan. She said the key will be how much the online
service is priced.
The big question is how much HBO charges for the online service. If the company sets the price too low,
many consumers will drop their cable subscriptions and eat into the firms profits from that business. But
set it too high, and viewers used to the roughly $10 per month charged by Netflix and Hulu Plus will balk.
The availability of more online content will provide more choices for consumers. But it wont necessarily
reduce costs. Cobble together HBO, Netflix, MLB.tv and a few more services and being an online-only
viewer adds up.
And even though HBOs announcement weakens the hand of the cable industry, firms like Comcast
still enjoy a huge advantage: exclusive live sports.
As a result, consumers like Avi Greenberger wont stop paying for the monthly service. The 25-year-old
Brooklyn resident subscribes to HBO, sports channels and online services such as Hulu Plus.
I hate double paying for both cable and online services, Greenberger said. But with the Rangers on
MSG and the Yankees on Yes Network, its hard to give up on cable.
Will there be football and basketball streaming online for people who dont pay for cable or satellite? Not
anytime soon.
This month, ESPN and TNT inked deals to retain rights to show NBA games through the 2024-25 season.
And the National Football League and ESPN have a deal to keep Monday Night Football on the sports
network through 2021.

8 Rare Gems from Heidi Roizen on
Building a Fulfilling Life and Career

Heidi Roizen is one of those names in Silicon Valley that everyone learns at
some point. Thats what happens when you spend 14 years running your own
company, then building developer relationships as a VP for Apple. Today,
shes an investor with DFJ Venture and teaches a class called the Spirit of
Entrepreneurship at Stanfords School of Engineering. Generally speaking,
shes someone who knows everyone (theres even a Harvard Business
School case about her) and shes wielded that influence gracefully.
Before graduation this year, she returned to Stanford (where she was also an undergraduate
and business student), to speak at the Entrepreneurship Corner and share the lessons she has
learned from over three decades of working and operating in tech. The result is a type of
commencement speech for entrepreneurs, full of seldom shared gems based on her
experiences.
Below are eight tenets Roizen has used to guide her career, create an expansive and
lasting network, and shape new innovations. The beauty is that while they were delivered
to an audience of people just starting out, they remain deeply relevant as a roadmap and
important reminders for entrepreneurs at all stages.

1. If youre not doing something hard, youre wasting your time.
Melinda Gates was once walking by her young daughters room, and watched as she tried to
put on her shoes. This is hard, her daughter said. But I like hard. I love that line, says
Roizen. When youve been through a lot of hard things, you know that the best times are when
you get through them.
Successful entrepreneurs are constantly chasing a state of flow. You know that feeling when
youre working right at the edge of your capability and youre so engaged in trying and failing
and trying more that time just flies? Thats when youre really testing yourself. Ask yourself
every day, every week, What is something hard that I can tackle? Its funny, Roizen says,
that so many ambitious people still strive to eliminate difficulty from their careers they
want to cruise by, or land a dream job without earning it first but thats wrongheaded.
The reality is, when you get there, if you do, youll be bored. So look for the hard stuff.

The great thing about being an entrepreneur is that it's hard.
There's no safety net. No regular paycheck. You have to do
it all on your own.

2. Your ethics set the tone for your life.
When Roizen was CEO of her first company, T/Maker, there was a sprinkler malfunction that
ruined all of the inventory in the stock room. Fortunately, it was mostly worthless. Even more
fortunately (in another sense), their landlord didnt know that and offered to cover any amount of
damages with insurance. It was really tempting we could have collected $150,000 when we
were bootstrapped, she says. But we decided to tell the truth, because not only did we know
the inventory wasnt worth anything, but our employees knew too. If we were willing to cheat,
what would that tell them?
When youre setting an example for a staff of people, you have to be cognizant of every
move that you make. If T/Makers leadership had taken the money, they would have sent the
message that cheating is okay. It would be the same as saying, 'Hey file an expense report
thats not true. Take home that extra piece of equipment if you want.' Seems obvious, but it can
be an incredibly hard lesson to learn, Roizen says. You will think, 'I can take this easy road. I
can say this thing. I can tell this customer something that isnt really true about our product to
make a sale.'

Sometimes you get away with it. Sometimes you don't. A lot
of times you won't.
What you decide to do sets the tone and culture for the whole company you are building, she
says. Part of this is being able to sleep at night. More of it is about being a good contributor to
the people you work with and the relationships you build. This is easier when you hold yourself
to a higher standard.

3. Your gut has more information than you do.
While in business school at Stanford, Roizen took a class called Creativity in Business that
asked students to conduct an exercise for a week: Write down a decision you need to make the
next day on a piece of paper, go to sleep, wake up in the morning and immediately make the
decision. The purpose was to show students how gut decisions get made, and how right they
can be.
Increasingly, tech culture is about the opposite making decisions driven by exhaustive data.
Theres this idea that the more data you have, the better the decision you can make. That may
be true for some things, but not everything, says Roizen. Gut instincts are built on years of
experience and subconsciously what you observe about human nature from every
interaction. They are informed in ways we dont even understand. Shes learned this
several times the hard way, especially when it came to decisions about people who to work
with, who to keep on, who to fire. When the data said something else and I didnt go with my
gut, I regretted it," she says.

4. Picking your team is the most important thing you will ever do.
The vast majority of companies succeed or die by the
quality of the team.
Over the years, Roizen has seen a lot of young entrepreneurs make the same mistake. They
have an idea for a company, they start their own thing, and when it comes time to hire
executives, they dont want to bring on anyone who knows more than them. They dont
want to be intimidated, so they hire someone who is the same age and knows about the same
stuff. You hire people who are familiar to you because you trust them. This sounds good, but at
the same time, youre missing out on all kinds of expertise because youre worried about being
outgunned or sidelined.
If you want to be the smartest person in the room, you're
going to build a crummy team.
Do you really want a VP of sales who knows less about sales than you? Do you want a
CFO who knows less about accounting? No of course not, she says. You have to take
risks to find the right people and then trust in those relationships. Your job becomes to empower
those people and make sure they get along. My goal is always to be the dumbest person in the
room because I want to be surrounded by really bright, really amazing people. Thats when
exciting, world-changing things get done.

5. The art of negotiation is finding the optimal intersection of mutual
need.
In another one of Roizens business school classes, the students were paired off into buyers
and sellers and told to negotiate the purchase of a car. Everyone had the same data, yet the
difference between the highest sale price and the lowest at the end of class was drastic. She
was shocked, and it shaped her perception of how negotiations work. As she puts it, when you
first learn about transactions, you see them as a zero-sum game. You either want to make the
most money you can, or pay the least. You dont care who is on the other side of the deal. You
want to win at their expense.
I dont believe anything in life is a transaction like this anymore, Roizen says. I believe
everything is about relationships. If you have a transactional view of life, you think, Im not going
to worry about the future. Im going to worry about getting as much as I can right now. The
relationship-based view is very different.
Nothing in life is a zero-sum game.
If I can walk into a transaction with you, and my goal is not to just make myself better off but to
make you better off as well, were going to end up with a much better outcome. Youll want to do
business with me again and thats really, really important.
Roizen has spent nearly her entire life in Silicon Valley, and has run into the same people again
and again. This familiarity has only been compounded by Facebook profiles and Etsy ratings,
and all kinds of other permanent metrics. You are now the sum total of your transactions
because they are relationships, she says. Every time you meet someone, think about the
relationship instead of the transaction. If you know more about them and they know more about
you, you will be able to collaboratively help each other.
6. Life is actually really, really random.
Bad things will happen to you. You will fail. Things outside of your control will happen. You
need to lean into this fact. In this environment, how can you survive, much less strive for
success? Roizen has one piece of advice:Expect things to be messy.
The key to happiness is to lower your expectations.
This doesn't mean you shouldn't go after your goals. It means you should prepare for an
imperfect path on the way. For example, when Roizen travels internationally, she assumes
her checked baggage will be lost, that her flight will be late, that the rental car won't be there
waiting. I assume everything that can go wrong will go wrong so when it actually happens, Im
not stressed, she says. I have a change of clothes in my carry-on; I schedule no meetings
within two hours of landing; I expect the mess, and if it doesnt happen, Im pleasantly
surprised. 95% of stress is self-inflicted.
Roizen remembers one entrepreneur she knew in particular who would always make meticulous
plans everything would have to fall perfectly into place for things to work out, and of course
they never did. If you assume everything is going to go perfectly, bad things will happen to you.
You will run out of money before you reach the next milestone. Accept that life will get messy,
and when it does, pick yourself up again.
If you fall down and refuse to get up, you will be down the
rest of your life.
Remember, the other side of the randomness coin is that some really great things can and do
happen. When they do, dont balk at the opportunity. Theres no knowing what could happen. If
you get three truly excellent job offers, dont drive yourself nuts over picking the right one, for
example. The fact is if you pick one thats bad and it goes out of business and you get fired, it
may still be the greatest thing that ever happens to you. You might learn something amazing
that you may not have learned sitting at that other safer job.
A while ago, Roizen came across a book that said when people were asked about the best and
worst things that happened to them in the last five years, most people said the same thing
even things like getting divorced, getting cancer, losing a job. Its shocking when you ask real
people what has moved their life in the most positive directions, it is often those types of
things.Sometimes bad things can be good when you allow randomness in your life.

7. Get good at using your time.
The most important thing you have is time because you
can't make more of it.
You can do things to leverage your time with money and help, but at the end of the day, youre
going to run out of it, so you have to be really sensitive about how you spend it, Roizen says.
A lot of people are really bad at understanding how much time things take. They have 1,000
unanswered emails and they say, I have no idea how to handle this. Well, the solution is to not
schedule more than five hours of things in a day to leave three hours to answer email and calls
and read, and stay informed. When people say they dont have time to do that, I say, Of course
you do. You just have to do them instead of other things.
Her advice: Think about every use of your time and give it all equal weight to
start. Recognize that grunt work takes time. Reading takes time. Figure out
what you like doing, what extends your capabilities the most, and organize
your time to strike the right balance. Ideally, this leaves some space for
reflection and sleep, but Roizen knows this isnt always realistic.
I was once an entrepreneur, and I did not live a balanced life, she says. I think we live our
lives in a serial fashion there are periods where you wont have time to do everything you
want. If youre really excited about something, you can run on that for a while. That's okay, as
long as you're aware of the tradeoffs, she says. More time spent working means less time with
family and friends. Theres this fantasy that important things like relationships and
communication dont take any time to maintain, but they do. You may not be perfectly
balanced, but the key is to keep trying.
If you don't give yourself space, there won't be any room for
good, random things to happen to you.
8. The 20-40-60 Rule.
Espoused by actress Shirley MacLaine, the rule goes something like this: At 20, you are
constantly worrying about what other people think of you. At 40 you wake up and say,
'Im not going to give a damn what other people think anymore.' And at 60 you realize no
one is thinking about you at all. The most important piece of information there, Roizen
says: Nobody is thinking about you from the very beginning.
Of course, this is good news and bad news. The bad news is that no one is constantly
wondering if you're okay, how much money youre making, whether youre fulfilled in your job or
your relationships.
You need to be your own advocate, Roizen says. If youre in a job you dont like, you need to
be the one to change it. You cant sit in your office and wait for someone to bring you the
answer.
Your boss is not thinking about you. Your peers are not
thinking about you. You need to think about you.
Harsh. But theres a flipside. People waste hours and hours torturing themselves over what
other people think about them and they do it needlessly. Even Roizen used to fret about
showing up to meetings after long flights with the wrong shoes, or a wrinkled suit. I would be so
worried about what people were going to think if I couldnt pull myself together. But then it
occurred to me, I have never once been in a meeting where halfway through I thought, Even
though this person is smart, they have a wrinkle in their jacket, so they must not be very good.
No one ever thinks that way.
People have enormous capacity to beat themselves up over the smallest foibles saying the
wrong thing in a meeting, introducing someone using the wrong name. Weeks can be lost,
important relationships avoided, productivity wasted, all because were afraid others are judging
us. If you find this happening to you, remember, no one is thinking about you as hard as
you are thinking about yourself. So dont let it all worry you so much.

