Archive for June 11th, 2009

Hyundai actually grew in this crisis!

June 11, 2009

Hyundai is perhaps the only company selling more cars in 2008. I didn’t know this but this Wharton note is a good one on Hyundai and its strategy in these times.

In 2008 — a brutal year for the auto business — Hyundai’s global unit sales rose 2%, lifting revenues by 5%. In the first three months of this year, the company’s global market share rose to 4.7%, compared to 4% a year earlier.

However, Hyundai had to really do some image management.

Hyundai first made a name for itself in the United States in the late 1980s when it exported the low-cost Excel to the American market. The car was popular at first, but soon earned a reputation for developing rust and other quality problems. “Sales dropped and it left reputational damage in consumers’ minds,” according to MacDuffie. In the 1990s, Hyundai attempted to introduce a range of high-priced vehicles into the U.S. market, but MacDuffie says the company was “haunted” by its reputation: “Quality has always been Hyundai’s Achilles heel in … the U.S.”

So, what did it do ?

Beginning in 2001, MacDuffie says, Hyundai launched a major push to upgrade quality with a daily focus on improvement through new processes at its manufacturing plants, and from better design and engineering. At the same time, to help overcome its reputation for poor quality, the company announced a 10-year, 100,000-mile warranty. The Hyundai program was far more comforting than the industry’s standard three-year, 30,000-mile warranty, and essentially guaranteed the car for its entire expected working life.

“It was risky, but a powerful impetus to improve quality,” says MacDuffie. “They pulled it off and it helped them make a major jump forward.” This year, Hyundai’s Genesis was named 2009 Car of the Year by independent automotive journalists at the North American International Auto Show in Detroit.

Its strategy in this crisis is a real winner:

In January, Hyundai grabbed attention in the United States as consumers were reeling from the collapse in housing and stock market prices and growing fears of unemployment, by offering to take back a car that is financed or leased by a worker who subsequently loses a job. When it was introduced, the Hyundai Assurance program was seen as more than just a marketing campaign, but also as psychological affirmation that the economy was not going to collapse entirely.

What they are doing is empathizing with the plight of people who are struggling,” says Wharton marketing professor David J. Reibstein. He observes that the Assurance program is similar to the warranty that Hyundai used to build confidence among consumers. “There might be hesitancy to buy because people don’t know if they will be employed, but this provides the safety net which allows them to say, ‘I can still afford to be in the market.’ Clearly, the market needed some stimulation and Hyundai was able to provide that stimulation.”

In another surprising marketing move, the company last month offered to send buyers of some Hyundai models up to $333 a month for six months. The catch: The deal applies only to cars on which Hyundai is offering rebates. Buyers may opt for either the rebate or the monthly check (not both), and the value of the two offers is about equal. But such programs tend to generate consumer buzz.

This is superb stuff from Hyundai. Both the strategies are an example of using a bit of behavioral economics. The first looks at people’s emotions and helps them make a buying decision in these times.

The second strategy is a typical behavioral  economics situation: Do you want USD 600 now or USD 100 per month for in next 6 months.

In good times most people usually opt for USD 600 now. But in uncertain times like these, I think they might opt for the second choice  as it ensures some income stream every month.

There are studies which show that people usually opt for the first choice , I am not aware of any study which looks at the behavior of people in these times. Does it change? The Wharton note does not tell you which option people would have taken more. I think it is a good topic for research for behavioral economists. Contact Hyundai officials right away and analyse the data! It could throw just the opposite of what I think, who knows? 

What is also interesting is firms are copying Hyundai strategy as well:

Competing automakers and other types of businesses soon followed with similar promises.

Reibstein says the offer was a groundbreaking concept, which was later adopted by other companies. The idea might be used successfully in other industries to inspire confidence among consumers, he adds. Big-ticket durables would likely benefit the most, although he says the idea might also succeed in real estate. Pfizer has a similar program assuring the users of its products that they will be able to continue to receive medication if they lose their jobs.

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India – a flailing state?

June 11, 2009

Jaideep Mishra of ETpointed a must read paper by Lant Pritchett in this article on Indian political economy. The paper is  here and is titled as: Is India a Flailing State?: Detours on the Four Lane Highway to Modernization.

The abstract says it all:

India is an emerging global superpower as its rapid growth has transformed its economy and has maintained itself as the world’s largest democracy. But at the same time India lags in many dimensions—its malnutrition rate is one of the highest in the world, its immunization rates are lower than most African countries, and Bangladesh has a better infant mortality rate.

