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Friday, July 30, 2010

India on Wrong Track to Lower Food Prices

On Tuesday, the Reserve Bank of India increased its interest rates – the reserve repo rate (the rate at which it takes away money from the economy) by 50 basis points to 4.5% and the repo rate (rate at which it lends to commercial banks) by 25 basis points to 5.75%. These moves are the second rate-rises this month and the fourth this year.

The reasoning given for these rises in interest rates is that reducing the money supply will curb the high inflation that has been caused by rising incomes and low yielding crop. Indeed, the greatest, most pressing issue that the government has to deal with is rocketing food prices – the WPI (Wholesale Price Index) rose at a rate of 10.55% in June from a year earlier. However, by raising interest rates, India isn’t addressing the issue. No one takes out loans to buy food; hence, raising the interest rates won’t curb consumption. Even if people were taking loans to feed themselves, due to the inelasticity of food products, demand wouldn’t contract significantly. Clearly, the argument that the rising incomes of the middle and upper classes are fuelling inflation in food prices is baseless.

If this inflation in food prices isn’t demand-pull, then it must be cost-push. Indeed this seems to be the case. In June, the government freed the previously state-controlled (and heavily subsidised) diesel prices – leaving them in the hands of the free market. The result of this withdrawal of subsidy is inevitably going to be price rises (we are already seeing this happen). While the prices of cooking fuels – liquid petroleum and kerosene – will remain state controlled, they too were raised by 11.2% and 33% respectively. The effect of these measures is that costs are going to rise all along the food supply chain – from transportation to actually cooking the food itself. This will make food much less affordable for India’s impoverished masses.

While India’s intention to slash its 5.5% budget deficit is laudable, doing so by cutting fuel subsidies from $20 billion to $11.7 is unwise due to its untimely nature. India shouldn’t worry so much about its deficit – the recovery of the international consumer market in the medium-term ought to bring greater profits to India’s exporters. The resulting increase in tax revenues will go some way to reducing the deficit. At this point the government should turn its focus back on the people. Things were better before with the greater fuel subsidies.

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Thursday, July 29, 2010

Legalisation of Online Gambling the Way to Go

When students are taught about the role of the public sector in a mixed economy, they are often taught that one of the demerit goods that governments ban is online gambling and, frankly, any sort of betting apart from de facto state-run lotteries like the Mark Six in Hong Kong. Betting is classed along with other demerit goods like cigarettes and drugs. While smoking and drug-taking are genuinely harmful, I believe that governments (particularly in the EU) which are considering the legalisation of online gambling should go through with it.

In the current economic climate with many governments struggling with large budget deficits, online gambling has suddenly become a very promising potential revenue source. Europe, the largest online gambling market in the world, accounts for US$12.5 billion of the industry's US$29.3 billion total revenue this year (Source: H2 Gambling Capital). Taxing this revenue could spell billions of dollars of revenue for cash-strapped governments. Italy, which has only partially liberalised the online gambling industry earned Euro150 million in tax revenue last year.

One of the biggest arguments against liberalisation is that it hooks young people in much the same way as a social drug. However, the point is that online gambling is rampant anyway in countries like the US and China where it is de jure illegal. Governments can't stop it so at least they should tap it to gain something from it. As for the addicted gamblers, regulating the industry would go some way to protecting them.

I also believe that it is hypocritical (of some EU countries in particular) of governments to ban gambling yet keep their own state-run casinos and lotteries running. One the one hand, they talk loudly about the need for free trade, implementing organisations like the WTO as well as forming trading blocs. And on the other hand, they use the bans as a way to protet their state-run gambling institutions. In the name of freer trade and consistency of values, online gambling should be legalised.

For these reasons I feel that governments must legalise online gambling sites. With countries like Germany, Spain, Switzerland, and Greece considering liberalisation, the outlook is good for this industry.