October 10, 2014
Oil Gauge

Equity Research
Physical markets keep weakening; 2015 capex budgets at risk
More weak demand and strong supply put pressure on oil markets
On September 12 we highlighted a weakening of the physical oil market
Oil Gauge: More supply growth, more demand weakness; focus on Brazil.
Since then all the datapoints that we collect from the regulators of the key
oil consuming and producing countries point to a further deterioration.
Datapoints on demand show deterioration in Europe, record decline in
Japan and only a moderate recovery in China. Non-OPEC production keeps
accelerating, led by North America and Brazil, while Russia recovers and
the mature offshore basins show slower declining trends. This accelerates
the deflationary pressure that we highlighted in Looking beyond Iraq: The
triple deflationary impact of shales, July 9, 2014, and poses downside risk
to our US$100/bl assumption for 2015.
OPEC production keeps recovering, adding to market concerns
The September OPEC survey shows a major pick-up in OPEC supply
recovering from recent disruptions back to 30.5 mbpd, led by strong Libya
and Iraq production. This puts further pressure on the physical market and
raises questions about OPECs willingness to balance the market. Our
analysis of the oil price required by the OPEC countries to balance their
budget, shows that OPEC has become increasingly reliant on oil prices
(Brent) above US$90/bl, with Saudi Arabia at c.US$85/bl, suggesting that
OPEC starts feeling under pressure at the current level of oil prices.
2015 capex budgets are at risk; cautious on European oil services
We update our analysis of the oil price required by the global oils in 2015
to balance their budget, which is US$113/bl, with the European integrated
oils requiring US$122/bl and TOTAL, BP, Repsol and Statoil all above
US$120/bl. As these companies are formulating their 2015 budgets, we
believe that they are all likely to implement further capital efficiency
measures. We reiterate our Cautious stance on European oil services,
which we believe will be the main losers from these cuts. We remain most
negative on the more capital intensive offshore segments, and reiterate our
Sell ratings on Seadrill, Odfjell Drilling, Technip and TGS Nopec (CL-Sell).
Our top picks from among the winners
Our global preferences are: BG, ENI, EOG, Range Resources, Santos, Afren,
Africa Oil, Gazprom-Neft, Halliburton, Patterson-UTI Energy.

DEMAND AND SUPPLY GROWTH L3M
Source: IEA, Goldman Sachs Global Investment Research.
RELATED RESEARCH
Energy & Utilities Investment Strategy: Valuation or global
oil saturation? CL bias remains pipeline/MLP weighted,
October 9, 2014
Oil Gauge: More supply growth, more demand weakness;
Focus on Brazil, September 12, 2014
Oil Gauge Monthly: Looking beyond Iraq: The triple
deflationary impact of shales, July 9, 2014
Top 400 projects From revolution to dominance: Shale
drives deflation, M&A, capital efficiency, May 16, 2014
Oil Gauge Monthly: Non-OPEC supply recovery is broad, not
just from US shales, May 12, 2014
Oil Gauge Monthly: More divergence: DM vs. EM demand
and non-OPEC vs. OPEC, December 12, 2013
Oil Gauge Monthly: Non-OPEC supply acceleration, EM
vulnerability raise some risks, November 21, 2013
Oil Gauge Monthly: Record North America oil growth
driving differentials wider, October 2, 2013
Oil Gauge Monthly: Time spreads well supported as
demand steps up/OPEC disappoints, August 19, 2013
Oil Gauge Monthly: Sharp demand recovery needed to
balance the oil market, July 5, 2013
Oil Gauge Monthly: Oil market remains balanced as US
demand recovers, May 8, 2013

Michele della Vigna, CFA
+44(20)7552-9383 [email protected] Goldman Sachs International
Goldman Sachs does and seeks to do business with
companies covered in its research reports. As a result,
investors should be aware that the firm may have a conflict of
interest that could affect the objectivity of this report. Investors
should consider this report as only a single factor in making
their investment decision. For Reg AC certification and other
important disclosures, see the Disclosure Appendix, or go to
www.gs.com/research/hedge.html. Analysts employed by non-
US affiliates are not registered/qualified as research analysts
with FINRA in the U.S.
Henry Tarr
Theodora Lee Joseph
Brian Singer, CFA
(212) 902-8259 [email protected] Goldman, Sachs & Co.

The Goldman Sachs Group, Inc. Global Investment Research
-100
400
900
1,400
1,900
Demand growth
-3m
IEA demand
growth -3m
Supply growth -
3m
IEA supply
growth -3m
y
o
y

g
r
o
w
t
h

(
k
b
p
d
)
October 10, 2014 Oil Gauge

Goldman Sachs Global Investment Research 2
Recent datapoints: Weak demand growth (Europe, Japan) and
strong non-OPEC supply growth (North America, Brazil)
The latest global demand data has been soft since the start of the year and has been
unable to keep pace with the solid growth of non-OPEC supply. The latest July/August
datapoints have been the weakest year to date with Europe and Japan continuing to
disappoint, showing an accelerating demand decline, while China remains volatile.
Only demand from the US, Brazil and India shows consistent signs of growth.
Exhibit 1: Demand growth has been poor across the board in the last three months
Incremental oil demand growth yoy (kbpd) from the major consuming nations

Source: DOE, METI, Chinese Bureau of Statistics, ANP, Pemex, Petronas, PPAC.
North America continues to dominate supply growth, with both the US and Canada
delivering consistent strong growth. However, the biggest surprise in recent months has
been the rest of non-OPEC, with very strong performance from the mature offshore basins.
Brazil in particular shows strong signs of growth after a couple of weak years and we
expect this new trend to continue, as positive momentum on pre-salt production continues.
The worlds major mature offshore basins delivered a very weak performance in 2012 and
1H13, owing to declining reliability and utilization of infrastructure. We are now seeing
early signs of the high maintenance spend in 2012-13 paying off, with North Sea, GoM and
Brazil production all showing signs of stabilization and growth (Brazil). This will be, in our
view, a key driver of improved non-OPEC production in 2014-15. The region with a
deteriorating trend is Russia, although the September datapoint is back on a 1% growth
track.
Exhibit 2: Non-OPEC supply growth has kept up a strong pace especially in NA and Brazil
Incremental supply growth yoy (kbpd) from the major non-OPEC producers (Aug/Sept data for
US implied)

Source: DOE, Chinese Bureau of Statistics, ANP, Pemex, Russian Energy Ministry, Ecopetrol, NPD, IEA.
kbpd May-14 %yoy Jun-14 %yoy Jul-14 %yoy Aug-14 %yoy
L3M
yoy
growth
3m yoy
%
growth
IEA 3m
growth
US -35 -0.2% 109 0.6% 118 0.6% 64 0.3% 94
Japan -138 -4.7% -134 -4.6% -377 -11.7% -334 -10.3% -282 -8.9% -273
China -92 -1.0% 258 2.6% -209 -2.1% 324 3.4% 124 1.3% 282
Brazil 105 5.1% 38 1.8% 100 4.8% 93 4.3% 77 3.6% 82
Mexico -79 -4.4% -147 -8.1% -26 -1.5% -186 -10.0% -120 -6.5% -80
Korea 54 2.5% -64 -2.8% -29 -1.3% 30 1.3% -21 -0.9% 33
India 101 3.0% 226 7.0% 84 2.7% 28 0.9% 113 3.5% 98
France -22 -2.5% 36 4.2% -28 -2.9% -34 -4.0% -4 -0.4% -9
Italy -42 -3.5% -48 -4.0% -65 -4.9% -78 -6.6% -52 -4.1% -69
UK 44 3.6% 14 1.1% -54 -4.2% 2 0.1% -14
Global yoy gr -104 286 -486 -157 -100 144
kbpd May-14 % yoy Jun-14 %yoy Jul-14 %yoy Aug-14 %yoy Sep-14 %yoy
3m yoy
growth
3m yoy
%
growth
IEA 3m
growth
US 1,075 15% 1,305 18% 1,075 14% 1,152 15.7% 1,132
China 7 0% 14 0% 41 1% 44 1% 33 0.8% 75
Russia 68 1% 57 1% -25 0% -8 0% 72 1% 13 0.1% 1
Norway -204 -11% 99 6% -40 -2% 23 1% 27 -2.4% -34
UK 7 1% -37 -4% -58 -7% -29 -3.4% -30
Canada 240 10% 255 11% 154 7% 216 9.3% 216
Brazil 203 10% 150 7% 303 15% 326 16% 260 12.5% 228
Mexico 4 0% -83 -3% -106 -4% -106 -4% -98 -3.4% -92
Global yoy g 1,400 1,760 1,344 279 72 1,573 1,495

OPEC production: Supply rises led by Libya and Iraq recovering
OPEC production has been under pressure since 2Q13 owing to disruptions in Libya, Iraq
and Nigeria, but has recovered strongly over the past few months. This is a result of a
partial recovery in production in those countries, while Saudi Arabia has only marginally
cut back production. Production from Saudi Arabia picked up in response to the disruptions,
reaching a peak of 10.2 mbpd in August 2013. Since then, Saudi has only slightly scaled
back production, to 9.6 mbpd in September. The latest OPEC survey indicates that Saudi
crude production slightly declined by 50 kbpd in September from August despite the
continued easing of Libyan production disruptions.
Exhibit 3: We expect OPEC effective spare capacity to
increase, even without Iraq growth or a Libyan recovery

Exhibit 4: Saudi still producing close to historical highs,
while the rest of OPEC is recovering
Saudi Arabia and OPEC ex. Saudi crude oil production (kbpd)


Source: IEA, OPEC Monthly Oil Market Report.

While we believe OPEC supply will likely remain volatile in the wake of recent geopolitical
events, we see signs of recovery in Libya, Nigeria and Iraq. The latest survey run by OPEC
indicates that output from OPEC surged by 402 kbpd in September, led by higher supply
from Libya and Iraq while Saudi and other Gulf producers have kept output steady to
higher. We include the survey datapoints for September but note that these are preliminary.
Exhibit 5: OPEC production has been improving since the
start of the year
OPEC crude production (kbpd)

Exhibit 6: and Saudi production shows no signs of a
pullback
Saudi crude production (kbpd)

Source: IEA.

Source: IEA.
0
2,000
4,000
6,000
8,000
10,000
12,000
14,000
k
b
p
d
OPEC spare capacity
Iraq growth
Libya and Iran shut-in production
19500
20000
20500
21000
21500
22000
22500
23000
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7000
7500
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Saudi Arabia OPEC ex. Saudi (RHS)
28000
28500
29000
29500
30000
30500
31000
31500
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32500
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b
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In Libya, although the agreement to reopen some of the ports in the Eastern part of the
country has been effected, the outcome remains unpredictable and its production in the
Western desert remains unreliable. However, we are seeing early signs of production
recovery and according to the spokesman for the state-run National Oil Corp (NOC), the
countrys production reached c.900 kbpd in early October.
Exhibit 7: Iraq production has not suffered from recent
instability
Iraq crude production (kbpd)

Exhibit 8: Libyas recovery could be swift as evident in
the past (3Q11-1Q12)
Libya crude production (kbpd)

Source: IEA.

