Reinventing the Wheel for India

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India currently has just one automotive company, Tata Motors, in the global top 20, while China has three in the top 20.

The transportation sector in India is witnessing rapid growth as India urbanizes and the economy continues to expand. Car sales for July recorded a jump of 38% from a year earlier, rising to an all-time high. Delhi, Bangalore, Mumbai and Kolkata are all building up mass-transit systems. The national capital has just opened a swanky new airport terminal and the civil aviation industry has never been more competitive.

Consumers today have lots of choices in how they choose to get around. This is a far cry from the earlier times when government carriers dominated the skies and entry into the automotive industry was heavily regulated and just a handful of players allowed to manufacture cars. With the exception of railways, which continue to be a government monopoly, every sector of transportation is witnessing a vibrancy never seen before in India.

The upward shift in the standard and quality of transportation in India is one of the most visible and tangible benefits bestowed by economic growth. The problem – and investment opportunity – is that we have only scratched the surface.

India currently has just one automotive company, Tata Motors, in the global top 20, while China has three in the top 20 and ten in the top 30. Interestingly, many of China’s large automotive firms are home-grown, while international auto companies like Suzuki, Honda and Hyundai dominate the Indian market.

Vast regions of the country are yet to be connected by roads and airports. Conventional approaches and legacy technology cannot meet all the new demand. The 300 millionth car to be sold in India may not even run on petrol or diesel. There is a need for innovation to ensure that transportation capacity scales in step with mushrooming demand in every sector, be it aviation, passenger cars, commercial vehicles or mass transit.

Relying only on technologies and ideas from the West is not feasible, since there has never been a transportation need of this scale in the developed economies. Indian policy-makers and entrepreneurs must think for themselves.

Investing in auto startups and building companies in the transportation sector is certainly not for the fainthearted. Building an auto company from scratch is extremely difficult. Most investors would balk at the idea of funding a car company, given the capital investment required to manufacture cars. But it is all but impossible for an entrepreneur to start up without financing.

Tesla Motors, the electric car company funded by leading Silicon Valley VC firms and built by PayPal co-founder Elon Musk went public recently in the first IPO by a US-based automotive company since Ford Motor Co. in 1956. Mr. Musk staked his considerable personal wealth behind the venture, using his own money when institutional funding was difficult to obtain. Without Musk’s calculated gamble, Tesla wouldn’t have survived.

There are other ways of entering the industry. I met Dilip Chhabria, the founder of automotive design firm DC Design, at an event organized by IIM Calcutta last week and he said the time was right for investors to form a consortium to acquire the rights to rebuild and redesign the Ambassador, an iconic car produced by Hindustan Motors, the one-time market leader that is now struggling financially.

One should remember that while the precedents which are the basis of the negativity about automotive startups are from abroad, the Indian context and market represent a new dynamic – and that can make all the difference. The structural factors driving the growth of India’s automotive market are not going away anytime soon. Rather than facing a headwind, there will be a tailwind assisting those venturing into the Indian automotive industry.

While this doesn’t imply that any automotive startup will do well, high capital requirements should not be a deterrent to investing in the opportunity presented by the Indian auto sector at this stage of India’s growth cycle.

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Billionaires should fund startup countries

Every Independence Day, one’s thoughts inevitably veer around to the abject poverty and destitution that consumes most of India. After more than 60 years of Independence, why do we continue to have widespread poverty? Watching “Peepli Live” — a fantastic satire on the state of politics, the mainstream media and the urban-rural divide in India — crystallized those thoughts even more, giving a vivid visual representation to what most urban citizens of India only see in passing on news channels.

As the film shows, much of the poverty is caused by the poor incentives and choices enforced by India’s socialist economic system. Year after year, decade after decade, the government creates more and more schemes, and they all fail to uplift the poor. In fact, the schemes keep poor people poor.

Clearly, there is need for a new approach. We all know what that approach is, but the execution is lacking because there is no political will to follow up on it — India has seen no substantial reforms since 2004. There has never been a more pressing need for economic liberalization.

Recently, Bill Gates and Warren Buffett have been personally reaching out to the world’s wealthiest individuals, requesting and cajoling them to join the Giving Pledge. The Giving Pledge, initiated by the two, has been attracting a lot of media attention thanks to its high-profile backers. The Pledge requires billionaires to publicly commit to “give away” half of their wealth during their lifetimes.

Both billionaires plan to visit Asian nations over the next year to convince billionaires in the region to take the Pledge. Gates and Buffett are redefining the standard for philanthropy by their example, and they have been compared to Andrew Carnegie and John D Rockefeller for the sheer scale of their charity.

But there is a small difference — Carnegie and Rockefeller built institutions of lasting significance, like the University of Chicago, Carnegie Mellon University, Rockefeller University, the Council on Foreign Relations and the Carnegie Endowment for International Peace. Andrew Carnegie is still remembered for building countless libraries. Rockefeller built institutions that continue to push the boundaries of research in medicine, natural sciences and social sciences, and define the public discourse in matters of government policy. The impact of their philanthropy has been outsize, transformational and incalculable.

In India, the Tatas have played a seminal role in giving to the nation institutions such as the Indian Institute of Science, Tata Institute of Social Sciences, Bhabha Atomic Research Centre, Tata Memorial Hospital, Tata Institute of Fundamental Research and National Centre for Performing Arts. For over 100 years, Tata scholarships have helped meritorious students fulfil their academic potential. Without the Tatas, India wouldn’t be the India we know.

The best way to support charity in India is to always buy Tata products, for the primary holding company of the group has been majority-owned for several decades by the philanthropic Tata trusts.

While Gates and Buffett have noble intentions, their strategy can be made more effective. In many cases, the Gates Foundation and other foundations will be allocating billions of dollars to solve political problems with charity. Charity cannot fix what are essentially failures of governance. Billions of dollars of aid cannot get rid of AIDS, malaria and other infectious diseases in African countries, just as government support for farmers has failed to uplift them in our country.

What is the solution — how can a rich person be charitable, support market economics and yet help the poorest of the poor?

Stanford economist Paul Romer has been the most vocal proponent of an idea known as charter cities, also called startup countries by some. In a nutshell, a charter city is governed by its own rules, laws, regulations and institutions — its own “charter”, rather than those of the parent nation. A charter city would be much like a new business development unit within a large company. Leased by China to the United Kingdom for 99 years, Hong Kong may be taken as an example of the first-ever startup country. While China suffered under Chairman Mao, Hong Kong prospered because of the different rules adopted by its government.

We have made massive strides in wealth creation, and now we are at a stage where individuals are wealthy enough to lease land from nations and build them with new rules and institutions as a strategy for economic development. Creating charter cities and startup nations maybe be among the most effective ways to improve the standard of living of vast swaths of humanity who are trapped in nations governed by inept and corrupt leaders.

The model allows for a way to circumvent politics and regime change via war while promising economic development — and it may be the 21st Century equivalent of the kind of philanthropy that Carnegie, Rockefeller and Tata have pursued.

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