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Wednesday, July 28, 2010

Skype Guns for Corporate Telecoms Market

The name of the Estonian start-up, Skype, has already become synonymous with free or very cheap phone and video calls over the internet. By being the first into the market, it has monopolised it and is reaping the rewards. By connecting 520 million people worldwide, it generated revenues of US$705 million in 2009.

Now it is planning to team up with Cisco Systems and ShoreTel to enter the US$203 billion corporate telecommunications market. By doubling its sales and support team to deal with technical difficulties and by perhaps offering commissions to Cisco and ShoreTel to recommend its services, Skype hopes to gain a slice of that market.

Entering the market would give Skype much greater revenues (especially from the 'per-call' point of view) and would go some way to making the brand Skype more respectable. Indeed, one of the toughest barriers to entry the firm will face is convincing potential clients that its service is reliable as it has somewhat infamous for poor call quality.

Whether Skype is successful or not remains to be seen but its attempt to expand into other, more cash-rich markets follows a trend. Previously free websites are now charging as are a host of other online services that used to be free. Even Google is now expanding into the mobile phone industry (eg. its Android operating platform). Perhaps these firms are realising that, with so many new websites out there, all keen to emulate their success, free or low cost services don't make that much sense when compared with traditional markets?

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Disney In Talks to Buy Playdom

The Walt Disney Corporation is in talks to buy Playdom – a profitable firm which creates games for online social media platforms like Facebook. Playdom bought online virtual world Club Penguin in 2007 for $350 million and runs other successful online games such as Sorority Life, Social City and Tiki Farm. The deal is likely to be between $400 million and $750 million.

The consequence of this acquisition could be that Disney develops new ‘casual’ games incorporating some of its timeless characters such as Mickey Mouse and Donald Duck. Disney is likely to be able to expand the reach of Playdom’s own games, perhaps by introducing consumer products themed around them. This would be a key step in the leap from virtual gaming to real-world products.

While Playdom is profitable, many firms struggle in the online gaming market as most users don’t bring in any revenue. This forces firms to rely on a few users who pay real money to buy virtual goods that enhance their virtual experience. With more and more firms entering the market due to the relative ease of setting up and publicising a game (eg. through social networking sites), profits will be squeezed for most. However, small failing firms with only one or two games could represent opportunities for larger competitors like Playdom who will be able to aquire them – increasing their dominance of the market. Hence, the outlook looks good for Playdom (and Disney) – the online social gaming market could be worth $1.5 billion in three years.

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Tuesday, July 27, 2010

Mainland Firms Bet on Magnetite Ore

Traditionally, the main type of iron ore sourced by steelmakers has been haematite ore. The main reasons for this are that it has a relatively high content of iron – about 61%, and because it is convenient – in fact, it is known as a ‘direct shipping ore’ (DSO) because, after mining, only a simple crushing and screening process needs to be conducted before export. In contrast, magnetite ore is only 36% iron and hence, must be upgraded into pellet form (in order for it to be suitable for steelmaking) – a process that adds $15 per tonne to costs.

However, in countries like Australia that are relatively close (geographically) to Asia (particularly China), such extra costs are worthwhile because of the savings made on shorter shipping journeys than routes which source ore from South America. Some of China’s largest steel firms are backing projects that will deliver 25 million tonnes of magnetite ore in the next two years compared with 3 million now. If more players join in, the outcome could be a reduction in reliance on large haematite-mining firms like Rio Tinto and BHP Billiton as well as the loss of competitiveness of South American ore in China’s market. The planned merger of giants Rio Tinto and BHP Billiton (which would make them a near monopoly in the iron ore industry) will act as a further incentive for Chinese firms to explore magnetite as a viable alternative.

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Sunday, July 11, 2010

The Fall of Print Books?