Source: IEA.

Saudis announcement in early October that it would cut official selling prices for Asian
customers in November came as a surprise to the market as the oil price continued its
strong decline. Saudi is a key swing producer, but cannot be the only one. In Exhibit 9 we
look at the hypothetical scenario under which Saudi was the only swing producer, all other
OPEC countries did not act, and there was no impact on non-OPEC supply from lower oil
prices.
We examine three scenarios and their implications for Saudis future production. The first
scenario assumes Libya continues to produce at its all-time low of 200 kbpd while Iraq does
not achieve any production growth at all; the second assumes a mild Libyan production
recovery to 600 kbpd while Iraq achieves only 50% of our assumed growth from its new
projects; and the third assumes recovery of Libyan supply to 1 mn bl/d while Iraq continues
its normal growth trajectory despite geopolitical events.
The analysis shows that even under a very bearish picture of continued Libyan supply
disruptions and no supply growth from Iraq, Saudi would be required to cut production to
below 8 mn bl/d to balance the market by 2018. This indicates that more adjustments in the
system are likely to be required, involving other OPEC countries and a slowdown of non-
OPEC growth.
2000
2200
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2800
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3200
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Exhibit 9: Saudi is unlikely to rebalance the market by itself if Libya comes back and Iraq
keeps growing
Saudi production required to balance the market in different scenarios

-
1.00
2.00
3.00
4.00
5.00
6.00
7.00
8.00
9.00
10.00
2015E 2016E 2017E 2018E
S
a
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d
i

c
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u
d
e

p
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u
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i
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n

t
o

b
a
l
a
n
c
e

t
h
e

m
a
r
k
e
t

(
m
b
p
d
)
Implied Saudi (Libya @ 200kbpd, Iraq no growth) Implied Saudi (Libya @ 600kbpd, Iraq 50% growth)
Implied Saudi (Libya @ 1 mmbpd , Iraq normal growth)

Demand growth remains poor; no clear signs of significant pick-up
Exhibit 10 shows that the gulf between gasoline and diesel demand growth in China has
widened since the start of the year. Diesel demand growth in China has averaged 1% since
2012 compared with 10.8% gasoline demand growth, reinforcing the view that
consumption growth in China remains strong, while industrial production lags. We expect
this trend to continue over the coming 6-12 months, although recently even gasoline has
shown some signs of weakening. Recent US oil demand datapoints suggest that the
exceptional growth in 4Q13 was led by weather, while the underlying growth is likely to be
0-500 kbpd yoy.
Exhibit 10: Chinas gasoline continues its divergence
from diesel demand
China yoy diesel and gasoline demand growth

Exhibit 11: US oil demand is stabilizing on a positive note
US oil demand growth (actual data is solid line, implied
weekly data is dotted line)

Source: CEIC.

Source: EIA.

OECD crude inventories have been building but product inventories are low
OECD crude inventories saw large seasonal draws in the last quarter of 2013 which has left
them lower than average. However, since then, inventories have gradually built up, largely
driven by an increase in US crude inventories. Total product inventories, on the other hand,
are at historical lows since the last quarter of 2013.
Exhibit 12: Current OECD crude inventory levels have
built up from the seasonal lows in January
OECD crude inventories (mn bl)

Exhibit 13: although product inventories are low
OECD total products inventories (mn bl)

Source: IEA.

Source: IEA.
-20%
-10%
0%
10%
20%
30%
China yoy diesel demand growth China yoy gasoline demand growth
-1500
-1000
-500
0
500
1000
1500
k
b
p
d
870
890
910
930
950
970
990
1010
1030
1050
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
m
n

b
l
s
2007 2008 2009 2010 2011 2012 2013 2014
870
970
1070
1170
1270
1370
1470
1570
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
m
n

b
l
s
2007 2008 2009 2010 2011 2012 2013 2014

Exhibit 14 shows that the time spreads have overshot the level currently implied by
inventories and reflect a market expectation of further inventory builds, consistent with a
surplus market.
Exhibit 14: Historically, building levels of inventories
support looser time spreads
Brent 2-year time spreads (US$/bl) against the inverse of
OECD inventories vs. their 5-yr avg (i.e. above zero implies
tighter inventories than the historical average)

Exhibit 15: Recent mom changes in OECD inventories (ex.
US NGLs) do not show a clear picture
Change in OECD industry inventories ex. US NGLs (mom,
mnbls)

Source: IEA, Bloomberg.

Source: IEA.

Saudi Arabia requires US$80-90/bl to balance its budget, on our analysis
Our analysis of the oil price required by the OPEC countries to balance their budgets
estimates an average OPEC breakeven price of US$95/bl, going to US$105 by 2015. The
Saudi Arabia breakeven price is currently US$85/bl on our estimates.
Exhibit 16: OPEC oil price required is currently US$95/bl,
on our estimates...
Oil price required by OPEC countries in aggregate to balance
their fiscal budgets (excluding Venezuela)

Exhibit 17: ...with Saudi requiring US$85/bl
Oil price required by OPEC countries (and Russia) to balance
their fiscal budgets (excluding Venezuela)

Source: IMF, Goldman Sachs Global Investment Research.

Source: IMF, Goldman Sachs Global Investment Research.

The global oil industry requires US$110/bl or more to balance the budgets
Exhibit 18 shows our estimate of the oil price required for the listed oil companies to be
free cash flow neutral after capex and dividends. It is a very steep curve, with significant
differentiation between companies and regions. In 2015, we estimate the vast majority of
the industry will need over US$100/bbl to balance the budget and the fourth quartile of this
graph needs US$130/bbl or more. The bottom quarter of the breakeven curve is dominated
by some of the better placed EM companies (Lukoil, PetroChina) and by some of the more
-170
-120
-70
-20
30
80
130
-15
-10
-5
0
5
10
15
20
25
30
35
B
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t

2
4

m
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n
t
h

t
i
m
e

s
p
r
e
a
d
Brent 24mth timespread
Inventories vs. 10yr trailing average
(inverted)
-50.0
-40.0
-30.0
-20.0
-10.0
0.0
10.0
20.0
30.0
40.0
50.0
m
n

b
l
s
10yr average 2013 2014
0
20
40
60
80
100
120
2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
U
S
$
/
b
l
Brent oilprice(US$/bl) requiredtobalanceOPEC fiscalbudgetsincluding Qatar from2001 andIraqfrom2004
Algeria
Angola
Iran
Iraq
Kuwait
Nigeria
Qatar
Saudi Arabia
UAE
Russia
20
40
60
80
100
120
140
20 40 60 80 100 120 140
O
il
p
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ic
e

r
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q
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ir
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d

(
U
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t
o

b
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b
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d
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2
0
1
4
E
Oil price required (US$/bl) to balance budget 2009
Indi a Economi cs
Analysing the Implications of Lower Commodity Prices
October 13, 2014
For important disclosures, refer to the Disclosures Section, located at the end of this report.
93
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t
-
1
4
Commodity Terms of Trade excluding gold & silver 3MMA
Source: IMF, Bloomberg, Haver, Morgan Stanley Research
M O R G A N S T A N L E Y R E S E A R C H
Asi a/Paci fi c

India Economics Team

Morgan Stanley Asia Limited

Chet an Ahya
[email protected]
+852 2239 7812

Morgan Stanley India Company Private Limited

Upasana Chachr a
[email protected]
+91 22 6118 2246

2
India Economics
October 13, 2014
Commodity Imports Account for 52% of Indias Total Imports but only 9% of Exports
Source: CEIC, Ministry of Fertilizer, GoI, BP Stats 2014, Morgan Stanley Research
Key Commodit i es Production Consumpt ion Imports
Net Exports as %
of Demand
Coal
Mt oil
equivalent 593 753 -160 -21
Oil Mn tonnes 42 175 -133 -76%
Steel Mn tonnes 75 74 1 1%
Edible Oil Mn tonnes 8 19 -12 -61%
Fertilizer Mn tonnes 16 24 -8 -33%
As commodity prices are weakening after a long super-cycle, India is beginning to benefit from improving
terms of trade. Indias net commodity imports had risen steadily from 1.9% of GDP in F2002 to a peak of
7.4% of GDP in 2008, and remained elevated at 7% of GDP until 2012. India is relatively self-sufficient for
iron (and steel), bauxite (and aluminum) and has a relatively large opportunity in thermal coal mining
(though regulatory, logistics and other constraints have meant that India is dependent on imports too).
Indias key commodity imports are crude oil, coal (thermal and coking), edible oil, fertilizers and
minerals/ores (such as copper and lead).
3
India Economics
October 13, 2014
Commodity Imports Account for 52% of Indias Total Imports but only 9% of Exports
Oil imports constitute the
largest share in commodity
imports. Net oil accounts for
91% of the net commodity
imports
Source: CEIC, Morgan Stanley Research
As % of GDP Exports Imports
Net
Exports
F2014 F2014 F2014
Commodity 6.4% 12.3% -5.9%
Food 1.5% 0.7% 0.9%
Oil 3.3% 8.8% -5.5%
Mica, Coal & Other Ores, Minerals 0.2% 1.6% -1.4%
Fertilizers - 0.3% -0.3%
Iron, Steel, ferrous and non ferrous
metals 1.3% 0.9% 0.4%

Non Commodity 10.2% 11.5% -1.3%
Engineering Goods 2.0% 3.0% -1.0%
Gems & J ewellery 2.2% 3.0% -0.8%
Textiles, including readymade garments 1.3% 0.2% 1.0%
Drugs & Pharmaceuticals 0.8% 0.2% 0.6%
Organic & Inorganic Chemicals 0.3% 1.1% -0.7%
Electronic goods 0.4% 1.6% -1.2%
Others 3.2% 2.4% 0.8%
Total (Commodity + Non Commodity) 16.7% 23.9% -7.2%
Includes gold imports
4
India Economics
October 13, 2014
Prices of Indias Commodity Import Basket Has Risen 112% In last 12 years in Real Terms
Source: Bloomberg, Morgan Stanley Research

Trend in Commodity Prices in US$ and INR terms
275
438
212
85
185
285
385
485
585
J
a
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0
2
J
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-
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2
N
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A
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9
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M
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in US$ terms
in INR terms
In INR, Deflated by GDP Deflator
India's Imported Commodity Price Trend* (Jan 2002 = 100)
Pre Crisis -
Period of sready rise in commodity prices
Immediately
post crisis -
correctionin
commodity
prices
Post Crisis -rising
commodity prices
Since Apr-14
commodity
prices moving
lower
10Yr CAGR:
13.2%
10Yr CAGR:
5.1%
10Yr CAGR:
6.0%
100
2004-2008: A systemic rise in commodity prices
particularly in oil prices since 2002 has meant steady
deterioration in terms of trade. However, with strong
productivity growth with steady rise in investment to GDP
and savings to GDP, India could absorb this rise in
commodity prices.
2008-2010: As commodity
prices collapsed, commodities
trade deficit fell sharply and
remained within manageable
limits.
2011-2013: Rise in oil prices
above US$100/bbl and a
simultaneous deterioration in
productivity dynamic reflected
in quick deterioration in macro
stability indicators beyond
RBIs comfort zone. Weaker
currency caused further
pressure on deficit
Apr-2014 onwards: Improvement in
macro stability and stabilization of
currency trend began to translate in slow
improvement in terms of trade since Apr-
2014
* Commodity price
index is constructed
based on prices of
Brent oil, crude
palmoil, fertilizer
and coal prices
(which constitute
Indias top
commodity imports
excluding gold)

