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Bilateral trade relations between India and China.

Abstract

The caselet discusses bilateral trade relations between India and China. It analyzes the
issues to be addressed to strengthen economic ties between India and China and explores
reasons for the advances in the Chinese economy. It looks at the potential exports that
India can make to China

Issues:

» Bilateral trade between India and China.


» Growing economic relations between India and China.
» The disagreement over trade imbalance between the two nations i.e. India and China.

Introduction

“China is poised to become India's largest trade partner in two-three years, next
only to the U.S. and Singapore.” - Union Commerce Minister, Kamal Nath, in April
2005.

India and China – two of the largest developing countries of the world have many
common concerns for their economic development. Though both of them are neighboring
countries, bilateral relations between them went through rough times during various
occasions in the past. However, of late, things have changed for the better.

In the last decade, there has been increasing trust being developed between the two
countries. At the beginning of the 21st century, both countries were working hard to
improve ties and to ensure economic growth. At the same time, there were growing
apprehensions in the minds of many experts and people in India about the benefits that
India could derive by improving economic ties with China....

Questions for Discussion:::

1. Comment on Brazil's history of inflation.

2. Do you believe in Goldman Sachs report that Brazil is going to be one of the top six
economies in the world by 2039? Justify your answer.
Multinational Retail Chains & the China Opportunity

China's huge population, booming economy, and the growing affluence of the consumers
have always attracted the multinational companies (MNCs). In the past, China was like
an impregnable barrier for these MNCs. However, with the opening up of the economy
and introduction of further reforms in the late 1990s and the 2000s, MNCs, cutting across
industries, began seriously considering the China opportunity.

After the opening up of the retail industry in 1991 and the introduction of major reforms
in the mid-2000s, China has emerged as one of the most attractive retail markets for
MNCs.

However, like their peers in other industries, MNC retail chains that have entered the
market or are planning to enter the market have had to face a number of challenges, some
of which are peculiar to the Chinese market. Cracking the market requires capabilities
and commitments that go beyond a simple adaptation of business strategy to suit an
international market.

This write-up can be used as a case study for class discussion and also double up as a
teaching aid for teaching other China-specific case studies, particularly in the retail
industry.

One of the markets that has attracted several MNC retail chains is China.

Though the average consumer spending per capita is low compared to more developed
markets, the strong growth of over 10% per annum in consumer spending per head and
the huge size of the market make China very attractive to the MNC retail chains.3

With the Chinese government opening up the retail industry in 1991 and introducing
further reforms in the early 2000s, the attractiveness of the Chinese market has increased
manifold

As of 2008, China is one of the largest retail markets in the world. For the month of June
2008, retail sales in China touched a record US$126.7 billion (864.2 billion Yuan4),
according to the China Chain Store & Franchise Association (CCFA). After being
adjusted for inflation, this represented a growth of 14.8%.5

Not only was China one of the top retail markets by value, but it was also one of the top
retail markets in terms of its ability to attract international retailers.
As of early 2008, around 40% of the international retailers were present in China, earning
it the ninth position among the top 10 retail markets in terms of ability to attract
international retailers (Refer to Table I for the top 10 global retail markets)...

Issues:
» Analyze China's retail market, identify the opportunities and challenges, and explore
ways in which multinational retail chains can take advantage of the opportunities while
mitigating the risks of operating in the market

» Compare and contrast strategies adopted by Carrefour, Tesco and Wal-Mart in China,
and understand the challenges these retail chains faced in the country

» Understand the issues and challenges faced by global companies operating in emerging
markets

» Understand the critical factors for succeeding in emerging markets, particularly in


China
Inflation in India *

Abstract

The caselet explains the trends in inflation in India and the impact of inflation on the
economy as a whole. It explains the reasons for inflation and measures to be taken to
control it. It even highlights the role of RBI in helping government to manage inflation.

Issues:

» Impact of inflation on the Indian economy.


» Reasons for increasing inflation rates in India.
» Measures taken by the Indian government (fiscal measures) to control inflation.
» Role of RBI (monetary measures) in managing inflation in India.

Introduction

India is a fast growing economy and has the potential to compete with the other big
economies of the world. However, a growing population, increasing inflation, political
instability, need for infrastructure development, and many other issues are causes for
concern for the Indian economy.