When Amazon came out with the Kindle, many said that digital books were no substitute for the real thing. Others, however, predicted that e-books would spell the end for their print antecedents. Signs are now emerging that the latter group may be proved right. In mid-July Amazon announced that it sold 180 e-books for every 100 hardcover copies – an astounding statistic especially when considering that just four weeks before that, the figures were 143 e-books for every 100 real books. Price seems to have been a key reason for this recent ascendance of e-books. For example, when in June Amazon dropped the price of its Kindle from $259 to $189, its sales tripled. This high elasticity of demand (PED value of 7.4) isn’t surprising considering the vast number of substitutes, namely, physical book publishers and the numerous other brands of e-readers. One can safely say that the ratio of 180:100 will only increase following Amazon’s recent price drop to $139.

In China too, it seems as if digital books have caught on. Shanda Literature just announced the launch of its Bambook e-reader which allows users access to a library of three million books and 1000 journals. Shanda is looking to challenge Hanvon Technology which, with a market share of almost 90% in the mainland, has monopolised the industry. Hanvon also predicts robust sales growth from 270,000 e-readers in 2009 to two million in 2010. These great growth prospects are only set to continue. 24.6% of mainlanders aged 18 to 70 now read books digitally. More worryingly for book stores and hardcover printing houses, that figure is 49% for mainlanders aged under 29 (Source: Joint Publishing, Chinese Institute of Publishing Books).

While this growing trend may be great for consumers, it will have harmful implications on the hardcover industry. Nearly half of China’s private bookstores have terminated operations in the past 10 years according to the Book Industry Chamber of Commerce under the All-China Federation of Industry and Commerce. This said, the impact on unemployment won’t be that great as many people who work in bookstores have skills that are transferrable to jobs in other shops.

Despite recent promising figures for e-readers across the world, they still have a long way to go. Yu Guoming, vice-dean of the school of journalism and communications at Beijing’s Renmin University, says that the industry hasn’t yet reached the stage where it experiences significant economies of scale. When it does, he says, ‘the price will fall’ and, judging from the elasticity of demand, that will lead to a tremendous rise in e-reader sales. In China at least, e-readers will have to contend with books available on the internet and on mobile phones. Books read in these forms currently corner the digital market – each form has a customer base 15 times larger than that of e-readers. So, in short, the era of hardcover books could be over and the digital age is just emerging.

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Wednesday, July 7, 2010

Roaring Burial Prices in China

Due to a scarcity of land suitable for burial plots across cities in China, prices for burial plots have shot through the roof. In Shanghai, a plot less than 1 square meter has risen in value from 10000 yuan to 30000 yuan over the past year.

Apart from the land scarcity, increasing demand for high-end cemetery services has also fuelled the price rise.

The outlook: Prices like 30000 yuan are equivalent to several years of savings for middle-income wage-earners. Clearly such people can’t afford such high prices. Hence, this great rise in price may lead to the growth of other, alternative services such as cremation.

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Medical Tourism in Taiwan

With the recent Free Trade Agreement (FTA) signed between China and Taiwan, mainland tourist volumes, which already account for 22% of Taiwan’s inbound visitor numbers, look set to rise. Medical tourism is emerging as a possibly lucrative market in Taiwan.

Lion Travel, Taiwan’s biggest travel agency, is betting on the growth of this segment by offering packages where tourists can have plastic surgery, recover in a secluded spa and go sightseeing, all in a 5-day tour.

The main advantage that Taiwan has is that all its medical services – from CT scans for serious heart illnesses to plastic surgery and other non-essential services – are comparatively cheap. A CT scan costs HK$7250 in Taiwan compared with HK$20000 in Hong Kong. Medical costs in Taiwan are roughly one-seventh the costs in the US and half the costs in Australia – hence, the boom in medical tourism may be supplemented by sources other than the mainland too. Another advantage is that people can get sensitive things like plastic surgery done without anyone knowing.