5
India Economics
October 13, 2014
Prices of Indias Commodity Import Basket Have Recently Declined in INR Terms

Trend in Commodity Prices YoY%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
O
c
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0
3
F
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4
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6
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7
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4
In Rupee Terms, YoY%
In Dollar Terms, YoY%
India's Imported Commodity Price Trend
Since Apr-14 commodity prices for
key imports have started to
decelerate in INR terms
* Commodity price
index is constructed
based on prices of
Brent oil, crude
palmoil, fertilizer
and coal prices
(which constitute
Indias top
commodity imports
excluding gold)

6
India Economics
October 13, 2014
Commodity Trade Balance To Narrow As Commodity Terms of Trade Improves
Evolution of Commodity Trade Balance
Source: CEIC, Ministry of Commerce, Morgan Stanley Research
0.4%
0.8%
-3.1%
-5.1%
-0.3%
-0.3%
-1.2%
0.6%
0.2%
-2.5%
-0.1%
-5.5%
-9%
-7%
-5%
-3%
-1%
1%
A
u
g
-
0
4
F
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-
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5
A
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6
A
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6
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7
A
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7
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8
A
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8
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9
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9
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1
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A
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1
4
Food Products (incld edible oil) Oil
Fertilizer Coal, other ores and minerals
Iron, Steel, ferrous and non ferrous metals Total
12M trailing sum as % of GDP
Peak commodity trade deficit of
7.4% of GDP in CY 2008
Immediately post credit crisis
commodity trade deficit declined
to 4.7% of GDP in CY 2009
Combination of
deteriorating domestic
macro stability and rise in
global crude oil prices led
to widening of commodity
trade deficit to 7% of GDP
in CY 2012
Commodity trade
deficit has
narrowed to 5.5%
of GDP for
12months ended
Aug-14
7
India Economics
October 13, 2014
Evolution of Indias Terms of Trade Since 2002 When Commodity Super Cycle
Began
Four Phases of Terms of Trade Evolution

1) 2002-2008 (Pre-credit crisis): A systemic rise in commodity prices particularly in oil prices since 2002 had meant
steady deterioration in terms of trade. Commodities trade deficit also widened sharply from 1.9% of GDP in F2002 to
4.2% in 2007. However, with strong productivity growth with steady rise in investment to GDP and savings to GDP, India
could absorb this rise in commodity prices. Indeed up to 2007, while oil prices had already risen to US$100/bbl Indias
inflation and current account deficit were well within RBIs comfort zone. However, oil prices spiked sharply in short span
to US$145/bbl in J uly 2008, Indias commodities trade deficit shot sharply to 7.4% of GDP in 2008 pushing the current
account deficit to 2.4% of GDP and inflation also pushed higher than RBIs comfort zone.

2) 2H2008: 2010 (Immediately post credit crisis): Immediately post crisis commodity prices collapsed and that led to a
fall in the commodities trade deficit which remained within manageable limits.

3) 2011 to 2013 (Period of rise in commodity prices and increasing domestic macro stability): Rise in oil prices
above US$100/bbl and a simultaneous deterioration in productivity dynamic reflected in quick deterioration in macro
stability indicators beyond RBIs comfort zone. Productivity growth suffered post credit crisis macro policies of pushing
growth with the support of high fiscal deficit, labour market policy encouraging strong growth and corruption scandals
related investigation slowing down administrative machinery. Moreover, RBIs decision to pursue with negative real rates
increased the macro stability risks with higher gold imports and wider current account deficit. This in turn reflected in
weaker currency causing further widening in commodities trade deficit. Weaker domestic coal and iron ore production
only added to the deterioration in commodities trade deficit. Rise in coal imports and decline in iron ore exports pushed
the trade deficit higher by approx 0.8% of GDP. Weaker productivity dynamic also reflected in decline in Indias market
share in global goods exports and a higher current account deficit.

4) 2Q2014 onwards (gradual improvement in terms of trade): While commodity price rise has softened since 2012,
Indias poor macro stability and weaker currency have delayed the benefits of this development. For instance, crude oil
prices were flat between 2012 and 2013 in USD terms but in INR terms, oil prices moved higher by 11.5%. However,
improvement in macro stability and stabilization of currency trend began to translate in slow improvement in terms of
trade since 2Q2014. Over the last two months with oil prices declining by 16%, Indias terms of trade are beginning to
see a big improvement.
8
India Economics
October 13, 2014
Commodity Terms of Trade Have Started to Improve Since July 2014
Source: IMF, Bloomberg, CEIC, Haver, IMF Morgan Stanley Research E-Morgan Stanley Research Estimate
Trend in Total Factor Productivity Growth %, YoY
Trend in Commodity Terms of Trade vs. Commodity
Trade Balance
-1
0
1
2
3
4
5
6
F
1
9
9
7
F
1
9
9
9
F
2
0
0
1
F
2
0
0
3
F
2
0
0
5
F
2
0
0
7
F
2
0
0
9
F
2
0
1
1
F
2
0
1
3
F
2
0
1
5
E
Total Factor Productivity
High TFP shows improving
productivity trend
Steady improvement in TFP
between 2004-2007 helped to
better manage the rise in
commodity prices
-7.3%
-5.5%
-10%
-9%
-8%
-7%
-6%
-5%
-4%
-3%
-2%
-1%
93
94
95
96
97
98
99
100
101
O
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0
2
O
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-
0
3
O
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0
4
O
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0
5
O
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t
-
0
6
O
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0
7
O
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-
0
8
O
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t
-
0
9
O
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-
1
0
O
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-
1
1
O
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1
2
O
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1
3
O
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4
Commodity Terms of Trade excluding gold & silver
Commodity Trade Balance (3M Trailing Sum, Annualised), RS
Slowing productivity growth
meant weaker capacity to
absorb higher commodity
prices
9
India Economics
October 13, 2014
Impact of Terms of Trade On Evolution of Current Account Deficit
Source: CEIC, Morgan Stanley Research
Current Account Deficit Has Narrowed in Last 12 Months
-7%
-6%
-5%
-4%
-3%
-2%
-1%
0%
1%
2%
3%
-100
-80
-60
-40
-20
0
20
40
J
u
n
-
9
6
J
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-
9
7
J
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-
9
8
J
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-
9
9
J
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-
0
0
J
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0
1
J
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0
2
J
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3
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0
4
J
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5
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0
6
J
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0
7
J
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8
J
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0
9
J
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1
0
J
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1
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3
J
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1
4
% of GDP, RS
US$ bn, LS
Current Account Deficit,
Trailing 4-quarter sum
Pre Credit Crisis
Immediately
post crisis
Widening CAD
between 2011-2013
2002-2008: Current account deficit remained in a
manageable range as strong productivity growth
with steady rise in savings and investment to GDP
meant CAD did not widen beyond 2.5% of GDP
2008-2010: Fall in
commodity prices led to
narrowing commodity trade
balance and CAD remained
in check
2011-2013: Widening CAD
due to deterioration in
productivity, rising commodity
prices, persistent negative
real rates and overvalued
exchange rate
3Q2013 onwards: Trend in
CAD improved with help of
restrictions on gold imports,
compression of non oil non gold
imports and better export
growth. However full benefit of
lower commodity prices was
delayed due to weaker currency
10
India Economics
October 13, 2014
Bottom-line: If Commodity Prices Stay Flat for the Next 12 Months, What Would it Mean for
Indias Terms of Trade and Macro Stability Indicators?
Impact CPI WPI
CAD as % of
GDP
Oil* -0.3% -0.8% to -1% -0.6%
Coal# -0.2% -0.2% -0.1%
Fertilizer NA -0.3% -0.03%
Iron & Steel NA -0.9% 0.01%
Impact of a 10% Decl i ne i n Pri ces (Di rect Impact)
Source: CEIC, CSO, Morgan Stanley Research
*indirect impact could be of a similar magnitude for both CPI and WPI
#indirect impact will also be through pass through in electricity prices
We have used weights from consumer expenditure survey to analsye the impact on CPI
Bottom-line: Decline in commodity prices is resulting in significant improvement in Indias terms of
trade. If current levels of commodity prices are maintained for the next 12 months, we estimate
that Indias net commodities trade deficit could decline by approximately 1% pt to 4.5% of GDP
from 5.5% of GDP as of 12 months ended August 2014 and the recent peak 7% of GDP in 2012.
Correspondingly, this will mean Indias current account deficit, subsidy burden (fiscal deficit) and
inflation will be lower.
11
India Economics
October 13, 2014
Appendix Oil Subsidy Details
Source: Morgan Stanley India Oil & Gas Research Team, - Vinay J aising
F2013 F2014 F2015E F2016E F2017E F2018E
Diesel, INR bn 921 628 117 - - -
LPG (cooking gas), INR bn 396 465 428 378 347 343
Kerosene, INR bn 294 306 272 232 176 132
Total - Rs bn 1610 1,399 817 610 523 475
Total - US$ bn 29.6 22.6 13.6 10.2 8.7 7.9
As % of GDP 1.6% 1.2% 0.6% 0.4% 0.3% 0.3%
Oil Orice US$/bbl 110.4 110 102 99 99 99
Oil Orice US$/bbl Avg 110.4 107.5 104.8 99 99 99
FX Rate (INR/US$) 54.4 62 60 60 60 60
Govt Share (%) 62% 51% 19% 0% 0% 0%
Govt share (INR bn) 1000 708 157 - - -
As % of GDP (Fiscal Deficit Impact) 0.99% 0.62% 0.12% 0.00% 0.00% 0.00%
Savings in Fiscal Deficit (FY14 levels) 0.00% -0.37% -0.50% -0.62% -0.62% -0.62%
12
India Economics
October 13, 2014
Appendix - Trend in Key Global Commodity Prices
Key Commodity Prices in INR (YoY%) Key Commodity Prices in US$ (YoY%)
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Apr-04 Oct-05 Apr-07 Oct-08 Apr-10 Oct-11 Apr-13 Oct-14
CRB Food
CRB Commodity
CRB Metal
Brent Crude ~rhs
3MMA YoY in INR terms
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
-60%
-40%
-20%
0%
20%
40%
60%
80%
100%
Apr-04 Oct-05 Apr-07 Oct-08 Apr-10 Oct-11 Apr-13 Oct-14
CRB Food
CRB Commodity
CRB Metal
Brent Crude ~rhs
3MMA YoY in USD terms
13
India Economics
October 13, 2014
Appendix - Trend in Commodity and Non Commodity Trade Balance
Source: CEIC, CMIE, Ministry of Commerce, Morgan Stanley Research
As % of GDP
F2013 F2014 F2015* F2013 F2014 F2015* F2013 F2014 F2015*
Commodit y 6.1% 6.4% 5.8% 12.9% 12.3% 11.0% -6.8% -5.9% -5.2%
Food 1.3% 1.5% 1.3% 0.8% 0.7% 0.6% 0.5% 0.9% 0.6%
Oil 3.3% 3.3% 3.3% 8.8% 8.8% 7.6% -5.5% -5.5% -4.3%
Mica, Coal & Other Ores, Minerals 0.2% 0.2% 0.2% 1.8% 1.6% 1.2% -1.6% -1.4% -1.0%
Fertilizers 0.5% 0.3% 0.3% -0.5% -0.3% -0.3%
Iron, Steel, ferrous and non ferrous metals 1.3% 1.3% 1.1% 1.1% 0.9% 1.3% 0.2% 0.4% -0.2%
Non Commodit y 10.0% 10.2% 9.3% 13.4% 11.5% 10.4% -3.4% -1.3% -1.1%
Engineering Goods 1.9% 2.0% 2.3% 3.6% 3.0% 2.0% -1.7% -1.0% 0.3%
Gems & J ewellery 2.3% 2.2% 1.8% 4.2% 3.0% 2.5% -1.9% -0.8% -0.7%
Textiles, including readymade garments 1.1% 1.3% 1.1% 0.2% 0.2% 0.1% 0.9% 1.0% 1.0%
Drugs & Pharmaceuticals 0.8% 0.8% 0.7% 0.2% 0.2% 0.3% 0.6% 0.6% 0.5%
Organic & Inorganic Chemicals 0.3% 0.3% 0.6% 1.0% 1.1% 0.9% -0.7% -0.7% -0.3%
Electronic goods 0.4% 0.4% 0.3% 1.7% 1.6% 1.8% -1.3% -1.2% -1.5%
Others 3.2% 3.2% 2.5% 2.5% 2.4% 2.8% 0.7% 0.8% -0.3%
Tot al (Commodit y + Non Commodit y) 16.1% 16.7% 15.1% 26.3% 23.9% 21.4% -10.2% -7.2% -6.3%
* Annualized April to August trade figures
Expor t s Impor t s Net Expor t s
Preparing for the global liquidity drought
India must monitor corporate leverage and build macroeconomic credibility