In fact, these issues are preventing the growth of the Indian economy to a considerable
extent. Out of all these factors, it is the impact of inflation that is felt across all sections.

Inflation has a direct impact on the lives of the people in the country. People's capacity to
buy goods and services is affected by the inflation rate in the country....

Questions for Discussion:::

1. Inflation has to be tackled efficiently to ensure the future growth of the Indian
economy. How do you find the inflation situation in the financial years 2004 and 2005 in
India?

2. Comment on the measures taken by the GoI and RBI to control inflation. How
successful do you think they will be in controlling inflation?
HR Restructuring - The Coca Cola & Dabur Way: The
Leader Humbled
It all began with Coca Cola India's (Coca-Cola) realization that something was surely
amiss. Four CEOs within 7 years, arch-rival Pepsi surging ahead, heavy employee exodus
and negative media reports indicated that the leader had gone wrong big time. The
problems eventually led to Coca-Cola reporting a huge loss of US $ 52 million in 1999,
attributed largely to the heavy investments in India and Japan. Coca-Cola had spent Rs
1500 crore for acquiring bottlers, who were paid Rs 8 per case as against the normal Rs 3.
The losses were also attributed to management extravagance such as accommodation in
farmhouses for executives and foreign trips for bottlers.

Following the loss, Coca-Cola had to write off its assets in India worth US $ 405 million
in 2000. Apart from the mounting losses, the write-off was necessitated by Coca-Cola's
over-estimation of volumes in the Indian market. This assumption was based on the
expected reduction in excise duties, which eventually did not happen, which further
delayed the company's break-even targets by some more years. Changes were required to
be put in place soon. With a renewed focus and energy, Coca-Cola took various measures
to come out of the mess it had landed itself in.

The Sleeping Giant Awakes


In 1998, the 114 year old ayurvedic and pharmaceutical products major Dabur found
itself at the crossroads. In the fiscal 1998, 75% of Dabur's turnover had come from fast
moving consumer goods (FMCGs). Buoyed by this, the Burman family (promoters and
owners of a majority stake in Dabur) formulated a new vision in 1999 with an aim to
make Dabur India's best FMCG company by 2004. In the same year, Dabur revealed
plans to increase the group turnover to Rs 20 billion by the year 2003-04.

To achieve the goal, Dabur benchmarked itself against other FMCG majors viz., Nestle¢,
Colgate-Palmolive and P&G. Dabur found itself significantly lacking in some critical
areas. While Dabur's price-to-earnings (P/E) ratio1 was less than 24, for most of the
others it was more than 40. The net working capital of Dabur was a whopping Rs 2.2
billion whereas it was less than half of this figure for the others. There were other
indicators of an inherently inefficient organization including Dabur's operating profit
margins of 12% as compared to Colgate's 16% and P&G's 18%. Even the return on net
worth was around 24% for Dabur as against HLL's 52% and Colgate's 34%.

The Burmans realized that major changes were needed on all organizational fronts.
However, media reports questioned the company's capability to shake-off its family-
oriented work culture.
"There could scarcely be a more undisciplined bunch of workers than IA's 22,000
employees."

- Business India, January 25, 1999.

Flying Low
Indian Airlines (IA) – the name of India's national carrier conjured up an image of a
monopoly gone berserk with the absolute power it had over the market. Continual losses
over the years, frequent human resource problems and gross mismanagement were just
some of the few problems plagued the company. Widespread media coverage regarding
the frequent strikes by IA pilots not only reflected the adamant attitude of the pilots, but
also resulted in increased public resentment towards the airline.

IA's recurring human resource problems were attributed to its lack of proper manpower
planning and underutilisation of existing manpower. The recruitment and creation of
posts in IA was done without proper scientific analysis of the manpower requirements of
the organization. IA's employee unions were rather infamous for resorting to industrial
action on the slightest pretext and their arm-twisting tactics to get their demands accepted
by the management.