Lion Travel has teamed up with 6 hospitals – betting its future on the world-class medical facilities Taiwan has built over the last 25 years. Moreover, while they were put off by the hassle of flying through Hong Kong in the past, younger Chinese are bound to be a large proportion of travellers to Taiwan from the mainland. These are the people who are attracted by the prospect of having plastic surgery done – this will only help the industry. While medical tourism only accounted for 0.51% of cross-strait travel last year, that figure looks set to change.

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Pearl River Delta Here to Stay

With the recent spate of Foxconn suicides and the accompanying wage rises in numerous factories in the Pearl River Delta – China’s manufacturing hub – it is no wonder that there has been speculation that the bulk of manufacturing may shift from the Pearl River Delta to lower-cost regions like the impoverished Henan province.

Indeed, wages have risen 50% since 2005 and 20-30% this year alone as a result of worker strikes and pressure from the government. Coupled with a strengthening yuan which will reduce the competitiveness of exports, some may say that the move to more far-flung places is and no-brainer in order to protect slim profit margins.

This said, a survey by the Hong Kong Trade Development Council revealed that 21.8% of factory owners planned to expand production in the Pearl River Delta and 66.3% said they would make no change.

Presumably, the reason for this is external economies of scale experienced in the Delta. A sophisticated supply chain of ancillary firms (ie, firms that help each other – for example, a parts manufacturer and a finished goods manufacturer) has grown over the past 25 years in a concentrated area. Such a network of firms doesn’t exist in other provinces. There is also no shortage of migrant labour and, importantly, the Delta has a large pool of labour with the appropriate skills. In rural areas, labour is scarcer and spread out, making them relatively expensive.

Also, even though provinces like Henan may be physically closer to raw materials, the ever-growing rail and road network in China is mitigating logistical issues. Due to the external economies of ancillary firms, suitable labour, and infrastructure, the dominance of the Pearl River Delta as the manufacturing heart of China looks set to continue.

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Monday, July 5, 2010

The Resurgence of Budget Long-haul Carriers

After the failure of previous attempts like OasisHK, new budget carriers like Air Asia X are expanding their fleets by over 50% to run long-haul flights. The main reason why they might succeed where OasisHK and others failed is that these new carriers are affiliated with other domestic, short-haul carriers. For example, Air Asia X runs point-to-point long-haul flights but has plenty of feed-in traffic from Air Asia which is one of the largest short-haul budget carriers in Asia. Hence, while OasisHK also ran point-to-point long-hauls, they had periods of limited traffic because there weren't that many people at either end. It is unlikely that Air Asia X will face that problem as Air Asia will source them constant traffic.

These budget carriers are also cutting costs and increasing revenue by adding 35% more seats on each plane and using light equipment. Hot meals are only provided on previous request, saving up to US$100 per seat. These budget airlines are also saving by booking slots at second-tier airports - for example, Air Asia X's Kuala Lumpur-London flight lands at Stanstead Airport rather than Heathrow.

The outlook: This resurgence may not affect normal carriers like Singapore Airlines (SIA) who target a different class of passengers - 40% of SIA's revenue comes from 'premium passengers'. However, industry analysts still predict that budget carriers will increase their market share of all flights (short and long) from 20% to 30% in the near future.

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Cross Strait Travel

Due to the recent Free Trade Agreement (FTA) between the two countries, the mainland is allowing a fixed quota of flights across the Taiwan Straits. The government has also ordered mainland carriers to slash fares by 10-15% - potentially sparking a price war.

The legalisation of direct flight paths could lower flight times by half - lowering costs and fuelling the price war. Second-tier cities like Xiamen will recieve more traffic due to a lack of landing slots at major cities.

The outlook: The FTA could harm Hong Kong carriers like Cathay Pacific and Dragonair as it will bring lower demand for Hong Kong - Taiwan flights - formerly one of the most lucrative short-haul flighs in the world. Hong Kong will no longer be a stepping stone. In fact, the introduction of direct flights has already reduced traffic in Hong Kong International Airport by 7%.

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