The growing strength of the dollar against other currencies with each passing day underlines the
realignment underway in global markets in anticipation of tighter monetary policy in the US. Monetary
tightening in the US has in the past led to turbulence in emerging markets, and there is no reason why
this time should be different.

Although the rupee has been facing depreciatory pressure over the past few weeks, it has been among
the more stable emerging market currencies this year, after being one of the worst-hit last year when
fears of tighter monetary policy in the US first surfaced. A key reason for the relative resilience of the
rupee is the improvement in Indias economic fundamentals over the past year. The current account
deficit has shrunk, inflation has fallen and the election of a stable government that has committed to
fiscal consolidation has reduced political risks, and even led to a sovereign ratings upgrade.

However, there are dark clouds on the horizon, and policymakers must pay attention to them before
things spiral out of control. Most of Indias problems relate to debt. This year, foreign investors have
pumped in nearly $21 billion net investments in debt markets compared with net investments of $13
billion in Indian equities. Debt flows are much more fickle than equity flows and can reverse quickly. The
initial run on the rupee in mid-2013 was after all caused solely by debt outflows. As and when global
money managers start paring exposures to emerging markets, Indian debt markets are likely to see
outflows again. Some analysts have argued that the recent slump in international commodity markets
reflects pessimism about global growth prospects and signals growing risk aversion. If thats true,
emerging market equity assets could be the next asset class to witness a sharp correction.

Thats not all. Many large corporations in India have sizeable overseas borrowings, a large chunk of
which is unhedged. Several of them are stuck in long gestation or unviable projects, and are unable to
generate cash flows that can repay their domestic and overseas loans. With the dollar becoming
expensive and global interest rates set to increase, the costs of servicing foreign loans will only rise. As
this newspaper has argued earlier, the pile-up of debt has become the Achilles heel of the Indian
economy. Foreign loans have allowed Indian companies easy access to cheap finance for the past few
years, but with global liquidity drying up, the chickens are coming home to roost.

According to data from the Reserve Bank of India, Indias external debt-to-gross domestic product (GDP)
ratio rose 1.3 percentage points to 23.3% in the year ended March over the previous year. Short-term
debt by residual maturity as a proportion of overall debt was 40% on March. But these numbers are
likely to be gross underestimates of Indias true external vulnerability. Very often, foreign subsidiaries of
Indian companies take overseas loans, or issue dollar-denominated debt instruments abroad, and then
use such funds to make rupee investments, leading to a currency mismatch. Using data from the Bank of
International Settlements (BIS), Hyun Song Shin, a professor at Princeton University and one of the
foremost financial economists in the world, has shown that the gap between official debt figures and
the actual foreign exposures of companies has grown since 2010 for most emerging markets, including
India.

Shin calls the post-2010 era the second phase of global liquidity in which emerging market corporations
have replaced banks as the key conduits of capital flows across the world. In essence, emerging market
companies have taken on a carry trade, by financing local assets with apparently cheap dollars. So far,
the arrangement has suited both purchasers of emerging market corporate bonds, who desired higher
yields in a low yield environment, and the issuers, who have received access to cheap finance. But the
turning tide of global liquidity can prove lethal for such trades. The volatility emerging markets faced in
2013 was because of such currency and risk mismatches, and we may be headed for another storm
soon. While India wont remain unaffected, we can weather the storm better if policymakers act now to
minimize the possible impact by monitoring corporate leverage levels more closely, and by building
credibility on Indias macroeconomic policies.

Sourc: http://www.livemint.com/Opinion/DuBD0yGvWn7CbiucX4i9fO/Preparing-for-the-global-
liquidity-drought.html

Monetary policy
When will they learn?
Oct 14th 2014, 9:40 by R.A. | LONDON

THE monetary economics of a world in which interest rates are close to zero are not especially
mysterious. Stimulating the economy at that point requires central banks to raise expected inflation.
Disinflation, by contrast, results in passive tightening, since the central bank can't lower its policy
rate and since the real interest rate is the policy rate less expected inflation. In this world, the
downside risks are much larger than those to the upside. There is infinite room to raise interest rates
if inflation runs uncomfortably high (one might even welcome that opportunity to push rates up as
that would reduce the probability that rates would fall to zero again in future). But there is no room to
reduce interest rates if inflation is running to low. That, in turn, forces central banks to use
unconventional policy or run psychological operations to try to boost expectations. Central banks are
not very good at those sorts of things.
You need to overshoot, in other words, because undershooting feeds on itself. The zero lower bound
is a heavy drag on an economy that must be thrown off by rapid growth. If a central bank is too
cautious it will not simply fail to escape the ZLB; the effort of trying to provide stimulus through
unconventional routes may lead to stimulus fatigue. The central bank may simply become less
willing to take the necessary expansionary steps, creating an increased risk that the weight of the
ZLB drags the economy beneath the waves.
Fatigue may be setting in at the Federal Reserve, which is expected to end its asset-purchase
programme at its meeting later this month. Hawkish members of the Federal Open Market
Committee are seizing on a relatively low and falling unemployment rate and on good hiring
numbers as evidence that the economy can stand on its own. And if the Fed's main policy rate were
at 4% rather than just above 0%, they might have a point. But the FOMC ought to have learned by
now that an economy at the ZLB does not function like an economy in which interest rates are well
above zero.
The threat is clear enough. Inflation in America is below the Fed's 2% target and looks to be falling
again. The disinflationary winds blowing in from abroad are strengthening to a gale. Commodity
prices are tumbling; cheaper resources will have a direct disinflationary impact in America but also
signal a weakening global economy which should itself reduce inflationary pressures. Inflation in the
euro zone has tumbled to 0.3%, and with many of the euro area's large economies in or near
recession the downside economic risks in Europe are substantial. In Britain, which alongside
America is the closest thing the rich world has to an economic success story, inflation has dropped
sharply to just 1.2%, and markets are revising outward the date at which the Bank of England is
expected to raise interest rates.
American markets are once again hunkering down for a bout of disinflation. Expectations for inflation
over the next five years have fallen half a percentage point since July, to around 1.5%: a level at
which the Fed has previously moved to begin new asset purchases. The yield on long-term
Treasuries is tumbling again; the 10-year is down to around 2.2%, from nearly 3% earlier this year.
Equity prices are sinking while the dollar is rising sharply. And futures markets now suggest the first
increase in the Fed's main policy rate will not occur until January of 2016.
My question for the Fed is: what happens when disinflation continues in November and December
after the Fed has termintated its asset purchase programme? Is it prepared to start purchases up
right away, or will it wait to see whether things turn around? If so, how long is it prepared to wait?
What is the plan here? Employment growth is not going to continue at current rates for very long if
inflation expectations continue to behave this way while interest rates are at zero.
There are so many ways things around the rich world could go very badly in coming months. The
euro zone, in particular, is entering a new and dangerous crisis phase, with Germany seemingly
committed to fiscal tightening even as its economy falls into recession alongside France and Italy. A
renewed dip into recession could lead to revolt, in markets or in the political systems of peripheral
economies that have had enough of economic contraction forever.
The sensible course is what it has been for the last six years: keep pushing until the economy is well
clear of danger. If inflation gets up to 3% or 4% or 5%, well, there are far worse things, and the
response is simple enough: tighten policy. Erring in the opposite direction may end up far more
costly, however. As, I fear, we all may learn.