I argue that this is in part because the India state is “flailing”—its very capable head is not longer reliably connected to the arms and legs of implementation. In the four-fold transition of economy, polity, administration, and society the administrative capability of the state is lagging. I use examples from services like health, education, and routine transactions like issuing driver’s licenses to show that the agents of the state routinely do not implement the tasks they are assigned—causing a massive divergence between de jure and de facto reality. The paper concludes with speculations about the causes of flailing and possible future trajectories.

The paper makes you think a lot about state of Indian economy. The way Prtichett begins the paper by citing an example from Slumdog Millionaire is superb:

The premise of the recent Indian novel Q&A is that the hero, an uneducated working class waiter in a downscale restaurant, has won a billion rupees in a game show that requires answers to twelve questions of increasing difficulty2. The novel them weaves in and out of the hero’s life with vignettes that reveal how he came to know the answers to each of the questions.

The novel opens with the hero having won the game show but is being beaten by the police in a Mumbai police station as the producer of the game show, short on cash, has decided to pay-off the police to extract a false confession of cheating by the contestant rather than pay out the winnings. This is not remarked upon as unusual. As one reads the novel in each instance in which the hero’s life intersects with agents of the government–he is treated with the same mix of venality and casual brutality.

This is especially striking for two reasons. First, the bad behavior of the government is not a theme of the book nor is it ever remarked upon, rather these descriptions are there to provide verisimilitude of a real person’s life—to make the book seem realistic and in-touch with the “true” India. Second, the novel was written, not an estranged radical, but by an active duty member of the Indian Foreign Service.

While watching the movie, I never saw it from this perspective.

The paper then looks at the often discussed puzzle- Though Indian economy  is doing really well but as a state we are just declining. India is one of the toppers when it comes to economic growth but is still a laggard on all other indicators like health, welfare, service delivery etc etc.  

He then looks into why things are like this in India and suggests what to do. He realises it is not going to be easy and there is no magic bullet. One should look to Chicago for some inspiration:

Suppose a development expert from a modern, well-governed country, of today, say Norway, were told he was traveling to a foreign country but were really transported via a time machine to Chicago in 1929. He would find a booming economy, but corrupt politics, huge social tensions across races and ethnicities, vast economic inequalities, barely functional municipal services, unplanned and unregulated expansion of a city crowded with immigrants from rural areas and from other nations. What is his forecast? Should he be optimistic or pessimistic? What is his prescription? Where does one start with “reform” when everything seems out of control? From the hindsight of history, he should be optimistic, Chicago, while still perhaps far from being Norway, is a rich, vibrant, and functional city. But there was no magic bullet; change was a long, hard, slog. Corruption did not disappear overnight (or overmonth or overyear or overdecade). The police did not become less brutal and racist with one application of “reform.”

So we don’t have usual laundry list of reforms (thank god for that). But we have to work together to make things work. Unless people themselves realise it and work on it nothing is going to change.

The paper has many excellent insights and is a must read. The case studies on delivery of health, education and driver’s licences are excellent (though picked up from other people’s research). The Gardener’s tale on page 26 is funny and depressing.

One should also read this superb paperby Arvind Subramaniam which also asks the same – How India is managing such high growth rates when all measures show India’s institutions are declining.

While discussing India we should always r’ber Joan Robinson famous words: 

everything and its opposite are guaranteed to be true in India.

Financial Regulation- Moving back to 1960s?

June 11, 2009

Daniel Tarullo, Fed Governor has given a nice speech on financial regulation. He discusses the historical perspective, the current status and road ahead. He also tells you how the controls imposed in 1930s were eased and led to the current regualtory structure.

How, then, should we respond to the shortcomings of the current financial regulatory system, shortcomings so plainly highlighted by the most serious financial crisis experienced by our country since the Depression?  Let me state at the outset that I do not believe the answer lies in an effort to recreate the regulatory system of the 1960s. Capital market developments of the last several decades are not going to be fundamentally reversed, nor should we want them to be. Reform by nostalgia is not usually an effective approach, since it tends to forget the problems of the past and deny how much has changed. The task is to refashion a regulatory structure so as to encourage the efficient allocation of capital to productive uses, while protecting the financial system from the defects and excesses that are inherent in financial markets.

We are still married to this fancy idea of financial markets- the efficient allocation of capital to productive uses. True that is the purpose of the financial system but it has been seen it is not really doing this. What has been happening is just hanky panky stuff and capital being allocated for self-benefits (one needs to work in financial sector to see this really).

I am not advocating that we need to stifle financial system and all that. But we clearly need some understanding of how can we make this system work on its desired objective- the efficient allocation of capital to productive uses.

But a nice speech. A good read on financial regualtion


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