During the 1990s, the Government took various steps to turn around IA and initiated talks
for its disinvestment. Amidst strong opposition by the employees, the disinvestment plans
dragged on endlessly well into mid 2001. The IA story shows how poor management,
especially in the human resources area, could spell doom even for a Rs 40 bn monopoly

Background Note
IA was formed in May 1953 with the nationalization of the airlines industry through the
Air Corporations Act. Indian Airlines Corporation and Air India International were
established and the assets of the then existing nine airline companies were transferred to
these two entities. While Air India provided international air services, IA and its
subsidiary, Alliance Air, provided domestic air services. In 1990, Vayudoot, a low-
capacity and short-haul domestic airline with huge long-term liabilities, was merged with
IA. IA's network ranged from Kuwait in the west to Singapore in the east, covering 75
destinations (59 within India, 16 abroad).

Its international network covered Kuwait, Oman, UAE, Qatar and Bahrain in West Asia;
Thailand, Singapore and Malaysia in South East Asia; and Pakistan, Nepal, Bangladesh,
Myanmar, Sri Lanka and Maldives in the South Asian subcontinent. Between themselves,
IA and Alliance Air carried over 7.5 million passengers annually. In 1999, the company
had a fleet strength of 55 aircraft - 11 Airbus A300s, 30 Airbus A320s, 11 Boeing B737s
and 3 Dorniers D0228.
In 1994, the Air Corporation Act was repealed and air transport was thrown open to
private players. Many big corporate houses entered the fray and IA saw a mass exodus of
its pilots to private airlines. To counter increasing competition IA launched a new image
building advertisement campaign. It also improved its services by strictly adhering to
flight schedules and providing better in-flight and ground services. It also launched
several other new aircraft, with a new, younger, and more dynamic in flight crew. These
initiatives were soon rewarded in form of 17% increase in passenger revenues during the
year 1994. However, IA could not sustain these improvements. Competitors like Sahara
and Jet Airways (Jet) provided better services and network. Unable to match the
performance of these airlines IA faced severe criticism for its inefficiency and excessive
expenditure human resources. Staff cost increased by an alarming Rs 5.9 bn during 1994-
98.

These costs were responsible to a great extent for the company's frequent losses. By 1999
the losses touched Rs 7.5 bn. In the next few years, private players such as East West,
NEPC, and Damania had to close shop due to huge losses. Jet was the only player that
was able to sustain itself. IA's market share, however continued to drop. In 1999, while
IA's market share was 47%, the share of private airlines reached 53%.

Unnecessary interference by the Ministry of Civil Aviation was a major cause of concern
for IA. This interference ranged from deciding on the crew's quality to major technical
decisions in which the Ministry did not even have the necessary expertise. IA had to
operate flights in the North-East at highly subsidized fares to fulfill its social objectives
of connecting these regions with the rest of the country. These flights contributed to the
IA's losses over the years. As the carrier's balance sheet was heavily skewed towards debt
with an equity base of Rs 1.05 bn in 1999 as against long term loans of Rs 28 bn, heavy
interest outflows of Rs 1.99 bn further increased the losses.

IA could blame many of its problems on competitive pressures or political interference;


but it could not deny responsibility for its human resource problems. A report by the
Comptroller and Auditor General of India stated, "Manpower planning in any
organization should depend on the periodic and realistic assessment of the manpower
needs, need-based recruitment, optimum utilization of the recruited personnel and
abolition of surplus and redundant posts. Identification of the qualifications appropriate to
all the posts is a basic requirement of efficient human resource management. IA was
found grossly deficient in all these aspects."

'Fighter' Pilots?
IA's eight unions were notorious for their defiant attitude and their use of unscrupulous
methods to force the management to agree to all their demands. Strikes, go-slow
agitations and wage negotiations were common. For each strike there was a different
reason, but every strike it was about pressurizing IA for more money. From November
1989 to June 1992, there were 13 agitations by different unions. During December 1992-
January 1993, there was a 46-day strike by the pilots and yet another one in November
1994. The cavalier attitude of the IA pilots was particularly evident in the agitation in
April 1995.

The pilots began the agitation demanding higher allowances for flying in international
sectors. This demand was turned down. They then refused to fly with people re-employed
on a contract basis. Thereafter they went on a strike, saying that the cabin crew earned
higher wages than them and that they would not fly until this issue was addressed.