CALIFORNIA MANAGEMENT REVIEW VOL. 49, NO. 4 SUMMER 2007 6
Misunderstanding the
Nature of Company
Performance:
THE HALO EFFECT AND
OTHER BUSINESS DELUSIONS
Phil Rosenzweig
I
n February 2005, Dell Computer was ranked #1 among the Worlds
Most Admired Companies by Fortune magazine. Just two years later,
in February 2007, amid slumping performance, Michael Dell removed
CEO Kevin Rollins and took over the reins to revive the company.
What had gone wrong? Observers were quick to offer their views.
According to Business Week, Dell succumbed to complacency in the belief that its
business model would always keep it far ahead of the pack. It had been lulled
into a false sense of security. An unsuccessful acquisition was said to be evi-
dence of hubris.
1
In Leadership Excellence, a management consultant explained
that Dell got stuck in a rut and became reluctant to change. When rivals had
matched Dells strategy of customization, managers fell back on an old practice:
they cut costs to maintain market share. The Financial Times quoted a business
school professor at the University of Maryland who opined: [Dell has] forgotten
how to make customers happy. I have to believe the problems with the company
are cultural and they begin at the top.
2
Dells misfortunes made for an irresistible storyHow the mighty have
fallen. The reasons that were advancedcomplacency, hubris, reluctance to change,
and poor leadershipall sounded reasonable. They offered explanations that most
readers would nd sensible and satisfying. On closer inspection, however, the
coverage of Dell illustrates some of the common errors that distort our under-
standing of company performance.
Start with the suggestion that Dell had been complacent. Its easy to
infer from Dells slowing performance that it must have been complacent,
but the claim doesnt stand up to closer scrutiny. In fact, as far back as the late
1990s, Michael Dell and his top managers knew that their dominance wouldnt
last forever. They identied new growth opportunities, seeking to build upon
Purchased by SANJAY BAKSHI ([email protected]) on September 22, 2012
Dells core strengtha disciplined fast-cycle manufacturing process. High on
their list were related hardware products where they might apply this capability,
such as computer storage, printers, and televisions. Dell also acquired a com-
panyConvergeNetthat promised a sophisticated new storage product. None
of these actions are evidence of complacency. Further, Dell responded to
renewed competition by nding new ways to lower costs, hardly evidence
of an unwillingness to change.
A fair-minded assessment suggests that for Dell, extending its manufac-
turing model into related products was a sensible strategy. Suppose that Dell
had never tried to expand into new eldsthat might be grounds to charge it
with complacency. Or suppose that Dell had ventured into entirely different
businesses, such as software or consulting, or into a very different product seg-
mentthat might be evidence of hubris. Such a choice would have been much
less sensible, and if things had gone badly, the press would have hammered Dell
for abandoning its core strength in pursuit of an impossible dream. Michael Dell
would have been accused of arrogance and derided for a nave belief that he
could succeed in very different markets.
The Halo Effect and the Problem of Data Independence
The story of Dell is an example of errors we commonly make in explain-
ing company performance. Today, knowing that Dells performance faltered, its
easy for pundits and professors to claim that someone blundered. Decisions that
turned out badly are castigated as bad decisions. However, these sorts of judg-
ments are erroneous, made retrospectively in light of what we know to have
happened subsequently. These errors are surprisingly widespread in the business
world. They affect not only journalistic accounts about specic companies, but
also undermine the data used for large-scale studies about company perfor-
mance. They lead to a broad misunderstanding of the forces that drive company
success and failure. As we will see below, some of the most popular business
studies in recent years are undermined by fundamental problems of data
integrity.
One of the root causes is the halo effect. First identied by American psy-
chologist Edward Thorndike in 1920, the halo effect describes the basic human
tendency to make specic inferences on the basis of a general impression.
3
How is the halo effect manifested in the
business world? When a company is doing well,
with rising sales, high prots, and a surging
stock price, observers naturally infer that it has
a smart strategy, a visionary leader, motivated
employees, excellent customer orientation, a
vibrant culture, and so on. When that same
company suffers a declinewhen sales fall and prots shrinkmany people are
quick to conclude that the companys strategy went wrong, its people became
complacent, it neglected its customers, its culture became stodgy, and more. In
Misunderstanding the Nature of Company Performance
Phil Rosenzweig is a Professor of Strategy and
International Management at IMD in Lausanne,
Switzerland, and author of The Halo Effect: . . .
and the Eight Other Business Delusions That
Deceive Managers (Free Press, 2007).
<[email protected]>
fact, these things may not have changed much, if at all. Rather, company perfor-
mance creates an overall impression that shapes how we perceive its strategy,
leaders, employees, culture, and other elements.
The halo effect helps explain the way that Dells performance was
described. As long as Dell was successful, observers marveled at its strategy,
its focus on customers, its disciplined operations, and its execution skills. When
performance began to falter, those same things were seen in a different light.
Very much the same thing happened at Cisco Systems, which was praised in
the late 1990s for its brilliant strategy, its superb management of acquisitions,
and its laser-like customer focus. When the tech bubble burst, Cisco was sud-
denly derided for a awed strategy, sloppy acquisition management, and poor
customer relations. In fact, Cisco really had not changed mucha decline in
performance led people to see the company differently. The same happened at
IBM and ABBthey were admired for when performance was strong, then criti-
cized for the exact same things when performance fell, with little evidence of
meaningful changes. Why is the tendency to make these attributions so strong?
Because many everyday concepts in businessfrom leadership to corporate
culture, and from core competencies to customer orientationare ambiguous
and difcult to dene objectively. Our perceptions of them are therefore often
based on other things that appear to be more concrete and tangible, namely
nancial performance. When nancial performance is strong, people tend to
have broadly favorable opinions of other things that are less tangible; and when
performance falters, they make the opposite judgments. As a result, many of the
things that we commonly believe drive company performance are better under-
stood as the result of performance.
The halo effect may seem at rst like harmless hyperbole that that helps
reporters tell a coherent and satisfying story. In fact, however, the halo effect
is pervasive in the business world and affects much more than journalistic
accounts. In a series of experiments about group performance, UC Berkeley
professor Barry Staw (then at the University of Illinois) showed that members
attribute one set of characteristics to groups they believe are high performers,
and a very different set of characteristics to groups they believe are low perform-
ers.
4
When told their group had performed well, members described it as having
been more cohesive, with better communication, and more open to change;
when told it had performed poorly, they remembered the opposite. In fact, the
groups had done just about as wellthe only difference was what Staw had told
them about their performance. Similarly, in a series of studies about leadership,
James Meindl and his colleagues found that the words used to describe leaders
were highly dependent on the performance of the company. In fact, they con-
cluded that there was no adequate theory of leadership in the absence of knowl-
edge about company performance.
5
A successful company with a strong record
of performance? The leader appears to be visionary, charismatic, with strong
communication skills. A company that has suffered a downturn? The same
leader appears to be hesitant, misguided, or even arrogant.
6
The halo effect is
also present in large-scale surveys. A prominent example is the Fortune Most
UNIVERSITY OF CALIFORNIA, BERKELEY VOL. 49, NO. 4 SUMMER 2007 8
Admired Survey, where evaluations of things such as managerial talent, product
quality, and innovation have all been shown to be affected by the halo cast by
nancial performance.
7
In sum, the halo effect has a powerful inuence on our evaluations of
company performance, whether we look at evidence from experiments, from
empirical studies of surveys, or from content analysis of journalism. The impli-
cation is clear: data independence is vital. As long as people are asked to assess
companies when they already have an opinion about its performance, their
evaluations are likely to be biasedand their resulting ndings of questionable
value.
Popular Studies of Company Performance:
Dubious Data and Flawed Findings
Fortunately, many researcherswhether at business schools, in research
institutes, or in consulting rmsare careful to be sure that their data are valid.
Yet some of the most inuential studies of recent years have relied on data of
doubtful quality, leading to questionable ndings and to a general misunder-
standing of company performance.
Reliance on contaminated data is the principal aw in several of the most
popular studies from recent years. Lets look at three of the most inuential.
1982In Search of Excellence: Lessons
from Americas Best-Run Companies
The rst of the modern business blockbusters was In Search of Excellence:
Lessons from Americas Best-Run Companies by Tom Peters and Robert Waterman,
both at McKinsey & Co.
8
Peters and Waterman asked a basic question: Why are
some companies more successful than others? They began by identifying 43 excellent
American companies, including Boeing, Caterpillar, Digital Equipment, Hewlett-
Packard, IBM, Johnson & Johnson, McDonalds, Procter & Gamble, and 3M.
Next, they gathered data from archival sources, press accounts, and from inter-
views. Based on these data, Peters and Waterman identied eight practices that
appeared to be common to the Excellent companies, including a bias for action,
staying close to the customer, stick to the knitting, and simultaneous loose-
tight properties.
In Search of Excellence was an enormous popular success, in part because it
inspired American managers at a time when they felt beleaguered by Japanese
competitors. Managers felt reassuredby following these eight principles, they
were told, they could lead their companies to high performance. Yet when we
look at the sources of data, we nd that Peters and Waterman relied on sources
that were likely to be compromised by the halo effect. Its no surprise that Excel-
lent companies were thought to be good at managing people and listening to
customers, or were said to have strong values or a good corporate culture. Thats
what was said about Cisco and ABB, and more recently about Dell. Thats very
much what we would expect given the halo effect.
In the years after the study ended, the performance at most of the 43
Excellent companies regressed sharply. Over the next ve years, only one-third
of the Excellent companies grew faster than the overall stock market, while the
rest failed to keep up. If we look at protability rather than stock market perfor-
mance, the record is even worse: of the 35 companies for which data were avail-
able, only 5 improved their protability, while 30 declined. Whether we look to
market measures or prot measures of performance, the pattern is the same:
most of these companies, selected precisely for their high performance, did not
maintain their edge.
The rapid decline in performance seems puzzling if we believe that Peter
and Waterman had successfully isolated the reasons for high performance. It
would be remarkable that so many Excellent companies, which did so many
things well, would fade so quickly. Yet the pattern of regression is entirely rea-
sonable when we realize that their ndings were, for the most part, not the
causes of performance but rather attributions based on performance. In fact, the
research method of Peters and Waterman contained two basic errors. First, they
studied a sample made up entirely of outstanding companies. They selected their
sample based on the dependent variablethat is, based on outcomes. If we look
only at companies that have performed well, we can never hope to show what
makes them different from companies that perform less well. Compounding this
error was a second mistake: much of their data came from sources that are com-
monly biased by the halo effect. By relying on sources of data that are not inde-
pendent of performance, the data were tainted from the start. The result may
have been a pleasing set of stories, but it was hardly a valid description of why
some companies were high performersor what other companies could do to
achieve similar success.
1994Built to Last: Successful Habits of Visionary Companies.
Jim Collins and Jerry Porras of Stanford University conducted the most
inuential study of company performance in the 1990s.
9
Rather than focus on
todays successful companiesmany of which might soon falter, as had the com-
panies studied by Peters and WatermanCollins and Porras turned their atten-
tion to companies that had been successful over the long term. They hoped to
nd the underlying timeless, fundamental principles and patterns that might
apply across eras (italics in the original).
Collins and Porras began by identifying 200 leading companies from
a wide range of industries, then narrowed their sample to include the most
durable and successful of them all, the best of the best. Eighteen companies
were worthy of this distinctiontruly outstanding, enduring, visionary compa-
nies. Included were some of the great names of American business: high-tech
companies such as IBM, Hewlett-Packard, and Motorola; nancial services giants
such as Citicorp and American Express; health care companies such as Johnson
& Johnson and Merck; plus Boeing, General Electric, Procter & Gamble, Wal-
Mart, Disney, and more.
Collins and Porras knew that In Search of Excellence had made a fundamen-
tal error by simply looking for commonality among successful companies. As
they noted, if you look at a group of successful companies and try to nd what
they have in common, you might conclude that they all reside in buildings.
Very true, but hardly something that distinguishes successful companies from
less successful ones, or that might conceivably lead to success. So Collins and
Porras went a next step: for each of their Visionary companies, they identied
a Comparison company from the same industry, of about the same vintage, and
that was a good performernot a dog. Boeing was paired with McDonnell
Douglas, Citicorp with Chase Manhattan, Hewlett-Packard with Texas Instru-
ments, Procter & Gamble with Colgate-Palmolive, and so forth. This way, they
might be able to isolate what made the most successful and enduring companies
different from others that werent quite so outstanding.
The next step was to study these 18 matched pairs. Supported by a team
of researchers, Collins and Porras undertook an extensive process of data collec-
tion. They read more than 100 books including company histories and autobi-
ographies. They consulted more than 3,000 documents, from magazine articles
to company publications. They read business school case studies. All together,
they amassed data that lled several cabinets and bookshelves. As they described
it, their research method was disciplined and rigorous.
Based on their data, Collins and Porras distilled their ndings into a set of
timeless principles that distinguished the 18 Visionary companies from the 18
Comparison companies: having a strong core ideology that guides the companys
decisions and behavior; building a strong corporate culture; setting audacious
goals that can inspire and stretch people; developing people and promoting them
from within; creating a spirit of experimentation and risk taking; and driving for
excellence.
Yet for all their claims of rigorous research, Collins and Porras never
addressed the basic issue of data independence. Much of the data they gathered
came from sources that are known to be undermined by the halo effect. Unfor-
tunately, if the data are biased, it doesnt matter how many cabinets and book-
shelves are lled. Pick any group of highly successful companies and look
backwards, relying on articles in the business press and on retrospective inter-
views, and you may well nd that theyre said to have strong cultures, solid
values, and a commitment to excellence. Pick a group of comparison companies
that are good but not outstanding, and theyre likely to be described in some-
what lesser terms. But unless the data were gathered in a way that was truly
independent of performance, we dont have a satisfactory explanation of perfor-
mance at all. Did Collins and Porras successfully identify practices that led to
high performance, or did high performing companies tend to be described as
having these practices? Given what we know about the pervasive nature of
the halo effect, the latter explanation is at least as likely as the former.
Built to Last was published in 1994 and became an immediate hit. It
was called The In Search of Excellence for the 1990s. In its own words, Built to
Last claimed to provide a master blueprint for building organizations that will
prosper long into the future. Collins and Porras were emphatic about the
impact of the ndings: Just about anyone can be a key protagonist in building
an extraordinary business institution. The lessons of these companies can be
learned and applied by the vast majority of managers at all levels. They con-
cluded: You can learn them. You can apply them. You can build a visionary
company. Many reviewers, including at the Wall Street Journal and Harvard Busi-
ness Review, were taken in by the appearance of rigorous research, and concluded
that Built to Last offered solid ndings. After all, it was based on a large data set,
and its results were presented with the authority of solid science. But of course,
if the quality of data is poor, the quantity of data is entirely beside the point.
In the ve years after the study ended, the performance of the 18
Visionary companies regressed sharply. If we look to a measure of market per-
formancetotal shareholder returnmore than half did not even match the
overall market over the next ve years. If we use a measure of protability
operating income as a percentage of total assetsthe results are much the same:
ve companies improved their protability, while eleven declined, with one
unchanged. By either measure, the picture is the same: most of Collins and Por-
rass Visionary companies, chosen precisely because they had done so well for so
long, quickly fell back to earth once the period of study was over. The master
blueprint of long-term prosperity turned out to be a delusion.
It is important to note that the fact some Visionary companies fell back
does not, by itself, invalidate the ndings. Some regression is to be expected,
even among the best companies. However, the sheer amount of decline, so
quick and so extensive after such a long period of success, should have raised
serious questions. Such a pattern is decidedly not what one would have
expected had Collins and Porras truly isolated the reasons for long-term success.
On the other hand, the pattern of sharp regression is entirely consistent with
what we would expect if their principles of success were not the causes of high
performance at all, but rather attributions based on performance. That, in a
word, is the fundamental weakness of Built to Last: by using biased sources of
data, the very things that were claimed to be drivers of enduring performance
strong culture, commitment to excellence, and morewere in fact attributions
based on performance.
Jim Collins and Jerry Porras corrected one of basic problems of In Search
of Excellence by including comparison companies, but they didnt solve the prob-
lem of data independence. Unfortunately, if the data are colored by the halo
effect, well never know what drives high or low performance; instead, well
merely nd out how high and low performers are described. For all its claims of
extensive research and scientic rigor, Built to Last was built on faulty dataand
produced awed results. Its basic ideas are probably helpful for many companies
much of the timeafter all, who can argue against such things as strong values,
customer orientation, and a commitment to excellence?but are hardly the
reasons for long-term success.
Some have argued, in defense of Collins and Porras, that no data set is
perfect. Any database will have some errorssome data may be missing, or
coded incorrectly, or misplaced. Yet such an argument overlooks the critical dis-
tinction between noise and bias. If errors are randomly distributed, we call that
noise. If we gather sufcient quantities of data, we may be able to detect a signal
through the noise. However, if errors are not distributed randomly, but are sys-
tematically in one direction or another, then the problem is one of biasin
which case gathering lots of data doesnt help. The halo effect, unfortunately, is
a problem of bias: what is known about company performance has a systematic
effect on evaluations, and therefore will produce skewed results.
At the start of Built to Last, Collins and Porras wrote that it is not possible
to study company performance using the techniques of scientic experimenta-
tion. Companies cannot be put in a Petri dish, and therefore we have to take
what history gives us and make the best of it. However, good researchers dont
simply take what history gives us. They challenge and probe the data, they
look for corroborating evidence from reliable sources, they triangulate, and then
they set aside what is suspect and rely on data that are solid and rigorous. The
result will not be perfect, and will likely always include some noise, but should
be free of strong and systematic bias.
2001Good to Great: Why Some Companies
Make the Leap . . . and Others Dont
The most inuential study of company performance in the present decade
has also been conducted by Jim Collins.
10
Whereas Built to Last looked at compa-
nies that had been successful for many years, Collinss next study asked a differ-
ent question: Why do some ordinary companies make the shift to outstanding
performance while others dont?
Once again, Collins and his researchers began with a large samplethey
considered all the companies on the Fortune 500 between 1965 and 1995, 1,435
in all. From this group, they identied a very few that t a particular pattern: 15
years of stock market returns near the general average, followed by 15 years of
stock market returns well above the average. Just 11 t the prole: Abbot, Cir-
cuit City, Fannie Mae, Gillette, Kimberly-Clark, Kroger, Nucor, Philip Morris,
Pitney Bowes, Walgreens, and Wells Fargo. Then Collins identied, for each,
one comparison company in the same industry and active at about the same
time. This way, it might be possible to isolate the factors that distinguished
those companies that became great from those that remained merely good.
Collins and his team then gathered another extensive data set about the
11 pairs of companies. They cast their net widely, considering everything from
strategy to corporate culture, from acquisitions to compensation, from nancial
measures to management policies. As Collins wrote in a lengthy appendix, his
team read dozens of books and reviewed more than 6,000 articles. They also
conducted scores of interviews with managers, asking them to explain the
events of past years. The result was a vast trove of data, lling crates, and entire
cabinets, as well as 384 million bytes of computer storage. Based on these data,
Collins and his team found that the 15 years of average performance were
described as a Build-Up phase, characterized by strong yet humble leadership
(known as Level Five Leadership), getting the right people on board (First
Who . . . Then What), and facing reality directly and courageously (Confront
the Brutal Facts). The 15 years of rapid growth were called the Breakthrough
phase, and were characterized by focus (The Hedgehog Concept), execution
(Culture of Discipline), and, nally, the use of technology to reinforce progress
(Technology Accelerators).
The results were presented as rigorous research, carefully undertaken
over several years of hard work. By his own account, Collins claimed to be
searching for the immutable principles of organizational performance, those
things that would remain valid and useful at any time and placethe equivalent
of physics. Once again, however, there are serious problems with the data. Some
of the data appear to be free of the halo effect: for example, measures of top
manager turnover, or the presence of major institutional shareholding blocks, or
the extent of board ownership, are all matters of public record and not likely to
be shaped by perceptions, whether by journalists, company spokespeople, or by
the recollections of the managers themselves. Yet much of the data was prob-
lematic. A great deal came from magazine and newspaper articles, sources that
are biased by the halo effect. Other data came from retrospective interviews with
managers who were asked to look back and describe the factors that contributed
to greatness. These sorts of interviews, while often producing colorful quotes
and inspiring stories, are commonly biased by the knowledge of eventual perf-
ormance. For all the attention paid to the large quantity of data, there was no
apparent effort to ensure that the data were of high qualityindeed, there was
not even a concern that so much of the data came from questionable sources.
Collins claimed to have explained why some companies made the leap
from good to great while others did not, but in fact his book does nothing of the
kind. Good to Great documented what was written and said about companies that
made the leap versus those that did notwhich is completely different. At the
start of his book, Collins urged his readers to confront the brutal facts. Yet one
important fact was not confronted: if researchers begin by selecting companies
based on outcome, then gather data by collecting articles from the business press
and conducting retrospective interviews, they are not likely to discover what led
some companies to become Great. They will mainly catch the glow of the halo
effect.
Yet once again, very few people looked closely at these shortcomings,
perhaps because Good to Great offered such an encouraging message: You, too,
can transform your good company into a great one. Collins was explicit on this point.
He wrote: Greatness is not a matter of circumstance. Greatness, it turns out,
is largely a matter of conscious choice. Its a compelling story. People want to
believe their good efforts will be rewarded, that good things come to those who
wait, and thats exactly what Collins was saying: with vision and humility, by
caring about people, through persistence and focus, a company can achieve
greatness. Regrettably, however, the logic and data of this popular book are
badly awed. Does having humble leadership and great people lead to
success? Or is it more likely that successful companies are described as having
excellent leadership, better people, more persistence, and greater courage?
Given the way the data were gathered, and given the widespread tendency
to make attributions based on performance, the latter is more likely than the
former.
Beyond the Halo Effect:
Misunderstanding Company Performance
The studies reviewed above are not the only ones to be based on ques-
tionable data, but they are worthy of attention because they are among the most
prominent and the most widely quoted business books of recent years. At best,
they offer basic principles that managers may nd useful to steer their organiza-
tions: to have strong values, to care about people, to listen to customers, and to
stay focused. There is nothing wrong with general principles such as these,
which are probably useful for many managers much of the time. Nor is there
anything wrong with success stories that can inspire managers and provide com-
fort during troubled times. However, these principles and stories do not consti-
tute the explanation for performance that is claimed by the authors.
In fact, these and other popular studies have done more than simply
arrive at erroneous conclusions about the causes of company performance. They
have helped bring about a fundamental misunderstanding of the nature of com-
pany performance. They have diverted our attention from a more accurate
understanding of what it takes for companies to achieve success.
A rst misconception is the notion that there exists a formula, or a blue-
print, which can be followed to achieve high performance. Jim Collins, in partic-
ular, has been explicit on this point, claiming that his ndings in Good to Great
constitute immutable laws of organizational performance, akin to physics in
their rigor and predictive accuracy. In subsequent interviews, he has emphasized
repeatedly that his ndings are comparable in their accuracy and predictive
power as the laws of physics.
11
The apparently clear and solid nature of his nd-
ings, however, is a product of circular logicthe very data that were used to
arrive at conclusions about high performance were, in fact, shaped by the per-
formance they were said to explain. Once we recognize that much of the data
are the result of attributions based on performance, then the purported causal
relationships are exposed as unfounded.
In fact, formulas can never predictably lead to business success with the
accuracy of physics for a simple but profound reason: in business, performance
is inherently relative, not absolute. This is an exceedingly important point, yet
is routinely overlookeda 2005 Harvard Business Review article about company
performance missed the point entirely.
12
Why do we not grasp the relative
nature of performance? Part of the problem is that we often think in terms of
laboratory sciencewhether physics or chemistry. Put a beaker of water on a
burner, and youll nd that it boils at 100 degrees Celsius, a bit less at high alti-
tude. Put a hundred beakers on a hundred stoves, and youll nd they still boil
at 100 degrees. One beaker doesnt affect another. However, thats not how
things work in the business world, where companies compete for customers,
and where the performance of one company is inherently affected by the perfor-
mance of others.
The relative nature of competition becomes clear when we consider the