Due to adamant behaviour of pilots many of the cabin crew and the airhostesses had to be
off-loaded at the last moment from aircrafts. In 1996, there was another agitation, with
many pilots reporting sick at the same time. Medical examiners, who were sent to check
these pilots, found that most of these were false claims. Some of the pilots were
completely fit; others somehow managed to produce medical certificates to corroborate
their claims.

In January 1997, there was another strike by the pilots, this time asking for increased
foreign allowances, fixed flying hours, free meals and wage parity with Alliance Air.
Though the strike was called off within a week, it again raised questions regarding IA's
vulnerability. April 2000 saw another go-slow agitation by IA's aircraft engineers who
were demanding pay revision and a change in the career progression pattern.1 The
strategies adopted by IA to overcome these problems were severely criticized by analysts
over the years. Analysts noted that the people heading the airline were more interested in
making peace with the unions than looking at the company's long-term benefits.

Russy Mody (Mody), who joined IA as chairman in November 1994, made efforts to
appease the unions by proposing to bring their salaries on par with those of Air India
employees. This was strongly opposed by the board of directors, in view of the mounting
losses. Mody also proposed to increase the age of retirement from 58 to 60 to control the
exodus of pilots. However, government rejected Mody's plans.2 When Probir Sen (Sen)
took over as chairman and managing director, he bought the pilot emoluments on par
with emoluments other airlines, thereby successfully controlling the exodus. In 1994, the
IA unions opposed the re-employment of pilots who had left IA to join private carriers
and the employment of superannuated fliers on contract. Sen averted a crisis by creating
Alliance Air, a subsidiary airline company where the re-employed people were utilized.
He was also instrumental in effecting substantial wage hikes for the employees. The extra
financial burden on the airline caused by these measures was met by resorting to a 10%
annual hike in fares. (Refer Table I)

TABLE I
IMPACT OF STAFF COST HIKE IN FARE INCREASE (%)

Date of fare Impact


increase (%)
25/07/1994 16.22
01/10/1995 25.00
22/09/1996 36.00
15/10/1997 13.44
01/10/1998 8.80

Source: IATA-World Air Transport Statistics

nitially, Sen's efforts seemed to have positive effects with an improvement in aircraft
utilization figures. IA also managed to cut losses during 1996-97 and reported a Rs 140
mn profit in 1997-98. But recessionary trends in the economy and its mounting wage bill
pushed IA back into losses by 1999.

Sen and the entire board of directors was sacked by the government. In the late 1990s, in
yet another effort to appease its employees, IA introduced the productivity-linked
scheme. The idea of the productivity linked incentive (PLI) scheme was to persuade
pilots to fly more in order to increase aircraft utilization.

But the PLI scheme was grossly misused by large sections of the employees to earn more
cash. For instance, the agreement stated that if the engineering department made 28
Airbus A320s available for service every day, PLI would be paid. This number was later
reduced to 25 and finally to 23.

There were also reports that flights leaving 30 - 45 minutes late were shown as being on
time for PLI purposes. Pilots were flying 75 hours a month, while they flew only 63
hours.

Eventually, the PLI schemes raised an additional annual wage bill of Rs 1.8 bn for IA. It
was alleged that IA employees did no work during normal office hours; this way they
could not work overtime and earn more money

Though experts agreed that IA had to cut its operation costs. To survive the airline
continued to add to its costs, by paying more money to its employees. (Refer Table II).

The payment of overtime allowance (OTA) which included holiday pay to staff,
increased by 109% during 1993-99. It was also found that the payment of OTA always
exceeded the budget provisions.

Between 1991-92 and 1995-96, the increase in pay and allowances of the executive pilots
was 842% and that of non-executive pilots was 134%. Even the lowest paid employee in
the airline, either a sweeper or a peon, was paid Rs 8,000 – 10,000 per month with
overtime included.

ABLE II
INCREASE IN STAFF COSTS

Year Staff cost No. of Per Total Staff cost as Effective


percentage of
employee
expenditure total
(in Rs bn) employees cost (in fleet size#
(in Rs bn) operational
mn)
expenditure
1993-
2.85 22182 0.13 20.75 15% 54
94
1994- 3.74
22683 0.16 22.59 19% 58
95 (31.18%)*
1995- 5.71
22582 0.25 26.00 25% 55
96 (52.59%)
1996- 7.10
22153 0.32 29.29 26% 40
97 (24.35%)
1997- 8.17
21990 0.37 32.21 27% 40
98 (15.03%)
1998-
8.75 (7.12%) 21922 0.39 34.31 28% 41
99

Source: IATA-World Air Transport Statistics


* Figures in brackets indicate increase over the previous year.
# Excludes 4 aircraft grounded from 1993-94 to 1995-96 as well as 12 aircraft leased to
Airline Allied Services Ltd. from 1996-97 to 1998-99.

In 1998, IA tried to persuade employees to cut down on PLI and overtime to help the
airline weather a difficult period; however there efforts failed. Though IA incurred losses
during 1995-96 and 1996-97 and made only marginal profits during 1997-98 and 1998-
99, heavy payments were made on account of PLI. A net loss of Rs 641.8 mn was
registered during the period 1995-99.

PLI payments alone amounted to Rs 6.66 bn, during the same period. According to
unofficial reports, arrears to be paid to employees on account of PLI touched nearly Rs 7
bn by 1999. Over the years, the number of employees at IA increased steadily. IA had the
maximum number of employees per aircraft. (Refer Table III).

It was reported that the airline's monthly wage bill was as high as of Rs 680 mn, which
doubled in the next three years. There were 150 employees earning above Rs 0.3 mn per
annum in 1994-95 and the number increased to 2,109 by 1997-98.

The Brar committee attributed this abnormal increase in staff costs to inefficient
manpower planning, unproductive deployment of manpower and unwarranted increase in
salaries and wages of the employees.

TABLE III
A COMPARISON OF VARIOUS AIRLINES
Number of ATKm
Name of No. of ATKm3 (in Employees
aircraft in per
Airlines employees Million) per aircraft
fleet Employee
Singapore
84 13,549 14418.324 1064161 161
Airlines
Thai Airways
76 24,186 6546.627 270678 318
International
Indian Airlines 51 21,990 2113.671 398204 431
Gulf Air 30 5,308 1416.235 245831 177
Kuwait
22 5,761 345.599 92853 261
Airways
Jet Airways 19 3,722 1094.132 49756 196

Source: IATA-World Air Transport Statistics

Analysts criticized the way posts were created in IA. In 1999, Six new posts of directors
were created of which three were created by dividing functions of existing directors.
Thus, in place of 6 directors in departments' prior April 1998, there were 9 directors by
1999 overseeing the same functions.

There were 30 full time directors, who in turn had their retinue of private secretaries,
drivers and orderlies. The posts in non-executive cadres were to be created after the
assessment by the Manpower Assessment committee. But analysts pointed that in the
case of cabin crew, 40 posts were introduced in the Southern Region on an ad-hoc basis,
pending the assessment of their requirement by the Staff Assessment Committee. Another
problem was that no basic educational qualifications prescribed for senior executive
posts.

Even a matriculate could become a manager, by acquiring the necessary job-related


qualifications & experience. Illiterate IA employees drew salaries that were on par with
senior civil servants. After superannuation, several employees were re-employed by the
airline in an advisory capacity.

According to reports, IA employed 132 retired employees as consultants during 1995-96


on contract basis.

With each strike/go-slow and subsequent wage negotiations, IA's financial woes kept
increasing.

Though at times the airline did put its foot down, by and large, it always acceded to the
demands for wage hikes and other perquisites

Troubled Skies
Frequent agitations was not the only problem that IA faced in the area of human
resources. There were issues that had been either neglected or mismanaged. For instance,
the rates of highly subsidized canteen items were not revised even once in three decades
and there was no policy on fixing rates. Various allowances such as out-of-pocket
expenses, experience allowance, simulator allowance etc. were paid to those who were
not strictly eligible for these. Excessive expenditure was incurred on benefits given to
senior executives such as retention of company car, and room air-conditioners even after
retirement. All these problems had a negative impact on divestment procedure. This did
not augur well for any of the parties involved, as privatization was expected to give the
IA management an opportunity to make the venture a commercially viable one. Freed
from its political and social obligations, the carrier would be in a much better position to
handle its labor problems. The biggest beneficiaries would be perhaps the passengers,
who would get better services from the airline

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