case of Kmart. Long a dominant U.S. retailer, Kmart went into steep decline
during the 1990s and declared bankruptcy in 2002. Yet on several objective
dimensionsincluding inventory management, procurement, logistics, auto-
mated reordering, and moreKmart actually improved during the 1990s. Why
then did its prots and market share decline? Because on those very same mea-
sures, Wal-Mart and Target improved even more rapidly. Kmarts failure was a
relative failure, not an absolute one. The same holds for General Motors. Com-
pared to what it produced in the 1980s, GMs cars today are better on many
dimensions: features, quality, safety, and styling. Why then is it bordering on
failure? Because other automakers, including many from Japan and Korea, have
improved still further. Indeed, one of the reasons why GM has made important
strides is precisely because of the competitive pressures imposed by foreign
rivals. Thus the paradox: a company can get better and fall further behind its
rivals at the same time.
To be clear, company performance is inherently relative but it is not nec-
essarily a zero-sum game. There are instances where the success of one rm may
have spillover benets to another. As Michael Porter argued, the close proximity
of companies in a given industry can help each other, creating a cluster that
attracts talented employees, complementary rms that offer support services,
and ultimately customers. Such clusters provide benets to all players. Yet even
within clusters, companies compete against each other for customers. In a com-
petitive market economy, company performance remains fundamentally rela-
tive: for most customers, purchasing a Toyota this year precludes buying a Ford;
consuming more private label soft drinks leads to lower sales of branded drinks;
and Internet stock trading cuts into the business of traditional broker sales. In
these and many other instances, performance is best understood as relative, not
absolute.
A second misperception stems from this rst one: if we mistakenly believe
that rm performance is absolute, not relative, we may wrongly conclude that it
is driven entirely by internal factors, such as the quality of its people, the values
they hold, their persistence, and the like. It may be comforting to believe that
ones destiny rests in ones own handsthat greatness is a matter of choice
yet once we recognize that performance is fundamentally relative, it becomes
clear that analysis of the competition is central to performance. Strategic choices
are critical, and they are based on an assessment of not only our capabilities and
resources, but on those of our present and potential rivals. Regrettably, that basic
dimension of company performance is missing in formulaic treatments, which
emphasize what is internal and overlook the complex and unpredictable com-
petitive landscape.
A third error follows logically. Since strategic choices are made under
conditions of uncertaintyuncertainty about competitors and their actions,
about customers and their changing preferences, about technology, and more
they always involves risk. As a consequence, even good decisions may turn out
badlyyet the fact that they turned out badly does not mean they were neces-
sarily mistaken. Thus we come full circle: whereas it is easy to make positive
attributions when performance is high and tempting to make negative judg-
ments when things turn out badly, this view is a gross oversimplication. The
business world involves a series of choices, made under uncertainty, that aim to
produce a relative advantage. In a competitive market economy, there is no such
thing as a formula for success, nor a guarantee of high performance, and there
is scant evidence that high performers in one time period will endure in a next.
Claims to the contrary are appealing, but usually based on errors of research
design, awed data, or a combination of the two.
Clear Thinking About Company Performance
Once we have set aside some of the common misconceptions that afict
popular studies, what then? What lessons we can draw to think more clearly
and accurately about company performance?
A rst lesson, which applies to journalists, researchers, and managers
alike, is to beware of the halo effect. It is to refrain from making easy attribu-
tions based on company performance, but instead to insist that we are making
decisions based on valid data. This view is consistent with ideas about evidence-
based management, advanced by Jeffrey Pfeffer and Robert I. Sutton of Stanford
University in their excellent 2006 book, Hard Facts, Dangerous Half-Truths, and
Total Nonsense: Proting from Evidence-Based Management.
13
As they have persua-
sively argued, it is important to discard half-truths and nonsense that pervade
the business world, and instead to rely on hard facts. By extension, its impor-
tant to recognize what constitutes a hard fact, and when to detect that an
apparently solid fact is in fact biased by performance. Rather than assume that
a successful company has superb customer orientation and excellent execution
skills, or that a struggling company must have displayed complacency or weak
execution, it is important to seek independent evidence. We need to ask: If we
didnt know how the company was performing, what would we think about its
culture, execution, or customer orientation? As long as our judgments are
merely attributions reecting a companys performance, our data will be biased,
our logic circular, and our conclusions doubtful.
For managers, in particular, there are further lessons. Wise managers
know to be skeptical of formulas. They know that performance is relative, not
absolute, and therefore no formula can predictably lead to success. After all, if
all companies followed the same formula, would they all be successful? Of
course not. Next, since performance is relative, it follows that companies succeed
when they do things differently than rivals, which means that they must make
choices under conditions of uncertainty, which in turn inevitably involves risk.
Wise managers must therefore shift away from the search for blueprints and
formulas, and instead think of the business world in terms of probabilities.
Strategic leadership is about making choices, under uncertainty, that have the
best chance to raise the probabilities of success, while never imagining that suc-
cess can be predictably achieved.
Finally, since actions and outcomes are imperfectly linked, it is important
not merely to infer that good outcomes are always the result of good decisions,
or that bad results must mean that someone blundered. The fact that a given
choice didnt turn out well doesnt always mean it had been a mistake. It is
therefore necessary to examine the decision process itself and not just the out-
come. Managers need to ask questions such as these: Had the right information
been gathered or had some important data been overlooked? Were the assump-
tions reasonable or were they awed? Were calculations accurate or had they
been mistaken? Had the full set of eventualities been identied and their impact
thoughtfully estimated? Had the companys strategic position and risk preference
been considered properly? This sort of rigorous analysis, with outcomes sepa-
rated from inputs, requires the extra mental step of judging actions on their
merits rather than simply making after-the-fact attributions, be they favorable
or unfavorable. Good decisions dont always lead to favorable outcomes, and
unfavorable outcomes are not always the result of mistakes. Wise managers
resist the natural tendency to make attributions based solely on outcomes.
The business world is full of books with comforting messages: that success
can be achieved by following a formula, that specic actions will predictably lead
to desired outcomes, and that greatness can be achieved no matter what rivals
do. The truth is very different. The business world is not a place of clear causal
relationships, where a given set of actions leads to predictable results, but one
that is more tenuous and uncertain. The task facing executives is to gather
appropriate information, evaluate it thoughtfully, and make choices that provide
the best chances for the company to succeed, all the while recognizing the fun-
damental nature of uncertainty in the business world.
Another Look at Dell
All of which brings us back to Dell. For years, it had been widely
applauded for its insightful strategy of selling direct, for its superb execution,
and for its stellar management of operations. These plaudits were not merely
inferred from performanceby objective measures, such as inventory turnover,
cycle time, and working capital management, Dell was a leader among
companies.
How, then, should we explain its recent decline in performance? It may
be convenient to infer that Dell became complacent or stuck in a rut, but the
evidence doesnt support such a verdict. Dells management did not stubbornly
remain xed in PC manufacturing, but looked for new avenues of growth, seek-
ing to leverage its capabilities in other products. Dell may not have been as suc-
cessful in those new areas as it had hoped, but that doesnt mean it had made a
mistake.
That sort of thinking misses the realities of competition in a free market
economy. Strategy is about choice, and choices involve risk. Yet in our desire to
tell a satisfying story, these complexities are set aside. We tend to prefer simple
notions such as complacency, hubris, and cultural problems that we imagine
start at the top.
Rather than resorting to easy retrospective attributions, we might more
accurately understand the worsening of Dells performance from 2005 through
early 2007 not as an absolute decline, but as a relative one. One rival, Hewlett-
Packard, improved dramatically since a new CEO, Mark Hurd, came aboard in
2005, and by 2006 it had overtaken Dell in market share. Another rival, Lenovo,
had also become a stronger contender, in part because it was run by William
Amelio, a former Dell manager who brought with him some of Dells legendary
strength at efcient execution. In fact, HP and Lenovo were both spurred to
improve in large part because of Dells previous excellence. Thats the reality of
competitionoutstanding success in one time period tends to stimulate rivals,
who raise the bar and make it tougher for the incumbent to maintain its success.
Did Dell get worse? In relative terms, yes, but not obviously in an absolute
sense.
The way forward for Delland for any other company in the midst of
a brutally competitive industryis far from obvious. Perhaps Dells glory days
have come to an end, and its efforts to reignite protable growth will, despite its
best efforts, sputter and fail. Or perhaps it will nd ways to write a new chapter
of success, innovating successfully with new products or services, or achieving
higher levels of quality while offering still greater value. If we scour history, we
can nd examples of recovery as well as of failure. However, if Dells eventual
fortunes have yet to be decided, the challenge facing Michael Dell is abundantly
clear. It is to set aside the supercial analyses from Monday morning quarter-
backs, to disregard the simplistic formulas that are claimed to have worked else-
where, and to focus on what every company must do: make a sober assessment
of its capabilities, look closely at customer needs, and make a clear-eyed evalua-
tion of the competitionand then make choices that might set it apart from its
rivals. Again, strategy is about choice, and choice involves risk. There are no
easy formulas to apply, no tidy plug-and-play solutions that offer a blueprint
for success. At best, Michael Dell will make choices that stand the best chance
of improving his companys chances of success, but there is no way to guarantee
high performance. In a free market economy, where performance is relative and
constantly rivals strive to out-do each other, despite our fondest longings for the
secrets of success, outcomes will always remain uncertain.
Notes
1. Nanette Byrnes and Peter Burrows, Where Dell Went Wrong, Business Week, February 19,
2007, pp. 62-63.
2. Stefan Stern, Dells Chief Kevin RollinsMy Part in His Downfall, Financial Times, Febru-
ary 6, 2007, p. 10.
With Flipkarts Big Billion Day sale, Indias e-commerce market has come of age
Recently, when Flipkart organised the Big Billion sale, everyone including the industry was pessimistic on
the amount of sale that could be generated in a single day. Flipkart shared that they sold products worth
Rs. 600 crore in 10 hours and Snapdeal announced numbers close to that. It is an amazing feat for two
players to sell products worth Rs. 1,200 crore in 10 hours for an industry that only a few years back had
sales worth a few thousand crore per annum. So has the e-commerce market in India come of age? I
would say emphatically, absolutely yes!
Barring the issues faced that day, our leading e-commerce players proved in one day that demand can
be created and that there are a great deal of customers willing to purchase online given the right
circumstances.
There are several factors that are contributing to the enormous growth of the industry:
Internet Penetration: Internet penetration has grown from 10 per cent to almost 20 per cent, which
means there are double the number of people with access to Internet. Over the next two years this
number is estimated to grow to 32 per cent. This growth will organically add more online buyers,
approximately 200 million new ones in the next two years.
Mobile Penetration: The platform shift from computers/laptops to mobile phones is a game changer for
e-commerce. Mobiles enable players to provide simple yet engaging and personalised user experience.
In 2012, we had 25 million mobile Internet users and the number is more than 100 million this year and
estimated to be 220 million by 2016. Indias mobile opportunity is unique as most mobile users do not
own a laptop or a desktop but already own (or will own) a smartphone. Large e-commerce portals have
shared that more than 50 per cent of their sales are through mobiles and we estimate that by 2016 70
per cent of online sales will be mobile influenced.
Logistics infrastructure: The logistics infrastructure, that may have been a very limiting factor for growth
of the industry, has been improving substantially. Today some customers are unable to purchase online
due to unavailability of delivery in their area or the transit times to their location. As infrastructure
improves, there will be faster deliveries to more postal codes which in turn will mean further growth of
the e-commerce industry.
Changing customer buying behaviour: We see a huge shift in customer buying behaviour where even a
non-purchaser is discussing the possibility of researching online before their next purchase. Today
approximately 10 per cent Internet users are considered online buyers, but we are unaware that there
are a larger number of people who are on the fence or have taken their first step towards an online
purchase by researching online. This customer behaviour shift will drive exponential growth for the
industry that will continue to see linear growth through many other factors.
These are just a few examples what will continue driving the e-commerce industry in India. I dont see
any of these growth factors relenting, which means that the inflection point is here.
Coming of age does not mean reaching a certain number, but the ability for the industry to achieve
exponential growth, to go beyond linear growth. We have experienced that over the last few years and
are continuing to see that.

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